Guideline for

Description of the Product This financing structure entails a situation in which the Customer appoints a financial institution to invest their funds on their behalf, intending to grow those funds and generate a return. The financial institution executes the investments according to the terms agreed upon by both parties, whether the investments are restricted or unrestricted. Upon the expiration of the investment period, the financial institution is obligated to return the funds to the customer. The customer is entitled to a profit if the investment returns are realized. It may be agreed in advance that the financial institution will retain a percentage of any surplus profit if the total investment profit exceeds the amount agreed upon with the customer. In the event of a loss, the customer bears the loss alone, and the financier (financial institution) is not obligated to cover any loss or pay any previously agreed-upon profits. The parties may also agree that the financial institution is entitled (in addition to its allocated profit) to a fee or a specific percentage of the invested amount, paid as compensation (Wakala fees or management fees) for the investment services it provides on behalf of the customer. This structure can be simplified as follows: Investing Funds Financial Institution Customer Funds Agent fee Profit Funds Excess gain Funds+ agreed gain 11.2 VAT Treatment of the Product The following VAT treatment applies to the financing structure as described above if it concerns a Shari’ah-Compliant Financing Product. Financing structures that are offered under the same conditions, but under a different name, will have the same VAT treatment as described below. The transfer of funds from the customer to the financial institution, and then their return to the customer after the investment period has ended, is outside the scope of VAT, regardless of whether the customer is a taxable person or not. Any excess gain charged or withheld by the financial institution (on an implicit margin or spread basis) is VAT exempt for KSA VAT purposes. Any explicit (agency) fees, commissions or commercial discounts charged within the structure are Taxable services. Example (12): Mustafa inherited SAR 2,000,000 when his uncle passed away and decided to invest it. He appointed Jeddah Bank to manage the investment, and an agreement was reached between the bank and Mustafa to deposit the amount as a two-year term deposit with an expected return of 3.5%, payable at maturity. The agreement did not include any separate agency fees. After two years, Jeddah Bank earned a return of 6% instead of the expected 3.5%, amounting to SAR 120,000 in profit on the deposited amount. As per the agreement, the bank retained 2.5% of the profit (equivalent to SAR 50,000), and the remaining amount (SAR 70,000) was paid to Mustafa. Element of a Shari’ah-compliant Financing Product Standard VAT Treatment Funding Outside the scope of VAT Excess gain for a financial institution Exempt Profit for Customer Outside the scope of VAT )Agency service fees (explicit Taxable Tax Treatment: The SAR 50,000 retained by the bank is considered payment for a financial service and is exempt from VAT. As for the amount of SAR 70,000 paid to Mustafa, it is considered an investment return resulting from the deposit and is not considered consideration for a supply, and therefore falls outside the scope of VAT. 12. Input Tax