VAT Treatment in Transfers of Going Concern (TOGC) & Special Zone Supplies — Saudi Arabia

A keyword-rich guide for corporate taxpayers in Saudi Arabia on VAT treatment for Transfers of a Going Concern (TOGC), Special Economic Zones (SEZs) and Special Integrated Logistics Zones, including eligibility criteria, time-of-supply, input VAT adjustments, and ZATCA compliance tips. Standard VAT rate remains 15% as of 12 Aug 2025.

Overview: TOGC vs. Ordinary Asset Sale

Feature	TOGC (Transfer of a Going Concern)	Ordinary Asset Sale
What is transferred?	A business (or part) capable of independent operation	Individual assets (e.g., equipment, inventory)
VAT treatment	TOGC relief may apply (commonly treated as non-supplies/out of scope when conditions are met)	Standard VAT rules apply (15% or relevant rate) unless another relief applies
Impact on cash flow	No VAT charge to finance if relief applies	VAT charged; buyer may claim input VAT (subject to rules)
Documentation	Substance evidence: staff, systems, contracts, continuity	Asset list, valuations, tax invoices per item

Key point: TOGC relief is conditions-based. If any condition fails, the transfer is treated as a normal taxable supply.

TOGC Eligibility Tests & Evidence

Seller’s activity: Seller transfers a business capable of independent operation, not just isolated assets.
Buyer’s intention: Buyer is (or will be) a VAT-registered taxable person continuing the same/similar business.
Continuity of operations: Staff, systems, customer/supplier contracts or licenses transfer to allow immediate operation.
No artificial separation: Avoid splitting economically linked assets into multiple contracts to bypass VAT rules.
Evidence pack: Signed SPA, completion deliverables, asset & contract schedules, license transfer approvals, VAT registrations.

VAT Consequences of TOGC (Output & Input)

Output VAT: Where TOGC conditions are met, the transfer is commonly treated as outside the scope of VAT; otherwise, 15% VAT may apply to taxable elements.
Input VAT clawback: If the buyer uses transferred assets for exempt activities, post-acquisition partial exemption and capital asset scheme (CAS) adjustments can arise.
WIP & inventory: If TOGC treatment is not available, these items are typically standard-rated at 15% (subject to specific rules).
Apportionment: Mixed transfers (e.g., tangible assets + IP + real estate) require careful characterization and invoicing lines if TOGC fails.
Time of supply: Usually completion date; deposits/earnouts may have separate time-of-supply consequences.

Capital Asset Scheme & Change-of-Use Adjustments

The Capital Asset Scheme (CAS) aligns input VAT recovery with actual taxable use of high-value assets over a multi-year period (indicatively 10 years for real estate and 5 years for other capital assets).

Buyer continuity: On TOGC, the buyer typically steps into ongoing CAS obligations for transferred capital assets.
Change of use: Post-deal repurposing (e.g., to exempt leasing) triggers clawback for the remaining CAS years; higher taxable use can trigger additional recovery.
Registers: Maintain a capital asset VAT register showing input VAT, start date, total CAS years, annual use %, and adjustments posted.

Special Zones: VAT Concepts & Common Scenarios

Saudi Arabia designates certain Special Economic Zones (SEZs) and logistics/special zones with tailored customs and VAT rules. VAT treatment can differ from mainland KSA depending on:

Zone designation & scope: What activities and supplies the zone covers (e.g., logistics, manufacturing, distribution, services).
Direction of supply: Within the zone, between zones, from zone to mainland KSA, or to foreign customers.
Customs status: Whether goods are in a customs-suspended setting or cleared to free circulation.
Documentation: Required zone approvals, movement documents, and VAT evidence to apply any special treatment.

Important: Zone rules are specific to each zone and activity. Always verify the current VAT treatment, zero-rating eligibility, and documentary requirements before invoicing.

