General Authority of Zakat and Tax exempts lease-to-own and rent-to-own contracts signed before January 1, 2018, from VAT
Riyadh, January 3, 2018
The General Authority of Zakat and Tax (GAZT) announced the exemption of lease-to-own and rent-to-own contracts of assets (e.g. automobiles or real estate) delivered before January 1, 2018, from VAT. These types of contracts are legally viewed as non-continuous supplies and thus 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 5% 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.
As per the Article 29 of the Implementing Regulations, 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 5% VAT is charged on the transfer fee - not the amount transferred - to be paid by the person making the remittance.
The Implementing Regulations include an exhaustive list of the economic activities which are either subject to the standard 5% rate, zero-rated, exempt, or out of the tax scope. Businesses engaged in economic activities subject to VAT are entitled to claim refunds on the tax amount they paid on the input tax related to activities subject to the 5% rate or 0% rate. Businesses engaged in exempt economic activities are not entitled to claim refunds on their input taxes.