Understanding Saudi Arabia’s New Real Estate Tax Law: Key Changes and Implications
On Tuesday, September 17, 2024 (14th of Rabi Al Awal 1446), the Cabinet of the Kingdom of Saudi Arabia issued Decree No. 239 of 1446, officially approving a new Real Estate Transactions Tax Law (“Law”). The Law was published in Umm Al-Qura Journal No. 5051 on October 11, 2024 (8th of Rabi Al Thani 1446). Comprising 20 articles, the Law will take effect 180 days after its publication, replacing any conflicting provisions. The Cabinet is tasked with issuing its Executive Regulation (“Regulation”) within the same 180-day timeframe.
Key Provisions
Tax Rate and Applicability
Article 2 establishes a 5% tax (“Tax”) on all real estate transactions (“Transactions”) irrespective of the property’s condition or use. This Tax applies to both full and partial Transactions, even those not notarized. The Tax is calculated based on the gross Transaction value agreed upon by the parties, provided it aligns with the fair market value. Tax is due on the date of the Transaction, considered as the date of notarization, or earlier. The Regulation will detail specific exceptions allowing the Tax to be paid after the Transaction date.
The Zakat, Tax and Customs Authority (“ZATCA”) is responsible for Tax administration and holds the authority to verify the Tax amount, adjusting it if it is deemed lower than the fair market value. ZATCA is also empowered to impose penalties as stipulated by the Law.
Refunds
Article 9 specifies that Tax refunds are available in cases of:
- Overpayment.
- Payment made by mistake,
- Incomplete Transactions.
- Canceled Transactions by mutual agreement within 90 days of notarization.
Definitions
Article 1 revises the definition of a real estate transaction to encompass any transaction that directly or indirectly transfers ownership of a property, conveys its benefits permanently, or conveys benefits for a duration exceeding 50 years.
A a real estate company is defined as any company, fund, or entity that directly or indirectly owns real estate in the Kingdom, aiming to generate income through sales or rentals.
The Law further clarifies fair market value as the price at which a property can be traded in an open market between independent parties for a similar or comparable real estate transaction, based on indicators established by the Regulation.
Exemptions
Article 3 outlines several exemptions from the Tax, including:
- Transactions resulting from a forced sale issued by a competent court.
- Transactions arising from mergers and acquisitions between legal entities.
- Transactions involving public subscriptions, trading in listed securities, and dealing in investment fund units.
- Uncompensated Transactions from charitable organizations.
- Transactions involving an investment fund incorporated in the Kingdom.
The new Law also amends exemptions for uncompensated endowment Transactions, making them exempt regardless of whether they are public, private, or joint.
Tax Liability and Payment
The seller is primarily responsible for the Tax and its payment to the authorities; however, the buyer may also be held jointly liable if they contribute to non-payment.
Tax Administration
ZATCA may verify disclosed Transaction values and recalculate the Tax within three-year if the Transaction value is determined to be lower than the fair market value. This Law also grants ZATCA the authority to appoint a certified real estate appraiser to assist in verifying fair market values.
Penalties for Non-Compliance
Article 15 reduces the delay fine to 2% per unpaid month or any portion thereof, down from 5%. Furthermore, the new Law caps the total delay fine at 50% of the unpaid Tax and introduces an additional 1% fine if ZATCA adjusts and recalculates the Tax amount. This fine will be imposed thirty days after notification of the Tax adjustment.
Grace Period
The new Law provides a grace period of one Hijri year, which can be extended by a decision from the Prime Minister based on ZATCA’s CEO recommendation. This grace period applies to:
- Individuals who conducted Transactions without notarization before the 14th of Safar 1442, allowing them to have these Transactions notarized.
- Shareholders of a company who engaged in Transactions on behalf of the company without notarization. In this case, the Transaction will be exempt from Tax, provided that the property is recorded as part of the company’s assets and the company submits audited financial statements.
Takeaways on the New Law
Here are some key takeaway points outlining actions companies should take to comply with the new Real Estate Transactions Tax Law in Saudi Arabia:
- Review Real Estate Transactions: Conduct a thorough review of all existing and upcoming real estate transactions to ensure compliance with the new Tax requirements.
- Assess Tax Liabilities: Calculate potential Tax liabilities based on the new 5% Tax rate and determine the fair market value of properties involved in Transactions.
- Implement Documentation Practices: Ensure that all Transactions are documented properly, including notarization where necessary, to avoid potential penalties.
- Stay Informed on Regulatory Updates: Monitor any updates from ZATCA regarding the Executive Regulation and specific provisions that may affect compliance strategies.
- Train Staff: Provide training for relevant personnel on the new Tax Law, including procedures for Tax payment, filing, and compliance reporting.
- Engage Tax Advisors: Consider consulting with tax professionals or legal advisors who specialize in real estate to navigate the complexities of the new Law.
- Establish Internal Controls: Set up internal processes for tracking and verifying the fair market value of properties and ensuring proper Tax calculations and payments.
- File Timely Tax Payments: Ensure that Tax payments are made on or before the due date specified in the Law to avoid fines and penalties.
- Prepare for Audits: Be ready for potential audits by ZATCA by maintaining clear records of all Transactions, Tax payments, and any supporting documentation.
- Take Advantage of Exemptions: Identify any Transactions that may qualify for exemptions under the new Law and ensure proper documentation is in place to support these claims.
- Consider the Grace Period: If applicable, utilize the grace period provisions to regularize any Transactions conducted without notarization prior to the Law’s enactment.
- Communicate with Stakeholders: Keep all stakeholders informed about the implications of the new Tax Law and how it may affect ongoing and future real estate activities.
By taking these proactive steps, companies can position themselves for compliance and minimize the risk of penalties associated with the new Real Estate Transactions Tax Law in Saudi Arabia.
