For corporate taxpayers in Saudi Arabia, zero-rated supplies present a valuable opportunity—not only do these transactions attract 0% VAT, but they also preserve the right to claim full input VAT recovery. This combination can significantly improve cash flow and reduce the overall VAT burden for businesses engaged in qualifying activities.
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1. What Are Zero-Rated Supplies?
Zero-rated supplies are taxable transactions charged at a VAT rate of 0% under Saudi Arabia’s VAT Law. While the VAT rate is zero, the supply is still considered taxable, which means businesses can recover the input VAT paid on related purchases and expenses.
Key Examples of Zero-Rated Supplies:
- Exports of goods to countries outside the GCC VAT system.
- International transport of passengers and goods.
- Supply of qualifying medicines and medical equipment.
- Supply of precious metals meeting purity standards.
To apply zero-rating, suppliers must maintain proper documentary evidence—such as export declarations, airway bills, and customs documents.
2. Full Input VAT Recovery Rights
One of the primary benefits of zero-rated supplies is the right to recover all input VAT paid on goods and services directly related to the zero-rated transaction. This includes:
- Procurement of raw materials used in manufacturing exported goods.
- Logistics and shipping services for exported products.
- Marketing and promotional expenses related to zero-rated sales.
Pro Tip: Input VAT recovery can result in substantial refunds from ZATCA if your business primarily engages in zero-rated activities.
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3. Documentation and Compliance Requirements
| Requirement | Zero-Rated Supplies |
|---|---|
| Tax Invoice | Must clearly state “0% VAT” and reason for zero-rating. |
| Proof of Supply | Customs export documents, transport contracts, delivery notes. |
| Retention Period | Minimum of 5 years from the end of the tax period. |
| Input VAT Claim | Submit via VAT return; ensure linkage to zero-rated transactions. |
4. Common Mistakes to Avoid
- Failing to collect adequate proof for exports—leading to disallowed zero-rating.
- Mixing exempt and zero-rated supplies without proper input VAT apportionment.
- Late VAT return filings, risking penalties from ZATCA.
Warning: ZATCA audits often focus on verifying eligibility for zero-rating. Weak documentation can result in assessments and penalties.
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