Summary

This article by Manish Bansal of Dhruva Consultants discusses how Saudi Arabia has taken a major step in digital transformation under Vision 2030 with the launch of its first tokenised real estate transaction. By leveraging blockchain technology, property ownership can now be divided into digital tokens, allowing fractional ownership starting from just a few Riyals.

Analysis

As Saudi Arabia continues its digital transformation under Vision 2030, the convergence of blockchain technology and real estate has given rise to tokenised real estate—a model where property ownership is divided into digital tokens on a blockchain. Recently, one of the major real estate developers in Saudi Arabia has announced their partnership with world’s leading global AI & Blockchain company to execute the Kingdom’s first ever tokenised real estate transaction. This is a major milestone in blockchain-based property investment. The initiative enables fractional ownership starting from just a few Riyals and aligns with Saudi Arabia’s goals of financial inclusion, and citizen empowerment.

While this innovation enhances liquidity and accessibility to retail investors as well as financial institutions, it is imperative to address compliance with the Value-Added Tax (VAT) and Real Estate Transaction Tax (RETT) implications applicable to investors, developers, and platforms.

Understanding Tokenised Real Estate

Tokenised real estate involves converting ownership rights in a property into digital tokens, which can be bought, sold, or traded on blockchain platforms. These tokens may represent full or fractional ownership of a property and right to rental/ capital gain income thereon.

These tokens can be easily bought or sold on the platform without any minimum investment or lock-in requirements.

VAT/ RETT Framework in Saudi Arabia

Saudi Arabia levies VAT at 15% (the rate was 5% until 2020). The Zakat, Tax and Customs Authority (ZATCA) governs VAT administration. The key VAT provisions relevant to real estate are set out below:

• 15% VAT applies to commercial property leases.
• Residential leases are exempt from VAT, without any input VAT recovery
• Sale/ purchase of real estate property (commercial or residential) is also exempt. However, input VAT recovery is permissible subject to certain conditions under the Licensed Real Estate Developer Scheme (LREDS).

In addition, a 5% RETT applies to most real estate property disposals.

VAT/ RETT implications for Tokenised Real Estate

VAT implications on such transactions may vary depending on the nature of the token:

• Utility Tokens: If the token represents a share in rental income, it may be treated as a financial instrument, potentially exempt from VAT.
• Asset-Backed Tokens: If the token represents a direct interest in the underlying property, VAT could be generally exempt as purchase/ sale of real estate is exempted.

Having said the above, if the token represents a direct interest in the underlying property, RETT at 5% could be applicable on the sale and purchase of such tokens. RETT legislation in the Kingdom provides exemption to trading of listed securities. It would be interesting to see if the tokens qualify as securities financial instruments (as discussed above and if trading on a platform can be treated as securities being listed.

Rental income distributions

Income distributed to investors could be viewed either as rental income or as a return on investment depending upon the classification of the tokens. This is important – rental income could be either exempt or taxable at 15% depending on whether the property is residential or commercial. On the contrary, if the distributions are considered as return on investments, such as dividends, they may fall outside the scope of VAT.

Implications for the platforms

Fees charged by a platform for services such as property listing and property management are typically subject to VAT. However, fees related to the management or transfer of financial instruments may qualify for financial services treatment, potentially altering the VAT treatment.

Each of these scenarios underscores the need for a detailed analysis of contractual terms and the economic substance of transactions.

Input VAT Recovery

Real estate developers and tokenisation platforms often incur VAT on services like legal fees, digital architecture, administration, payroll and business development. The recoverability of input VAT depends on whether the output supply (token sale) is taxable or exempt and the proportion of taxable vs. exempt activities.

Fractional ownership – a global perspective

In countries such as India and the United Kingdom, the fractional holding is through Real Estate Investment Trust. The units of many of the trusts is listed on the stock exchanges (some could be unlisted units). From a VAT perspective, returns are treated at par with dividends.

VAT Considerations for Stakeholders

• Classifying the investment correctly – whether the investment constitutes a financial instrument or a share in real estate. This would determine the appropriate VAT and RETT treatment thereon.
• Assess the VAT treatment of income streams such as rental income, capital gains, and sale proceeds.
• Assess recoverability of VAT on associated costs and fees.
• Consider filing a private clarification with the ZATCA to confirm the tax treatment.
• Needless to say, platforms and investors must maintain detailed records of their transactions, viz. token issuance, ownership, and transaction flows.

Tokenised real estate offers exciting opportunities in Saudi Arabia’s evolving real estate landscape, but it also requires adherence to ZATCA’s VAT and RETT regulations. As ZATCA continues to refine its regulatory framework in tandem with global laws, stakeholders must stay informed and proactive to ensure compliance and optimize tax efficiency.

Written by Manish Bansal, Associate Partner.