Guideline for

Transfer of Commodities from Finance Recipient to a Market Trader The default VAT treatment of the onward transfer of the commodity by the finance recipient depends on whether the financee is a taxable person for KSA VAT purposes. 8.2.3.1 Financee Is a Taxable Person If the sale of commodities by the financier to the trader takes place within the context of a legitimate financial product, and ownership is transferred to the financier only temporarily for financing purposes, without the intention of permanent ownership or final consumption, then this transfer is not considered a separate supply of commodities. In this case, VAT is not imposed on the sale of commodities to the trader, provided sufficient evidence is available to prove the following: • The transfer of commodities to the financier is temporary. • The transaction is within the framework of a legitimate financing product, or as a guarantee related to financing or any other arrangement. • The commodities are not consumed or used by the financier. If the conditions mentioned above are not met, and the sale of the commodities by the financier to the trader is based on an actual and non-temporary transfer of ownership, then this sale is considered a supply subject to VAT at a rate of 15%, provided that the commodities are present in the KSA at the time of supply, and the financier must issue a tax invoice in the name of the trader that includes the VAT due. 8.2.3.2 Financee Is Not a Taxable Person If the financee is not a taxable person, the transfer of the commodities by the non- taxable financee to the market trader is not subject to VAT. However, if the market trader subsequently supplies the commodities onwards, the market trader’s subsequent Supply of Goods is by default subject to VAT. Element of Shari’ah-Compliant Financing Croduct Standard VAT Treatment Supply of commodities by a trader in the market to the financier Outside the scope of VAT Profit charged by the financier to the financee Outside the scope of VAT Explicit fees, commissions, or commercial discounts Taxable at the standard rate Supply of commodities by the financee to a trader in the market Outside the scope of VAT )Profits charged by the financier (the financing element Exempt Later supply of commodity by market trader Taxable at the standard rate 9. Sukuk Paragraph 9.1 discusses the specific characteristics of the financing structure in which financing is provided by issuing certificates guaranteed by assets of the party that wishes to obtain financing. These structures are often referred to as Sukuk. In Paragraph 9.2. The VAT treatment is described. Other financing structures that meet this description will be subject to the same VAT treatment.