VAT on Real Estate and the Real Estate Transaction Tax in Saudi Arabia: Who Pays What, When, and the 1446H Law

Two taxes touch real estate in Saudi Arabia, and they are often confused. Since 4 October 2020 the sale of real estate has no longer been subject to VAT: it became exempt, and the Real Estate Transaction Tax (RETT) at 5% took its place. Leasing was left as it was: residential leases exempt, commercial leases taxable at 15%. Then came the Real Estate Transaction Tax Law, issued by Royal Decree No. M/84 dated 19/3/1446H, published in the Umm Al-Qura official gazette on 11 October 2024 and in force 180 days after publication, together with its Implementing Regulation approved by ZATCA Board Decision No. 01-03-25 dated 24 March 2025. Together they put the tax on a full statutory footing: defined exemptions, joint liability for the buyer, a three-year window for ZATCA to review the declared value, and penalties for evasion.

This article is a practical map for business owners and investors: which tax applies to which transaction, who pays it and when, which exemptions matter to companies and how easily their conditions are lost, and what remains within VAT — with the article number beside each rule.

First: which tax applies to which transaction?

The rule that settles most questions: a transfer of ownership belongs to RETT; a lease belongs to VAT. The table sets out the detail:

Transaction	VAT	Real Estate Transaction Tax (RETT)
Sale or transfer of ownership of real estate — residential, commercial, agricultural or bare land	Exempt (Article 30(1)(a) of the VAT Implementing Regulation)	5% of the total value of the disposal (Article 2 of the RETT Law)
Residential lease	Exempt (Article 30(1)(b))	Not applicable, unless the right of use exceeds 50 years
Commercial lease: offices, shops, warehouses, land	Taxable at 15%	Not applicable
Hotels, furnished apartments, serviced accommodation	Taxable at 15% — not “residential” (Article 30(3))	Not applicable
Transfer of the right of use for more than 50 years, or permanently	—	Taxable: treated as a real estate disposal, computed on the present value of the right of use
Sale of 30% or more of the shares of a “real estate company” within any three-year period	—	Taxable on the transferred share of the fair market value of the company’s real estate

RETT applies — in the words of Article 2 of the Law — whatever the condition, form or use of the property at the time of disposal; whether the disposal covers the whole property or a divided or undivided part of it; whether the property is completed, under construction or sold off-plan; and whether or not the disposal is notarised. VAT on a commercial lease applies whenever the landlord is registered for VAT or required to register.

Second: RETT — rate, base and who pays

• Rate and base: 5% of the total value of the disposal agreed between the parties, provided it is within the fair market value; the cost of deferred payment under financing from a licensed provider is excluded from the base (Article 2(2)). A disposal is taxed only once where the parties, the property and the value are the same (Article 2(3)).
• When the tax falls due: on the date of the disposal, which is deemed to be the date of notarisation (Article 4). Where there is no notarisation, the Regulation fixes the date as the date the buyer takes possession or the date of an unconditional agreement, whichever is earlier.
• Payment: paid to ZATCA on the disposal date and may be paid earlier (Article 5), and the disposal must be registered on ZATCA’s platform on or before that date (Article 11 of the Regulation). A notary may not notarise a disposal on which the tax has not been paid (Article 19(2)).
• Who is liable: the disposer — the seller, or the person for whose benefit the disposal is made — is responsible for payment (Article 7(1)); the transferee is jointly liable where ZATCA establishes that they caused the non-payment (Article 7(2)). An agreement that the buyer will bear the tax is a commercial arrangement and does not shift the statutory liability.
• Value review: ZATCA may, within three years of the disposal, verify the declared value and recompute the tax if it finds the value below the bounds of fair market value, and it may engage an accredited valuer (Article 8). In practice, a low paper price does not close the file; it opens it for three years.
• Refunds: tax paid in excess, in error or on an uncompleted disposal is refunded (Article 9), as is tax on a disposal cancelled by mutual consent within ninety days of notarisation, provided the property is unchanged and its full value returned (Article 3(a)(21)); the refund claim is filed within twelve months under the Regulation.

Third: the exemptions that matter to companies

Article 3 of the Law lists twenty-one fully exempt disposals and refers the conditions of each to the Regulation. The ones that matter most to businesses fall into five families:

1. Intra-group restructuring: contributing property in kind to the capital of a company incorporated in the Kingdom (item 11); transfers between a company and another that owns all of its shares, or between companies and funds wholly owned by the same person (item 18); and transfers from a natural person to a company or fund they wholly own (item 17). The decisive condition: no change in ownership, and no disposal of the corresponding shares, for the period set by the Regulation, not exceeding five years — and, for in-kind contributions, financial statements audited by a licensed external auditor throughout that period.
2. Mergers and acquisitions: disposals resulting from mergers and acquisitions between legal persons (item 16).
3. Capital markets: public offerings and the trading of listed securities and investment fund units (item 9) — with an exception under the Regulation where 50% or more of a fund’s units are disposed of within three years — and contributing property in kind to a real estate investment fund (item 13).
4. Financing: a temporary transfer of property as security for financing, unless enforced by a permanent transfer (item 14); lease-to-own, murabaha and finance-lease contracts, which the Regulation taxes only once, on the first disposal to the licensed financier; and forced sale by court order (item 15).
5. Family, endowments and public bodies: division of an estate (item 1), a notarised gift to a spouse or a relative up to the third degree (item 7), execution of a will (item 8), transfers without consideration to an endowment or a licensed charity (items 2 and 3), transfers to a public body or on expropriation (items 4 to 6), and transfers to a licensed developer for an off-plan project (item 19).

