Tax exemptions for KSA Regional Headquarters

Tax exemptions for KSA Regional Headquarters

The Kingdom of Saudi Arabia (KSA), as part of Vision 2030, aims to diversify its economy and reduce its dependency on fiscal resources stemming from commodities.

Amongst others, Vision 2030 focuses on attracting more Foreign Direct Investment. It does so through incentivizing businesses to establish themselves in KSA. Additionally, subject to certain conditions, only businesses which are incorporated in KSA can still tender for contracts with the government and government agencies (i.e., any entities or agencies with public legal personality in KSA) from 1 January 2024.

The introduction of the Regional Headquarters Program (“RHQ”) fits in with Vision 2030. This joint initiative between the Ministry of Investment (“MISA”) and the Royal Commission for Riyadh City (“RCRC”), invites global companies with a presence in the MENA region to relocate their regional headquarters to the KSA, promising accessibility to the ever-expanding economy of Saudi Arabia and to be part of the 2030 strategic development goals.

Regional headquarters by definition refers to the home or center of operations, including research and development, of a national or multinational corporation with no retail sales to the general public. The eligibility requirements and further details for an RHQ are outlined by Invest Saudi, and can be found here.

Based on what is already known so far, the program offers a range of benefits and facilities for RHQs in KSA, although it remains to be seen at this stage whether RHQs will get to enjoy any tax holidays or incentives. Although often rumored, there is currently no legal framework to award such tax exemptions, until further notice.

This, in turn, brings the tax consequences in focus of setting up an RHQ in KSA. By nature, the RHQ will be a location for strategic and management functions, and possible support services. This triggers proper tax consequences. This article provides an overview of the tax implications following the setup of the RHQ in KSA within the context of the existing KSA corporate income tax framework.

Taxable revenue generated by the RHQ

For those that establish an RHQ in KSA, the legal entity through which the RHQ license will be operated, will be considered a tax resident in KSA based on its place of incorporation. If this is an LLC, its worldwide income is subject to tax in KSA.

The fact that its C-suite, and therefore assumed to be the decision makers, may potentially not be resident in KSA effectively, or take decisions outside of KSA, has no bearing on the tax residency of the RHQ, which is simply a KSA tax resident.

If, however, the place of effective management of such an entity is outside of KSA, the entity may have a second residency, which may create additional issues outside of KSA in the country where the entity would be considered as having a second residency.

Setting up the RHQ as a branch, and not as an LLC has its own challenges, especially around profit allocation.

While from a regulatory point of view the RHQ license does not permit commercial activities, the revenue generated will be subject to corporate tax in KSA. Under the existing corporate income tax framework, 20% corporate income tax will apply on the taxable income generated by the RHQ.

Given that the RHQ is aimed mainly at foreign investors, while a theoretical possibility, it is unlikely that the entity will be held by GCC nationals such that zakat will apply on its zakat base at a rate of 2.5% (the zakat base is calculated differently than taxable income for corporate income tax purposes).

While the entity’s activity is not of a commercial nature, from a tax point of view, it has key strategic functions sitting in KSA. The entity needs to comply with transfer pricing rules and needs to be remunerated for its functions. An entity which is a pure cost center and is therefore loss making continuously is not permissible from a transfer pricing point of view, not desirable and is likely to trigger an audit.

The RHQ’s functions, assets and risks will need to be analysed, and likely the outcome will be that its strategic functions need to be remunerated at arm’s length determined through a benchmarking analysis, while its less strategic functions, such as back office functions, would be considered as low value intra group services (“LVIGS”), where the nature of such services is considered supportive and supplementary rather than an element of the core business of the Group.

The OECD have a safe harbour for LVIGS transactions which include accounting and auditing, tax and legal services, IT services (when not part of the principal activity of the group), HR activities etc. KSA has endorsed those Guidelines.

Where services meet the definition of LVIGS, a simplified approach may be available, which would see the appropriate cost base identified for the LVIGS activities be recharged with a profit markup of 5% with no requirement for a full benchmarking analysis to support the arm’s length nature of same. However, documentation should be retained which supports the rationale for the treatment of the activities as LVIGS. This includes a Master File and Local File where intercompany transactions exceed 6M SAR annually.

Below is a table of the mandatory activities under the RHQ license, and the optional ones.

Mandatory RHQ Activities – Strategic direction

Mandatory RHQ Activities – management functions

Optional RHQ Activities

Formulate and monitor regional strategy

Business planning

Sales and Marketing Support

Coordinate strategic alignment


Human Resources, and Personnel Management

Embed products and/or services in region

Business coordination

Training Services

Support M&A

Identification of new market opportunities

Financial Management, Foreign Exchange, and Treasury Centre Services

Review financial performance

Monitoring of the regional market, competitors, and operations

Compliance and Internal Control

Marketing plan for the region


Operational and financial reporting



Research and Analysis

Advisory Services

Operations Control

Logistics and Supply chain management

International Trading

Technical Support or Engineering Assistance

Network Operations for IT System,

Research and Development

Intellectual Property Rights Management

Production Management

Sourcing of Raw Materials and Parts

Other pitfalls for newly incorporated RHQ’s?

KSA residents are obliged to withhold a tax from the amounts payable to non-resident entities for services (“WHT”). WHT applies on the gross income sourced by the non-resident entities from KSA at the time of payment by the KSA resident customer. The rate applied to the payments ranges between 5% to 20%, depending on income types.

However, subject to the double taxation treaties (“DTTs”) entered with KSA, non-residents from countries that have treaties with KSA may be able to avail of a WHT exemption or relief on the income generated. KSA has entered DTT’s with numerous countries outlining the extent to which tax may be charged and the potential relief available on the WHT application pertaining to profit repatriation, dividend, interest and royalty payments, among a few others. The list and overview of DTT’s can be found here.

KSA additionally has wide Permanent Establishment concepts, covering amongst others virtual Permanent Establishments. KSA also has a Force of Attraction principle, widening the scope of any profits allocated to a Permanent Establishment. This exceptional position from an international point of view tends to constitute more of an issue with non-treaty countries.

The Financial Times has recently published an article found here, which refers to how the taxation uncertainty is “paralyzing some people from doing things”, with fears among executives revolving around how the setting up of the RHQ in KSA could potentially give rise to a tax creep on the regional profits generated outside of KSA, allowing KSA to tax such profits under its domestic tax legislative, in the absence of tax treaties between KSA and other countries in the region.

These concerns are partially unfounded. If the activities described above are conducted in KSA, no other countries would be entitled to tax them. Their very nature would not make them particularly prone to Permanent Establishment risks elsewhere (although there may be residency risks elsewhere).

Where there is more of a valid concern, is around passive income, where DTT’s may help in reducing potential foreign withholding taxes and establishing a method for double tax relief to be used in KSA. It is therefore important that KSA continues to develop its DTT network.

Value Added Tax (“VAT”) considerations

In general, the place of supply in respect to both goods and services determines the applicable VAT regime. The supply of services by a KSA resident entity, including an RHQ, to a non-resident customer, who benefits from the service outside the GCC territory, is in principle subject to zero-rate for KSA VAT purposes. In order to apply the zero-rate, the supplier must ensure it can meet each of the criteria set out in Article 33 of the VAT Implementing Regulations.

This treatment should be appropriately accounted for in any invoices issued by the RHQ to its affiliates. Additionally, it will be important for the RHQ to monitor the activities/supplies undertaken in KSA which are subject to VAT and whether they will exceed the standard threshold of 375,000 SAR, requiring them to register for VAT in KSA.

Concluding thoughts

There is currently no tax exemption available for RHQ activities. The taxation of RHQ activities therefore has no specific angle to it. The attention point mainly turns towards Transfer Pricing and the appropriate arm’s length remuneration for RHQ activities. Given the potential mix of strategic, management and back office activities, these arrangements need to be analysed and appropriately remunerated.

We will potentially see more clarification from ZATCA or from MISA on the aspects of the RHQ program soon, and definitely more interest, given the very fast growth KSA is currently going through, and the multitude of megaprojects and smaller projects being developed.

As we have seen in the UAE for Qualifying Free Zone Persons, even if benefits are granted (0% in the case of the UAE), transactions need to comply with transfer pricing. Therefore, even if eventually RHQ’s are granted a tax holiday, the transfer pricing principles will remain very relevant.


UAE Corporate tax makes tax structuring and conducting tax due diligence more relevant

UAE Corporate tax makes tax structuring and conducting tax due diligence more relevant

Over recent years, Mergers and Acquisitions (M&A) activities in the Middle East have held steady, despite the challenging economic climate across the world.

Such feat can be credited to the economic strategies implemented by the countries in the region. The United Arab Emirates (UAE) has remained the top market for M&A activity, with 155 deals worth $17.2 billion (AED 63 billion) in the first nine months of 2022, according to reports.

Saudi Arabia has also launched initiatives that had a positive impact on M&A, such as Vision 2030, the privatization of state-owned assets, and industry consolidation.

With favorable business and UAE corporate tax policies, the Middle East has become a prosperous hub for trade and investment, leading to a steady stream of M&A activity as businesses seek to access new markets and generate additional revenue streams.

In this article, we provide insights on some of the basic concepts of how to manage the tax aspects of M&A transactions. We also discuss the nuances of the law pertaining to the direct and indirect tax regime in the UAE, and how these impact M&A.


Why conduct a Tax Due Diligence?

Conducting a tax due diligence helps to assess possible tax risks associated with the target company that the buyer plans to acquire, or the seller wishes to sell.

From the buyer’s point of view, a tax due diligence is required for the following reasons:

  • Ability to assess the target’s tax compliance,
  • Evaluation of any tax exposures or contingencies, and
  • Estimation of any potential tax costs or benefits of the transaction.

From the seller’s point of view, a tax due diligence is required for the following reasons:

  • Ensuring proper addressal of historical tax exposure to help reduce the risk of any future tax disputes or penalties,
  • Increase the value of the deal, and
  • Understand the tax implications of the transaction and potential tax planning opportunities.

A Tax due diligence can create value. A clean slate for the target, will reduce uncertainty, and therefore increase the deal value.


Negotiating the deal and managing risk

Deals can be structured in a variety of ways, of which the simplest ones are the negotiation of outright Asset Purchase Agreements or Share Purchase Agreements.

Some of the matters that the buyer may pay attention to following a due diligence are:

  • Adjustment of purchase price,
  • Negotiation of representation and warranties,
  • Inclusion of specific indemnity clauses, and
  • Removal or restructuring of tainted structures until the risks are mitigated, or resolution of tax disputes before the deal is concluded.

Some of the matters that the seller may pay attention to are:

  • Maximize the after-tax proceeds from the sale,
  • Structuring the deal in the most efficient way possible, and
  • Removing uncertainty on certain positions.

Often a tax ruling is highly critical in respect of the structuring of the deal itself. Having the tax authority rubberstamp the transactions helps in avoiding any future disputes.

