Guideline for

Lease with Contemplated Transfer of Ownership In the case of leasing, which contemplates transfer of ownership from the financier to the financee, the Supply of the asset to the financier by the third-party Supplier qualifies as a Supply of Goods and is a Taxable Supply (except for the transfer of real estate ownership). The third- party Supplier must issue an invoice with VAT addressed to the financier. The financier is entitled to fully deduct the VAT invoiced by the Supplier on the basis that the financier will use the asset exclusively for leasing to transfer the asset to the financee. If the financier incurs other costs on which VAT is due in relation to entering into the financing, this VAT is deductible to the extent that the costs are attributable to VAT 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 amounts due for payment under the lease terms comprise a principal amount that equals the cost price of the asset, as well as an agreed profit. The principal amount is consideration for a taxable supply. The profit amount is VAT exempt. Any explicit fees, commissions, or commercial discounts are VAT taxable at the standard 15% rate. The financing structure of a lease with transfer of ownership 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 the end of the contract. As the transfer of ownership is contemplated as part of the agreement, the financier is considered for VAT purposes to have made a supply of the underlying asset at the start of the contract when the finance recipient receives possession of the asset(s). This is not affected by the payment in installments by the financee. Consequently, the financier is liable for VAT on 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. Example (7): Saudi Private Hospital enters into an Ijarah contract with a finance provider to lease a new MRI scanner. Under the terms of this Ijarah contract, the ownership of the MRI scanner will be transferred to Saudi Private Hospital after the lease period of four years. Saudi Private Hospital will pay a monthly instalment of SAR 10,000. In case any maintenance on the MRI scanner is required during the lease period, this will qualify as a separate VAT taxable service. As it is intended that the ownership will transfer at the end of the contract, the VAT due on the supply of the MRI scanner will be due at once for all installments to the extent it concerns the principal amount and other VAT taxable services, that are included in the periodical installments at the moment of transfer of the actual or constructive possession by the finance recipient, the first invoice issue to the finance recipient or first payment by the finance recipient, whatever comes first. As the maintenance services are supplied separately, VAT will also apply separately to these services. Element of Shari’ah-Compliant Financing Product Standard VAT Treatment Profit Exempt )Principal amount (excluding real estate Taxable Explicit fees, commissions, or commercial discounts Taxable