KSA GAZT publishes VAT guide on Islamic Finance

The Kingdom of Saudi Arabia (KSA) General Authority of Zakat and Tax (GAZT) has published the Islamic Finance Value Added Tax (VAT) guide in Arabic. The new guide provides businesses involved in Islamic Finance arrangements with additional clarity on the VAT treatment of a variety of Islamic Finance products.

Who is this alert for?

This alert is relevant to any business that is involved in Islamic financing arrangements, either as a supplier or recipient. More specifically, we would expect this alert to be of particular interest to banks, insurance companies, and any other financial services institutions which supply Islamic Finance products, as well as businesses which are recipients of such arrangements.

Islamic Finance VAT guide

The Islamic Finance VAT guide provides further clarity on the VAT treatment of Islamic Finance products and the transactions such products entail. Sections are included for a number of Islamic Finance products, including (but not limited to) Ijara, Murabaha, and Musharaka, with a description of the product and the relevant VAT treatment identified.

In general, as per Article 29(3) of the KSA VAT Implementing Regulations, Islamic Finance products which are Shariah compliant and simulate the intention and effectively achieve the same result as a conventional financial product will have the same VAT treatment as the conventional financial product.

As Islamic Finance products involve a profit margin rather than charging interest, the implicit profit margin included in the fees under an Islamic Finance product may be treated as VAT exempt even if part of an explicit fee or commission which would not be exempt under a conventional finance product.

One of the key concepts of Islamic Finance is the transfer of ownership of goods from one party to another without the intention of permanently passing on the ownership of the goods to the recipient. The guide explains the special treatment of such temporary transfer of ownership when it occurs as part of the structure of an Islamic Finance product, in addition to providing details on the evidentiary requirements for proving the eligibility of applying the special treatment.