Guideline for

Description of the Product The financing contract is executed by the financier and the financee to jointly obtain an asset from the third-party Supplier. By the payment of instalments by the financee to the financier, the financier gradually transfers the ownership of its part of the asset to the financee. After paying the final instalment, the financee obtains full ownership. The total amount of the instalments paid by the financee to the financier exceeds the purchase price paid by the financier to the third- party Supplier for its part of the asset. The difference is the profit for the financier. This structure can be simply depicted as follows: Financing Provider Financee Asset Gradually Asset (Partial Ownership) Installments Supplier Cash Asset (Full Ownership) Asset (Partial Ownership) 7.2 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. The supply by the third-party Supplier to the finance provider and the finance recipient constitutes a Supply of Goods. This Supply of Goods is taxable. The third-party Supplier must issue an invoice to the finance provider (the bank) in the name of the finance provider, as well as an invoice to the finance recipient in the name of the finance recipient. The gradual transfer of ownership from the finance provider to the financee, which is intended to be definitive, is subject to VAT19. The profit for the finance provider on the transactions is VAT exempt. That part of the installments payable in respect of an explicit fee, commission, or commercial discount is VAT taxable. Example (8): An Islamic bank (the financier) entered into a diminishing partnership agreement with a local manufacturing company (the beneficiary) to finance the purchase of production equipment for a total amount of SAR 500,000. The bank contributed 60% (SAR 300,000), while the company contributed 40% (SAR 200,000). The equipment was purchased from a local supplier registered for VAT. The supplier issued a tax invoice in the names of both parties, including VAT at the standard rate. Ownership of the equipment was registered jointly in the names of the financial institution and the company, reflecting each party's contribution. The parties agreed that the company would gradually purchase the bank's share over five years through monthly payments. The total payments made by the company to the bank during the partnership period amounted to SAR 340,000, including SAR 300,000 representing the bank's contribution and SAR 40,000 representing the bank's profit. 19. Article 29, Implementing Regulations Tax Treatment: Element of Shari’ah-Compliant Financing Product Standard VAT Treatment Principal amount for supplying the equipment is )SAR 500,000( Taxable The profit (SAR 40,000) that the institution makes from gradually selling its share in exchange for a financial service based on profit-sharing financing Exempt In case of any explicit fees, commissions, or discounts Taxable 8. Tawarruq Section 8.1 discusses the characteristics of a Shari’ah-Compliant Financing Structure that uses the purchase and sale of real commodities to provide liquidity to the financee. This model is commonly known as “Tawarruq” or “Commodity Murabaha.” Paragraph 8.2 explains the tax treatment applicable to this type of financing.