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Approved KSA RETT Law

16 October 2024 - The Real Estate Transaction Tax (RETT) Law in the Kingdom of Saudi Arabia (KSA) has been enacted under Royal Decree No. M/84, issued on 22 September 2024, and Council of Ministers Decision No. 239, dated 17 September 2024. This marks a significant regulatory development. The legislation published in the official Saudi Gazette on 11 October 2024 will become effective 180 days after its publication. Furthermore, the Regulations under the RETT Law shall also be issued within 180 days and are expected to supersede the existing RETT Implementing Regulations. In this alert, we provide an overview of the key highlights and implications of the newly enacted RETT Law.
 

Key highlights 
 
  1. The RETT Law defines a real estate company as any company, fund, or entity that owns real estate in KSA with the aim of generating revenue through its sale or lease, and the fair market value of such real estate exceeds 50% of the total fair market value of the company, fund, or entity’s assets. The definition is different from the existing definition, provided only in the RETT guideline. It is different in the following aspects:

    • Real estate assets are required to be compared only against total assets, as opposed to both total assets and equity in the current definition.
    • The underlying real estate must be used to generate revenues through sale or lease.
    • The values of real estate assets and total assets to be compared must be the fair market value.
  2. The transfer of shares of a real estate company is not specifically included in the definition of a real estate transaction. However, the definition includes the transfer of real estate or its ownership rights directly or indirectly. We believe that the transfer of shares is likely to be covered under this.
  3. The Law introduces new exemptions, namely for cases of public offerings, trading of listed securities, trading of units in investment funds, forced sale orders, and real estate disposals resulting from mergers and acquisitions between legal persons. 
  4. The Law does not lay down any conditions or controls for various exemptions. These will be specified in the Regulations that will be issued. 
  5. The Law brings back the provision concerning discretionary exemptions that may be applied by the Council of Ministers in certain exceptional cases. It is to be noted that this provision was in the original Royal Order, removed but has been re-introduced. 
  6. Article 7 of the RETT Law introduces a three-year period of statutory limitation, beyond which the Zakat, Tax and Customs Authority (ZATCA) shall not conduct assessments on real estate transactions, unless in cases of evasion. 
  7. The joint and several liability of the buyer relating to a real estate transaction has been eased under certain conditions. The buyer will be held liable only in cases where it is evidenced to ZATCA that the buyer was the reason for the non-payment of RETT. 
  8. Penalties for non-compliance have been amended as follows:
     
    • Late payment: Reduced from 5% to 2% of the unpaid tax for each month the liability remained unpaid, capped at 50% of total tax liability. An additional 1% will be imposed if ZATCA identifies additional tax due.
    • General violations: The amendment caps fines either to the total tax due or a maximum of SAR 50,000, as opposed to SAR 10,000 in the existing Regulations.

Key takeaways
 

The impending Regulations will shed some more light with respect to several areas.  In the meantime, the main points to note are as follows:

  • The RETT law unveils some new exemptions which should be welcomed by the industry. The exemptions in our view should stimulate investment, facilitate corporate restructurings and Mergers and Acquisitions (M&A) activity, and encourage collaboration between public and private sectors.  
  • The purpose test for determination of what constitutes a real estate company potentially restricts the scope of application of RETT to share transfers of such real estate companies.  While currently any organization can qualify as a real estate company, going forward only companies having core real estate businesses seemingly would qualify. This should ease the burden on various non-real estate sector entities. 
  • The re-introduction of the power for granting discretionary exemptions by the Council of Ministers is also a welcome move. This provides a modicum of flexibility to facilitate a more amenable environment for real estate transactions as the law evolves. 

Finally, a limit on late payment penalties will be welcomed where genuine errors may have occurred.

Next steps 

Deloitte has a dedicated RETT team within its Indirect Tax practice. We have successfully supported businesses in the Kingdom with:

  • RETT health check assessment to help identify gaps and mitigate risks.
  • M&A and restructuring projects where real estate forms part of the targets. 
  • Bespoke RETT advisory services on key real estate contractual arrangements and business models, including Build Own Operate Transfer Contracts (BOOTs), Build Operate Transfer (BOTs), etc.
  • RETT compliance services. 

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