Which financial services are exempt under Article 29
Article 10 of the VAT Law provides that the Regulations shall determine the Exempt Supplies and the zero-rated Supplies and the terms and conditions required in relation to them. Article 36 of the Common VAT Agreement provides that Financial Services performed by licensed banks and financial institutions shall be exempt, and allows each State to apply any other tax treatment to financial Services. In the Kingdom, the scope of the exemption is set by Article 29 of the Implementing Regulations.
This article addresses what falls within the exemption. The exception for consideration paid by way of an explicit fee, commission or commercial discount, and the life-insurance rule that applies notwithstanding that exception, are addressed in our separate article on exempt financial services and explicit fees.
The listed Financial Services
Article 29(2) provides 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(1) exempts supplies of the Financial Services listed in the Article, subject to the explicit-fee exception.
Securities and other transferable instruments
Article 29(6) provides that the issue or transfer of a debt security, equity security, or any other transferable document recognizing an obligation to pay a monetary amount to the bearer will be considered an Exempt Supply of Financial Services.
Islamic finance products
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, will be treated in the same manner as the equivalent non-Shari'ah financial product for the purpose of applying the exemption.
Article 29(4) addresses the transfer of goods within such structures. 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, and possession is not intended to pass permanently to the recipient, the transfer of the underlying Goods is not considered a separate Supply of Goods. A separate Supply of collateral Goods is made when the transferee becomes entitled to exercise full rights of disposal, or otherwise acts in such a way that the transfer may no longer be considered temporary.
Margin-based supplies
Article 29(5) gives a non-exhaustive list of supplies considered exempt Financial Services under the principles in the second and third Paragraphs:
- 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 under a murabaha contract; and
- commissions charged on an implicit margin or spread for brokerage services, or under a mudaraba or wakala contract.
The recurring element is that the consideration is an implicit margin or spread. That is what distinguishes these supplies from those where the consideration is an explicit fee, commission or commercial discount.
Life insurance and reinsurance
Article 29(7) treats the provision or transfer of a life insurance or reinsurance contract as an exempt financial service. Article 29(8) defines a life insurance contract as 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.
Consequences of exemption
Under the Agreement's definition, Exempted Supplies are supplies on which no Tax is charged and for which associated Input Tax is not deducted. A provider of exempt financial services should therefore expect restrictions on the deduction of input tax attributable to those supplies, and should analyse each product line against Article 29 rather than assuming that every supply by a financial institution is exempt.
Instruments relied on: VAT Law, Article 10; Common VAT Agreement, Article 1 (definition of Exempted Supplies) and Article 36; Implementing Regulations, ninth edition, 26/11/1444H corresponding to 15/6/2023G, unofficial English translation, Article 29 (not amended by ZATCA Board Resolution No. (01-06-24) dated 17/05/1446H, published in the Official Gazette, Umm Al-Qura issue 5082, on 18 April 2025). The Arabic text prevails.