Residential VAT Exemption
Synonyms: Residential Lease VAT Exemption، Exempt Residential Rent، VAT Exemption on Residential Leasing
Last updated: 2026-09-25
Short Definition
The residential VAT exemption is the rule that makes the lease or licence of residential real estate in Saudi Arabia an exempt supply for Value Added Tax, so a landlord does not add 15% VAT to residential rent, unlike commercial rent, which is taxed at the standard rate.
Overview
Legal Basis
The exemption is based on the VAT Law issued by Royal Decree No. (M/113) dated 2/11/1438H and Article 30 of its Implementing Regulations issued by the Zakat, Tax and Customs Authority (ZATCA), which exempts the supply of residential real estate by way of lease or licence and excludes hotels, inns, serviced accommodation and any building designed for temporary accommodation. Royal Order No. (A/84) dated 14/2/1442H exempted real estate sales from VAT from 4 October 2020 and subjected them to the 5% Real Estate Transaction Tax. ZATCA administers and enforces the rules.
Practical Example
Saad owns a building in Jeddah with four ground-floor shops and eight flats. The flats rent for SAR 30,000 a year each (SAR 240,000), which is exempt, so he adds no VAT. The shops rent for SAR 100,000 each (SAR 400,000), which is taxable; because his taxable supplies exceed SAR 375,000 he must apply to register within 30 days of the end of the month in which he crossed the threshold, and then charge 15% on the shop rents: SAR 60,000. Saad paid SAR 3,000 VAT on renovating the flats and can deduct none of it, because it relates to an exempt supply. He paid SAR 6,000 VAT on maintaining the shared lift and facade and deducts it in the ratio of taxable to total supplies (400,000 / 640,000 = 62.5%), i.e. SAR 3,750; the remaining SAR 2,250 is a cost to him.
Common Mistakes
- ✗Adding 15% to the rent of a permanent residential flat — this collects tax that is not due, and a non-registered person who issues a tax invoice faces a fine of up to SAR 100,000.
- ✗Treating serviced apartments or temporary tourist accommodation as exempt residential property — the Regulations expressly exclude them and they are taxed at 15%.
- ✗Assuming the exemption covers brokerage commission and property-management fees — these are separate services taxed at 15% when supplied by a registered supplier.
- ✗Deducting input VAT on maintaining and renovating leased residential units — it is not deductible because it relates to an exempt supply.
- ✗Failing to separate commercial and residential parts of a mixed-use building, or counting exempt residential rent toward the mandatory registration threshold.
International Differences
Many countries exempt residential leasing from VAT, but in different ways. In the UAE (5% VAT), subsequent residential leases are exempt while the first supply of a new residential building within three years of completion is zero-rated, and commercial leases are standard-rated. In Turkey, individuals renting out homes are generally not charged KDV (standard rate 20%) and their rental income falls under personal income tax, while commercial leases are taxable. In the EU, letting of immovable property is generally exempt, with options for member states to tax certain cases. The Saudi regime stands out for an explicit definition that excludes hotels and serviced apartments, and for moving property sales entirely out of VAT into the 5% Real Estate Transaction Tax.
