Understanding the Real Estate Transaction Tax Law in the Kingdom of Saudi Arabia

Introduction

The Real Estate Transaction Tax (RETT) is a pivotal aspect of the Kingdom of Saudi Arabia’s efforts to regulate and promote its real estate market. Implemented through Royal Decree No. (A/84) on 14/02/1442 H, this law plays a significant role in enhancing real estate ownership among citizens while ensuring compliance with tax regulations. This article delves into the key elements of the RETT, its implementation, and the responsibilities of the Zakat, Tax, and Customs Authority (ZATCA) in managing this tax.

1.1 Implementation of the Real Estate Transaction Tax Law in the Kingdom

The Royal Decree exempted supplies of real estate made for transferring ownership or the right to dispose of the property from the RETT. However, the law mandates a tax rate of 5% on the sales value of real estate. This initiative aims to support citizens and licensed real estate developers while contributing to the Kingdom’s broader goals of increasing home ownership rates.

To further bolster this objective, the Kingdom will bear the RETT for amounts not exceeding one million SAR from the purchase price of a citizen’s first home. This is a significant enhancement compared to the previous VAT threshold of 850,000 SAR before the Royal Decree was issued. The Implementing Regulation of the Real Estate Transactions Tax, issued by the Minister of Finance under No. (712) on 15/2/1442, officially enacted this tax on October 4, 2020.

Real estate transactions are subject to specific tax obligations in many jurisdictions, including the Real Estate Transaction Tax (RETT), which aims to regulate and levy taxes on property disposals. This article provides an overview of RETT, focusing on the key components such as tax entitlement, calculation of the tax base, payment deadlines, and individuals responsible for fulfilling the tax obligation.

Zakat, Tax, and Customs Authority (ZATCA)

ZATCA is the primary body responsible for implementing, regulating, and collecting the Real Estate Transaction Tax. As part of its mandate, ZATCA oversees the collection of Zakat, taxes, and customs duties, aiming to achieve the highest level of compliance through best practices and operational efficiency. The authority also manages all customs-related activities, ensuring optimal productivity and competitiveness while coordinating with other entities to fulfill its objectives.

1.2 What is the Real Estate Transaction Tax?

The Real Estate Transaction Tax is an indirect tax levied on all transactions that produce legal effects involving the transfer of property ownership or possession for the purpose of ownership or benefit. The types of transactions subject to RETT include, but are not limited to:

• Sales: The most common form, where ownership of real estate is transferred from one party to another.
• Gifting or Waiver: Transfers made without consideration, such as gifts to family members or waivers of ownership rights.
• Netting or Barter: Exchange of properties or services instead of monetary payment.
• Financial Leasing: Contracts where a property is leased for a specific period, with the option to purchase at the end of the term.
• Lease to Own and Islamic Lease to Own (Ijara): Agreements that combine leasing with the eventual transfer of ownership.
• Share Transfers in Real Estate Companies: When shares in companies that primarily hold real estate (over 50% of their assets) are transferred, it is considered an indirect transfer of property ownership, subject to the RETT.
• Long-term Usufruct Contracts: Contracts granting use and benefit from real estate for over 50 years.

The RETT applies to all forms of real estate, regardless of their current status, nature, or intended use during the transfer. This includes lands and any structures or developments on them, whether they are completed or still in progress.

Example (1)

To illustrate the application of the RETT, consider a scenario where an individual sells a plot of land valued at one million SAR with the intention of transferring the title to the buyer. This transaction would be subject to the RETT. If the buyer subsequently subdivides the land into multiple plots and transfers each plot to different individuals, each transfer represents a separate real estate disposal, and thus each is subject to the RETT.

Conclusion

The Real Estate Transaction Tax Law is a strategic initiative by the Kingdom of Saudi Arabia to facilitate real estate ownership and stimulate the housing market. By implementing a fair tax system and providing exemptions for first-time home buyers, the government is making strides toward increasing property ownership among citizens. The role of ZATCA in regulating and enforcing this tax is crucial in ensuring compliance and promoting transparency within the real estate sector. As the Kingdom continues to develop its real estate market, the RETT will remain a key component in supporting its economic objectives and enhancing the welfare of its citizens.

summary

The Real Estate Transaction Tax (RETT) in Saudi Arabia, established by Royal Decree No. (A/84), imposes a 5% tax on real estate transactions to promote property ownership among citizens and support licensed developers. Effective from October 4, 2020, the law exempts the first one million SAR of a citizen’s home purchase from the tax, enhancing accessibility compared to the previous VAT threshold. The Zakat, Tax, and Customs Authority (ZATCA) oversees the implementation and collection of RETT, ensuring compliance and efficiency in tax regulations. The RETT applies to various property transactions, including sales, gifting, leasing, and share transfers in real estate companies, making it a crucial part of the Kingdom’s strategy to stimulate the real estate market and enhance economic growth.

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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