Guideline for

Lease Without Contemplating Ownership Transfer to the Customer In the case of lease without contemplating ownership transfer to the Customer, the Supply of the asset to the financing provider by the third party qualifies as a Supply of Goods and is a TaxableSupply. The third party must issue an invoice with VAT addressed to the financing provider. The financing provider is entitled to fully deduct the VAT invoiced by the third party on the basis that the financing provider will use the asset exclusively for carrying on a (taxable) leasing activity, making taxable supplies to the financing recipient. If the financing provider incurs other costs on which VAT is due in relation to entering into the financing agreements, 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. The lease terms invoiced by the finance provider to the finance recipient qualify as consideration for VAT taxable services in full. No VAT exempt profit is recognized. Additional fees charged (explicit fees, commissions or commercial discounts) charged in relation to the leasing are VAT taxable. If a security payment is requested by the financing provider and not used for settlement with the lease terms the receipt of the security payment and the repayment thereof to the financing recipient is outside the scope of VAT. If the financing provider settles any of the security amounts with the actual lease terms, then such settlement follows the VAT treatment of the payment of the instalments and/or other service fees it is settled for. The VAT is due on and at each instalment and the lease qualifies as a service not as a Supply of Goods. Example (6): Road Rocks LLC, a Saudi Arabian company registered with ZATCA for VAT purposes, is seeking to lease an industrial machine for use in road maintenance projects. It has agreed with a specialized leasing company that the latter will purchase the machine from the manufacturer and lease it to Road Rocks under a five-year operating lease agreement, with no transfer of ownership at the end of the lease term. The agreed-upon monthly payment is SAR 1,000, plus SAR 150 VAT, for a total of SAR 1,150 per month. Since there is no promise of ownership, the lease agreement is treated as a service subject to VAT at the standard rate (15%). Road Rocks has provided a cash guarantee of SAR 4,000, which will be held in a separate account and may only be used by the leasing company to cover outstanding payments. This guarantee, as long as it remains unused, is exempt from VAT and does not constitute consideration for a supply. If any portion of the guarantee is used to settle future rental payments, the VAT due will be reported on the installments paid using the guarantee. Element of Shari’ah-Compliant Financing Product Standard VAT Treatment Lease term Taxable Explicit fees, commissions or commercial discounts Taxable