Key highlights of the Draft RETT Regulations

The recent RETT Law, enacted under Royal Decree No. M/84, introduces several key provisions that align with the draft RETT Regulation:

1. Expanded scope of tax

• The RETT applies to all real estate transactions, including sales, transfers, and other forms of real estate dispositions.
• In-line with the enhanced defined scope in the RETT Law, the draft RETT Regulation covers both direct and indirect transfers, including the transfer of shares in companies holding real estate if the real estate constitutes a significant part of the company's assets.

2. New exemptions and reliefs

• Certain transactions are exempt from RETT, the draft RETT Regulation provides clarification to the newly introduced exemptions in the RETT Law, the key exemptions include:
  • Indirect real estate transfers resulting from mergers and acquisitions between legal persons.
  • Indirect real estate transfers from public offerings and trading of listed securities and units in investment funds.

3. Taxable events

• The tax is triggered by any transfer of ownership or rights in real estate, including sales, gifts, and exchanges.
• Transfers of shares in companies holding real estate are also subject to RETT if the real estate constitutes a 50% or more of the company's assets.
• The draft RETT Regulation specifies that any change in ownership percentage due to listing or re-listing of shares will not be considered a taxable event.

4. Valuation

• The fair market value of the property is determined based on the prevailing market conditions at the time of transfer. The law emphasizes the importance of fair market value and rigorous compliance. Specifically, the RETT Law includes a new provision on "fair market value verification" which allows the ZATCA to verify and estimate the real estate transaction within three (3) years from the date of the transaction. 
• The draft RETT Regulation emphasizes more comprehensive guidelines for determining fair market value, considering prevailing market conditions and specific property types.

5. Compliance and reporting

• Taxpayers are required to report and pay the RETT within a specified period following the transfer.
• The draft RETT Regulation introduces more rigorous compliance and reporting requirements, including detailed documentation to support transaction values and tax calculations. Detailed documentation must be maintained to support the reported transaction values and tax calculations.
• The draft RETT Regulation also echoes a three (3) year period of statutory limitation, beyond which the ZATCA cannot conduct assessments on real estate transactions, except in cases of evasion.

6. Penalties

• Penalties are imposed for non-compliance, including late payment, underreporting of transaction values, and failure to maintain proper documentation. Under the RETT Law, penalties have been reduced to 2% monthly on the value of the unpaid RETT and maximum caps are set to fifty (50%) of the value of the unpaid RETT. The law specifies penalties for non-compliance and clarifies the buyer's liability, which are also addressed in the draft regulations.
• The draft RETT Regulation specifies that the buyer will be held liable for non-payment of RETT only if it is evidenced that the buyer was the reason for the non-payment. 

Looking into the merger and acquisition exemption

The merger and acquisition exemption under the recent RETT Law and the draft RETT Regulation encourages companies to pursue strategic mergers and acquisitions without the additional cost of RETT. The merger and acquisition exemption means that when companies merge or one company acquires another, the transfer of real estate involved in these transactions is exempt from the 5% RETT.

The term "merger" is defined in the draft RETT Regulation to mean "the joining of one or more existing legal persons to another existing legal person, or the merging of two or more existing legal persons to establish a new legal person in accordance with any provisions regulating merger operations in the Kingdom."

In order to qualify for the merger exemption, the following conditions must be met:

1. The merger consideration shall be limited to shares in the merging legal entity, or the entity resulting from the merger, without including any other cash or in-kind consideration, and in accordance with the provisions of the Companies Law - where applicable;
2. The shares obtained by the owners of the merged legal entity must be proportional to their ownership rights before the merger; and
3. The shares of the merging or merged legal entity must remain owned - directly or indirectly - by the same partners or shareholders for a period of at least five (5) years from the date of the merger, unless the shares are disposed of as part of a subsequent merger process, while meeting the criteria specified here.

This exemption does not apply to any other consideration - whether cash or in kind - obtained by the partner or shareholder objecting to the merger.

In order to qualify for the acquisition exemption, the following conditions must be met:

1. The acquisition consideration shall be limited to shares in the acquiring person and shall not include any other cash or in-kind consideration;
2. The owners of the acquired person shall retain their shares obtained in exchange for the acquisition process in the acquiring person for a period of no less than five (5) years from the date of registration or ownership of those shares; and
3. The acquisition will be completed in a single transaction.

Application of RETT to the exemption

• While the merger exemption provides relief from the RETT, companies must still comply with certain reporting and documentation requirements to qualify for the exemption.
• Detailed records of the merger or acquisition transaction must be maintained, including documentation that supports the claim for exemption.
• Even though the transfer is exempt from RETT, the fair market value of the real estate must still be determined and documented.
• If the conditions for the exemption are not met, or if there is a failure to properly report and document the transaction, the exemption may be disallowed, and the standard 5% RETT may be applied.
• Penalties for non-compliance, including late payment and underreporting of transaction values, will also apply.

Conclusion

The draft RETT Regulation, in conjunction with the recent RETT Law, represent a comprehensive update to the existing framework. These changes aim to broaden the scope of taxable transactions, introduce additional exemptions, and enhance compliance and reporting requirements. The merger exemption, in particular, offers significant benefits by facilitating corporate restructuring, stimulating investment, encouraging business consolidation, and promoting public-private partnerships. Stakeholders are encouraged to review the draft regulations and provide their feedback to ensure the final regulations are comprehensive and effective.

For more details, please visit the official consultation page here.

Proactive engagement and timely adjustments will be key to navigating this evolving regulatory environment effectively.

Please reach out to a member of the MENA tax team if you have any questions or would like to discuss how the above could impact you. We continually monitor all tax updates and developments within the region to ensure we are best equipped to support you and your business.

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To speak to us in relation to the RETT Law in the KSA or any tax matters or issues more generally, please contact one of the team members above.