Capital Assets excluded from the annual supplies figure for VAT registration
The value of a Supply of Capital Assets is excluded from the total value of annual supplies subject to Tax used for registration purposes, where the conditions in Article 6(5) of the Implementing Regulations are met. The Common VAT Agreement likewise calculates the total value of supplies by including the value of Taxable supplies except for the value of a Capital Assets Supply. The exclusion matters for both the historic and the expected-supplies mandatory registration tests, because those tests turn on the annual-supplies figure calculated in accordance with the Agreement.
The exclusion in Article 6(5)
Article 6(5) of the Implementing Regulations provides that the value of the Supply of Capital Assets is excluded from the total value of annual supplies subject to Tax, provided that the Capital Asset is used in the operation and furtherance of the Economic Activity of the Person who carries it out in accordance with a commercial registration or a similar license from the competent Authority, and that the Capital Asset has not been held to generate rental income or similar income or to supply it at a later time.
Three conditions therefore sit together under Article 6(5): use in the operation and furtherance of the Person’s Economic Activity; that Economic Activity being carried out in accordance with a commercial registration or a similar license from the competent Authority; and the Capital Asset not having been held to generate rental or similar income or to be supplied at a later time. Where those conditions are not met, Article 6(5) does not itself state that the exclusion still applies.
Agreement definition and calculation rule
Article 1 of the Common VAT Agreement defines Capital Assets as material and immaterial assets that form part of a business’s assets allocated for long-term use as a business instrument or means of investment.
Article 52(2)(a) of the Agreement provides that the total value of supplies consists of, among other components, the value of Taxable supplies except for the value of Capital Assets Supply. Article 52(1) calculates the value of annual supplies on either a historic twelve-month basis or an expected twelve-month basis, excluding exempted supplies. The Capital Assets Supply exception in Article 52(2)(a) therefore sits inside that annual-supplies calculation.
Interaction with mandatory registration tests
Article 3 of the Regulations requires a Resident Person to calculate Supplies made in the Kingdom in the twelve months then ended in accordance with the requirements set out in the Agreement. Article 4 requires an estimate of annual Supplies to be made in the next twelve months in accordance with the requirements provided for in the Agreement. In both cases, the annual-supplies figure is the figure against which the Mandatory Registration Threshold of SAR 375,000 in Article 50(2) of the Agreement is compared. Excluding a qualifying Capital Assets Supply from that figure can affect whether the threshold is exceeded.
What the legislation does not determine
Article 6(5) and Article 52(2)(a) do not list categories of assets that always qualify as Capital Assets beyond the Agreement definition. They do not state how “rental income or similar income” is measured, or how “held … to supply it at a later time” is evidenced. They do not amend the Mandatory Registration Threshold itself. Input Tax recovery for Capital Assets, depreciation, and post-registration adjustments under other Articles of the Agreement and the Regulations are outside the registration-calculation exclusion stated here.
Instruments relied on: Implementing Regulations, ninth edition, 26/11/1444H corresponding to 15/6/2023G, unofficial English translation, Article 6(5) (this paragraph was not amended by the text of ZATCA Board Resolution No. (01-06-24) relied on here; earlier Board resolutions reflected in the ninth edition are noted in that edition’s footnotes); Common VAT Agreement, Articles 1 and 52, executed in Arabic on 27/2/1438H corresponding to 27/11/2016. The Arabic text prevails.