For corporate taxpayers in Saudi Arabia, understanding VAT rate exceptions—specifically zero-rated supplies and exempt supplies—is critical to proper VAT compliance. The distinction affects your ability to claim input VAT, impacts your pricing strategy, and determines the accuracy of your ZATCA VAT returns.
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1. Understanding Zero-Rated Supplies
A zero-rated supply refers to goods or services taxed at 0% VAT. This means the transaction is taxable, but the rate is set at zero. Businesses can still claim input VAT on related expenses, which makes this category advantageous for corporate taxpayers involved in international trade or specific sectors.
Examples of Zero-Rated Supplies under Saudi VAT Law:
- Export of goods to customers outside the GCC territory.
- International transport services.
- Qualifying medicines and medical equipment.
- Supply of precious metals meeting purity standards.
Ensure documentation—such as customs declarations and transport contracts—is complete to substantiate zero-rating.
2. Understanding Exempt Supplies
Exempt supplies are transactions outside the scope of VAT taxation, meaning no VAT is charged and input VAT related to these supplies cannot be claimed. These typically relate to sectors where VAT recovery is not permitted.
Examples of Exempt Supplies under Saudi VAT Law:
- Financial services (certain fee-based services may be taxable).
- Lease or sale of residential real estate.
- Public sector services provided without consideration.
Important: If your business provides both taxable and exempt supplies, input VAT apportionment rules apply.
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3. Key Differences Between Zero-Rated and Exempt Supplies
| Aspect | Zero-Rated Supplies | Exempt Supplies |
|---|---|---|
| VAT Rate | 0% | Not applicable |
| Input VAT Recovery | Allowed | Not allowed |
| Common Examples | Exports, international transport, qualifying medicines | Residential leases, certain financial services |
| Impact on VAT Return | Reported in zero-rated sales section | Reported in exempt sales section |
4. Compliance Tips for Corporate Taxpayers
- Classify your supplies accurately to avoid penalties.
- Retain proper documentation for all zero-rated supplies.
- Apply correct apportionment rules when dealing with mixed supplies.
- Use ZATCA’s e-portal for guidance and clarifications.
Pro Tip: A VAT health check every quarter can help ensure compliance and maximize input VAT recovery.
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