Guideline for

Description of the Product The financial institution (the financier) purchases real goods from the market through suppliers, paying for them in cash. It then sells these goods to the customer (the financee) under a deferred payment contract (in installments), which includes a higher price that incorporates a profit margin for the institution. The goods are not physically delivered, but a hypothetical delivery location is specified in the contractual agreement. After the customer takes possession of the goods from the financial institution under the deferred payment contract, they sell them to a third party in the market to obtain cash. The customer is obligated to repay the deferred payment in specified installments, and the difference between the cash price paid by the institution and the deferred payment price represents the profit margin for the financial service. Although both the financier (financial institution) and the financee (customer) purchased the goods for resale within a Tawarruq structure, each party acquired actual or implicit ownership of the goods for a specified period. The goods must be clearly identified and distinct from the trader's other assets. This can be achieved by physically allocating the goods, separating them in the warehouse, or documenting them with identification numbers or ownership certificates to ensure actual control before sale. This structure can be simply depicted as follows: 8.2 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. In cases where ownership of goods is temporarily transferred within a legitimate financing structure, and this transfer is not intended to permanently transfer ownership of the goods to the customer, such a transfer is not considered a separate supply of goods for VAT purposes, provided that the transaction structure clearly indicates that its purpose is financing and not actual supply. However, if the transfer grants the customer full and unrestricted right to dispose of the goods— as is the case in some Tawarruq structures where the customer resells the goods in the market— this may be considered a separate supply, subject to assessment as to whether the actual supply has been realized according to the law provisions. Therefore, Tawarruq contracts must be carefully examined to determine whether the supply is covered under the exempt financial product or constitutes a separate supply of goods subject to VAT. Market Installments Financing Provider Financing Recipient Cash Cash Commodity Commodity Commodity Example (9): Under Tawarruq arrangements (Shari’ah compliant financing products) Omar Building LLC purchases from Khobar Enterprise Finance Bank commodities at a total price of SAR 105,000 to be paid in 10 yearly installments of SAR 10,500. The commodities are initially purchased by Khobar Enterprise Finance Bank from the market for SAR 100,000. The commodities purchased by Omar Building LLC from Khobar Enterprise Finance Bank are sold by Omar Buiding LLC at SAR 100,000 to a buyer on the market. As Omar Building LLC receives SAR 100,000 immediately and only has to pay SAR 10,500 in yearly instalments to Khobar. Enterprise Finance Bank, Omar Building LLC is funded. The principal amount of the instalments (SAR 10,000) is out of the scope of VAT. The SAR 500 profit is VAT exempt.