Executive summary

On 22 September 2024, the Saudi Cabinet announced the approval of the Real Estate Transaction Tax Law (Law) through Royal Decree M/84, dated 19/3/1446H. The Law was published in the Official Gazette on 11 October 2024.

The Law introduces specific exemptions for various real estate transactions, providing further guidance on certain exemptions that were not referenced previously. The Law is effective 180 days from the date of its publication in the Official Gazette (i.e., effective 9 April 2025). Once the Law is effective, any contradictory provisions will be superseded. Additionally, the Board of Governors of the ZATCA will also issue new Implementing Regulations (Regulations) within 180 days from the date of issuance of the Law to facilitate the effective implementation of the Law, by providing additional guidance.

Detailed discussion

Background

On 4 October 2020, Saudi Arabia introduced real estate transaction tax (RETT) as a significant fiscal measure to regulate the taxation of real estate transactions. Under the existing RETT Implementing Regulations, a 5% tax is levied on the sale or transfer of real property. The reform is part of Saudi Arabia's broader economic initiatives to diversify revenue streams and stabilize the real estate market, reflecting the ongoing commitment to economic modernization under Vision 2030.

The provisions of the RETT Implementing Regulations have been revised multiple times to further clarify and provide guidance to taxpayers, incorporating additional exemptions.

The issuance of the Law is intended to represent a pivotal advancement in strengthening and consolidating Saudi Arabia's real estate landscape. It facilitates a clearer and more effective understanding of the RETT provisions, which in turn, is expected to enhance the efficiency of application of the Law.

Highlights of the Law

New definition: The new definition of "real estate company" considers the taxpayer's intention or the actual business operations, while previously, the definition was broader. In addition, the Law defines what constitutes "real estate."

Tax calculation and payment: Under the Law, RETT is calculated based on the total value of the agreed real estate transaction at the date of the disposal, which should not be less than the fair market value (FMV). Taxpayers shall pay RETT to the ZATCA on the date of the transaction (i.e., the date of its notarization), and tax may also be paid on or before the dates as may be specified in the Regulations to be issued.

FMV verification: A new provision relating to verification of FMV is included in the Law whereby the ZATCA may verify and estimate the disclosed or unspecified value of the real estate transaction, respectively, within three years from the date of the transaction. If the disclosed value is less than the FMV (including cases of tax evasion), the RETT due shall be recalculated by the ZATCA. The ZATCA shall calculate any RETT due on unnotarized or undisclosed real estate transaction.

Any RETT due based on the ZATCA's calculation or recalculation shall be paid within three years from the date of the transaction or from the date of the knowledge of the unnotarized or undisclosed transaction.

New exemptions: The Law provides for additional exempt transactions, including:

• Indirect real estate disposal resulting from mergers and acquisitions
• Indirect real estate disposal in cases of public subscription and trading of listed securities and investment fund units

Penalties reduction: For violations under the Law and the Regulations, penalties have been reduced and maximum caps provided. Specifically, the penalty for late payment has been reduced to 2% (previously 5%) of the value of the unpaid tax for each month or part thereof for which the tax has not been paid, without exceeding (50%) of the value of the unpaid tax.

Implications

Taxpayers dealing with real estate in Saudi Arabia should review the provisions of the approved Law to facilitate compliance and identify exemptions applicable to their real estate transactions. Noncompliance with the Law can trigger the application of fines and penalties.