A Saudi company sells an office building it owns to a buyer, and separately enters into a new annual lease agreeing to rent out a different commercial building it owns to a tenant. Under the coordination between the Real Estate Transaction Tax (RETT) Law and the VAT Law, how are the sale and the lease generally treated respectively?
- Both the sale and the lease are subject only to RETT at 5%, because RETT replaced VAT for every kind of real estate transaction once the RETT Law was introduced
- Both the sale and the lease are subject only to VAT at the standard rate, because RETT applies exclusively to residential property and never to commercial property
- The sale is subject to RETT at 5% rather than VAT, while the commercial lease remains a supply of services subject to VAT at the standard rate rather than RETT
- The sale is subject to VAT at the standard rate, while the commercial lease is subject to RETT at 5%, the reverse of the general treatment for a transfer of ownership versus a right to use property
Why C? And why not the others?
Correct answer: C. The sale is subject to RETT at 5% rather than VAT, while the commercial lease remains a supply of services subject to VAT at the standard rate rather than RETT
Since the RETT Law's introduction, a transfer of ownership of real estate by sale is generally taken out of the VAT system and instead taxed once under RETT at 5%, avoiding both taxes applying to the same sale. Leasing or renting out commercial real estate, by contrast, does not transfer ownership at all; it is a supply of a service (the right to use the property for a period), which is precisely the kind of transaction RETT was not designed to capture, so it remains subject to VAT at the standard rate. The option applying RETT to both the sale and the lease overstates RETT's scope, which is anchored to transfers of ownership rather than every dealing in real estate. The option applying VAT to both ignores that the RETT Law specifically carved ownership sales out of VAT to prevent double taxation. The option that swaps the two treatments, taxing the sale under VAT and the lease under RETT, inverts the actual coordination rule between the two regimes.
Source: RETT Law and Implementing Regulations; VAT Law coordination provisions for real estate (ZATCA)