A popular method is also to insure against the risks discussed above and to procure ‘Warranty and Indemnity Insurance’ (W&I Insurance). Essentially, W&I Insurance provides cover for losses arising from a breach of warranties and claims under tax indemnities.

This way, the benefit for the seller is that they access the sale proceeds immediately, rather than, for instance, having an amount blocked in an escrow. In turn, the buyer is protected from any unknown tax related loss, from the insurer directly, especially when the buyer is not convinced about the financial standing of the seller after closing.

From the insurer point of view, they require a thorough analysis of the tax due diligence report. This will determine any points of uncertainty, and to ensure that the scope of the insurance coverage is limited to the extent of their satisfaction, before quoting for a premium.

Read more on the importance and practice of obtaining tax insurance in the Middle East here.

Another important reason for protection against legal liabilities (during M&A transactions as well as more generally) is that sometimes, non-compliance may even trigger liability for the Directors and other executives of the company. In one of our earlier articles, we discussed the interplay with the personal liabilities of the Directors.


From Current structure (As Is) to Target structure (To Be)

Effective tax structuring is essential to mitigate the tax-related risks that can arise in M&A transactions—such as tax compliance, tax disputes, and transfer pricing. It usually involves carefully designing the structure of the transaction in a tax-efficient manner while ensuring compliance with applicable laws and regulations.

Pre-deal structuring may happen to make the Target more attractive, and Post-deal structuring may happen to align the acquisition better with the operation model of the buyer.


M&A and Direct Tax

M&A transactions have a profound accounting and valuation impact, both for the buyer and the seller. This in turn leads to a potential tax impact. For example, the M&A deal may revalue the assets and liabilities of the company, or the sale of shares may trigger a capital gain, a potential tax exposure.

Many jurisdictions have provisions under their law to reduce the impact of M&A transactions from a tax point of view, or otherwise address certain relief on certain types of  reorganisations.

For example, under the UAE CIT Law, transfers of business are considered to be tax neutral and benefit from a temporary exemption of taxes, subject to conditions. This is the case where (i) businesses within the same ‘Qualifying Group’ are restructured (Article 26 UAE CIT law – we will not be covering these aspects here) or (ii) where the M&A transaction is eligible for a specific business restructuring relief (Article 27 UAE CIT Law).

The specific business restructuring relief allows sellers not to have to account for any potential capital gains (or losses) as a result of the transaction. Certain conditions need to be met, as shown below in Table 1.

Table 1 – Tax-neutral restructuring – status of parties and transfer details

Status of the transferor

The transferor is a taxable person

Nature of the transfer

Transfer of entire business, (or) an independent part of the Business (as the case may be)

Status of the transferee

The transferee is either: (a) already a Taxable Person (or) (b) will become a Taxable Person as a result of the transfer


In exchange of shares or other ownership interests

Further, the conditions for availing the above benefits are as follows:

  • Value of shares received shall not exceed net book value of assets transferred or liabilities assumed (less the value of any other form of consideration received),
  • The transfer is undertaken as per the applicable laws of the UAE,
  • The taxable persons are either:
    • Resident persons, or
    • Non-Resident persons with a Permanent Establishment (PE) in the UAE,
  • Neither the transferor(s), nor the transferee(s) are ‘Exempt persons’ or ‘Qualifying Free Zone Persons’,
  • The Financial Years of all the Taxable Persons end on the same date,
  • The Taxable Persons prepare their financial statements using the same accounting standards,
  • The transfer is undertaken for valid commercial or non-fiscal reasons which reflect economic reality.

In terms of the consequences, in both situations for this benefit to accrue, the following must be observed:

  • The assets and liabilities shall be treated as being transferred at their net book value such that neither a gain, nor a loss arises,
  • Any unutilised Tax Losses incurred by the Taxable Person (transferor) prior to the Tax Period in which the transfer is completed may be carried forward to the Taxable Person (transferee), subject to conditions to be prescribed by the Minister. The law itself provides one condition. Where the taxable person transfers an independent part of its business, the unutilised loss carry forward benefit is only attributable to the extent of the independent part of the Business being transferred (this benefit is also subject to the change-in-control provisions discussed later).

The tax-neutral benefit is not available, and therefore there is a clawback, when any of the following occurs within 2 years from the date of the transfer:

  • The shares or other ownership interest in the taxable person (transferor or the transferee) are disposed of (in whole or in part) to a Person that is not a member of the Qualifying Group to which the Taxable Person(s) belong(s), or
  • There is subsequent transfer or disposal of the (independent part of) the business.

If any of the above activities occur within two years, the transfer of the (independent part of the) business shall be treated as having taken place at Market Value at the date of transfer, what is popularly known as the ‘claw-back provision’.

The unutilised tax loss carry-over benefit is also subject to the transferee conducting the same or similar Business or Business Activity, following a change in ownership of more than 50%. Relevant factors to decide if the Business or Business activities conducted are same or similar include:

  • The transferee uses some or all of the same assets as before the ownership change;
  • The transferee has not made any significant changes to the core identity or operations of its Business since the ownership change; and
  • Where there have been any changes, it is a result of the development or exploitation of assets, services, processes, products or methods that existed before the ownership change.

M&A and Indirect Tax

From an indirect tax point of view, it is important to note a difference between an ‘Asset Deal’ and a ‘Share Deal’.

An ‘Asset Deal’ is where the buyer acquires specific assets of the target company. The buyer does not acquire ownership of the target company itself. Instead, the target company continues to exist, and the buyer becomes the owner of the specific assets.

A ‘Share Deal’, on the other hand, is where the buyer acquires the target company by purchasing its shares. This gives the buyer full ownership and control of the target company, including all of its assets and liabilities.

Within ‘Asset deal’, there are two types of deals – (i) normal sale of assets (sale of assets) (ii) sale of assets as part of the Transfer of Going Concern (TOGC) (sale of business).

As per the clarification provided by the UAE FTA, a sale of assets is normally subject to VAT as a taxable supply. This is because only the specific assets, and not the entire business itself is transferred.

On the other hand, where the assets are sold as part of a transfer of a business as a going concern (“TOGC”), the transfer is not a ‘supply’ and no VAT is charged. For example, if the transferor sells the factory building, all the machines and transfers the rights from the employment and supply contracts, this is considered as a TOGC, and is not considered a ‘supply’ for VAT purposes. A similar understanding is given in the guidances to the Saudi Arabian VAT law, which explains the same concept referring to as a ‘Qualifying Transfer’. We have summarised the difference between an ‘Asset Deal’ and a ‘Share Deal’ in the below table:

Conclusion and Final Thoughts:

Tax advisors play a crucial role in structuring M&A deals. Over recent years, the GCC tax landscape has become increasingly complex. This is the result of a number of contributing factors, such as the introduction of VAT, frequent changes in local legislation, the implementation of the Base Erosion and Profit Shifting (BEPS) standards, increased transparency and disclosure measures (Ultimate Beneficial Ownership (UBO) reporting requirement, Common Reporting Standards / Foreign Account Tax Compliance Act (CRS/FATCA) standards, and a range of other changes.

In addition, taxpayers may have noticed an increased focus on enforcement by the tax authorities, which is evidenced by an uptake in tax audits and disputes.

We have tackled how new tax rules impact M&A deals before in one of our previous webinars, noting how tax advisory plays a critical role in M&A transactions, as tax issues can have a significant impact on the success of the deal and the post-merger integration process.

The UAE Ministry of Finance has designed a carefully balanced CIT system and has tried to avoid adversely affecting M&A transactions.

Going forward, the tax department’s involvement in the transaction will be much more important, and like in other jurisdictions, tax can sometimes make or break a deal.

The UAE CIT applies as from June 2023, but the involvement of the tax teams in the M&A deals from a UAE CIT point of view, has already started. The FTA will no doubt develop an important ruling practice important for the legal certainty around M&A Transactions.


Scoring Tax Exemptions in Qatar

Scoring Tax Exemptions in Qatar

International sports bodies typically insist on obtaining widespread tax exemptions as a precondition to awarding the hosting rights to a bidder. This also applies for events organized by the Fédération Internationale de Football Association (FIFA). FIFA’s biggest event, the Football World Cup, will kick off later this month in Qatar.

Obtaining tax exemptions is such a sensitive topic for sports organizations that there have even been instances where the events have entirely moved to another country because a country was unable to grant the exemption. For example, the T20 Cricket World Cup was moved from India to the United Arab Emirates (UAE) and Oman last year because the Indian Government did not offer the exemptions in time.

In Qatar, even though Qatar has Free Zones, only the Qatar Financial Centre (QFC) issues its own tax framework. It applies next to the general tax framework applicable in the rest of the State of Qatar. We will be looking at these frameworks in this article.

Claiming Tax Exemptions (Substantive Aspects)

For mainland Qatar, Ministerial Decision No. 9 of 2022 (Ministerial Decision) issued earlier this year on 25 August 2022 = provides details on the exemptions available to different parties, based on Government Guarantee No. (3) dated 22 February 2010 (Government Guarantee) issued by the State of Qatar to FIFA.

The most comprehensive exemption benefits are provided to FIFA itself and its affiliates (whether residents or non-residents). They are totally exempt from any taxes.

Contractors are granted a limited exemption to the extent of all taxes on import, export or transfer of goods, services and rights related to the activities of the World Cup, if the goods are imported for their use by:

  • The Contractors themselves in Qatar,
  • The Contractors, with the possibility of re-exporting the goods,
  • The Contractors, with the possibility to donate to sports entities, charitable foundations etc.

Individuals employed or appointed by the following, are also exempt from individual taxes on payments, fringe benefits or amounts paid or received in relation to the World Cup, until 31 December 2023:

  • FIFA,
  • FIFA’s affiliates,
  • Continental or National Football Associations,
  • Event broadcasters,
  • Suppliers of goods,
  • Works contractors and
  • Service providers.

This exemption also covers Personal Income Taxes for those individuals who enter and exit Qatar between 60 days before the first match (21 September 2022) until 60 days after the final match (16 February 2023), as long as they do not permanently reside in Qatar. This exemption may be void of much effect, given the absence of Personal Income Tax in Qatar.

An Exemption from Excise tax is to be obtained by way of refund, by providing documents like purchase invoices and bank details.

 Claiming The Exemptions – Logistical Aspects

For exemptions granted by the General Tax Authority (GTA), there is no requirement to register with the GTA. Instead, FIFA (through the Supreme Committee for Delivery and Legacy (Supreme Committee)) prepared a list of exempted entities and individual, containing data such as the nature of contracted works, term and value of the contract, and the residency of the contracting party.

The Supreme Committee then provides the GTA the relevant documentation (Articles of Associations of companies, addresses of individuals etc.) in regard to the organisation or individuals for whom the Tax Exemption is applied.

