Tax due diligence in real estate acquisitions: what to review

First: is the target a «real estate company»?

A company, fund or entity is a real estate company if it owns real estate in the Kingdom, directly or indirectly, to generate income from selling or leasing it, and the fair market value of that real estate is not less than 50% of the total fair market value of its assets, on the date of the disposal or at any time in the 365 days before it.

This look-back period has a direct practical effect: rearranging the company's assets shortly before the transaction does not necessarily take it outside the definition. And indirect ownership means the review extends to the subsidiaries and funds in which the target holds interests.

Second: does the transaction reach the threshold?

A transfer of 30% or more of the shares of a real estate company, in a single transaction or in linked transactions, within any three-year period beginning on or after the date that percentage is reached, is a real estate disposal. For this purpose, transfers by persons acting in concert are aggregated, and related persons are presumed to act in concert unless shown otherwise.

Splitting the sale into stages, or spreading it among related sellers, therefore does not necessarily change the result.

Third: the tax base and timing

On a transfer of shares, the tax is calculated on the fair market value, at the date of the disposal, of all the real estate the company owns directly or indirectly, multiplied by the percentage of shares transferred, or on the value agreed to be allocated to the real estate if that is higher.

The tax becomes due on the date the shares are transferred or the date an unconditional agreement to transfer them is concluded, whichever is earlier, and must be paid within thirty days of that date, with the registration request submitted by the same date. Drafting the conditions precedent in the sale agreement is therefore not only a legal matter; it decides when the tax clock starts.

The transferor, that is the seller, is primarily liable for payment, and the transferee becomes jointly liable if it is shown to have caused the non-payment.

Fourth: the history of the properties and their exemptions

The target carries its tax history with it, so for each property the review asks:

1. 01Payment and registrationWas the tax paid when the property was acquired, and was the transaction registered with ZATCA, or its exemption registered if it was exempt?
2. 02Conditional exemptionsDid the property come into the company under an exemption conditional on a holding period, such as an in-kind contribution, a transfer from a sole owner, a transfer between wholly owned companies, or a merger or acquisition, and has the period not yet ended? If the transaction would breach its conditions, tax becomes due on the original disposal from its date, payable within thirty days of the breach.
3. 03Declared valuesWere the values declared on past transactions close to market value? ZATCA may re-verify values within three years. Transactions before the Law took effect are subject to transitional rules allowing re-verification within three years of its effective date, or of the date ZATCA learns of an unregistered transaction, whichever is later.

Fifth: VAT in the target

• Commercial leases: VAT charged on them, and e-invoicing in good order.
• Mixed residential and commercial portfolios: the soundness of the apportionment rates.
• Membership of a VAT group: joint liability for the periods of membership, and the procedure for leaving after the acquisition.
• In asset deals rather than share deals: the conditions for a transfer of an economic activity, and notifying ZATCA within the period set by the 2025 amendments.

Sixth: contractual protection

• Tax warranties and indemnities covering Real Estate Transaction Tax and VAT for the periods before closing, and any breach of the conditions of past exemptions.
• A retention from the price, or an escrow account, sized to the risks the review identifies.
• Agreement on which party bears the tax on the transaction itself, and how it will be paid and registered.
• Access to the necessary records and documents, which the Regulations require to be kept for five years.

In summary

In a real estate acquisition, the tax cost is measured by what the records reveal before closing, not by what emerges after it. A review that combines the real estate company test, the history of the properties and their exemptions, and well-drafted contractual protection turns unknown risks into figures that can be negotiated.