Guideline for

VAT treatment of the Product The following VAT treatment applies to the financing structure as described above, provided that 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. Since the financier purchases the asset in its own name, the financier acquires (full) ownership of the asset by actual possession and/or constructive possession with the intention to transfer this (full) ownership of the asset to the financee after acquisition thereof by the financier. The transfer of ownership from the third-party Supplier to the financier is a Supply of Goods. This supply is taxable. The third-party Supplier must issue an invoice to the finance provider in the name of the finance provider. The Supply by the financier to the financee is also taxable. The financier can therefore deduct the VAT due on the purchase of the asset from the third-party Supplier in full. If the financier incurs other costs on which VAT is due in relation to entering into the financing arrangements, this VAT is deductible to the extent that the costs are attributable to taxable supplies. Given the nature of the transactions, it is possible that the VAT on other costs is only partially deductible or not at all. Financing Provider Financee Asset (Full Ownership) Asset (Full Ownership) Installments Third Party Supplier Cash The financing structure is based on the principle that the financier will transfer the ownership of the assets to the finance recipient as a Supply of Goods at once at the start of the contract. This is not affected by the payment in installments by the financee. Consequently, the financier is liable for VAT on the supply of goods, valued at the full principal amount due on all installments (including the principal amount and other VAT taxable services that are included in the periodical installments). The date of supply for VAT purposes takes place on the date of transfer of the actual or constructive possession by the finance recipient, the first invoice issued to the finance recipient, or the first payment by the finance recipient, whichever comes first. The financier must issue an invoice addressed to the finance recipient for the supply of goods. The financier may ask the financee to settle the VAT amount when due or may include the VAT amount within the asset value, where the financee can pay such VAT in installments. Payment of the VAT due on the asset is a commercial agreement between the parties, which does not affect the VAT due date for the finance provider17. If a security payment is requested by the financier and cannot be used for settlement of the instalments, the receipt of the security payment and the repayment thereof to the financee are outside the scope of VAT. If the financier settles any of the security amount with the actual instalments or other costs, then such settlement follows the VAT treatment of the payment of the instalments and/or other service fees it is settled for. The mark-up or profit amount included in the installments is VAT exempt. For any VAT taxable services that are supplied separately from the financing services, the VAT becomes due on the date the service is performed, based on the nature of those separate services. Example (5): A taxi company established in the KSA wishes to expand its car fleet. To purchase these new taxis, a Murabaha arrangement has been agreed with Islamic Bank Ltd. To execute the transaction, Islamic Bank Ltd. purchases ten cars from the car manufacturer in its own name, for an amount of SAR 1,150,000 (including a VAT amount of SAR 150,000). 17. We refer to the Financial Services Sector - Industry Guideline for further guidance on this matter. As part of the Murabaha, the taxis are subsequently supplied by Islamic Bank Ltd. to the taxi company for an amount of SAR 1,255,000 (including a VAT amount of SAR 150,000). The taxis are physically handed over to the taxi company on 30th July. As this is a one-off supply, 30th July is also the date of supply of the taxis (as the date on which the goods are made available to the Customer). A tax invoice must be issued by Islamic Bank Ltd. for the full principal amount on the date of supply of the cars. Islamic Bank Ltd. is liable for the payment of the (full) VAT due on the principal amount (SAR 150,000) in the tax period, including 30th July, as this is the date on which the supply takes place VAT becomes due in full on the supply on 30 July, but payment of the principal amount, VAT amount, and finance component are subsequently collected in 48 monthly installments of SAR 23,020,84 A separate tax invoice is not required in respect of the individual installments. The mark-up charged by Islamic Bank Ltd. (SAR 105,000) qualifies as VAT-exempt turnover that is realized at the moment the mark-up is charged. Component of Shari’ah-Compliant Financing Products Standard VAT Treatment Supply of assets (excluding real estate) by the third-party Supplier Taxable Supply of assets (excluding real estate) by the financier to the finance recipient Taxable (principal amount )only Profit charged by the financier to the finance recipient (i.e., )financing component Exempt Explicit fees, commissions, or commercial discounts Taxable 6. Ijarah Paragraph 6.1. discusses the specific characteristics of the financing structure in which financing is provided to a financee that wishes to become the lessee (with or without becoming the owner) of the asset for its own use. These structures are often referred to as Ijarah. In Paragraph 6.2. The VAT treatment is described. Other financing structures that meet this description will be subject to the same VAT treatment.