For claiming customs duty exemptions with the General Authority of Customs (GAC), (and unlike the procedure with the GTA), the claimants need to register with the GAC.

Here too, FIFA approves the list for the Supreme Committee to provide to the GAC to entitle those entities to exemptions from customs duties and fees.  Based on this list, the GAC provides the listed entities amongst others with facilities in regard to electronic customs clearance.

In this regard, the GAC also earlier this year launched a ‘Sports Events Management System’ to facilitate customs procedures during sporting events, including the World Cup. This system provides electronic services for the clearance of goods, including easy registrations, accelerated customs procedures, and the inclusion of a special unit to facilitate approvals for incoming shipments. 

There may be some interesting questions on the applicability of the Ministerial Decision, including:

  • To what extent are the activities ‘directly or indirectly’ related to the activities of the World Cup? For example, does it include online betting platforms involved in placing bets on the matches? Would it include businesses that are involved in ancillary aspects to the World Cup such as general tourism consequent to the World Cup?
  • Would match fee or advertisement / sponsorship / award income earned by the footballers in relation to the World Cup also be covered under the Ministerial Decision?
  • Where an event broadcaster obtains substantial advertisement income from brand sponsors during the broadcast of the match or match related activities, is such income also exempt from taxes?

QFC – Tax Exemption Regime for the World Cup 

The QFC in its Concessionary Statement of Practice (Statement) explicitly provides that a QFC entity which is a:

  • FIFA subsidiary – is exempt from Corporation tax and any other charge, levy, penalty or interest related thereto;
  • FIFA Host Broadcaster or a Local Organizing Committee (LoC) Entity – is exempt from Tax ‘in relation to taxable profits that are derived from activities carried on for the purposes of the World Cup’.

The major conditions for such QFC entities to claim the exemption are as follows:

  • Such QFC entities have genuine economic substance in Qatar,
  • The QFC entity operates in terms of the license and upon authorization of the Qatar Financial Centre Regulatory Authority (QFCRA),
  • An Advanced Ruling has been applied for by the QFC entity and granted by the QFC, confirming the exempt status of such QFC entity,
  • The QFC entity is included in the list provided by FIFA to the QFC Tax Department,
  • The sole or main purpose of such QFC entity is not avoidance of tax,
  • The QFC Tax Department is satisfied that granting the exemption is not in breach of international tax principles set out in the BEPS Project minimum standards.

The potential activities that can be developed in the QFC are limited, and therefore not all types of businesses can set up in the QFC.

No VAT – No VAT Exemption

Even though Qatar is a part of the GCC VAT Agreement and committed to implement VAT in the same vein as its neighboring countries of the UAE, Kingdom of Saudi Arabia (KSA), Bahrain and Oman have done, it has not yet enacted any legislation.

Therefore, there is currently no need for a VAT exemption for the World Cup. Who knows, VAT may be introduced shortly after the organization of the World Cup?

Exemptions Worth the Trouble?

Granting tax exemptions for international sporting events are sometimes controversial. The public in some hosting countries do not always believe they receive a return on investments from the event. While Qatar has spent substantial amounts of money on the construction of infrastructure, the effect of the tax exemptions is rather limited, and at least for Qatar, it seems to have been worth the investment. In any case, the exemptions are a precondition, without which a country cannot bid. After the UAE had hosted the FIFA Club World Cup a number of times, Saudi Arabia will now be looking at hosting the Asian Winter Games in 2029. Those countries have given similar tax concessions to the international organizations managing the events.

For future possible events in the UAE, it will also be interesting to see how the sporting organizations and the tax authorities will deal with the Corporate Income Tax (CIT) which is to be introduced in the UAE in June 2023. The relationship may be anything between an unbridled and full-fledged exemption (if the UAE is willing to do so), or it may lead to rather interesting tax claims (like the Formula 1 case on Permanent Establishment (PE) in India a few years ago, which was decided by the courts in the tax authority’s favor). Time alone can tell.


Taxation of Non-Fungible Tokens – Musings observations and interrogations.

Taxation of Non-Fungible Tokens – Musings observations and interrogations.

Taxation of Non-Fungible Tokens – Musings observations and interrogations.

Non-Fungible Tokens (“NFTs”) have been hot, although the market seems to be cooling down as of late. According to a recent Bloomberg article though, there are still monthly NFT sales for an approximate value of 1bn USD. As trade value reduces, The Bored Ape seems to be boring its potential customers now. With the drop in the value of cryptocurrencies this may also affect the value of NFT’s.

Different countries have taken different tax positions on income derived from their supply, and on supply of NFTs (and some countries are yet to take a position).

When an NFT is sold, it is a digital representation on the blockchain of an artistic work or other object (e.g. trading cards, images, music, gold bars, diamonds etc.). The NFT grants the purchaser certain rights of use, although a precise legal framework is lacking in many jurisdictions. It is said that the blockchain ensures a digital title deed or proof of digital ownership.

When transferring an NFT, the underlying asset is not transferred. The NFT is a unique, non-interchangeable item. By way of an example, an NFT could be a digital representation of a painting featuring a monkey, but not the painting featuring a monkey itself.

In this article, we discuss the (possible) treatment of NFTs in different jurisdictions and the potential application of existing VAT and Corporate Income Tax (“CIT / CT”) laws on NFTs. Our article builds on an earlier analysis of the VAT treatment for cryptocurrencies, which you can find here).

VAT – between electronic services and regular taxable services.

As far as NFTs are concerned, the fact that these are usually paid with cryptocurrencies is not relevant. A sale of an NFT will raise the same questions on whether it is taxable, regardless of the mode of payment, whether the payment is made in regular (fiat) currency, crypto currency or in kind.

Currently, the most debated question is whether the sale of an NFT is subject to VAT or not? To answer this question, we examine the positions taken by some countries.

Firstly, it is important to note that NFTs are treated as services for VAT purposes under EU VAT law, as they do not constitute a supply of tangible assets.

In Spain, the Tax Authority (Dirección General de Tributos, the “STA”) issued an interesting ruling (V0482-22 of March 10, 2022). Fernando Matesanz discusses in his article the scenario of a natural person transforming photographs to produce unique pieces using photoshop-transformed illustrations. He then auctioned them on the internet through digital platforms that were not authorised to provide the real identity of the buyers (nicknames were adopted).

The STA held that the sale of an NFT is a supply of service, more specifically an Electronically Supplied Service (“ESS”), based on the fulfillment of the following tests: (i) automated and require minimal human intervention and (ii) are not feasible without information technology.

One major concern raised by many Spanish suppliers of NFT’s was that the identity of the acquirers was not disclosed to the supplier, given the nature of the transaction on the blockchain. Therefore, the difficulty was that the seller would not have been certain if Spanish VAT ought to be accounted for or not. If the buyer of the NFT would be abroad, no Spanish VAT would apply.

In our view, the qualification by the STA as an ESS is at least debatable. One school of thought can be that there is nothing automated about a digital representation of a(n artistic) work. It is a mere representation of an underlying asset. An NFT is a far cry from the traditional electronically supplied services, such as streamed music or movies. The ESS definition also does not refer to the requirement, or absence thereof, of a legal entitlement to an underlying asset.

At the same time, another school of thought can also exist, especially considering the facts of the Ruling, that while the act of using the photoshop software certainly requires human intervention and skills, the overarching representation (being the subject matter of the sale in question) which is generated via the blockchain itself does not require any human intervention. This latter view is supported by a Spanish tax expert, Rubén Bashandeh.

Fernando Martesanz’ article equally highlights the issues in determining the location of the supplier. Additionally, it flags the issues around the interpretation of the Use and Enjoyment rule which may localize the service in Spain, even if the regular place of supply rules determines these services outside the EU.

The UAE mandates the Use and Enjoyment rule (special place of supply rule), as a base rule for ESS and not as an exception to the normal rule to avoid double or non-taxation. It locates the service in the jurisdiction where services are used and enjoyed. The practical issues with this type of identification are well known.

Even if somehow, it can be established that the purchaser, say in the UAE, can be verified to have used and enjoyed the NFT in the UAE itself, or if a UAE supplier would adopt a conservative position on the matter, then the UAE would certainly be considered an attractive jurisdiction, given that the VAT rate is only 5% as compared to as high as 27% in some European countries or other jurisdictions.

A view similar to the Spanish Ruling was shared by the Belgian Minister of Finance, who recently stated in Parliament that he considers such a sale of an NFT akin to any other sale and therefore, in the view of the Finance Minister, an ESS.

In Switzerland too, as per the opinion of Cyrill Diefenbacher and Ollin Söllnerm in their article, the sale of NFTs would also qualify as ESS as Swiss VAT law is relatively aligned with the EU VAT laws. The authors also rightfully refer to the VAT exemption for creators of artwork which may apply, and which are common across multiple jurisdictions (but not the GCC).

The experiences that the UAE, or the broader Gulf Cooperation Council (“GCC”), can borrow from Europe are rather limited. NFT’s also do not seem to be as relevant in the other GCC countries.

Given their continued importance, other jurisdictions are bound to take position on the matter. With the VAT systems in the UAE and GCC being relatively new, an opportunity presents itself to align the tax framework with technological developments.


Income Tax – speculative income or regular income?

In the GCC countries, the sale of NFTs by a private person would not be subject to any form of taxation, given the absence of personal income tax. If the sale is made by a corporate (or an establishment), this may be different.

NFTs are taxed and regarded as property in most countries. There exists a distinction between (i) a taxpayer who creates NFTs and (ii) merely purchases or sells NFTs. The creation does not usually trigger any income tax. However, once the NFT is sold or otherwise transferred, the gain from the sale or transfer may be subject to tax.

In Switzerland, the tax treatment of NFTs depends on whether NFTs are considered private assets (not subject to tax) or business assets (subject to income tax). According to the Swiss definition of business asset, any individual participating in a “self-employed activity” and making a profit would be subject to income tax on the purchase and sale of NFTs. The same above cited article states that the key criteria to consider in establishing such an activity would be the transaction volume and potential use of debt to finance the transaction.

In our view, the above criteria would hardly apply to the UAE because the trigger of CIT in the UAE will be based on whether the individual is (required to) have a license or a permit to conduct the trade in the UAE.

With the UAE bringing in business tax (perhaps a more appropriate word for a corporate tax that taxes individuals), that legislative framework needs to be considered too. There is no difference made between speculative income and regular income, although the UAE does distinguish between passive and active income, stating its intention to tax only active income of natural persons.

In the US, the Internal Revenue Service (“IRS”) guidance on taxation of digital assets is sparse. Yet some authors referred to below have opined on how the taxability of NFTs would be played out. Section 197 of the Internal Revenue Code potentially allows taxpayers to amortize their adjusted basis in their NFTs over 15 years, as NFTs are considered intangible assets. However, this section can only apply to taxpayers other than creators. In the opinion of these authors, ”Amortization deductions would be allowed, and any potential losses such deductions generate would also be allowed as long as the taxpayer meets all of the loss limitation rules.” It remains to be seen what tax payers will actually hold NFT’s for 15 years.