Two warnings carry real money. First, a breach of an exemption condition brings the whole tax back: selling the shares received for an in-kind contribution before the period ends, or a change in the ownership of the transferee company, makes the tax payable within thirty days of the breach under the Regulation, and ZATCA’s three-year limit does not restrict its claim in that case (Article 8(6)). Second, the citizen’s first home is not one of the Law’s exemptions; it is a programme under which the State bears the tax on a first home worth up to SAR 1,000,000 — that is, up to SAR 50,000 of tax — through a certificate issued on the Sakani platform.

Fourth: VAT — what remains taxable

Article 30 of the VAT Implementing Regulation, as amended on 1 October 2020, exempts the supply of real estate “whether residential, commercial, agricultural or bare land, developed or undeveloped, by way of transfer of ownership or disposal as owner”, and exempts the supply of residential real estate by way of lease or licence. Residential real estate is a dwelling designed for permanent human occupation — houses, apartments, residential units and student accommodation — and does not include hotels, inns, guest houses, rest houses, serviced accommodation or any building designed for temporary lodging (Article 30(2) and (3)). Everything else — commercial leases of every kind and hotel accommodation — is taxable at the standard 15%.

The effect many miss is the effect of exemption on input VAT: tax paid on goods and services connected with an exempt supply is not deductible. The broker’s commission, the lawyer’s fees and the marketing costs of a property sale or a residential lease carry VAT that cannot be recovered, and a business with both taxable and exempt activity applies the proportional deduction under Article 51. There is one important exception for developers: a licensed real estate developer that meets the criteria of Ministerial Decision No. 1754 dated 15/4/1442H may be approved as an eligible person to recover input VAT paid on its exempt supplies of real estate by sale, through monthly, quarterly or annual claims filed within six months of the end of the period; the refund does not extend to property used for leasing, whether taxable or exempt.

Fifth: provisions of the new Law that concern companies

• The real estate company: a sale of shares can be a sale of property. Where a person, or a group of persons, disposes of 30% or more of the shares of a company, fund or entity whose real estate exceeds 50% of the fair market value of its assets, in one disposal or in related disposals within any three-year period, a real estate disposal arises; the tax is computed on the fair market value of all the real estate owned multiplied by the share transferred, or on the agreed value if higher, and is payable within thirty days under the Regulation.
• Sham arrangements: the tax is computed on the real disposal, not a sham or concealed one (Article 6), and submitting incorrect documents with intent to evade is tax evasion, with the burden of disproving intent on the taxpayer (Article 14).
• Penalties (Article 15): a fine of up to three times the tax in cases of evasion, extended to anyone who participates in or facilitates it; a late-payment penalty of 2% of the unpaid tax for each month or part of a month, capped at 50%, plus 1% per month where ZATCA adjusts the tax and it remains unpaid thirty days after notification; and, for other violations, a fine of up to the tax due or SAR 50,000, whichever is greater.
• Records and information: ZATCA may request any information from any person (Article 10), and disposal records are kept for five years under the Regulation.
• Objections (Article 17): an objection to ZATCA within sixty days of notification, decided within ninety days, then a claim before the competent judicial body within thirty days, failing which the decision becomes final — the same route described in our article on contesting a ZATCA decision before the tax dispute committees.

Sixth: six mistakes we see in companies

1. Treating RETT as input tax. It is not VAT and cannot be deducted in the VAT return; it is a cost, accounted for within the acquisition cost of the property or as a cost of sale, as the case may be.
2. Commercial leases without VAT. A VAT-registered landlord lets a warehouse or an office without charging 15% because “real estate is exempt” — the exemption covers sales and residential leases only.
3. An exemption with no follow-up. Property is contributed in kind, then the shares are sold or the ownership structure changes before the period ends, or the audit of the financial statements lapses during it; the whole tax returns, with late-payment penalties.
4. Selling shares without the real estate company test. A deal in the shares of a company whose assets are mostly real estate is treated as a real estate disposal once it reaches 30% within three years.
5. Deducting input VAT connected with an exempt supply — the broker’s commission and marketing fees on a property sale or a residential lease.
6. A paper price below the market. ZATCA verifies within three years using an accredited valuer, and the shortfall attracts a 1% monthly penalty after notification of the adjustment.

Frequently asked questions

How we help

At Al-Mousa & Al-Tamimi Certified Public Accountants we review the property transaction before it is signed, not after: identifying the tax due and documenting the basis of the market value, testing the exemption conditions in a restructuring and building a holding-period tracker, running the real estate company test before a share sale, getting the input VAT and proportional deduction right in the return, and preparing the developer’s eligibility file for refunds where it is worth it.

See our zakat and tax service · Read next: ZATCA examinations and how to build your file · Withholding tax: who is liable and at what rate · Contact us

Sources: Real Estate Transaction Tax Law, Royal Decree No. M/84 dated 19/3/1446H — Umm Al-Qura official gazette (Articles 1 to 9, 14, 15, 17, 19 and 20; Arabic); Implementing Regulation of the Real Estate Transaction Tax Law, ZATCA Board Decision No. 01-03-25 — Zakat, Tax and Customs Authority (Articles 2, 4, 5, 9 and 11); VAT Implementing Regulation, tenth edition, April 2025 (Articles 30 and 51; Arabic); Rules and procedures for licensed real estate developers as eligible persons for VAT refunds — Umm Al-Qura official gazette (Arabic); First-home Real Estate Transaction Tax coverage — Sakani. This article is general guidance and is not a substitute for advice on a specific case.