Zero-rating of qualifying medicines and medical goods under Article 35

The health sector is one of the areas in which the Common VAT Agreement leaves a measure of discretion to each Member State. Article 29(1)(b) of the Agreement allows each Member State to exempt or tax at the zero rate the health sector, in accordance with the conditions and provisions set by that State. Article 31 (Part II) of the Agreement provides more specifically that medicines and medical equipment shall be subject to the zero rate in accordance with unified provisions proposed by the Committee of Ministers of Health and approved by the Financial and Economic Cooperation Committee.

In the Kingdom, Article 10 of the VAT Law provides that the Regulations shall determine the zero-rated Supplies and the terms and conditions required in relation to them. Article 35 of the Implementing Regulations, headed "Medicines and Medical Equipment", gives effect to that power.

The zero-rating rule

Article 35(1) provides that, subject to any additional controls imposed by the Ministers of Health Committee of the Member States, the Supply of any Qualifying Medicines or Qualifying Medical Goods is zero-rated.

Two features of this wording deserve attention. First, the relief attaches to the Supply of the qualifying item. It is not a relief for a category of supplier, so the analysis turns on what is supplied rather than on whether the supplier is a pharmacy, a distributor or a hospital. Second, the relief is expressly subject to any additional controls imposed by the Ministers of Health Committee of the Member States, so the zero rate applies within whatever further controls that Committee has set.

What makes a medicine or medical good "qualifying"

Article 35(2) provides that, for the purposes of the Article, medicines and medical goods shall be considered Qualifying Medicines and Qualifying Medical Goods respectively in accordance with such classifications as may be issued by the Ministry of Health or any other competent authority from time to time.

The Regulations therefore do not contain their own list of qualifying products. Qualification depends on the classifications issued by the Ministry of Health or another competent authority, and those classifications may change from time to time. A product that is described commercially as a medicine or as medical equipment is not zero-rated for that reason alone; it must fall within the applicable classification at the time of the Supply.

Practical points for suppliers

• Each product line should be mapped to the current classification issued by the Ministry of Health or other competent authority, and the mapping should be reviewed when the classification is updated.
• Items that fall outside the classification are not covered by Article 35 and must be considered under the general rules of the Regulations.
• A zero-rated supply remains a Taxable Supply. The Agreement defines Taxable Supplies as supplies on which Tax is charged, whether at the standard rate or zero rate, and for which associated Input Tax is deducted in accordance with the Agreement. The zero rate under Article 35 therefore differs in its consequences from an exemption.

Where a supply is also exempt

Article 31(1) of the Regulations provides that the supplies listed in Chapter Six, which includes Article 35, are zero-rated in accordance with the Agreement and the Law. Article 31(2) provides that a Supply which constitutes both an Exempt Supply under Chapter Five and a zero-rated Supply under Chapter Six is treated as a zero-rated Supply.

Instruments relied on: VAT Law, Article 10; Common VAT Agreement, Article 1 (definition of Taxable Supplies), Article 29(1)(b) and Article 31 (Part II); Implementing Regulations, ninth edition, 26/11/1444H corresponding to 15/6/2023G, unofficial English translation, Articles 31 and 35 (neither was 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.

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