In the US, a dealer (one who buys and sells NFTs as a business) seems to be taxed on the sale of NFTs as ordinary income. Both dealers and creators could deduct business expenses relating to the sale of the NFTs (this includes the cost of the acquisition of the NFTs) and where the sale amounts to a loss, US regulations would allow for a deduction against other ordinary income for the dealers (see here). Lastly, regarding depreciation, it seems that NFTs would not be subject to depreciation due to the fact that their useful life is hardly determinable.

In India, the tax law was recently amended to introduce a charging section for income earned from Virtual Digital Assets (“VDA”) (which includes NFTs). It is a separate provision separate from provisions on business profits or capital gains. Given the intention of the Government of the UAE to have a relatively simple and business friendly tax system, it is unlikely that the UAE would follow the Indian route. The separate charge is heavily criticized as detrimental for the NFT trade in India.

In Denmark, the Tax Assessment Council in Denmark (Skatterådet – the highest administrative tax assessment authority), has taken the position that the gains derived from the sale of NFTs would be considered ‘business income’, at least in the particular case at hand.

In this case, a software engineer earned substantially higher income than his salary by selling NFTs (crypto art). The Tax Council in Denmark held that given his intention and professional abilities, the activity is more appropriately considered to be business income.

We can imagine that if a similar scenario would be considered in the UAE, a similar outcome would ensue, despite the fact that the revenue would be earned by an unlicensed person. A one-off gain on account of sale of an NFT may receive a different treatment though.

VARA – Virtual Asset Regulatory Authority.

Government entities and regulatory authorities have also jumped on the NFT bandwagon. In March 2022, the Emirate of Dubai enacted the first legislation relating to virtual assets (Law No. 4 of 2022 on the Regulation of Virtual Assets) creating a new regulatory authority, i.e., Virtual Asset Regulatory Authority (“VARA”) which would provide the legal framework for regulating the trading of virtual assets such as cryptocurrencies and NFTs.

The creation of VARA marks an important step in the Emirate’s journey in becoming the leading hub for Virtual Assets. However, this first step toward virtual asset regulation in the UAE has not yet addressed taxation issues. As for tax purposes, the recent law does not provide clear information on the taxation of such assets but simply states that a person engaging in “services related to offering, and trading in, Virtual Tokens” will require a permit from VARA (Art 16 (a) 7).

Uncertain Space – Uncertain Times!

In conclusion, we will have to wait and see the position that the Government of the UAE, and insofar as relevant, the other GCC governments will take on the VAT and CIT implications of NFTs.

As discussed above, each scenario would require a case-by-case analysis and there is no straitjacket formula available on the CIT issues. As for VAT, it seems considering NFT’s as services is a sensible approach.

We will need to keep a close eye on other countries’ positions and determine the position that fits most appropriately within the tax system of the UAE, and the GCC. Uncertain and equally exciting times are ahead of us. 


Is tax insurance used much in the Middle East?

Is tax insurance used much in the Middle East?

What is Tax Insurance and why use it?

Planning and protecting for tax risks identified during the due diligence process through the purchase of a specific insurance product has become increasingly commonplace in the last five years. Indeed, the tax insurance market has grown significantly year-over-year, and it is estimated that over $100 billion of specific tax risk was insured globally in 2021. This, of course, is in addition to those unknown and unquantifiable tax risks that are covered by warranty and indemnity (W&I) policies that are now standard in most transactions and, notably, in private equity, real estate, and infrastructure mergers and acquisitions (M&A).

Despite the booming market globally, there are still several regions where the tax insurance market has yet to take off, including the Middle East, even though M&A activity in the region is buoyant, with more than 650 transactions completed in 2021 and a combined deal value of close to $90 billion. Admittedly, there are several contributing factors, with the most significant being the fact that, historically, the tax regimes in the region have been extremely limited or non-existent and unpredictable. However, this position has been evolving steadily in the last 48 months with the introduction of value-added tax (VAT) and excise tax and is now accelerating following the announcement of the BEPS 2.0 implementation, and the ensuing implementation of Pillar 1 and 2. Most recently, we have seen the United Arab Emirates (UAE) announce that they intend to introduce corporate tax at a rate of 9 percent from June 2023.

While there is every intention for the newly introduced corporate tax regime in the UAE to be simplistic and straightforward, the continued presence of free trade zones, in which corporation tax will not be levied, and other issues add uncertainty and opportunities for abuse. As a result, the expectation is that the legislation and supporting guidance will quickly grow and the level of complexity will increase. In the context of M&A transactions, this will likely increase those instances in which significant tax risks may be identified and need to be handled.

Why Is Specific Tax Insurance on the Rise?

Specific tax insurance is especially popular in a competitive auction process as it allows a potential purchaser to protect themselves from the risk identified, in the event it unwinds to a cash tax liability, while ensuring their bid remains competitive as they will not need to request a price adjustment or contractual protection such as a warranty or indemnity. Such price adjustments or contractual protection may make a bid less attractive.

Vendors are also in favour of it as it mitigates value lost through purchase price adjustments for risks that may never materialise and/or lowers the risk of having funds tied up for long periods in escrow or set aside to cover potential indemnities should they be triggered in the future.

There are other strategies to manage risks, such as:

  • one party accepts the risk (and there is a corresponding adjustment in the deal value),
  • eliminating the risk, e.g., by disclosing the risk it materialises, and the uncertainty is removed,
  • pre-deal planning in which the tainted structure is removed or structured in a way that risks are mitigated e.g., deferring the deal until a holding period is met.

What is the Purpose of W&I Insurance? The purpose of a W&I policy is to protect against risks that are unknown at the time a deal is complete. In doing so, the seller is able to access the sale proceeds immediately rather than, as stated above, have any amount placed in escrow or price-chipped. Meanwhile, the buyer is protected as it can recover any unknown tax-related loss directly from the insurer. In return for providing the W&I policy, the insurer will expect a premium to be paid in return for the risk they are taking on. The size of this policy will depend on a number of factors such as the jurisdictions in which the relevant company operates and the level of due diligence carried out in relation to it.

Typically, the insuring party will want sight of the tax due diligence report and will raise a number of questions with the report preparer to clarify any points of uncertainty and understand the level of work that has been carried out, together with any limitations to the scope. Following this process, they will indicate the expected premium to insure the warranties and indemnities package. The process can be quite extensive, especially when large risks are insured.

Who Needs Specific Tax Insurance? In a tax due diligence process, especially given the ever-increasing level of anti-abuse or anti-avoidance legislation, it is not uncommon for a tax risk to be discovered that, while low in terms of likelihood of crystallisation, is significant in terms of quantum.

Naturally, a buyer would not want to be exposed to this amount should it crystallise, but attempting to protect against it through a purchase price adjustment or specific indemnity is likely to make their bid uncompetitive. Alternatively, a buyer may reach out to an insurance broker who will look to find an insurer to underwrite the risk. The underwriter would typically want a piece of work to be undertaken by a reputable advisor to analyse the risk, quantify it and set out the likelihood of it crystallising. Thus, they would look to price the premium for insuring it accordingly. It should be noted that most insurers will cover the cost of defending the risk and interest and penalties arising, as well as the tax liability itself.

Outside of the deal process, a common use of specific tax insurance is to protect against withholding tax risks of repatriating funds from subsidiaries back to parent companies. As a result of landmark case law, tax authorities (in particular those in Europe) are increasingly scrutinising and disallowing double tax treaty benefits of reducing withholding tax if the relevant tax authorities do not believe that the recipient of the repatriated funds has the sufficient “substance” to benefit from the double tax treaty, or it is not the true ultimate beneficial owner of such repatriated funds (the “beneficial owner” test.) The premium for insuring withholding tax risks will ultimately depend on the facts and circumstances, but premiums can range from two percent to eight percent of the potential tax exposure. For those Middle Eastern focused businesses that are aware of tax insurance, it is most likely that they have encountered it in this context.

How Can We Help?

While this market has yet to fully take off in the Middle East, a number of international insurance brokers and underwriters are increasing their presence in the region. As the tax regime in the region develops and, as we predicted, increases in both complexity and scope, we would expect to see tax insurance increase in relevance in the context of M&A transactions.

Aurifer will be co-hosting a webinar with one of our strategic partners in the region, Alvarez & Marsal, to talk our Middle Eastern clients through tax insurance in further detail and discuss how it may apply to M&A transactions in the region going forward. We look forward to seeing you all there. Registrations will open soon. If you wish to already register, drop an E-mail to


VAT on healthcare comparatively in the GCC

VAT on healthcare comparatively in the GCC

Below we analyse in a comparative manner how the VAT regimes apply to the health care sector in the GCC Member States which have implemented VAT so far, which are the UAE, KSA, Bahrain and Oman. As for Qatar and Kuwait, we are still expecting further announcements from the governments there as regards to the timeline of the implementation. It is still expected they will implement at some point.

Medical Care

The principal supply within the healthcare sector is the direct medical care given to patients by medical practitioners. In today’s world of modern medicine, this encompasses a long list of services and related products. This includes, for example, the basic doctor to patient care, specialist medical treatments within clinics or hospitals, dental or optician services, and physical and mental therapies.

Most VAT regimes around the world implement exemptions (with no recovery of VAT on associated costs) for healthcare, as a basic human need. The affected businesses are often partially state funded through grants and other mechanisms.

The GCC VAT regime has also considered this approach, however zero-ratings (which give deduction of VAT on associated costs) have mainly been favored across the region, in order to shield the sector during initial implementation from aspects such as price inflation and supply/demand economics. This has been different only for Oman.

VAT treatment for health care services

Article 29 of the GCC VAT Agreement gives Member States the option to apply an exemption or a zero rate to the healthcare sector. Therefore, the option to exempt, zero-rate or standard-rate some or all of the healthcare sector transactions (in goods and services) is at the discretion of each member state. While the GCC VAT Agreement discusses sectors, from a VAT point of view there is no such thing as a sector exemption. Only transactions can be exempt.

The UAE, as per article 45 of Federal Decree-Law No. 8/2017 on Value Added Tax, and Bahrain, as per article 53 of Bahrain Decree-Law No. 48/2018 on Value-Added Tax, have applied the zero-rating to preventative and basic healthcare services and related goods and services which are necessary for the treatment of a patient and are administered by licensed healthcare providers. This includes, for example, hospitals, mediclinics, doctors, nurses, dentists, and pharmacies.

Article 69 of Bahrain Resolution No. 12/2018 Issuing the Executive Regulations of the VAT Law provides further insights on the types of transactions falling within the zero-rating, such as treatment of mental illness, speech therapy and sight/hearing tests.

