Government body acting as a public authority is not an Economic Activity
Any activity exercised by a government body in its capacity as a public authority shall not be considered to be an Economic Activity for the purposes of the Law and the Implementing Regulations if three conditions are all met: a legal instrument authorises the government body to carry out the activity; the government body does not carry out the activity in accordance with commercial or economic standards; and the government body practices the activity exclusively, meaning the absence of competition with the private sector so that only government bodies can practice the activity. Where those conditions are met, the activity falls outside Economic Activity and therefore outside the Taxable Person definition that turns on conducting an Economic Activity independently for generating income.
The three conditions in Article 9(5)
Article 9(5) of the Implementing Regulations provides that any activity exercised by a government body in its capacity as a public authority shall not be considered to be an Economic Activity for the purposes of the Law and these Regulations, if all of the following conditions are met: (a) the existence of a legal instrument that authorizes the government body to carry out the activity; (b) the government body should not carry out the activity in accordance with commercial/economic standards; (c) the government body must practice the activity exclusively. Exclusivity means the absence of competition with the private sector, so that only government bodies can practice this activity.
All three conditions must be met. Article 9(5) is framed as an exclusion from Economic Activity where the government body acts in its capacity as a public authority and the conditions are satisfied. A failure of any one condition takes the activity outside this exclusion as drafted.
Why Economic Activity matters for registration
Article 2 of the Regulations defines a Taxable Person in the Kingdom as a Person who conducts an Economic Activity independently for generating income and is registered for VAT in the Kingdom or required to register under the Law or the Regulations. Article 1 of the Common VAT Agreement likewise defines a Taxable Person by reference to conducting an Economic Activity independently for the purpose of generating income, and defines Economic Activity as an activity conducted in an ongoing and regular manner including commercial, industrial, agricultural or professional activities or Services or any use of material or immaterial property and any other similar activity.
If an activity is not an Economic Activity under Article 9(5), it does not feed the Taxable Person definition through that activity. Article 9(5) does not, by itself, deregister a Person or waive mandatory registration for other activities that remain Economic Activities.
Amendment reflected in the ninth edition
Article 9(5) as set out in the ninth edition of the Implementing Regulations reflects amendment by Board of Directors Resolution No. (1-4-23) dated 26/11/1444H corresponding to 15/6/2023G. The text relied on here is the ninth edition unofficial English translation. Article 9(5) was not amended by the text of ZATCA Board Resolution No. (01-06-24) relied on for other Articles.
What the legislation does not determine
Article 9(5) does not define “government body” beyond that phrase, or list the legal instruments that satisfy condition (a). It does not provide a test for “commercial/economic standards” beyond the wording of condition (b). It does not address Supplies made by a government body that compete with the private sector, or mixed activities some of which meet the conditions and some of which do not. Registration, invoicing, and Tax liability for activities that remain Economic Activities are governed by the provisions that address those subjects.
Instruments relied on: Implementing Regulations, ninth edition, 26/11/1444H corresponding to 15/6/2023G, unofficial English translation, Article 9(5) (as amended by Board of Directors Resolution No. (1-4-23) dated 26/11/1444H corresponding to 15/6/2023G, and not amended by the text of ZATCA Board Resolution No. (01-06-24) relied on here); Common VAT Agreement, Article 1, executed in Arabic on 27/2/1438H corresponding to 27/11/2016. The Arabic text prevails.