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If you are doing business in Saudi Arabia or planning to expand in the Kingdom, it is important to know the VAT rate in Saudi Arabia and the different exemptions. KSA VAT rate has changed over the years and as we fast approach to 2025 let’s make sure you stay apprised especially when it comes to how changes will affect your operations. This is the case, whether you’re an entrepreneur or small business owner or part of a huge enterprise, to remain updated about the VAT rates 2025 and the rules attached to such are certainly avoidable mistakes and can be inclined with efficiency.
Read on to learn about the key aspects of VAT rates and exemptions as well as the fast developing trend of E-invoicing in Saudi Arabia which will make tax compliance simpler and more transparent in VAT rate in Saudi Arabia businesses.
In January 2018, Saudi Arabia introduced Value Added Tax (VAT) at the standard rate of 5 per cent on taxable supplies and imports. On July 1, 2020, in a dramatic change, the VAT rate in KSA rose from 5% to 15% as part of the kingdom’s fiscal reforms. According to billions of VAT rates 2025, businesses are in for some heavy changes, including an understanding of the taxable work and exemptions and the effect of the roll out of E-invoicing in Riyadh and Saudi Arabia generally on streamlining tax reporting, especially when the administrative burden is reduced.
Saudi Arabia has been charging 15 percent VAT since July 1, 2020, after the Zakat, Tax and Customs Authority (ZATCA) announced that. Most goods and services within the Kingdom come under this rate. Yet some goods and supplies are zero rated, they are taxed at 0%. Exports, international transportation services and basic food items are some of these zero rated supplies. Businesses should be able to distinguish taxable from zero-rated supplies in order for a firm to report its VAT accurately and in line with Saudi tax rules.
Here’s the list of supplies on which 0% VAT is charged, with a brief explanation for each:
1. Exports of Goods
VAT rate on goods exported outside Saudi Arabia is 0%. It eases export and import of products and encourages Saudi products to remain competitive in world markets.
2. Services Supplied to Non-GCC Residents
Outside the Gulf Cooperation Council (GCC) region, services are taxed at 0%. It provides the support for cross border business transactions and international service provision.
3. International Goods and Passenger Transport Services
0% is charged for transport services for goods or passengers across international borders. The purpose of this exemption is to promote world trade and facilitate flows of people and products.
4. Supply of Qualifying Means of Transport
VAT is not payable on the sale or lease of qualifying transport means such as ships, aircraft and trains. By doing this, this policy benefits the transport sector, lower cost for businesses that are involved in logistics.
5. Qualifying Medicines and Qualifying Medical Goods
VAT is not applied to medicines or medical goods that meet particular criteria set by Saudi authorities. It makes sure that health supplies are affordable to the general population, so that essential supplies are available to them.
6. The First Supply, or Supply for Investment, of Qualifying Metals
First or investment supply of metals like gold, silver or platinum is subject to a 0% VAT rate. Investment in precious metals and as such supporting the sector.
KSA VAT law excludes exempt supplies from the scope of VAT and they are not taxed. Exempt supplies are those supplies for which businesses dealing with exempt supplies neither collect VAT on sales nor claim input VAT paid on purchases.
Here’s the list of exempt supplies under VAT rate in KSA, with a brief explanation for each:
1. Issuance or Transfer of Money or Securities
Transactions which involve the issuance or transfer of money or securities are excluded from the tax scope and are therefore exempt from VAT.
2. Credit
Credit, including lending money, is exempt from VAT. It also exempts financial services related to loans from tax.
3. Current, Deposit and Savings Accounts Operations
Services that are related to the operation of current, deposit and savings accounts are exempt because they are basic banking functions.
4. Financial Instruments
VAT is exempt from the transfer or sale of financial instruments (stocks and bonds) to foster financial markets.
5. Shari’ah-Compliant Islamic Finance Products
VAT exempt Islamic finance products are products that follow Shari’ah principles and thus, Islamic finance products are fair for Muslim consumers.
6. Loans, Credit or Debt Securities
VAT does not apply to interest earned on loans, credit or debt securities as it relates to basic financial transactions.
7. Life Insurance
To ensure that not quite life insurance will become a privilege for the wealthy, life insurance and premium is excluded from VAT.
8. Residential Real Estate Leases (Excluding Hotel and Similar Short-Term Rentals)
VAT exempt is long term residential real estate leases and short term rentals like hotels are still taxed to encourage affordable housing.
To prevent confusion over the revised VAT rates in Saudi Arabia, the Zakat, Tax and Customs Authority (ZATCA) issued transitional provisions. The purpose of these provisions was to make clear the VAT treatment of contracts and tax invoices issued before May 11, 2020, and those concluded during the transitional period or after. The aim was to stop any abuse of dates when determining the right tax rate, so that businesses used the correct VAT rate depending on when the supply was made rather than when the contract was signed and that tax calculations were fair throughout the transition.