Similar to other global VAT regimes, article 41 of Cabinet Decision No. 52/2017 on the Executive Regulations of Federal Decree-Law No. 8/2017 on Value Added Tax in the UAE and article 69 of Bahrain Resolution No. 12/2018 specifically exclude elective cosmetic treatments from the zero-rating.

The KSA has applied the standard VAT rate of 5% (now 15% since 1 July 2020) on all private healthcare services, unless they are provided to Saudi nationals. For Saudi nationals, effectively, a zero rate has been implemented.

Public healthcare services are kept outside of the scope of VAT. This means that they also cannot recover any input VAT, unless they fall under the refund scheme for government entities.

In Oman, the legislator has settled on a policy to exempt health care services and related goods and services (article 47, 2 Omani VAT Law). This is much in line with EU VAT systems. Its implementation has an adverse impact on the input VAT recovery for businesses making such supplies (e.g. hospitals). Given the very recent implementation, with the application of VAT as of 16 April 2021, there is currently no guidance available in Oman.

  • UAE
    • Scope healthcare services: Zero rate for preventive and basic health care
    • Definition: Made by healthcare body or institution, doctor, nurse, technician, dentist, or pharmacy, licensed by the MoH or by any other competent authority, and relate to the wellbeing of a human being
    • Inclusions: none
    • Exclusions: Elective treatment, Establishments constituting principally holiday or entertainment accomodation
  • KSA
    • Scope healthcare services: OOS for government entities, refund for citizens when private institutions, otherwise 15%
    • Definition: none
    • Inclusions: none
    • Exclusions: none
  • Bahrain
    • Scope healthcare services: Zero rate for preventive and basic health care
    • Definition: Qualifying medical Services provided by qualified medical professionals or qualified medical institutions
    • Inclusions: General medical health Services, Specialist medical health Services, including surgery, Dental Services, Services related to the treatment of mental illnesses, Occupational or surgical health Services, Speech therapy, Physiotherapy provided by a qualified medical professional, Sight and hearing tests, Nursing care (including care in a nursing home), Services relating to diagnosing an illness, including the analysis of any samples and x-rays, Vaccinations, Health testing and screening that is undertaken under a local law, documented policy or contractual obligation.
    • Exclusions: Services of a commercial or investment nature, Cosmetic procedures
    • Other: Qualified medical institutions are hospitals, physiotherapy centres, medical centres, private clinics, alternative medical centres and clinics for practicing any supporting medical professions licensed by the National Health Regulatory Authority, or under supervision of MoH. Qualified medical professionals are licensed as practitioners by the National Health Regulatory Authority or under any other Authorized medical body, such as: Medical practitioners, Midwives, Nurses, Mental health specialists, Dentists, Opticians, Radiologists, Pathologists, Paramedics, Pharmacists.
  • Oman
    • Scope healthcare services: Exemption health care services and related goods and services
    • Definition: Services provided by Medical Professionals or Medical Institutions
    • Inclusions: General Medicine Services, Medical specialty services, Dental services and laboratory work, Psychiatric services, Physical therapy services, Nursing services in hospitals, nursing homes or similar licensed institutions, Legal midwifery services, Diagnosis and treatment of diseases and individuals, Service of surgical, reconstructive and cosmetic surgeries.
    • Exclusions: None

Ancillary services

Often when a patient requires medical care, they will need various types of diagnostics, tests, prescriptions, hospital or respite stays, products or devices, transportation, accommodation, and more to support their treatment. In other words, there may be many ancillary goods and services supplied. The ancillary services generally follow the treatment of the main supply (out of scope, exempt, zero rated, or standard rated).

From a VAT perspective, these ancillary services introduce an extra layer of complexity, as the VAT rules are applied on a transaction-by-transaction basis.

The VAT rules do however recognise that when various goods and/or services are supplied together, at times for one single consideration, there may be one principal supply and VAT treatment, with the other supplies ancillary in nature (i.e., a single composite supply). Alternatively, each good and service may be an individual supply in its own right, with an aim in itself and individual VAT treatments applicable (i.e. multiple supplies).

Given the presence of the various regimes in the GCC, taxpayers may resort to wanting to include as many items as possible in the applicable zero rates or exemptions (despite the input VAT deduction limitation for exemptions). To mitigate this risk, in KSA, ZATCA states that “Private Healthcare Providers should not seek to artificially value zero-rated medicines and medical goods supplies at a higher value than commercially appropriate, and should be able to provide support of the commercial pricing adopted upon request.” (ZATCA Healthcare Guideline , Section 4.2).

Some jurisdictions have specifically taken a position in regard to the VAT treatment applicable to ancillary services, when these are not considered to be part of a single composite supply.

United Arab Emirates

  • Ancillary goods necessary for the supply of such healthcare services supplied in the course of supplying a Person with zero-rated healthcare services are also zero rated.
  • Accommodation for patients: Other than holiday/entertainment accommodation, this is to be zero-rated as healthcare or residential accommodation.


  • Ancillary goods and services are also zero rated when they are an integral part of the Healthcare Services and are provided together with the qualifying medical Services. These are for example:
    1. Drugs, medicines, bandages and other medical consumables administered or used during the course of performing qualifying medical Services,
    2. Laboratory Services performed by qualified persons,
    3. Transport Services for patients or those injured,
    4. Accommodation and catering Services provided by a qualified medical provider to its patients,
    5. Mortuary Services provided by qualified medical providers,
    6. Medical consultations provided remotely by means of electronic communications such as telephone or video link.
  • Not considered as ancillary to the health care (and therefore subject to the standard rate) is the following:
    1. The Supply of food and beverages to any Person who is not a patient,
    2. Parking and valet Services,
    3. Telephone, internet and Electronic Services, including TV rental Services,
    4. Accommodation provided to any Person who is not a patient.


  • Goods and Services related to Health Care Services shall not include the supply of Services of a commercial nature, such as, the supply of food and drink to visitors, the provision of parking lots for visitors, and all activities that are not included in the medical treatment, such as a TV rental fees or telephone calls allowances.


There are often complex supply chains in the healthcare sector before the final services/goods can be provided to end consumers. Often, the medical practitioner dealing with the patient seeks external professionals for core healthcare services in specific areas of expertise. They are sometimes referred to as “consultants”. At times, these are engaged between two businesses within the healthcare sector.

It was generally expected that these supplies would similarly avail of the healthcare zero-rating regardless of the fact that the person contractually “receiving” them may not be the ultimate “beneficiary” – i.e. that the zero-rating applies throughout the full supply chain.

This is the case for example in Bahrain, where the zero rate is not limited to the B2C supply to the patient. When a hospital insources the services of a VAT registered medical practitioner for example, the VAT registered practitioner can apply VAT at a zero rate (Section 4.6 of the Bahraini VAT Health Care Guide).

However, in the UAE, the subcontracting of normally zero rated healthcare services is not subject to a zero rate, on the account of the fact that a business cannot be the person who receives the treatment (Public Clarification VATP016).

Pharmaceutical products and medical equipment

The UAE, KSA, Bahrain and Oman have implemented a zero-rating for certain pharmaceuticals and medical equipment, with lists of approved products available from the regulating health authority for each country. This zero rating was mandatory under article 31 of the GCC VAT Treaty.

As there are no references to the person supplying the products, the zero-rating will be applicable regardless of what stage in the supply chain the transaction takes place. This means they also apply on imports.

All other goods sold in to or within the healthcare sector, or imported, which do not fall within the prescribed list of pharmaceuticals and medical equipment, or other related goods, would be liable to VAT at the standard rate of 5% (or 15% in KSA).

It is not required that the ultimate recipient or user has a prescription or verified medical use for such commodities.

The Private Healthcare Providers in Saudi Arabia which are charging VAT on their services must identify the qualifying goods that are eligible for zero rating, which are provided to the patient as part of the therapeutic service. This does not apply to medicines or medical goods of a trivial value which are consumed or discarded during the provision of services.

Below, we have mentioned the requirements per jurisdiction.

Government bodies

Public healthcare services will generally be outside the scope of VAT, when undertaken by government bodies empowered to engage in such activities in a sovereign capacity (i.e., they are not carried out in competition with the private sector), as per article 10 of the UAE VAT Law and article 9 of the Bahraini VAT Law. KSA stated that a Government body acting in its capacity as a public authority shall not be considered as conducting an economic activity (Article 9 VAT Implementing Regulations).

KSA has issued guidance in this respect and considers that income of government bodies are outside the scope when those entities carry out designated activities assigned to them by the State through the Law, Royal Decree or order establishing those bodies to carry out public functions (ZATCA VAT Guideline for government bodies in KSA, issued on 12 August 2021, version 1.0).

Supplies not carried out within a public capacity, are subject to normal VAT rules (e.g., certain car parking, gifts shops within hospitals, etc.), including registration requirements.

Special regimes, as allowed for in article 30 of the GCC VAT Agreement, are available for government bodies, which are not within the scope of the VAT regime, in order to allow them a refund of VAT on associated costs.

The KSA VAT regime for public hospitals is an anomaly, as the public hospitals enter into competition with the private sector.

For an overview of the VAT regime applicable to non taxable legal persons, you can read one of our previous articles here.


The provision of health insurance, re-insurance and associated broker services are all subject to the standard VAT rate of 5% (or 15% in KSA) across the region to date.

This VAT may only be deducted when incurred by a VAT registered person, for business purposes, and if such VAT is not specifically blocked under the local VAT deduction rules – for example, where a business is obliged to provide health insurance to its employees under local employment law, the associated VAT would be deductible.

Where businesses in the health insurance industry pay VAT on supplies made by healthcare professionals to the insured, care should be taken when determining the business’ VAT deduction entitlement, as only VAT on costs contracted for and incurred by the insurer are deductible.


The development of the digital economy has created challenges within global VAT regimes in terms of the treatment of goods and/or services previously supplied in physical form or face-to-face, and now rendered digitally. There are some instances, for example physical and digital books, which have seen alternative treatments in other regions.

However, generally speaking, the VAT treatment should not change, for the supply of healthcare goods and services, as a result of them being rendered or ordered digitally.

The treatment of any associated technology or digital services should be assessed under separate VAT rules.

Registration, compliance & penalties

With certain reliefs available from registration and invoicing for wholly zero-rated activities or transactions, as set out within article 13 of Federal Decree-Law No. 8/2017 in the UAE, article 32 of Bahrain Decree-Law No. 48/2018, and article 9 of Saudi Arabia Administrative Decision No. 3839/1438 on the Approval of the Implementing Regulation of the VAT Law, businesses should assess their registration and compliance obligations in the region, comply and/or avail of reliefs where available, in order to mitigate the risk of penalties.

Further evolution?

The VAT regime applicable to healthcare services is certain to further evolve, subject to positions adopted by the tax authorities, case law and policy decisions made after testing the initial adoption. In addition, the different health care authorities may influence the process, and are also empowered to change the VAT regime for certain items.

Keeping a finger on the pulse for the health care sector is therefore a requirement.


