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Saudi confirms VAT rules for hire-purchase contracts

Saudi confirms VAT rules for hire-purchase contracts

RIYADH: Saudi Arabia’s tax agency announced an exemption from VAT for lease-to-own and rent-to-own contracts of assets (for example for automobiles or real estate) delivered before January 1, 2018.

VAT was introduced in Saudi Arabia from January 1, 2018, as part of an initiative among the six-member Gulf Cooperation Council bloc.

The tax agency said: “These types of contracts are legally viewed as non-continuous supplies and therefore exemptions related to continuous supplied do not apply to them, therefore VAT will not be collected on the installments due for these contracts after January 1, 2018.”

“All lease-to-own and rent-to-own contracts signed after January 1, 2018, will be subject to the standard five percent VAT rate, GAZT clarified. As per the GCC Unified VAT Agreement and VAT Law and Implementing Regulations, VAT should be calculated based only on the contracted asset’s value, not the associated profits or interest rate as these are exempt from VAT.”

“The date in which the VAT amount on the overall value of the goods supplied as per the contract becomes due either when the contracted asset is supplied, when the VAT invoice is issued, or when the payment is made in part or in full, whichever comes first. As per the VAT Law, the date of supply is considered to be the date when the goods are put at the disposal of the customer.”

The VAT Implementing Regulations stipulate that a number of financial sector activities are exempt from VAT, including interest or lending fees charged with an implicit margin for any form of lending, including loans and credit cards, mortgages, finance leasing, banknotes, or financial securities transactions, as well as current, deposit, and savings accounts.

Article 29 of the Implementing Regulations states that the exemptions do not include cases where the consideration payable in respect of the service is by way of an explicit fee, commission, or commercial discount. An example of this are fees charged on remittances, whereby five percent VAT is charged on the transfer fee – not the amount transferred – to be paid by the person making the remittance.