Exempt financial services, explicit fees, and the life-insurance exception
Supplies of the financial services listed in Article 29 of the Implementing Regulations are exempt from VAT, except where the consideration payable for the service is an explicit fee, commission or commercial discount. Where the consideration takes that form, the exemption in Article 29(1) does not apply. The paragraph does not say that the supply is then zero-rated. The provision or transfer of a life insurance or reinsurance contract remains exempt even where the consideration is an explicit fee, commission or commercial discount.
The Agreement and the domestic list
Article 36(1) of the Common VAT Agreement provides that Financial Services performed by banks and financial institutions licensed under the laws in force in each Member State shall be exempt from Tax, and that banks and financial institutions may reclaim Input Tax on the basis of the refund rates determined by each State. Article 36(2) provides that, as an exception to that subsection, each State may apply any other tax treatment to financial Services. Article 29 of the Regulations is the domestic provision in the instruments relied on. It does not repeat the limitation to banks and licensed financial institutions, and it does not state a refund rate. Article 36(2) is the Agreement provision which permits a Member State to apply another treatment. The two texts stand as written. They are not combined into a rule that neither text states.
Article 10 of the Value Added Tax Law provides that the Regulations shall determine the Exempt Supplies and the zero-rated Supplies and the terms and conditions required in relation thereto.
The explicit fee, commission or commercial discount
Article 29(1) of the Regulations provides that supplies of Financial Services listed within the Article are exempt from VAT, except in cases where the Consideration payable in respect of the service is by way of an explicit fee, commission or commercial discount. Consideration is defined in the Agreement as everything collected or to be collected by the Taxable Supplier from the customer or a third party for the supply, inclusive of VAT. Where the Consideration is by way of an explicit fee, commission or commercial discount, the exception in paragraph (1) means that the exemption does not apply. The paragraph does not say that the supply is then zero-rated. A supply which is not exempt and not zero-rated is, under the Agreement’s definitions, capable of being a Taxable Supply. Article 25(1) of the Agreement applies Tax at the standard rate of 5% of the value of the supply unless the Agreement provides for an exemption or the zero-rate. The structure is not taken further than that.
What Article 29 treats as a financial service
Article 29(2) states that Financial Services include the issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money; the provision of any credit or credit guarantee; the operation of any current, deposit or savings account; and financial instruments such as derivatives, options, swaps, credit default swaps and futures.
Article 29(3) provides that Islamic finance products, being financial products under contract which are Shari’ah compliant and which simulate the intention and achieve effectively the same result as a non-Shari’ah compliant financial product, are treated in the same manner as the equivalent non-Shari’ah financial product for the purpose of applying exemption from Tax.
Article 29(4) provides that, where ownership of Goods is transferred temporarily as part of a Shari’ah compliant financial product or as collateral in relation to a financing or other arrangement, but possession is not intended to pass permanently to the recipient of the financial product, the transfer of the underlying Goods is not a separate supply of Goods. A separate supply of Goods which has been transferred as collateral is considered to be made upon the transferee becoming entitled to exercise full rights of disposal, or otherwise acting so that the transfer may no longer be considered temporary.
Article 29(5) gives a non-exhaustive list of supplies which, under the principles in the second and third paragraphs, would be considered exempt Financial Services: interest or lending fees charged with an implicit margin for any form of lending, including loans and credit cards; interest or lending fees charged with an implicit margin for a mortgage or under a diminishing musharaka arrangement; interest or lending fees charged with an implicit margin for finance, including finance leasing, hire purchase products or a murabaha contract; and commissions charged on an implicit margin or spread for brokerage services, or under a mudaraba or wakala contract. The list is expressed as implicit margin or spread. It is not a list of explicit fees.
Article 29(6) provides that the issue or transfer of a debt security, equity security, or any other transferable document recognising an obligation to pay a monetary amount to the bearer, will be considered an Exempt Supply of Financial Services.
Life insurance and reinsurance
Article 29(7) is an exception to paragraph (1). An exempted supply for a financial service is the provision or transfer of a life insurance or reinsurance contract. The exemption includes cases where the consideration payable for the service has been explicitly paid as a fee, commission or commercial discount. The explicit fee, commission or commercial discount, which takes a supply outside the exemption under paragraph (1), does not take the provision or transfer of a life insurance or reinsurance contract outside the exemption. That is the effect of the words “as an exception to Paragraph (1)” and of the sentence which follows them.
Article 29(8) provides that a life insurance contract means any contract of conventional insurance or takaful or other form of Islamic insurance provided by a regulated provider in the Kingdom which results in the payment of a sum contingent on death or other significant event of human life, or a similar contract provided by a Nonresident Supplier. The paragraph defines the contract. It does not separately define reinsurance.
Article 31(2) of the Regulations provides that a supply which is both an Exempt Supply under Chapter Five and a zero-rated Supply under Chapter Six is treated as a zero-rated Supply. Article 29 is in Chapter Five. Whether any financial-service supply is also listed in Chapter Six is not stated in Article 29.
What the legislation does not determine
The instruments state the distinction between an explicit fee, commission or commercial discount and an implicit margin, and they give the paragraph (5) list. They do not classify which charges, in any product, fall on which side of that distinction, and they do not classify a tariff. No refund rate of the kind referred to in Article 36(1) of the Agreement is stated in Article 29. Input-tax apportionment for a person who makes both exempt financial supplies and Taxable Supplies is not set out, beyond the existence of Article 31(2) where a supply is both exempt and zero-rated. General insurance, other than life insurance and reinsurance as defined and stated in paragraphs (7) and (8), is not brought within the life-insurance rule. Paragraph (8) does not extend the life-insurance definition to general insurance. Article 29(8) uses “regulated provider” for a life insurance contract provided in the Kingdom. It does not set out the licensing statute, and licensing conditions for banks or insurers are not stated.
Instruments relied on: Implementing Regulations, Article 29, ninth edition, 26/11/1444H corresponding to 15/6/2023G, unofficial English translation (the text of ZATCA Board Resolution No. (01-06-24) relied on here does not amend Article 29; paragraph (7) records an amendment by Board Resolution No. (1-4-23) dated 26/11/1444H corresponding to 15/06/2023G); Common VAT Agreement, Article 36, executed in Arabic; Value Added Tax Law, Article 10, English text of the bilingual instrument. The Arabic text prevails.