A state of play on tax litigation in KSA

A state of play on tax litigation in KSA

  1. Introduction to Tax Litigation in KSA

In recent years, the Kingdom of Saudi Arabia (KSA) has gone through tremendous reforms, and tax and the Customs authorities were part of this. Going from Department of Zakat and Income Tax (DZIT) to the General Authority of Zakat and Tax (GAZT) to the Zakat, Tax and Customs Authority (ZATCA). The tax administration went from a Department to an Authority (important semantic difference), and merged with the Customs authority.

A host of tax reforms were pushed through, with the introduction of Excise Tax and VAT, the introduction of extensive Transfer Pricing rules and compliance requirements, to an increase in the VAT rate, the introduction of a Real Estate Transfer Tax and the introduction of mandatory E-invoicing.

We are even leaving out smaller reforms here, such as the increase of the Zakat rate for financial institutions, and the implementation of a look through principle for Saudi businesses to determine whether they are subject to Zakat or Corporate Income Tax.

In the years to come, we still expect a reform of the Zakat system in favor of a generalized broad-based Corporate Income Tax system, a decrease in the standard VAT rate, an upskilling of the authority to catch fraudsters more effectively, and very likely, the implementation of Pillar I and II in KSA.

The reforms and the importance tax has taken in the Kingdom, has lead to boardroom unrest. This is perfectly illustrated by the publicised tax assessments of Careem and Fetchr. The assessments are seen as at odds with the favourable business climate Saudi wishes to create. Fetchr is likely to be liquidated, and Careem is facing a tax bill exceeding $100 Million.

KSA is an interesting country for Foreign Direct Investment, but the authority may run the risk of being perceived as lacking in providing the legal certainty which taxpayers yearn for. Taxpayers sometimes remind the authority that tax does not drive the business. Business drives the business. This has led to an exponential increase in litigation with the authority. With the merging of the authorities, we expect Customs litigation to be following the same pattern going forward, similar to litigation on VAT, Corporate Income Tax and Zakat.

In this article, we have a closer look at these disputes.

  1. Parties and departments involved

In Saudi Arabia, the players involved in the disputes process are the taxpayers, the Authority (ZATCA) and what are effectively the specialized tax courts. These were previously managed under the General Secretariat of Tax Committees (GSTC), which now is called the General Secretariat of Zakat, Tax and Customs Committees (GSZTCC), after the merger of the Tax and Zakat committees with the Customs committees. For each type of tax, the GSZTCC has a specialized committee comprised of 3 members and a chairman. There is one of each specialized committee in Jeddah, Riyadh and Damam. Each specialized committee is further comprised of 2 levels, the preliminary level and the appellant level.

Within ZATCA, there are 3 separate departments that are potentially involved with any tax dispute.

  • The Assessments and Examinations department: branch of ZATCA which initially issues the assessment or penalty and undertakes the audit.
  • The Review and Objections Department: Considered the first stage of the tax dispute journey, where the taxpayer submits an objection/review request against the assessment issued by the authority.
  • Internal Dispute Settlement Committee (“IDSC”): Committee responsible for dispute resolution between the Authority and the Taxable Person. Typically, but not necessarily, this department will rule on the relevant dispute following the objection department’s decision.
  1. Matters of dispute

Any matters concerning disputes between taxpayers and the Authority can be litigated with ZATCA, and can be ultimately ruled over by the GSZTCC. In other words, the disputes can concern VAT, RETT, Excise Tax, Zakat, Corporate Income tax, Withholding Tax, and penalties imposed by the ZATCA.

When looking at the statistics, as of September 2021, the grand majority of the cases brought before the committees concerned Zakat and VAT. Together, they make up approximately 87% of all cases.

In decreasing order of importance, the disputes brought before the GSZTCC concern Zakat, VAT, Mixed taxpayers, CIT, WHT, Excise Tax and the Real Estate Transfer Tax.

Typically, under all stages of the litigation, the plaintiff (taxpayer) will assert that ZATCA’s assessment, penalty or rejection of the objection is unwarranted.. In all stages, the burden of proof lies on the taxpayer in his capacity as the plaintiff/appellant. A different scenario occurs when ZATCA successfully appeals the decision of the preliminary committee as the GSZTCC, where it assumes the burden in proving that the first instance committee members inadequately applied the law.

  1. Taxpayer Rights and general principles

A taxpayer always has the right to dispute a matter upon disagreement with ZATCA. There is no set of legally defined generally applicable principles for the taxpayer and the tax authority in the Saudi legal framework.

Therefore, the general principles would apply, such a nemo censetur legem, no taxation without representation, in dubio contra fiscum …

The process is somewhat shaped by Sharia law principles which would require justice and fair treatment for all. Other Sharia principles refer to applicably of punitive actions in absence of fault and the extent of taxpayers’ obligations in contrast with the possibility to effectuate such obligations.

In practice, the tax authority adopts an assertive approach, issuing assessments sometimes contrary to its own legislation and guidance, and suggests a taxpayer follows his course with the designated litigation procedure.

There is no official procedure for settlements with ZATCA. There is the Internal Disputes Settlement Committee, which has no apparent independence from the tax authority, and may therefore not necessarily adopt an objective view despite its presumed individuality from the assessment and objection teams. A significant compromise by the taxpayer is also expected to be presented to the IDSC to accept the settlement request and proceed with negotiations.

  1. Statute of Limitations

Different limitations apply for the assessment of taxes to be statute barred. The general principle in KSA is 5 years, but this can be extended to 10 years. For VAT purposes, the same statute of limitations applies, but the audit period can be extended up to 20 years.

The extensions generally apply when a taxpayer does not submit a return, or submits an incomplete return with the intention to evade taxes. Tax evasion in this context is often interpreted broadly by ZATCA.

  1. Stages of Tax Litigation

ZATCA will usually issue a preliminary assessment, leaving some room for discussions with the taxpayer, before it issues a final assessment. Some informal communications via email will take place, where the Authority will often collect numerous documents. As granted by the law, the Authority retains the power to demand any documents it deemes necessary. Some in-person meetings may also be held with larger taxpayers prior to finalizing the assessment.

After the issuance of the final assessment, the taxpayer has 60 days to object against the assessment. ZATCA has recently also started to exercise its discretionary power granted by the law which allows it to mandate the payment in full of the disputed tax and penalties, or the provision of a bank guarantee, before the taxpayer can proceed.

Alternatively, if the taxpayer is unsuccessful in his objection, he has the option to request for a settlement or submit his case to the GSZTCC. He needs to do both within 30 days of the issuance of the decision by the Objections department. However, both avenues cannot be perused simultaneously and hence, while the settlement is running with the Internal Settlement Dispute Committee, the case with the GSTZCC is put on hold.

While resorting to the IDSC is theoretically a good approach, given that the settlement is ruled over and presided by ZATCA, the chances that the taxpayer will have a favorable outcome are on average limited. The GSTZCC case becomes active again, after the ISDC rules on the case, and the taxpayer is unhappy with the results.

The GSTZCC is really the first instance of an independent review of the case, by expert judges. Often an expert is additionally appointed in the proceedings to deliver a report. Several exchanges of memorandum are made until the committee is satisfied with the amount of information and can rule on the case. Subsequently, hearings are conducted virtually or in person. Finally, a decision is made which can be appealed against by any party within 30 days. The decision of the appellant committee is construed to be final and non-contestable by any other judicial authority.

At the primary level of the GSTZCC, only 11% of taxpayer grievances are accepted. In two thirds of the cases, the grievance of the taxpayer is refused on procedural or substantive grounds. When the case goes to the appellate level, in 50% of the cases, the appeal is not granted on substantive grounds. These statistics, coupled with the associated financial costs and time expenditure, shape a taxpayer’s options and therefore his strategy.

  1. Transparency

Contrary to the other GCC States, where the publication of case law is spotty, the GSTZCC publishes some of the cases on a relatively regular basis. Compared to the UAE, where the TDRC cases are not published, this is a stark difference.

While they do not have precedent value, it is interesting to examine a number of these, and interestingly enough, they do side with the taxpayer on a number of occasions, underscoring their independence. The ratios of these cases can however be persuasive for subsequent litigants as the authority themselves sometime refer to previous GSTZCC principles in the pleadings.

  1. Conclusion

Considering the recent growth in the volume of ZATCA’s audits, the number of disputes is bound to increase substantially. This heavily neglected aspect is now on the verge of being one of the most vital areas of the Saudi Tax and Legal framework.

There are ways to avoid conflict, such as the use of advanced tax rulings, which is unfortunately not used sufficiently. Informal agreements with ZATCA have unfortunately also not resisted the test of time.

The taxpayer can seek consolation in the fact that the GSTZCC is relatively independent, and therefore, unfortunately after spending an vast amount of resources, may actually prevail. However, as numbers show, in practice, the tax authority still wins more often.

Thomas Vanhee, Mohamed AlAradi


Tax in the GCC – An accounting or a legal matter?

Tax in the GCC – An accounting or a legal matter?

This is a write up in respect of an event held by Aurifer and its partners earlier this year. We polled 25 tax directions in regards to the tax function in the GCC, its current status and perceptions.


Ever since being part of the team that prepared the introduction of VAT in KSA in 2017, participating in the drafting process, I have been amazed at how things have developed since then. Before 2017, the Gulf Cooperation Council States barely had tax practitioners, when compared with mature jurisdictions.

While matters have changed much, the GCC has not evolved yet into a mature tax market. This shows for example, in my view, in the disparity in salaries offered, in how there is no relation between the size and complexity of the business, and the number of tax people employed by the business.

A fragmented market

Upon the introduction of VAT, the large demand drew many interested people. Many firms started dedicating themselves to VAT. There were the usual suspects, i.e. the big4 companies. There were a few law firms which dipped their toes in the water, a few challengers and a whole range of businesses trying to cater the market, usually small .

Conspicuously, there are massive differences in the market, from a big4 partner charging USD 1,000 an hour to price challengers trying to access the biggest names in the market for hourly partner rates as low as USD 150. One can attribute that to immaturity in the market, but I expect this to continue, as there is a regional cost sensitivity, and the offer from the subcontinent to take on outsourced services is ever present.

This fragmentation shows in the hiring market as well. There are extreme differences in what is offered to tax people. According to Indeed, the average base salary for a tax director is AED approximately AED 31,000 ( According to Payscale, for the same position, the average yearly salary is AED 590,000 (approx. AED 49,166 per month).

At the lower levels, we see the same disparity. One ad offers AED 6,000-8,000 per month for a “VAT auditor” with at least one year of experience. The same outfit offers AED 3,500 for an “Excise Tax Auditor”. Another one is for an “Accounts Executive” and offers AED 2,400-2,800 per month, and asks that the applicant is “updated with FTA rules and regulations”.

