Saudi Arabia: Application of VAT to provision of collateral (liens and mortgages)

The General Authority of Zakat and Tax (GAZT) continues issuing the guidance and publications to clarify the tax treatment in so many areas of the tax regime. GAZT always mentions that the “Circular is issued for information purposes only and it should not be construed to constitute an amendment to the tax laws in force in the Kingdom”. It is worth stating that GAZT has enriched its customers’ experience by improving more than 155 procedures and launching more than 60 electronic services through a transformation journey full of achievement between 2018 and 2020.

In the latest VAT publication, GAZT refers collectively to mortgages and liens and other forms of security interests as collateral. It discusses the application of VAT to these transactions and provides its interpretation on the VAT and its implementing regulations.

The publication provides different cases for payments/arrangements on some treatments that may be considered for VAT purposes, such as in case the lender arranges for the sale of the property to a third party without holding the property as its own asset.

The publication states that “the grant of collateral in the borrower’s (moveable or immoveable) property does not constitute a supply of goods and is not subject to VAT. In many cases, the security rights transferred to the lender would not give the lender possession or the right to dispose of property (unless the borrower defaulted on its obligations under the loan agreement).

Therefore, the grant of security interests as collateral would not constitute a supply of goods as defined under the basic principles of the GCC VAT system. For completeness, the provisions of the VAT Implementing Regulations confirm that any temporary transfer of property under these circumstances is not considered a supply of goods in Saudi Arabia.

It also emphasises that “This interpretation also applies in cases where the formal notarised title in the property is transferred to the lender; provided the loan agreement intends this to be temporary and does not give the right of ownership or disposal to the lender”.