Adjustment of previously deducted input VAT on real estate capital assets 

As detailed below, it is imperative for the Kingdom of Saudi Arabia’s (KSA) real estate developers and others whose land and property related supplies became Value Added Tax (VAT) exempt since 4 October 2020, to review their capital assets portfolio. Adjustments may be required if such assets will be subject to an exempt supply from the above mentioned date. In some cases, these taxpayers may face adverse adjustments to previously recovered input VAT.

While the requirement to adjust previously deducted input VAT on capital assets is not a new requirement of the Saudi VAT laws, this rule has increased in relevance, particularly for real estate developers and others dealing with real estate. This is due to the fact that the majority of the real estate transactions have changed from being VAT taxable to being VAT exempt with effect from 4 October 2020. 

The Saudi VAT Implementing Regulations require an adjustment to be made to previously deducted input VAT in case there is a change in the way the taxable person uses the asset or there is a change in the VAT status of such use. The change in VAT status of such use may include a scenario where the taxpayer’s supplies become partially or exclusively VAT exempt.

The initial input VAT recovery on capital assets is based on the intended use at the time of acquiring the assets. This implies that a real estate developer whose supplies were fully taxable before 4 October 2020, would have fully deducted the input VAT on the purchase of the capital assets. However, with the supplies becoming VAT exempt, an adjustment to the input VAT previously deducted on purchase of capital assets may have to be made. If required, the adjustment must be made on a 12 months basis counting from the month of purchase. For most assets the adjustment period is 6 years. For example, for an asset purchased on 31 December 2019, the first 12 months period ends on 31 December 2020 entailing nearly 9 months of VAT taxable use and 3 months of VAT exempt use (given that exemption for real estate supplies came into effect on 4 October 2020).

However, in accordance with the conditions stated in Ministerial Resolution No. 1754, input VAT in respect of purchases made with effect from 4 October 2020 can be recovered by the real estate developer if he qualifies as a “licensed real
estate developer”.

Also, we wish to highlight that the above requirement of adjusting input VAT on capital assets applies to all taxpayers who are engaged in providing taxable and exempt supplies, not just those in the property sector.