At present though, a sufficient level of maturity does not seem to have reached. Important GCC businesses where one would expect multiple people in the tax department sometimes have no tax department. Smaller tax departments are sometimes found in mid size companies. From discussing with these businesses, the fact that there is no tax department in some of the big companies is not explained by the fact that the function is outsourced, as the work is done by accountants in the Finance department.

The tax function

Businesses have struggled identifying the right place for the tax function, the right role and responsibilities, and also the right remuneration.

One of the questions is for example whether the tax function should sit with the Finance Department, or with the Legal Department. The tax function is naturally at the intersection of a number of functions, as it needs to deal as well with the Logistics department and IT.

How much Legal work does the tax function do?

The Tax function should engage with the legal department on what positions to take in key contracts. It should engage with the CFO to understand tax provisions taken. It should discuss with the tax authorities key positions taken, or strategise these positions to understand and assess the risks.

How much Accounting work does the tax function do?

The Tax function should guide the internal accountants in respect of the preparation and filing of tax filings, whether it is VAT returns, Economic Substance Returns, Corporate Income Tax returns, Country by Country reports, etc.

In many organizations, even if there is a Head of Tax, the returns are still filed by the Finance Department. The Head of Tax is probably happy not to bear the responsibility but is it not giving away too much responsibility? It begs the question of centralized compliance versus decentralized compliance.

Organising the tax function

What do you need to start the tax function? Do you require an expert in CIT, VAT, or Transfer Pricing? Do you need an all around person? Do yo need an accountant, a lawyer or otherwise? Accountants can’t read and lawyers can’t count, right? The balance is sometimes delicate, but getting it right means getting your tax function right, which is important.

Results of our survey with in house tax directors

Who better to ask these questions, than the tax directors themselves? We asked 11 polling questions to 25 in house tax persons. Some of the results, may surprise you, others may not.

Question 1 The importance of the Tax Function in the GCC is underestimated

All attendees agreed and one had no opinion. Perhaps this shows a certain level of immaturity in the market, or just basic human need for recognition.

Question 2 The Tax Function in the GCC is undervalued in terms of its remuneration.

88% agreed with this statement. Surprisingly enough, one person disagreed. How much of this is attributable to a wish to make more, versus the undervaluation inside a company of the function, is hard to say.

Question 3 The Tax Function should be handled by who?

60% of respondents indicated that the Tax Function should be handled by a combination of Accountants, Lawyers and Economists. 32% said the Tax Function should be handled by an accountant. When the EU VAT system gained in considerable complexity in 1993, a similar way of thinking was present in the minds of companies. Tax was an accounting matter. With time, the tax departments started to develop independently.

Question 4 The tax function should report to who?

88% stated the tax function should report to the CFO. 8% said to the CEO and 4% to the Chief Legal Officer. This seems to be aligned to the current structures in many companies.

Question 5 The bigger the company, the more people the tax team should have

60% said they agreed. 28% disagreed.

Question 6 The key driver of a Tax Function should be

88% responded the driver is to support the business in the most efficient way. 12% answered it was to minimize disputes. No respondent answered that it was to maximize tax savings. That is perhaps indicative of a low amount of tax planning being conducted.

Question 7 Filing VAT returns should be handled by

16% answered they should be handled by the Finance department, while 84% replied they should be handled by the Tax Department. The respondents were therefore considerably in favor of centralized compliance.

Question 8 Why do I outsource work ?

The grand majority (72%) replied they wanted a second pair of eyes. 20% said they lacked the internal resources. 4% said they lacked the technology.

Question 9 Consultants are worth their money

60% agreed here, while 20% disagreed, and the rest had no opinion. The question obviously does not allow for great subtlety or explanation, but it is nonetheless interesting to note the outcome.

Question 10 When I select a consultant, my criterion is

32% answered previous experience, the same amount replied trust, and 28% replied that the main criterion is value for money.

Question 11 The differences in salaries and structures of tax departments are due to the immaturity in the market

88% of respondents expects the differences to level out in the long run. 12% expects that the GCC will always remain a jurisdiction of stark differences.

What did we get out of the poll?

Consultants are worth their money and are selected on previous experience, trust or value for money. Consultants are mostly appointed to have a second pair of eyes. The respondents mostly expect salary differences to level out in the long run. They like to handle VAT filing in the tax department, and consider that the role of that tax department is to support the business in the most efficient way. The bigger the company, the more tax people, and they want to be accountable mainly to the CFO. Tax directors feel undervalued in terms of their remuneration and underestimated.


Special Tax Payers in the GCC: Exempt taxable persons

Special Tax Payers in the GCC: Exempt taxable persons

The four GCC countries which have introduced VAT so far, UAE, KSA and Bahrain, have based themselves on the GCC VAT Treaty to draft their laws.

There is a special group of VAT payers, which have a special capacity as stakeholders in the VAT system. They sit on the fringes of the VAT system, not being a full on taxable person, and neither simply a payer, like private persons would be.

In the EU, this special group is sometimes called the “group of four”, or the “persons benefiting from an exception regime”. Together with the capital assets scheme, it is one of the more technical matters in VAT, and its status under GCC VAT is at a minimum lacking in clarification.

In a previous article, we explored the status of the non taxable legal persons ( In this article, we cover the exempt table persons. In the upcoming articles, we will be covering also the other special categories of taxable persons. Going forward we will refer to them as “special tax payers”.

GCC VAT and its origins

While not stated, the origin of the GCC VAT Framework (or “Common VAT Agreement of the States of the Gulf Cooperation Council” in full) lies in the EU VAT directive 2006/112/EC. More specifically it corresponds to the version applicable after 2011 and before 2013. The reasons for drawing inspiration from the EU VAT directive are obvious. The GCC had ambitions to copy the EU model.

For example, the Economic Agreements between the GCC States of 1981 and 2001 read like the Treaty of Rome, which established the European Union.

The GCC had ambitions to form a similar trade bloc like the EU. While it indeed negotiates free trade agreements together, internally it works in a different way. It tried to establish a currency union as well, but was unsuccessful, although given that the countries have pegged their currency (relatively closely to) the US dollar, in practice they may have implemented certain elements of the monetary union. One of the more eye catching provisions of the Economic Agreements is that GCC citizens are allowed free circulation within the GCC. Such free circulation is again exactly the same principle which applies to EU citizens.

In addition to wanting to follow in the footsteps of the EU politically, there is another good reason to incorporate EU VAT provisions. The EU has the oldest VAT systems, and has the oldest VAT systems integrated in a customs union (see for a discussion on the genesis of the laws).

The copy is never better than the original

Like VHS tapes, the copy is never better than the original. This holds even more true when the copy is made from an old original. The GCC VAT Treaty does not incorporate the important changes to the EU VAT directive entered into force in 2013, 2015 and now in 2021.

At the same time, that does not necessarily need to mean that adverse consequences are triggered for the GCC States. The UAE has for example integrated the 2015 changes in its guidance and de facto applies them ( Bahrain has done the same in its guidance for the place of supply rules applicable to telecoms services.

A special group of tax payers

Like EU VAT, GCC VAT has two important main groups of stakeholders. They are the taxable persons on the hand and the private individuals on the other. The taxable persons are the businesses complying with VAT. That means they charge it, collect it and pay it to the tax authority. The private individuals are the consumers who carry the economic burden of the VAT and pay it to the businesses. They are the ones hit with the rise in cost.

Let’s say that the taxable persons are “all in” and the private individuals “all out”. The private individuals have no obligation whatsoever. Although it may surprise, they have no legal obligations, except for their contractual obligations towards their contracting parties (and for imports made by private individuals).

There’s another special group though. They often go by a special name even. In France for example they call them the persons benefiting from an exceptional regime (“personnes beneficiant d’un regime derogatoire”). Elsewhere they may call them the “group of four”. In this article, we refer to them as the “special tax payers”.

Contrary to the taxable persons and the private individuals, the special tax payers are neither all in, nor all out. Whether they have VAT obligations or not, depends on their activity.

The special tax payers in the EU are:

  • Exempt tax payers
  • Non taxable legal persons
  • Small businesses
  • Farmers

Out of these four categories, the first three do not have any VAT obligations. The farmers are subject to special rules, but can generally opt out and follow the general rules.

An important feature of this group is that when it receives a service from abroad, it is obliged to apply the reverse charge mechanism. Indeed, for VAT purposes, it is considered as a taxable person. Equally so, when it receives goods from inside the EU, and the value exceeds a certain limit, they are liable for VAT on the intra-community acquisition (the EU internal equivalent of the import). Below, and in our next articles, we will analyze who the special tax payers are in GCC VAT. First however, we need to revisit the concept of taxable person.

The taxable person concept in the GCC

The concept of taxable person in the GCC is where the GCC deviates from more mature VAT systems. In the EU, a taxable person is “any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.” (article 9, 1 EU VAT directive 2006/112/EC). Economic activity is then “Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions…”.(ibidem).

Although at first sight only subtly different, a taxable person in the GCC is “A Person conducting an Economic Activity independently for the purpose of generating income, who is registered or obligated to registered”. The last bit of the phrase is crucial.

In the EU, the registration is a consequence of the fact that an economic activity is conducted, it is not a defining element of it. Note also that it is a global concept in the EU, i.e. anyone in the world can be a taxable person. This last element is in stark contrast with KSA, which, strangely enough, does not acknowledge the fact that a foreign company could be a taxable person (but does require non residents in certain cases to register).

As a comparison, the GCC inspired itself on the UK definition of a taxable person, which is “A person is a taxable person for the purposes of this Act while he is, or is required to be, registered under this Act.”

Does the detail matter? In the majority of the cases it does not, but as we will demonstrate in the next section, it does sometimes. First however, we need to remind ourselves of when a business is required to register for VAT purposes.

VAT registration requirements

A Person is required to register for VAT purposes when resident in a Member State and making annual supplies in that State above the Mandatory registration threshold of SAR 375,000 (USD 100,000 or its equivalent in local currency). Non resident businesses making taxable supplies in a Member State need to be registered as from the first cents made.

A person can voluntarily register when resident in a Member State and making annual supplies in that State above the Voluntary registration threshold of SAR 187,500 (USD 50,000 or its equivalent in local currency).

The GCC Member States have not deviated from this principle yet, although the UAE has set the forward looking threshold for the next 30 days instead of the next year (mimicking the UK).

Calculating the thresholds

According to the GCC VAT Treaty, in order to calculate the threshold, the following elements need to be included:

  • The value of taxable supplies, except for capital assets
  • Value of goods and services supplied to the Taxable Person who is obliged to pay Tax
  • The value of intra-GCC supplies which have a place of supply in another State but would have been taxable had they taken place in the State of residence

The third element is not applicable right now, as none of the GCC Member States recognize each other as Implementing States.

The first element is straightforward, the second is much less so. The second one suggests that imported goods and services received from abroad need to be counted towards the registration threshold. It mentions a Taxable Person. It may be Circular, since a business may not be a Taxable Person, but as a result of purchasing from abroad may become a Taxable Person and therefore may be required to register.

