A VAT-registered Saudi company takes its clients out for dinner at a restaurant to celebrate signing a new supply contract, incurring VAT on the restaurant bill. Under the Saudi VAT Implementing Regulations' rules on non-deductible input tax, can the company recover the input VAT it paid on this restaurant bill?
- No, input VAT on catering services provided in restaurants, hotels and similar establishments is specifically blocked from recovery under the Implementing Regulations, regardless of any legitimate business purpose behind the expense
- Yes, input VAT on any expense with a demonstrable business purpose is always recoverable, and a client dinner tied to signing a new contract clearly satisfies that business-purpose test
- Yes, but only half of the input VAT may be recovered, since the Implementing Regulations apply a standard 50% business-use apportionment to all client-entertainment expenses
- No, but only because the dinner involved external clients; the same restaurant bill would be fully recoverable if it were instead an internal staff-only dinner
Why A? And why not the others?
Correct answer: A. No, input VAT on catering services provided in restaurants, hotels and similar establishments is specifically blocked from recovery under the Implementing Regulations, regardless of any legitimate business purpose behind the expense
The VAT Implementing Regulations treat entertainment, sporting and cultural services, along with catering services supplied in restaurants, hotels and similar places, as expenditure falling outside a taxable person's Economic Activity, so input VAT on this restaurant bill is blocked from recovery even though the dinner had a genuine business motive, namely celebrating a new contract. The option treating any business-purpose expense as automatically recoverable is wrong because the Implementing Regulations specifically carve out entertainment and catering as blocked regardless of purpose; a legitimate business reason does not override that carve-out. The option describing a standard 50% apportionment invents a rule that does not exist for client-entertainment expenses under these Regulations; there is no such blanket half-recovery mechanism. The option distinguishing staff-only dinners from client dinners is wrong because the block on catering-service input VAT applies broadly to restaurant and hotel catering regardless of whether the diners are external clients or the company's own staff.
Source: Saudi VAT Implementing Regulations, non-deductible input tax for entertainment, sporting, cultural and catering services (ZATCA Input Tax Deduction and Recreation & Entertainment guidelines, zatca.gov.sa)