Saudi Arabia: The Tax Treatment of Real Estate Transaction Tax in Build-Own-Operate-Transfer (BOOT) Project Contracts

The Tax Treatment of Real Estate Transaction Tax in Build-Own-Operate-Transfer (BOOT) Contracts:

With regard to the tax treatment of Build-Own-Operate-Transfer (BOOT) project contracts, the Implementing Regulations of the Real Estate Transaction Tax (RETT), issued by Ministerial Resolution No. (712) dated 15 Safar 1442 AH and its amendments ("the Regulations"), have clarified the specific tax treatment for such contracts in line with their nature. The relevant date of the transaction, on which the tax becomes due, is the actual date of transfer of ownership or possession to the transferee.

According to Article Four of the Implementing Regulations of the Real Estate Transaction Tax:

"The tax becomes due on the date of the transaction, based on the value agreed upon between its two parties (or all parties), or the value of the property, provided that it is not less than the fair market value on the date of the transaction.

The property value for the purposes of calculating the tax shall not include any implicit profit margin in financing cases from entities that are legally licensed.

The tax is imposed on real estate transactions, including completed properties, properties under construction, or off-plan properties."

Tax treatments in Build-Own-Operate-Transfer (BOOT) contracts that result in ownership transfer:

In principle, the transfer of ownership of immovable assets to which the concept of real estate applies according to the provisions of the Executive Regulations of the Real Estate Transaction Tax — “everything fixed in its place, and cannot be moved without damage” — and which are created or constructed and owned by the operating company entrusted with establishing or constructing those assets, which undertakes their operation under its responsibility and for its benefit for a specified period according to the terms of the contract between the parties to the transaction, and then transferring and conveying ownership of those immovable assets to the beneficiary or a third party designated by the beneficiary according to the contract terms, is considered a real estate transaction according to the provisions stated within the Executive Regulations of the Real Estate Transaction Tax, and is subject to the tax according to the usual rules applicable to real estate transactions unless an exemption provision from the tax is applied according to the list of exemptions stipulated within paragraph (a) of Article Three of the regulations.

As for the immovable assets to which the concept of real estate may not apply, such as machinery, equipment, and fixtures that may be part of the project and whose ownership belongs to the operating company, and whose ownership will be transferred within the project’s assets at the end of the contract period to the beneficiary, these are no longer considered within the scope of the Real Estate Transaction Tax. Therefore, they are not subject to the tax in principle.

A. Build-Own-Operate-Transfer (BOOT) contracts in which a governmental entity awards the contract to the private sector.

As mentioned above, the transfer of ownership of the immovable asset to which the real estate definition applies for the governmental entity is considered, in principle, a real estate transaction according to the provisions stated within the Executive Regulations of the Real Estate Transaction Tax. However, the transfer in favor of a governmental entity is rarely included among the tax-exempt transactions according to subparagraph (3) of paragraph (a) in Article Three of the Executive Regulations of the Real Estate Transaction Tax, which stipulates the exemption:

“3. The transaction involving real estate for a governmental entity, or for public legal persons, or entities, and projects of public benefit. For the purposes of this paragraph, public benefit means entities and institutions that carry this status pursuant to the system of associations and civil institutions.

Date of payment of the Real Estate Transaction Tax for Build-Own-Operate-Transfer (BOOT) contracts subject to tax

The date of payment of the Real Estate Transaction Tax shall be within thirty (30) days from the date the tax becomes due based on the actual transfer of ownership of the real estate or the actual transfer of possession for the purpose of actual ownership to the transferee.

Responsible party for paying the Real Estate Transaction Tax for Build-Own-Operate-Transfer (BOOT) contracts subject to tax

According to Article Five of the Executive Regulations of the Real Estate Transaction Tax, the due tax is collected from the transferor, who is obligated to pay it along with any other obligations that may arise therefrom. However, it is permissible to agree otherwise between the transferor and the transferee, for example, by agreeing between them that the transferee shall bear the tax burden, while the transferor remains responsible for paying the tax to the Authority.

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Reference/Citation

The Tax Treatment of Real Estate Transaction Tax in Build-Own-Operate-Transfer (BOOT) Project Contracts

https://zatca.gov.sa/ar/MediaCenter/Publications/Documents/BOOT_RETT.pdf 

(Zakat, Tax, and customs Authority)