VAT on KSA finance leases

In a press release the General Authority of Zakat and Tax (GAZT) issued clarification on the Value Added Tax (VAT) treatment of the Kingdom of Saudi Arabia lease-to-own and rent-to-own contracts of assets (under Islamic finance these may be known as Muntahia Bittamleek and Ijarah Muntahia Bittamleek) which generally apply to e.g. supplies of cars and property. GAZT has confirmed that these contracts will be treated as non-continuous supplies i.e. a one-off supply of goods. This clarification therefore has significant implications for the “transitional” application of VAT to existing contracts, and to new contracts.  Specifically:

For contracts which were concluded and where the customer took possession of the goods before 1 January 2018, no VAT will be applicable on the installments even where they are received after 1 January 2018.

For contracts which were concluded after 1 January 2018 and where the customer took possession of the goods after 1 January 2018, VAT will be applicable.

For contracts which were concluded before 1 January 2018 and where the customer took possession of the goods after 1 January 2018, VAT will be applicable on the entire consideration relating to the asset (irrespective of whether any payment was received before or after 1 January 2018).

Summary table below:

By adopting this view, GAZT appears to be taking a narrow interpretation of the special domestic date of supply provisions in KSA law surrounding supplies.

It is also aligned with a recent European VAT case Mercedes Benz Financial Services which found that a contract where ‘in the normal course of events, ownership is to pass at the latest upon payment of the final instalment’ is a supply of goods with a single date of supply.

To summarize: for these contracts, VAT where due, shall be payable on the entire value of the asset being sold under the contract, based on the date the goods are made available to the customer, and not upon receipt of each installment.