Zero-rating the supply, maintenance and repair of a qualifying means of transport

The Implementing Regulations zero-rate the supply of a qualified means of transportation only where the customer submits a certificate, which the supplier keeps, that the means of transportation is qualified in accordance with Article 34. Maintenance, repair and modification of a qualifying means of transport are zero-rated under a separate paragraph, and only where the supplier obtains a different certificate from the customer and the supply meets the conditions in Article 34(6). A means of transport is qualifying where its main purpose is international transport, tested, for the purposes of the Article, at not less than 75 per cent on the average of four stated percentages.

What the Agreement permits, and what the Regulations require

Article 33 of the Common VAT Agreement permits, and does not require, each Member State to apply the zero-rate to three classes of supply: the supply of sea, land and air means of transport allocated to the transportation of Goods and passengers for a fee for commercial purposes; the supply of Goods and Services related to those means and allocated to their operation, repair, maintenance or conversion, or to the requirements of the means of transport or their cargo or passengers; and the supply of rescue airplanes, rescue boats and aid by land and sea, and boats allocated to sea fishing. The conditions that follow are those which the Regulations actually impose. They are not a paraphrase of Article 33 of the Agreement.

The supply of the means of transport, and its certificate

Article 34(4) of the Regulations provides that the supply of qualified means of transportation shall be zero-rated, provided that the customer submits to the Authority or the supplier a certificate stating that the supplied means of transportation is qualified in accordance with the provisions of the Article, and the supplier keeps that certificate. Article 34(9) requires the customer, before issuing the certificate referred to in paragraph (4), to verify the eligibility of each means of transport he has and that it fulfils all the terms and conditions stipulated in the Article.

The Regulations use “qualified means of transportation” in paragraph (4) and “qualifying means of transport” in paragraphs (6) and (8). Paragraph (9) ties the paragraph (4) certificate to the terms and conditions of the Article. The text does not create two expressly different regimes under those two phrases. It also does not define “qualified” separately from “qualifying”.

What counts as a qualifying means of transport

Article 34(8) provides that a qualifying means of transport means the means of transport the main purpose of which is carrying out international transport, and includes any vehicle intended for the transport of (10) persons as a minimum, or intended for transporting goods on a commercial basis, or any ship or aircraft prepared for transporting passengers or goods on a commercial basis. Any means of transportation diverted or used for recreational or personal purposes shall not be considered a qualifying means of transport. The paragraph both states a main-purpose requirement and states what the expression includes. The text does not explain the relationship between the opening words and the “includes” list beyond the text itself. International transport has the meaning in Article 34(7).

Article 34(10) states how, for the purposes of the Article, the main purpose of using the means of transport is international transport. That is so when it is used at a percentage of not less than (75%) for the purposes of international transport. That percentage is calculated from the average of the sum of the following percentages: the percentage of the number of international trips by that means of transport compared to all trips by that means; the percentage of the distance travelled on international trips by that means compared to the total distance travelled for all trips by that means; the percentage of revenue generated from international trips by that means compared to all trips by that means; and the percentage of the operating cost of international trips by that means compared to the total operating costs of all trips by that means.

The operator of the means of transport shall prove that this percentage has been achieved based on the actual data extracted for the previous twelve months for each existing and used means of transport, or based on the planned and expected data for the next six months for the new means of transport that has not been used or is to be purchased. The Regulations do not reduce “the average of the sum of the following percentages” to an algebraic formula, and none is supplied here.

Maintenance, repair and modification

Maintenance, repair and modification are dealt with in Article 34(6), not in Article 34(4). Subject to the supplier obtaining a certificate from the customer that the supply of Goods and services will be in relation to a qualifying means of transport, the maintenance, repair or modification of a qualifying means of transport is zero-rated. The zero-rate includes the supply of replacement parts, consumables and other necessary components ordinarily affixed or incorporated into the means of transport in connection with those services. It applies only where the purpose of the supply of those Goods and services is to ensure the continued operation of the vehicle, aircraft or vessel as a qualifying means of transport. Maintenance and repair services must be physically carried out on or at the qualifying means of transport to qualify under that paragraph.

The certificate in paragraph (6) is not the certificate in paragraph (4). Paragraph (4) is a certificate, submitted to the Authority or the supplier, that the means of transportation supplied is qualified. Paragraph (6) is a certificate from the customer, obtained by the supplier, that the supply of Goods and services will be in relation to a qualifying means of transport. Paragraph (9) refers only to the certificate in paragraph (4).

What the legislation does not determine

The Regulations do not prescribe a form, wording or addressee for either certificate, beyond submission to the Authority or the supplier under paragraph (4) and obtaining a certificate from the customer under paragraph (6). They do not state a worked method for “the average of the sum” of the four percentages, any weighting among them, or any rule where one of the four cannot be computed. Rescue aircraft, rescue boats, aid, and boats allocated to sea fishing, which Article 33(3) of the Agreement permits a Member State to zero-rate, are not enacted in those words in Article 34 of the Regulations as relied on here. Charters, leases, and the place-of-supply rule for leasing means of transport in Article 17 of the Agreement are not part of this zero-rate. The text states the exclusion for diversion or use for recreational or personal purposes. It does not state the consequences of a means of transport later falling below 75 per cent, or of recreational use after the certificate has been issued, and it does not state a clawback mechanism.

Instruments relied on: Implementing Regulations, ninth edition, 26/11/1444H corresponding to 15/6/2023G, unofficial English translation (Article 34 was not amended by the text of ZATCA Board Resolution No. (01-06-24) relied on here; paragraph (4) records an amendment by Board Resolution No. (1-4-23) dated 26/11/1444H corresponding to 15/06/2023G; paragraphs (8) and (2) record an amendment by Board Resolution No. (05-09-22) dated 05/05/1444H corresponding to 29/11/2022G; paragraphs (9) and (10) record that they were added by Resolution No. (1-4-23)); Common VAT Agreement, Article 33, executed in Arabic. The Arabic text prevails.

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