Circular on VAT treatment of real estate loan portfolio insurance in Saudi Arabia

The Saudi Arabian tax authority (ZATCA) issued a Circular on the VAT treatment of real estate loan portfolio insurance.

In the case of the real estate loan portfolios insurance, ZATCA opines that the financial institutions, not the borrower, should be considered the Customer for KSA VAT purposes provided all the following facts apply:

• The financial institutions enter into insurance contracts directly with the insurers;
• The financial institutions pay the insurance premium themselves and on their own account;
• The insurance contracts cover the entire real estate loan portfolio.
• The financial institutions are entitled to make a claim against the insurer upon the occurrence of the insured event and accordingly benefit from the insurance.

The Circular also mentions that where the financial institutions incur a portfolio insurance expense and do not recharge this expense to the borrowers this insurance should not be seen as supplied by the financial institutions to the borrowers and similarly it will not be treated as a nominal supply. 

While titled “Circular”, it represents the public opinion of ZATCA which is not legally binding. However, considering the tendencies of the current court practice on tax matters, analysing the public opinions of ZATCA is of great importance to reduce the risk of tax exposure.

KPMG KSA would be happy to assist the companies interested in the analysis of the impact of this new clarification, as well as in clearance with ZATCA of the new VAT treatment of their respective business models.