Zero-Rated VAT in Saudi Arabia: A Complete Guide to Qualifying Supplies

Zero-Rated VAT in Saudi Arabia: A Complete Guide to Qualifying Supplies

Introduction

Zero-rated supplies represent a critical type in the Saudi Arabia Value Added Tax (VAT) regime, governed by Zakat, Tax and Customs Authority (ZATCA). They are zero-rated transactions, i.e., 0% VAT-rated, so that the supplier does not impose any tax on the buyer but has the valuable privilege to claim any input VAT paid on related business expenses. Such a process is designed to favorably benefit major industries, enhance foreign competitiveness, and offer important commodities and services exempt from the burdens of the usual 15% VAT. Businesses should ensure they understand strict requirements for zero-rating to escape blanket non-compliance, face enormous penalties for erroneous application, and optimize VAT recovery mechanisms.

Recent Amendments

Saudi Arabia's zero-rated supply regime has remained the same since the introduction of VAT. However, businesses are advised that ZATCA (the Saudi tax authority) issues VAT Implementing Regulations or public clarifications on a relatively frequent basis, which can influence the interpretation of existing rules. For example, ZATCA has issued a series of detailed guides that set out the evidence that will be accepted as adequate to demonstrate that a supply is an export or for international transport. 

What are Zero-Rated Supplies?

A zero-rated supply is a taxable supply that is charged VAT at 0%. It is distinct from exempt supplies where no VAT is levied, but any input tax associated with them cannot be reclaimed. For zero-rated supplies, the business can reclaim the VAT it has paid on its expenses (input tax). This makes the supply effectively VAT-free throughout the entire supply chain, 

Difference Between Zero-Rated and Exempt Supplies

This is a crucial distinction for businesses:

Feature	Zero-Rated Supplies	Exempt Supplies
VAT Rate Applied	0%	VAT is not charged
Issuance of Tax Invoice	Required. Must issue a full tax invoice showing 0% VAT.	Not allowed. Cannot issue a VAT tax invoice.
Recovery of Input VAT	Yes. The supplier CAN reclaim all input VAT paid on related expenses/costs.	No. The supplier CANNOT reclaim any input VAT paid on related expenses/costs.
Impact on Price	Effectively VAT-free for the end consumer.	VAT-free for the end consumer, but the supplier bears the cost of non-recoverable input VAT.
Financial Effect on Business	Cash flow positive. Business gets a refund from ZATCA for its input VAT.	Costly. The business acts as the final consumer for its inputs; the unrecoverable VAT becomes a cost.
Examples in Saudi Arabia	- Exports outside the GCC - International transport - Certain medicines & medical equipment - Investment precious metals	- Sale/lease of residential real estate - Certain financial services (e.g., interest) - Local passenger transport

Categories of Zero-Rated Supplies

The VAT Regulations specify the following main categories of zero-rated supplies:

1. Exports of Goods outside the GCC Territory

This is one of the more common categories. The goods stock is currently zero-rated when leaving from one of the GCC member states (Saudi Arabia, UAE, Bahrain, Kuwait, Oman, and Qatar). For the use of the 0% rate to be invoked by the supplier, the supplier shall:  

• Export the goods within a stated period (3 months from the date of supply).  
• Obtain and retain official commercial evidence proving exportation, such as:  
• Customs declaration documents from the Saudi authority.  
• Proof of shipping and insurance.  
• Import documents from the destination country.

 2. International Transport of Goods and Passengers

This includes the supply of:  

• Moving goods or passengers from a point within Saudi Arabia to a point not part of the GCC (or vice versa).  
• Moving goods or passengers from one point not part of the GCC to another point not part of the GCC (i.e., a flight from London to Singapore operated by an airline based in Saudi Arabia).  
• Services that are directly related to international transportation. Examples of the types of services are loading and unloading, handling, and storage.

 3. Medicines and Medical Equipment

To make healthcare more accessible, the following are zero-rated:  

• All drugs licensed by the Saudi Food and Drug Authority (SFDA).  
• Equipment is specifically defined in regulations and is SFDA-approved.  
• Suppliers must allow products to receive the appropriate regulatory approvals in order to be zero-rated.

 4. Investment Precious Metals

To support the market for investment metals, the supply of the following is zero-rated:  

• Gold, silver, and platinum that are at least 99% pure.  
• The supply must be in an acceptable form for investment (e.g., bars, ingots, coins), not in a manner used for industrial or ornamental purposes (e.g., jewelry).

Documentation and compliance requirements

Simply getting the qualitative element of the criteria met is not enough. Businesses need to obtain and keep adequate documentation to support their claim for zero-rating. This supporting evidence is crucial during a ZATCA audit.  

• For Exports: Customs documentation, airway bills, bills of lading, and commercial invoices.  
• For International Transport: Passenger manifests, freight documents, and contracts specifying international routes.  
• For Medicines/Equipment: SFDA registration certificates and product lists.  
• For Precious Metals: Assay certificates confirming purity and invoices specifying the character of the goods.

Failure to provide this documentation when asked for can lead ZATCA to re-rate the supply as standard-rated (15%), and a huge VAT charge, along with potential penalties and interest.

Conclusion

Zero-rated supplies are an important part of Saudi Arabia's VAT regime, specifically for international exports of goods and services, international transportation, basic healthcare items, and investment metals, to promote economic development and global commerce. The main advantage of being able to do zero-rated supplies for the business is recoverable input VAT, leading to lower operating costs, competitive market advantage (capacity), and the main objective for the state is to keep a VAT-free zone around basic cross-border and life-saving activities. While there are advantages to making zero-rated supplies or sales, the strict application of 0% VAT can only happen if you meet certain precise legal criteria, and have full documentary evidence of the compliance level of record keeping to substantiate classification. Otherwise, incorrect application can lead to substantial tax exposures and penalties with back-paid taxes. 

FAQs

1. Can I zero-rate services provided to a client outside Saudi Arabia?

The zero-rate for exports typically applies to goods. Services provided to non-residents can be zero-rated under specific conditions outlined in the VAT Law (often under the "place of supply" rules). It is complex and requires careful analysis of the service type and contract.  

2. What is the difference between exporting outside the GCC and exporting outside Saudi Arabia?

Exports to other GCC states (ex., UAE) do not get a VAT zero rating. Instead, they will be attracted to a specific reverse charge mechanism or domestic rates. The zero rating only applies to the export out of the whole GCC territory ( ex, the USA, UK, EU).  

3. Do I need to issue an invoice to support a zero-rated supply?

Yes. This is a critical compliance step. You must issue a full tax invoice that clearly shows the VAT rate applied as 0% and states the reason for zero-rating (e.g., "Export outside GCC"). The invoice must include all other mandatory fields required by ZATCA.  

4. What happens if I incorrectly apply the zero-rate?

If ZATCA finds that a supply did not meet the criteria, they will assess the business for the outstanding 15% VAT that should have been charged. This will be due for payment, along with potential penalties for an incorrect tax return and issuing an incorrect invoice.  

5. Are educational services zero-rated?

No. Private educational services are generally exempt from VAT rather than being zero-rated. This means that no VAT is charged on the fee, but no input VAT on related costs (e.g., computers, books, construction) can be recovered by the school.

You can explore Flick's other global tax and compliance resources here.