Understanding Key Exceptions to the Real Estate Transfer Tax (RETT) Regulation in the Kingdom

The Kingdom’s Real Estate Transfer Tax (RETT) regulation aims to ensure transparency and efficiency in the transfer of property ownership. However, certain exceptions are outlined to provide clarity on when this tax does not apply. In this article, we will explore two such exceptions that are particularly relevant for leasing contracts and real estate investment funds.

1. Disposal of Property in Leasing Contracts Ending in Ownership

One of the key exceptions to RETT involves the disposal of real estate prior to the effective date of the RETT regulation. Specifically, this exception applies to leasing contracts such as Ijara (leasing contracts that end in ownership) and financial leases that were concluded before the RETT regulation came into effect.

The rationale behind this exception is straightforward: the Kingdom acknowledges that in cases where a leasing contract was signed before the RETT was enforced, the property might be transferred to the final beneficiary as a result of the lease ending in ownership. These properties may have been subject to VAT when transferred from the financial entity to the final beneficiary, particularly after the VAT regime was introduced in 2018.

However, if the contract was concluded before the VAT regime came into force and the real estate was transferred before the effective date of the law, it may not have been fully taxed. As such, the disposal of property through such leases is excluded from the RETT. Furthermore, the process of real estate transfer at the notary public is also excluded from the tax, ensuring that the transaction remains free from additional financial burden.

2. Temporary Property Transfer Between Funds and Custodians

Another significant exception relates to the temporary transfer of real estate between a fund and a custodian, or between custodians of the same fund. This exception is particularly relevant to real estate investment funds, which operate differently from traditional property ownership structures.

In these cases, real estate is not directly owned by the fund itself, as these funds do not possess legal personhood. Instead, a custodian is established to register ownership on behalf of the fund. In some cases, the custodian may change, requiring the temporary transfer of real estate between custodians.

The Kingdom’s RETT regulation acknowledges that such transfers are not permanent disposals of property. Therefore, they are not subject to RETT. This exception is particularly important for real estate investment funds that operate under the framework of the financial market law, rules, and regulations. It ensures that such transactions, which are temporary and administrative in nature, do not trigger unnecessary tax liabilities.

Conclusion

The Kingdom’s RETT regulation includes provisions that offer flexibility in specific scenarios involving leasing contracts and real estate investment funds. These exceptions ensure that businesses, funds, and individuals involved in real estate transactions do not face undue financial burden when transferring property under certain conditions. It’s important for stakeholders to be aware of these exceptions and consult legal experts to navigate the complexities of real estate taxation effectively.

By understanding these nuances, property owners, investors, and businesses can ensure compliance while maximizing efficiency in their real estate dealings.

Disclaimer: The Content offer general guidance and should not be considered legal, financial, or tax advice. Consult qualified professionals for personalized guidance. While efforts have been made to ensure accuracy, no guarantee is provided for completeness or applicability to individual situations. Users are responsible for their interpretation and actions based on this information, at their own risk. 

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