White Land Tax in Saudi Arabia

The Ministry of Municipalities and Housing in Saudi Arabia has just published the implementing regulations regarding White Land Tax following the changes to the law earlier this year.  Although the regulations do not add significantly to the principles set out in the changes to the law, we now have the full picture regarding the White Land Tax, the extent of the changes and how they are to be implemented. 

The changes to the law also introduced an additional tax on vacant buildings.  The implementing regulations for that tax are still awaited.  This note therefore only relates to the White Land Tax.

Declared purpose

The declared purposes of the Law is to:

1. increase the supply of developed land so as to balance supply and demand;
2. increase the supply of developed real estate units;
3. protect fair competition and combat monopoly practices.

Although the changes to the Law and the new Regulations have not materially changed this, there has been a greater emphasis in the commentary on the potentially depreciatory effect of the tax on land prices.

The White Land Tax

The tax applies to “Undeveloped Land”.  To be subject to taxation the parcel of Undeveloped Land has to either:

1. be 5,000m² or more or 
2. smaller than 5,000m² but in circumstances where the owner has a number of parcels of Undeveloped Land in the area that is subject to taxation that together amount to 5,000m² or more. 

Undeveloped Land is land that is capable of development on which development for its zoned purpose has not been completed in accordance with regulatory requirements.  The Minister can determine whether Undeveloped Land is land zoned for development for any purpose or only land that is zoned for development for a particular purpose or purposes. So, for example, if a particular locality is under-supplied with housing but over-supplied with commercial land then the Minister could determinate the White Land Tax only to apply to Undeveloped Land zoned for residential development. 

Land is no longer categorised as Undeveloped Land once development of it in accordance with regulations and permits is completed save for “fencing and the like”.  The general principle is that, for Undeveloped Land to be developed such that the White Land Tax no longer applies, authorised buildings on it must be completed even if there are some minor outstanding works still remaining.  Commencing development does not stop the White Land Tax from accumulating save where the development is completed before the end of the period for payment following a demand for payment being made – there is further commentary on this below.

How much is the White Land Tax?

The White Land Tax was originally 2.5% of the value of the land payable each year but, under the new Laws, the tax can be up to 10% of the value of the land payable each year.
The Minister for Housing will determine the percentage, within the range specified in the Laws, at which White Land Tax is to be charged.  The charging levels that the Minister can determine are:
 

1. Annual tax of 10% of the value of the land for the highest priority areas;
2. Annual tax of 7.5% of the value of the land for high priority areas;
3. Annual tax of 5% of the value of the land for medium priority areas; and
4. Annual tax of 2.5% of the value of the land for low priority areas.

If there is no priority for the relevant area then tax does not have to be levied. 

Does White Land Tax apply to all Undeveloped Land?

The White Land Tax does not apply to all Undeveloped Land in The Kingdom.  The Minister has the responsibility of assessing and reviewing the land to which it should apply to ensure that the purposes behind the laws are met.

The Minister for Housing will determine when an area is to be subject to White Land Tax.  In doing so he must take into account:

1. discrepancies between supply and demand;
2. inflation in real estate market prices;
3. lack of supply of developed land;
4. monopolisation of white lands;
5. proportion of white land in the vicinity; and priorities for development. 

The Minister’s decision must be published stating when it comes into effect, providing a plan of the area to be subject to the tax, details of any grace period, the priority categorisation and annual percentage for the tax and the minimum areas and zoned uses of the Undeveloped Land that are to be subject to the tax.

The decision is to be reviewed annually with the Minister making changes that he considers necessary. 

How is the value of the land determined? 

A committee of at least 3 licensed valuers is to be established as part of the Ministry of Housing, one of whose purposes is to determine fair value of land which is subject to taxation.
A basis for valuation and valuation methodology are not specified but the Minister is to issue a separate decision regarding rules and procedures for the committee.  We do know that location, use, terrain, building codes, availability and capacity of services and utilities and uses in the locality are to be taken into account in assessing value. 

The land owner who is liable to pay the tax can challenge the valuation of the committee but must do so within 60 days of being notified of the valuation decision. 

Who is liable to pay and when?

The person who is the legal owner of the land is liable for payment of the tax.  A tenant would not be liable but there is no reason why a lease could not require the tenant to repay or indemnify the landlord against all payments of White Land Tax.

Government owned real estate is, however, excluded from the tax. If there is more than one owner, they are each liable for payment of the part of the tax proportionate to their share of the ownership.  It appears that separate invoices will be issued and one co-owner will not be liable for a default in payment by the other co-owner. 

Once a demand for payment of White Land Tax is issued, the person liable to pay has to make payment within 1 year.  This gives them the opportunity to develop (i.e. to reach a stage of development such that the land is no longer “Undeveloped Land “) to avoid paying the tax.  The 1 year period can be extended to 2 years by the committee of valuation committee.  If the land owner disposes of the land in that period then the date for payment is brought forward to the date of the disposal.  A buyer of White Land cannot therefore take advantage of the grace period for development and immediately becomes liable for White Land Tax.

The Minister is to take measures to standardise dates for invoicing.  The implication from the Regulations is that invoices will be issued each year for the forthcoming year with payment being at the end of that year if no development has occurred.  The Regulations do, however, anticipate being to collect back taxes for prior years after in respect of which a demand was not previously made.

Are there any exclusions from the obligations to pay?

White Land Tax is not payable if:

1. the landowner is prevented from disposing of their Undeveloped Land for reasons that they did not cause or contribute to;
2. he landowner cannot obtain permits needed to develop for reasons that they did not cause or contribute to;
3. the Undeveloped Land ceases to be Undeveloped Land.

There are no grace periods during which White Land Tax is not payable post-acquisition of land.

How much of the land has to be developed to avoid paying tax? 

If part only of a parcel of the Undeveloped Land which is subject to White Land Tax is developed:

1. the extent of land that has been developed is defined by reference to permitting in accordance with zoning regulations.
2. once Undeveloped Land has been developed in accordance with the required permits:
   (i)    that developed land is no longer subject to White Land Tax; and
   (ii)   the residual land is assessed to establish whether it meets the criteria for White Land Tax to apply to it.

Practical points

1. If you are a landlord granting a development lease to a tenant, include a tenant obligation to reimburse and indemnify the landlord against all White Land Tax charged on the landlord.
   Similarly, if and when the tax on vacant buildings is introduced, a similar obligation should be included in relation to that tax. 
2. If acquiring land, undertake diligence to establish if the land is within an area to which White Land Tax applies.

The Regulations are not clear whether, if a property that is subject to the tax is sold part way through a tax year, whether the seller is only liable for the proportionate part or all of the tax demanded in the invoice issued at the beginning of that year.  The parties should agree in the sale contract on liability for and/or reimbursement of the White Land Tax for that year.

Further advice 
If you need advice on White Land Tax please email Austin Judson austin.judson@cms-cmno.com