Here’s the breakdown of special cases mentioned in the transitional provisions:
1. Contracts Signed with Government Entities Before 11th May 2020
For contracts signed before May 11, 2020, the VAT rate of 5% will continue to apply until one of the following events occur: The contract expires, is renewed, or June 30, 2021 (whichever occurs first). This rule prevails as you are ensuring your ongoing agreements comply with the previously applicable VAT rate instead of sudden increase in tax during contract execution for these entities.
2. Contracts Signed with Government Entities Between 11th May 2020 and 30th June 2020
The VAT rate of 5% will apply to supplies made before July 1, 2020, for contracts signed during this period. But supplies made after July 1, 2020, will be subject to the new 15 percent VAT rate. This distinction gives authorities — as well as businesses — the leeway to line up tax liabilities with the new rate while keeping contracts in the portion in question clear.
1. Contracts Signed Before 11th May 2020
The VAT rate of 5% will apply to contracts signed before May 11, 2020 until the earlier of contract expiration, renewal or June 30, 2021. This guarantees that contracts inked before the VAT rate hike remained subject to their original tax rate until completion or renegotiation of the contract, mitigating the period of adjustment of a tax hike on businesses without undue impact.
2. Contracts Signed Between 11th May 2020 and 30th June 2020
The 5 percent rate will apply to supplies made before July 1, 2020, for contracts signed between May 11 and June 30, 2020. But supplies produced after July 1, 2020 will be taxed at the new 15 percent rate. Clearly, this approach separates supplies delivered before and after the rate change so that businesses make the correct application of the transitional provisions to avoid tax discrepancies in invoicing.
3. Contracts Signed Before 11th May 2020 with Supplies Continuing After 1st July 2020
The 5% VAT rate will still apply to contracts signed before May 11, 2020, where the supply continues beyond July 1, 2020, until the earlier of expiration, renewal or June 30, 2021. This prevents businesses from suffering for contracts that cross the VAT rate change or continuity of tax application for ongoing transactions which has been agreed prior to the previous rate.
1. Tax Invoice Issued Before 11th May 2020
The VAT rate of 5% will still apply if a tax invoice is issued before May 11, 2020 and the actual supplies take place between July 1, 2020 and June 2021. This provision protects transactions where the delivery or service occurs after the rate change and based on an invoice originally issued prior to the increased rate beyond retrospective application of the new 15 percent rate to those transactions.
2. Tax Invoice Issued Between 11th May 2020 and 30th June 2020
Supplies made on or before June 30, 2020, will be taxed at 5% for invoices issued between May 11 and June 30, 2020. But any supplies made after July 1, 2020, will be taxed at the new 15% VAT rate. This distinction guarantees correct application of VAT rates to past and future supply in the light of the timing of delivery only and in accordance with transitional provisions.
3. For Periodic Tax Invoices Issued on Continuous Supplies Before 11th May 2020
For ongoing or continuous supplies, if periodic tax invoices were issued prior to May 11, 2020, the VAT rate of 5% will apply to any supply completed prior to July 1, 2020. But supplies made after July 1, 2020 will be taxed at the new 15 percent rate. This approach takes into account services that cross the VAT rate change boundary so that the correct tax rate is applied to the timing of the supply and no customer is overcharged.
VAT is generally applied to all goods and services in Saudi Arabia, except exempt or zero rated supplies. It includes the whole range of everyday products and services, by far the biggest part of the economy, so we are talking a broad application of the standard rate of VAT in this sphere.
A 15% VAT rate applies to goods imported into Saudi Arabia on or after July 1, 2020, up from a previous 5% VAT rate before the VAT amendment. Exports of goods and services outside the GCC are taken as zero rated supplies and taxed at 0%. These exports are business activities where businesses involved in these exports can recover the associated input VAT and this means that tax neutrality for international trade activities is ensured.
In conclusion, in conclusion, it is important for businesses to the understand the VAT rate in Saudi Arabia and its different exemptions in order not to avoid this law. Since July 2020, it is important to identify correctly taxable and zero-rated supplies, with the introduction of a 15% VAT rate. With the arrival of VAT rates 2025 approaching, it is important to know what is happening with the latest regulations and transitional provisions so that business errors can be avoided and tax efficiency maximised.
In addition, businesses must pay attention to changes associated with the VAT rate in KSA for imports and exports and the practice of E-invoicing in Saudi Arabia, which makes tax reporting a lot easier. Aiding in a business’ success in the dynamic economy of the Kingdom, these provisions help businesses adhere to, avoiding penalties and helping operations run smoothly.