The Second group of Special Tax Payers – The Exempt tax payers

In our previous article, we discussed the non taxable legal persons. In this article, we will discuss the exempt tax payers. All GCC countries so far have established a number of supplies which are exempt.

As a legislator, one exempts supplies, not tax payers. Tax payers become exempt though because they make exempt supplies. That is why we do not have exempt sectors, only exempt supplies.

From a tax policy point of view, when applying an exemption, you remove VAT from the supplies made, however you increase the costs for businesses making exempt supplies. Those businesses cannot recover input VAT. Until recently, the GCC countries which have implemented VAT have been very conservative in applying exemptions (see,. Oman seems to be gearing much more towards a European model, applying wide exemptions for education and healthcare ( ).

Below we are listing the applicable exemptions (excluding the import exemptions) in the GCC countries so far.

UAE Residential rent; Bare land; Margin based financial services; Local passenger transport

Bahrain Residential rent; Sale or lease of Bare land and buildings; Margin based financial services

KSA Residential rent; Sale building; Margin based financial services

Oman Residential rent; Sale bare land and resale residential property; Financial services; Local passenger transport; Health care; Education

The descriptions in the above table are limited, and they are much more complex in practice, especially when it comes to applying the VAT exemption for financial services. This holds even more true when it comes to the application of VAT on Shariah compliant financial products.

Due to the fact that Oman has more exemptions, the status of the exempt businesses will become more important.

In the EU we refer to them as “exempt taxable persons”, suggesting that they are taxable persons, because they conduct an economic activity, but they are part of the VAT system.

In the GCC, a business making exclusively exempt supplies is not required to register for VAT purposes, and therefore it is not a taxable person. As shown above, the exempt supplies also do not count towards the VAT registration threshold.

What is its status then? Is it similar to the EU in the sense that it may have certain obligations? When examining their status, they in principle have no registration obligation, no obligation to charge VAT on their supplies, no bookkeeping or record keeping obligations, but also importantly, no right to recover input VAT.

However, similar to the non taxable legal persons, when the exempt tax payers start “importing” services or goods, and the exceed the registration threshold, they are required to register for VAT purposes.

Application of the exemptions

As stated above, the descriptions in the above table are limited, and they are much more complex in practice, especially when it comes to applying the VAT exemption for financial services.

In the EU, exemptions need to be interpreted in a strict way, as an exception to the broad base of VAT needs to be interpreted in a limited way (cf. EU case law citation).

In the GCC, we do not have such an established principle. The FTA has stated though that it considers that the VAT legislation in the UAE prescribes a “narrow approach to the VAT exemption”.

Complex mixed status for exempt and taxable tax payers

For many exempt tax payers, the complexities arise when these tax payers are also making taxable supplies, i.e. supplies subject to 5% (15% in KSA) or 0% VAT in the GCC. This triggers a mixed situation, where they are partly entitled to input VAT recovery and partly not.

Organising that input VAT recovery for what is referred to in the EU as “mixed taxable persons”, or in the UK as a tax payer subject to the “partial exemption method” is where complexities arise.

The default method in the EU is the application of the so-called “pro rata” on the basis of the turnover. The second most prescribed method is the “direct allocation”. There are a number of other methods possible as well (e.g. floorspace, transaction count, …).

When comparing the methods in the GCC States so far, different methods have been proposed. Especially the UAE stands out with its default direct attribution method followed by a very specific type of method, an input tax based apportionment method for residual tax. For residual tax, alternative methods can be used as well, but these do not replace the initial direct attribution method, unfortunately.

KSA prescribes a direct attribution method, followed by an apportionment method based on turnover. Although Bahrain initially seemed to have followed the EU in prescribing a default turnover method leading to the calculation of a pro rata in its VAT Law (article 45), in its Executive Regulations (article 59), it reverts back to the KSA approach: a direct attribution method, followed by an apportionment method based on turnover. The same goes for Oman (article 58 of its Executive Regulations).

The available alternative methods are:

  • For UAE: turnover, floorspace, transaction count, sectoral
  • For KSA: input tax based apportionment, floorspace, transaction count, sectoral, number of employees
  • For Bahrain: turnover, headcount, number of transactions
  • For Oman: none – it is left up to the tax payer to determine an acceptable apportionment based on actual use of the goods and services and which includes an annual adjustment.

Compliance obligations and conclusion

Barring the situation where an exempt tax payer makes imports, it does not have to be registered for VAT purposes. Where the tax payer is mixed, because he makes taxable supplies, he obviously needs to register for VAT purposes when meeting the registration threshold, or can choose to do so when meeting the voluntary registration threshold. Upon registration, periodic VAT returns need to be filed, and VAT invoices issued for taxable supplies. Obviously the associated record keeping obligations need to be met as well.

The main challenge with these types of tax payers is with the calculation of their input VAT deduction, less with the registration. The applicable regime is different in the different GCC States, with especially the UAE imposing quite extensive administrative obligations.


Pillar Two and the GCC – Important consequences for tax havens and exemptions for nationals

Pillar Two and the GCC – Important consequences for tax havens and exemptions for nationals

The same thing is happening with Pillar One and Pillar Two as with BEPS. Initially, it seemed to be a topic for insiders, tax administration officials and a handful of academics, but eventually it became a topic for everyone.

Discussions around Pillar One and Pillar Two have picked up very considerable speed since the endorsement by the G7 on 5 June 2021, and the endorsement by most of the Inclusive Framework members on 1 July 2021.

With laws being drawn up in 2022, and an implementation in 2023, Pillar Two is right around the corner. In this article we analyse Pillar Two. We will leave an analysis of Pillar One for next month’s article.

What is Pillar Two?

Simply said, Pillar Two establishes a Minimum Global Tax of 15% for businesses operating in multiple jurisdictions. Those businesses need to have a consolidated turnover in excess of 750M EUR though in order to be caught be the Global anti-Base Erosion Rules (GloBE).

The minimum tax is achieved through the inclusion on the parent level of untaxed income of the subsidiary (the Income Inclusion Rule), or, as a backstop, via a rejection of the deduction of undertaxed payments (the Undertaxed Payment Rule).

In addition, a subject to tax rule applies, allowing source jurisdictions to impose a limited source taxation on certain related party payments, which will be taxed below the 15% minimum rate.

The rules are designed to create a level playing field, canceling out income declared and taxed below the minimum rate of 15%, or not at all, by having to “top up” the tax. This is done a jurisdiction basis (no consolidation between jurisdictions).

There’s an additional so-called “substance carve-out” for businesses, in jurisdictions where staff and tangible assets are used.

There are limited exemptions to be foreseen, which will be reserved for Government entities, international organisations, non-profit organisations, pension funds or investment funds that are Ultimate Parent Entities (UPE) of an MNE Group or any holding vehicles used by such entities, organisations or funds.

Do all countries have to apply it?

Technically no, but let’s call it fiscal peer pressure. Most of the Inclusive Framework members have endorsed the principles of Pillar Two. Amongst those are all GCC Member States, except Kuwait. The overwhelming majority of the important economies stand behind it, which means that the rest of the world is bound to follow.

What choices do countries have in terms of the implementation?

Countries with a corporate tax system leading to an effective taxation in excess of 15% may simply implement Pillar Two in their domestic tax legislation, with the abovementioned principles to be adopted. This means they will mainly target jurisdictions with a lower Corporate Income Tax rate, and include the top up tax in the most simple cases.

If a country however has a Corporate Income Tax below 15%, if may consider the following reforms:

  • Adopt a higher rate compliant with Pillar 2 provisions. It will therefore collect more revenue.
  • Adopt a higher rate compliant with Pillar 2 provisions, on a limited scale, i.e. only for businesses with a consolidated turnover in excess of 750 M EUR.
  • Do nothing – this will entail that other countries will tax the revenue of the source jurisdiction.

A country with no corporate income tax, may consider implementing corporate income tax, on a limited scale, or full scale.

What will the GCC countries do?

While arguably the UAE and Bahrain face the most important choices, with a potential (limited) implementation of corporate income tax on a national level on the cards, Saudi Arabia, Qatar and Kuwait will also need to reform their laws. Potentially, Oman will not need to amend its legislation.

On an international level, if UAE and Bahrain start taxing income recorded in those jurisdictions at 15%, as long as the corporate income tax rate in the parent jurisdiction is higher, the ETR may overall be equal or lower, than in the case where the parent includes the income of the UAE/Bahraini subsidiary and taxes the income at the CIT rate of the parent, under the current circumstances. The UAE faces a double conundrum as well, in regards to the free zones and its federal structure.

Was doing nothing an option?

While the UAE and Bahrain are often heralded because of the absence of the application of corporate income tax, and their large double tax treaty network, because they were often considered a tax haven, they were subject to measures taken by other countries, therefore reducing their attractivity.

The measures taken by other jurisdictions could be:

  • Monitoring payments with tax havens
  • Denying participation exemption for dividends received from tax havens
  • Controlled Foreign Corporations rules which include revenue recorded in tax havens in the country of the parent
  • Rejection payments as deductible expenses in jurisdiction of the parent
  • Imposing substance requirements on tax havens (such as those imposed under the Economic Substance Regulations)

This means that in effect today already transactions with tax havens are being targeted by other jurisdictions.

While Oman has been labeled a tax haven in the past for insufficiently exchanging information, and Saudi Arabia at some point as well for solely taxing non GCC shareholders, they undergo much less the same types of measures.

Next steps

The OECD and the IF Members will further develop a more granular set of rules for Pillar Two. In the meantime, governments will start exploring policy options, and implement them over the course of 2022 and 2023.

The OECD will likely develop a new multilateral treaty to implement Pillar Two. There’s bound to be some transitional rules as well.


The adoption of Pillar One, not discussed here, and Pillar Two, are undoubtedly going to have a profound impact on the international tax landscape. Simultaneously, it will put a number of governments as well before some policy choices, which will have an important impact on a domestic level.

Businesses can already analysis what the impact will be, at a high level, or on a more detailed level, by following the detailed guidelines given by the OECD in regards to the implementation. If prior implementation of transfer pricing or substance rules provides any lessons, it is that jurisdictions often implement them wholesale in their domestic jurisdictions. Businesses can therefore anticipate now already what the impact will be. The overall design is not expected to be changed much, and therefore analysis and planning can already be conducted now.

What concrete steps could be taken are:

  • Mapping the jurisdictions and the ETR under the Country by Country report which is already required to be filed by the same businesses.
  • Analyse what potential policy choices the jurisdictions with a nil to low ETR may take.
  • Analyse what measures are currently taken by other jurisdictions in respect of tax havens, and what impact Pillar Two might have on these transactions (i.e. identify “high risk jurisdictions”).
  • Calculate the financial impact of the imposition of the Global Minimum Tax on profits in terms of the net profit after tax.