The new real estate transaction tax system allows the Zakat, Tax and Customs Authority a period not exceeding 3 years from the date of the real estate transaction to verify the value of the transaction disclosed, and to recalculate the tax due if it is proven that that value is less than the limits of the fair market value, including cases of evasion.

The Real Estate Transactions Tax Law, approved by the Council of Ministers, grants those who conducted any undocumented real estate transaction before the effective date of the tax on 14/2/1442 AH (corresponding to 2020 CE), a one-year grace period from the date of the law's implementation to rectify their status and document their transactions in accordance with the relevant regulations. This grace period may be extended by a decision of the Council of Ministers based on a proposal from the Chairman of the Board of Directors of the Zakat, Tax and Customs Authority.

Article Two stipulates that a tax of (5%) shall be imposed on real estate transactions, regardless of the condition, form, or use of the property being disposed of at the time of the transaction, whether the transaction includes the entire property or a part of it, whether it is divided or shared, whether the property being disposed of is completed, under construction, on the map, or otherwise, and whether it has been documented or not.

According to the regulations, the tax is calculated based on the total value of the real estate transaction agreed upon between the seller and the buyer, provided that – at the time of the transaction – it falls within the fair market value. For the purposes of calculating the tax, the value of the real estate transaction does not include the cost of financing from legally authorized entities.

Real estate transactions are subject to tax only once, provided that the parties to the transaction, the property, and the value are unified. The regulations shall specify the provisions and controls necessary for the application of this article, including those related to the real estate company.

Article Three confirmed that real estate transactions in cases of estate division, real estate transactions – without consideration – to a public, private or joint endowment, as well as real estate transactions – without consideration – to or from a legally licensed charitable association, are completely exempt from tax.

The exemption does not apply when real estate is disposed of by a public entity or any public legal entity, or entities or projects of public benefit, and when real estate is disposed of by a public entity in its capacity as a public authority, or real estate is disposed of in cases of expropriation for the public interest or temporary seizure of the property.

One of the cases of total exemption is when the real estate transaction is made by the husband, wife, or any of the relatives up to the third degree, by way of a documented gift, or real estate transaction in execution of a documented legal will, and when real estate transaction is made in cases of public subscription, trading of listed securities, and trading of investment fund units.

The temporary real estate transaction between an investment fund and a custodian – or vice versa – or between custodians of the same fund, is fully exempt from tax, in accordance with the provisions of the Capital Market Law and the regulations and instructions issued thereunder, and when the real estate transaction provides an in-kind share in the capital of a company established in the Kingdom, provided that the shares or stakes corresponding to the in-kind share are not disposed of for the period specified by the regulation, not exceeding (5) years, and that the company maintains audited financial statements from an accredited external auditor throughout that period.

It is completely exempt when dealing with real estate in cases where one of the parties to the transaction is a foreign government or international organization, or a diplomatic or military body or mission, or a member of the diplomatic, consular or military corps accredited to the Kingdom, provided that there is reciprocity.

It is exempt in the case of a real estate transaction that provides an in-kind subscription to the capital of a real estate investment fund, in accordance with the provisions of the Capital Market Law and the regulations and instructions issued thereunder, and when a temporary real estate transaction is made for the purpose of using the property as collateral for financing or credit, unless it is executed on the property by permanently transferring its ownership to the financier or a third party.

One of the cases of total exemption is the real estate transaction carried out in execution of a forced sale order issued by a competent court, or the real estate transaction resulting from mergers and acquisitions between legal entities.

The exemption cases included real estate transactions by a natural person for a company or investment fund established in the Kingdom, and this person owns - directly or indirectly - all the company’s shares, stocks or fund units, provided that there is no change in the percentage of his ownership in the company or fund for the period specified by the regulation, not exceeding (5) years.

The exemptions included real estate transactions between two companies established in the Kingdom, where one owns – directly or indirectly – all the shares or stakes of the other company; real estate transactions between a company and an investment fund established in the Kingdom, where the company owns – directly or indirectly – all the units of the fund; and real estate transactions between companies or investment funds established in the Kingdom, where all their shares, stakes, or units are owned – directly or indirectly – by the same person. In all cases, it is stipulated that all shares of the company to which the transaction is made, or stakes or units of the fund to which the transaction is made, remain owned – directly or indirectly – by the same person for a period not exceeding five (5) years, as specified in the regulations. Exemptions also applied to real estate transactions by any person to a real estate developer licensed to conduct off-plan sales and leasing activities in accordance with the applicable regulations, rules, controls, and instructions in the Kingdom, provided that the property is designated for an off-plan sales project and has received a license from the competent authority. The system stipulates that real estate transactions without consideration for a company or investment fund established in the Kingdom are completely exempt from tax, provided that all shares, stocks, or fund units are owned – directly or indirectly – by a public, private, or joint endowment, and on the condition that there is no change in the percentage of endowment ownership in the company or fund for the period specified by the regulations, not exceeding (5) years.

The property that was disposed of is exempted when it is returned to its previous owner as a result of the cancellation of the documented real estate transaction - before the notary public or the accredited notary - by mutual agreement between its parties, within a period not exceeding (90) days from the date of documentation of the real estate transaction subject to cancellation, and on the condition that no change has occurred to the description of the property, and its full value is returned.

The person in charge shall be responsible for the tax due and shall pay it to the Authority, in accordance with the procedures and within the dates specified by the regulation, without prejudice to the provisions of Article (Five) of the system.

The recipient shall be jointly liable with the transferor for the payment of the tax due, in cases where it is proven to the Authority that he was the cause of the non-payment of the tax due.

For the purposes of applying the provisions of this article, the term “transferrer” means the person for whose benefit the real estate transaction is made.

Article Eight of the system clarified that the Authority – within a period not exceeding (three) years from the date of the real estate transaction – must verify the value of the disclosed real estate transaction, and it must recalculate the tax due in cases where it is proven to it that that value is less than the limits of the fair market value, including cases of tax evasion, in accordance with what the regulation indicates.

The Authority shall, within a period not exceeding (three) years from the date of the real estate transaction for the purposes of calculating the tax due, estimate the value of the real estate transaction of undetermined value, which has been disclosed to the Authority.

The Authority shall calculate the tax due on the undocumented or undisclosed real estate transaction, and the Authority shall demand payment of the tax due within a period not exceeding (three) years from the date of the real estate transaction, or from the date it became aware of the undocumented or undisclosed real estate transaction.

What is tax evasion?

The regulations define tax evasion as the submission of forged, fabricated, or incorrect documents, information, statements, or records, or similar items, related to real estate transactions, with the intent to evade paying the due tax. The burden of proof rests with the taxpayer to demonstrate the absence of such intent.

It is considered tax evasion to commit any other act with the intent of evading payment of the tax due.

Penalties are imposed on those who violate the regulations, including a fine not exceeding three times the amount of tax evaded. The same penalty applies to anyone proven to have participated in, aided, or facilitated tax evasion.

A penalty of (2%) of the value of the unpaid tax is set for each month or part thereof for which the tax has not been paid, and not exceeding (50%) of the value of the unpaid tax. The penalty shall be calculated from the day following the end of the period specified for the payment of the tax due. An additional penalty of (1%) of the value of the unpaid tax shall be imposed for each month or part thereof if the value of the tax due is amended by the Authority. The penalty shall be calculated after (30) days have passed from the date of notification of the amendment.