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Under Saudi Arabia’s VAT framework, some financial services and selected insurance services are exempt from VAT, while others are taxable at the standard rate. The distinction often turns on whether consideration is margin-based (implicit interest/spread) or explicit fee-based (advisory, arrangement, administration). This guide clarifies common scenarios, outlines input VAT recovery rules, and provides a practical compliance checklist for corporate taxpayers operating in the Kingdom.
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What “Exempt” Means in Practice
- No output VAT is charged on exempt supplies.
- Input VAT is not fully recoverable on costs wholly attributable to exempt supplies (partial recovery may be available via apportionment when mixed with taxable activities).
- Invoices for exempt supplies should clearly state the exemption basis per policy, and records must support the classification.
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Financial Services — Exempt vs. Taxable (At a Glance)
| Service | Typical VAT Treatment | Notes |
|---|---|---|
| Loans, credit, financing (interest/profit margin) | Exempt | Applies to conventional and Sharia-compliant financing where consideration is an implicit margin (interest/profit rate or spread). |
| Foreign exchange (currency margin) | Exempt | Where the consideration is the exchange margin, not a separate fee. |
| Trading in debt/securities (equities, sukuk, bonds) | Exempt | Issuance, allotment, transfer of ownership in shares or debt instruments generally exempt; custodial/settlement fees are usually taxable. |
| Account maintenance, card fees, advisory, brokerage | Taxable | Explicit fee-based services (including arrangement, processing and service fees) typically fall under standard-rated VAT. |
| Fund management & discretionary portfolio services | Taxable | Management/advisory fees are explicit consideration and standard-rated. |
| Derivatives dealing (margin-based) | Exempt (often) | Where consideration is an embedded margin; however, separate advisory/arrangement fees are taxable. |
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Insurance Services — What Is Typically Exempt?
Commonly Exempt
- Life insurance and life reinsurance products.
- Certain long-term savings/assurance policies with life cover components.
Typically Taxable at Standard Rate
- General insurance (e.g., property, liability, motor, marine).
- Health/medical insurance and most non-life reinsurance arrangements.
- Ancillary insurance services (claims handling, administration) where charged as a separate fee.
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Input VAT Recovery for Banks, Insurers & Corporate Treasuries
Partial Exemption (Apportionment)
- When you make both exempt and taxable supplies, recover input VAT using a fair and reasonable method (e.g., turnover-based, transaction-based, sectoral).
- Review and true-up the annual recovery percentage; maintain working papers and rationale.
Direct Attribution First
- Attribute costs directly to taxable or exempt activities where possible (e.g., brokerage platform fees → taxable; loan book origination → exempt).
- Only residual overheads go into the apportionment pool.
Blocked Input VAT (Common Pitfalls)
- Entertainment, staff catering, and similar items often non-recoverable.
- Medical insurance may be non-recoverable unless statutorily required for employees.
Evidence & Systems
- Use tax codes that distinguish exempt vs taxable outputs and direct vs residual inputs.
- Keep contract copies, product classifications, and GL mapping aligned with returns.
Decision Tree — Is My Financial/Insurance Service Exempt?
| Question | If YES | If NO |
|---|---|---|
| Is the consideration an implicit margin (interest/profit spread) rather than a fee? | Likely Exempt (financial services). | Likely Taxable (fee-based service). |
| Does the product qualify as life insurance (or life reinsurance)? | Likely Exempt. | Likely Taxable (general/health insurance, etc.). |
| Is the fee separately identifiable (advisory, management, arrangement)? | Likely Taxable. | Consider margin-based exemption (if truly implicit). |
| Is the service provided to a non-resident & zero-rating conditions met? | Consider zero-rating (distinct from exemption). | Apply domestic exempt/taxable rules. |
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Worked Examples (Corporate Perspective)
1) Corporate Treasury — FX Swaps
A treasury desk earns an exchange margin on spot/forward FX. The margin income is generally exempt. Any separate advisory/processing fees charged to group entities are usually taxable.
2) Bank — Loan Portfolio
Interest/profit on loans is exempt. Arrangement and early settlement fees are taxable. Input VAT on origination costs typically non-recoverable except via partial exemption.
3) Insurer — Composite Policy
A policy bundles life and medical cover. Life portion may be exempt; medical portion typically taxable. Split premiums on invoices to reflect correct treatment.
Compliance Checklist (Save This)
- Confirm product/fee mapping: exempt vs taxable vs zero-rated.
- Update e-invoicing (FATOORAH) codes and invoice descriptions to reflect VAT treatment.
- Apply direct attribution first; then apportion residual input VAT.
- Maintain evidence: contracts, policy terms, pricing memos, and GL mapping.
- Review recovery percentage at least annually; perform true-up and document methodology.
- Train front-office and AP teams on exemption triggers and blocked-input rules.
FAQs
- Are all financial services exempt?
- No. Only those where the consideration is an implicit margin (not a separately charged fee) are generally exempt. Fee-based services are typically taxable.
- Is life insurance always exempt?
- Life insurance (and life reinsurance) is commonly exempt, but confirm the product features and ensure composite policies are correctly split.
- How do we recover input VAT if most income is exempt?
- Use partial exemption (apportionment) on residual overheads after direct attribution. Keep a documented, fair and reasonable method and review annually.
- What’s the difference between exemption and zero-rating?
- Exempt supplies carry no output VAT and usually restrict input recovery. Zero-rated supplies are taxable at 0% (input VAT generally recoverable, subject to conditions).
References & Helpful Links
Disclaimer: This guide is general information for corporate taxpayers in Saudi Arabia. Always confirm the exact VAT treatment of your products and fees on the ZATCA portal and with a licensed Saudi tax advisor, especially for composite and bespoke arrangements.
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