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Al Madani & Co. Law Firm & Legal Consultants

Saudi Arabia's Real Estate Transfer Tax System: A Comprehensive Legal Overview

The Saudi Cabinet has approved a real estate transfer tax system imposing a 5% levy on the total value of real estate transactions. This system aims to regulate the Kingdom’s real estate sector and enhance transparency in real estate dealings, both among citizens and residents. This measure is a significant step within the framework of Saudi Vision 2030 to enhance the efficiency of tax systems and increase their contribution to the national economy.

What is the Real Estate Transfer Tax?

The real estate transfer tax is a levy imposed on any transfer of real estate ownership from one person to another, whether through sale, barter, or any other real estate transaction. This tax is calculated at a rate of 5% of the total value of the real estate transaction, and the seller is obligated to pay this percentage before or during the transfer of ownership.

Procedures for Registering Real Estate Transfers The new system mandates the registration of any real estate transfer through the real estate transactions portal of the General Authority for Zakat and Tax. The concerned parties must specify the type of real estate transaction and the property’s details, whether the transaction involves a sale, long-term lease, or even usufruct contracts exceeding 50 years. The transfer or notarization process must be completed with the competent authorities after registration.

Included and Excluded Real Estate Transactions The real estate transfer tax system covers various types of real estate transactions, including:

• Direct sale: Transferring ownership of real estate from seller to buyer for monetary consideration.
• Barter: Exchanging real estate between two parties.
• Long-term lease: Especially if the lease term exceeds 50 years.
• Bequests and gifts: The beneficiary or donee must pay the real estate transfer tax.

However, certain transactions are exempt from this tax according to the system’s executive regulations. Notable exemptions include:
• Transferring real estate ownership as an in-kind contribution to an investment fund: The property owner is exempt if they contribute the property as an in-kind contribution in exchange for investment units. • Transferring real estate to a company in which the person holds shares: For the purpose of correcting ownership or unifying shares within the company.

Calculating the Real Estate Transfer Tax The real estate transfer tax is calculated based on the agreed-upon value of the property between the buyer and seller, provided that this value is not less than the fair market value at the time of the transaction. The parties involved in the transaction must have accurate and transparent information about the property’s value to avoid any issues related to incorrect valuation or overpricing.

Recent Amendments to the System Last May, the General Authority for Zakat and Tax amended the executive regulations of the real estate transfer tax, which included:

• New exemptions: Most notably, an exemption for individuals contributing their property as an in-kind contribution to a real estate investment fund.
• Amendment to the tax due date: In build-operate-transfer (BOT) projects.

These amendments aim to facilitate real estate investment in the Kingdom and encourage real estate contributions in various sectors.

Impact of the System on the Real Estate Market The implementation of the real estate transfer tax system is expected to increase tax awareness among citizens and residents in the Kingdom. It also enhances transparency in real estate transactions and curbs tax evasion, contributing to a higher level of reliability in the Saudi real estate market. Additionally, the system can contribute to increasing government revenues, enhancing the state’s ability to finance development and infrastructure projects.

Exemptions and Incentives Despite imposing a 5% tax on real estate transactions, the system provides some incentives and exemptions aimed at supporting specific sectors. For example, real estate contributed as a share in a real estate investment fund is exempt from the tax, enhancing investment opportunities in this area. The state also encourages the correction of ownership situations within companies by providing special exemptions when transferring real estate from individuals to companies.

How to Comply with the System To comply with the new system, individuals and companies must follow several steps:

1. Registration: The concerned parties must register any real estate transaction on the dedicated electronic portal.
2. Determining the type of transaction: Each party must accurately determine the type of transaction, whether it is a sale, lease, or other.
3. Paying the tax: The seller must pay the tax before or during the transfer of ownership.
4. Transfer and notarization: After paying the tax, the concerned parties must go to the competent authorities to complete the transfer and notarization process.

In conclusion, the real estate transfer tax system is a significant step towards regulating the real estate market in Saudi Arabia and achieving greater transparency and fairness in real estate transactions. By imposing a 5% tax on every real estate transaction, the government aims to stimulate economic growth and increase public revenue. With the existence of some exemptions and incentives, the system provides an opportunity for investors to develop their real estate businesses within a clear and defined legal framework.