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VAT on the profit margin of eligible used vehicles

The Zakat, Tax and Customs Authority "ZATCA" has provided the option to calculate VAT on the profit margin of eligible used cars, without it being on the total sale value, starting from July 1, 2023 AD. The “profit margin” method targets car agencies and showrooms registered with the Authority for VAT purposes.

In this case, VAT is applied to the difference between the purchase price and the selling price instead of being imposed on the full amount.

In order to apply VAT to the profit margin only, the following controls must be met:

1. The dealer must be taxable and licensed to practice car trading activity.

2. The dealer must obtain ZATCA’s approval to practice the profit margin method on eligible used cars.

3. The car must be classified as a “qualified used car” by ZATCA, and must be located and previously used within the Kingdom.

4. That the first seller (who sold the car to the dealer) is not subject to VAT ,or is subject to VAT but this car is outside his economic activity, or that the first seller is a taxable person who applies the profit margin method, and in this case has not deducted the input tax on that car.

ZATCA specified four criteria for classifying used cars as “eligible used goods” for applying the profit margin method:

A - The used car must be registered in the Kingdom by the competent authority.

B - The car must have been driven on the road for personal or work purposes.

C - The used car must be suitable for reuse as it is in its condition, or after making some repairs or improvement to it, provided that it has not undergone modifications or repairs that altered its basic nature.

D - The supply of the used car must be by a taxable person registered with ZATCA and licensed to practice the activity of car trading according to the commercial registration or any similar license.

Used cars that are not eligible for the profit margin method:

- New cars; The distance traveled for the purpose of registering the car and delivering it to the customer does not mean that the car is considered a used car

- Cars imported into the Kingdom, even if they were previously used on the road outside the Kingdom.

- The car purchased by the qualified dealer from another person registered for VAT purposes and the tax was applied according to normal circumstances to the purchase.

Additional tax invoice requirements for the “profit margin” :

- Invoice title: “Tax invoice for profit margin.”

- Taxable amounts according to the rate or exemption, and the unit price does not include value-added tax

.- The consideration must be paid, including the value-added tax charged on the profit margin (with no indication of the amount of value-added tax due).

The simplified tax invoice for the “profit margin” method, which is distinguished from the simplified tax invoice for the non-profit margin method:

- Invoice title: “Simplified tax invoice for profit margin.”

- The consideration must be paid, including the value-added tax charged on the profit margin (with no indication of the amount of value-added tax due).

Cases that do not require the eligible merchant to issue a purchase invoice:

- In case of purchase from another qualified merchant using the profit margin method.

- In the case of purchasing from a taxable person who is not qualified to use the profit margin method and subjected the car to tax according to the traditional method.

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