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Saudi Arabia’s Real Estate Transaction Tax (RETT) does not apply only to direct sales of land and buildings. In certain circumstances, a transfer of shares in a Saudi company can also trigger RETT.
This is particularly relevant because the definition of a real estate company for RETT purposes is broader than many investors and business owners expect.
What Is a Real Estate Company Under Saudi RETT Rules?
A company does not need to be a property developer or carry out real estate activities as its principal business to qualify as a real estate company.
Broadly, an entity may fall within the Saudi RETT definition where it directly or indirectly owns real estate located in Saudi Arabia for the purpose of generating income from its sale or lease and the fair market value of that real estate represents 50% or more of the total fair market value of its assets.
The company’s commercial activity is therefore not necessarily decisive. A manufacturing, investment or other operating company could potentially qualify if a sufficiently significant proportion of its assets consists of Saudi real estate.
When Does RETT Apply to a Transfer of Shares?
A transfer of shares or equity interests in a real estate company may be subject to RETT where the relevant statutory conditions are satisfied, including:
- the entity qualifies as a real estate company at the time of the transfer or during the preceding 365 days;
- the transferring shareholder owns 30% or more of the company;
- the shares or equity interests transferred represent 30% or more of the company’s ownership; and
- the relevant transfer occurs within the applicable three-year period.
Where these requirements are met and no exemption applies, the transfer may be treated as a taxable real estate transaction, with the transferor generally responsible for paying the RETT.
What Is the Saudi RETT Rate on Share Transfers?
The Saudi RETT rate is 5%.
For a qualifying transfer of shares, RETT is determined by reference to the fair market value of the underlying Saudi real estate and the proportion attributable to the shares or equity interests being transferred.
Proper valuation can therefore become an important part of acquisitions and corporate restructurings involving companies that own Saudi real estate.
Why Should RETT Be Reviewed Before a Share Transfer?
The key point for investors is that a share deal does not necessarily avoid Saudi Real Estate Transaction Tax simply because the underlying property remains legally owned by the same company.
The RETT rules may become relevant in:
- acquisitions and disposals of Saudi companies;
- shareholder exits;
- transfers between existing shareholders;
- corporate and group restructurings; and
- family business reorganisations.
Before transferring a significant interest in a Saudi company that owns real estate, the parties should determine whether the company qualifies as a real estate company, review the applicable ownership thresholds, establish the relevant fair market values and consider whether a RETT exemption is available.
Addressing these questions before signing or completing the transaction can prevent unexpected Saudi RETT liabilities and allow the parties to properly allocate the tax consequences in the transaction documents. Therefore, expert tax counsel can help optimise transactions and mitigate risks.