Supply Flows: Zone→Zone, Zone→Mainland, Imports/Exports

Flow	VAT Lens (High Level)	What to Watch
Within the same zone	May follow zone-specific VAT treatment or documentation requirements	Zone rules, eligible activities, records
Zone → Zone (different zones)	Treatment can differ by zone pair and customs status of goods	Movement docs, evidence of status, transport proofs
Zone → Mainland KSA	Often treated similarly to imports into KSA mainland (VAT due upon release/clearance)	Importer of record, customs value, VAT accounting method
Mainland KSA → Zone	Potential suspension/deferral mechanisms where applicable	Correct tax codes, zone approvals, logistics evidence
Zone → Non-resident export	May be zero-rated if conditions are met	Export proofs, transport & exit docs, timing

ZATCA Compliance: Invoicing, Time of Supply, Returns

Determine classification first: Is it a qualifying TOGC? Is the supply governed by zone-specific VAT rules?
Time of supply: For TOGC, usually completion; for zone goods, consider customs events (release/clearance).
E-invoicing (FATOORA): Ensure the invoice reflects the correct VAT treatment (standard rate, zero rate, out-of-scope) and includes all mandatory fields.
Partial exemption & CAS: Post acquisition, update pro-rata and capital asset registers to capture any adjustments.
Return mapping: Post output VAT, input VAT, and adjustments into the correct ZATCA return boxes; attach/support documents when requested.

Numerical Examples

1) TOGC qualifies (no VAT cash cost)

SPA price: SAR 30,000,000 for a standalone division. Conditions met: buyer VAT-registered, immediate continuation, assets/contracts transferred.

VAT on transfer: Not charged (out of scope under TOGC treatment).
Post-deal: Buyer updates CAS registers and applies partial exemption going forward.

2) TOGC fails → ordinary taxable asset sale

Assets sold piecemeal: equipment SAR 5,000,000, inventory SAR 2,000,000, no staff/contracts transfer.

VAT on equipment: 15% of SAR 5,000,000 = SAR 750,000.
VAT on inventory: 15% of SAR 2,000,000 = SAR 300,000.
Total VAT: SAR 1,050,000 (buyer may recover subject to rules).

3) Zone → Mainland release

Goods valued at SAR 1,200,000 released from a zone into mainland KSA.

VAT due at 15%: SAR 180,000 accounted by the importer of record upon clearance (or per the applicable mechanism).
Input VAT recovery: Subject to normal rules and documentation.

Pre-Deal Checklists (TOGC & SEZ)

TOGC Readiness

Confirm buyer VAT registration and intention to continue the same business.
Ensure transfer of key people, processes, contracts, licenses.
Prepare a TOGC evidence pack and clauses in the SPA (VAT treatment, fall-back pricing, indemnities).
Update CAS registers and partial exemption methodology post-completion.

Special Zone Supplies

Identify the exact zone, eligible activities, and the current VAT/customs treatment.
Map supply flows: zone↔zone, zone→mainland, imports/exports, and who is the importer of record.
Collect and retain zone approvals, movement and export documents, and transport proofs.
Configure ERP tax codes for zero-rating/out-of-scope where applicable; test e-invoices.

FAQ

Is every business transfer a TOGC?
No. You must transfer a functioning business and the buyer must continue it. Otherwise, treat as a normal taxable sale of assets.

Do I issue a VAT invoice for a TOGC?
Typically, no VAT is charged where TOGC applies; issue commercial documents referencing the TOGC treatment and keep evidence on file.

Are supplies in special zones always zero-rated?
Not necessarily. Treatment depends on the specific zone rules, activity type, direction of supply, and documentation maintained.

How do TOGC and partial exemption interact?
TOGC affects the transfer VAT; input VAT recovery after completion is governed by the buyer’s partial exemption method and CAS.

SEO Takeaways for Corporate Readers

Saudi VAT TOGC—conditions, documentation, and cash-flow benefits.
Special Economic Zones VAT—zone-specific rules, customs status, and supply flow mapping.
ZATCA e-invoicing—correct rate tags: 15%, zero-rated, or out-of-scope.
Capital Asset Scheme and partial exemption—post-deal input VAT adjustments.
Compliance checklists for Saudi corporate taxpayers engaging in M&A and zone logistics.

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