VAT on Healthcare in KSA: Treatment, Special Provisions, Rates and More

VAT on healthcare in Saudi Arabia is more complex than any other economic activity due to the essential nature of healthcare services. In Kingdom of Saudi Arabia, Government healthcare services are exempt from VAT, while private healthcare services are subject to 15% VAT. Additionally, Saudi nationals are exempt from paying VAT on healthcare as the cost is covered by the state.

This blog will provide a detailed discussion on the VAT mechanism for healthcare in Saudi Arabia, covering government healthcare, private healthcare, qualifying medical equipment and goods, invoicing rules for insurers and more.

Definition of Healthcare in Saudi Arabia

According to the KSA Health Law, healthcare encompasses preventive, therapeutic, and rehabilitative services focusing on individual and community health at primary, secondary, and specialist levels. This includes services provided by doctors, nurses, and other healthcare professionals, as well as the provision of medicines and medical goods associated with these services.

Types of Healthcare Service Providers in Saudi Arabia

Government Healthcare Provider: These include any government institutions providing healthcare services to the public, such as hospitals, health centres, and other facilities managed by the Ministry of Health or other government agencies.

Private Healthcare Provider: These are healthcare institutions owned by the private sector and licensed by the Ministry of Health to provide treatment, diagnosis, nursing, medical analysis, rehabilitation, or accommodation for convalescents. Types of private healthcare providers include Hospitals, General Polyclinics, Specialized Polyclinics, Radiology Centers and more.

VAT Treatment for Government Healthcare Providers

Services provided by government healthcare providers are not considered economic activities when providing healthcare services in their capacity as public authorities.

No VAT: Healthcare services provided by Government Healthcare Providers are not subject to VAT. This applies to services provided for free or at a partial charge, regardless of whether the patient is a Saudi national or not.

Other Activities by Government Healthcare Providers: If a government healthcare provider engages in activities outside its public capacity (e.g., operating a paid parking lot), these activities are subject to VAT. 

Supply of Services to Government Healthcare Providers: Suppliers to government healthcare providers must charge VAT on their supplies. 

VAT Treatment for Private Healthcare Providers

All healthcare services provided by private healthcare providers are considered economic activities and are subject to VAT at 15%.

Combined Charges for Health Services and Medicines: Private healthcare providers must itemize qualifying goods (e.g., medicines) and apply zero rating (0% VAT) to these goods while applying 15% VAT to the service component. The invoice must clearly separate the zero-rated and standard-rated items.

For example, a dentist providing a service and an artificial tooth will tax the service at 15% and zero-rate the tooth.

Invoicing Rules for Private Hospitals

• Direct to Patient: Invoices for healthcare services should generally be issued to the patient.
• Third-Party Contracts: If services are contracted by a third party (e.g., an insurer), the invoice should be issued to that third party.

VAT Treatment for Insurance and Third-Party Claims

To ascertain whether VAT paid can be deducted from the liability of a third party or insurer, it's essential to establish who qualifies as the customer of healthcare services.

Criteria for Identifying the Customer

According to general guidelines, the customer of healthcare services is the individual who:

• Enters into a contractual agreement with the supplier.
• Provides specific instructions regarding the services or goods supplied.
• Holds the authority to ensure the supplier fulfills their contractual obligations, including service delivery.

VAT Deduction Rules

The ability to deduct VAT hinges on whether the payer qualifies as a third party or insurer. If the patient is identified as the customer, VAT deduction is not allowed.

Direct Invoicing: No Deduction Allowed 

When an individual directly contracts with a healthcare provider and issues instructions, the invoice is addressed to the patient. In such cases, even if an insurer or third party covers the expenses, VAT cannot be deducted.

Example: Abdullah, covered by XYZ insurance, seeks physiotherapy directly from a specialist. Despite XYZ paying for the service, VAT paid by XYZ cannot be deducted because Abdullah is considered the recipient for VAT purposes.

Third-Party Contracts: Deduction Allowed

When healthcare services are contracted through a third party or insurer, and the invoice is issued to that party, VAT deduction may be permissible.

Example: Essam, insured by XYZ company, is directed by his insurer to a specific physiotherapy center. As XYZ has a direct contract with the center and Essam has no direct obligations, XYZ can deduct VAT from their liability.

Responsibility for VAT Payment

Ultimately, the responsibility for VAT payment is determined by who instructs the service and benefits from it. The party benefiting or instructing the service is typically regarded as the VAT customer.

General Practices for Issuing Invoices

• Private healthcare providers must issue invoices in the name of the patient when directly supplying services.
• If the insurer is directly contracted, invoices can be made out to the insurer, showing the insurer as the recipient.
• Providers may include a statement for amounts due by the insurer.

Special Invoicing Cases

• Discounted Pricing for Insurers: Providers offering discounted rates must calculate VAT on the discounted price.
• Rejection of Invoices by Insurers: If an insurer rejects an invoice because the service wasn’t covered, the provider should seek repayment from the patient, and VAT applies to the service value.
• Bad Debts: Providers can adjust VAT output for bad debts under certain conditions, after 12 months of non-payment.

Special Provisions for Saudi National Receiving Healthcare Services

• The state bears VAT for private healthcare services provided to Saudi nationals based on a Royal Order.
• Establishments must issue VAT-free invoices to Saudi nationals and maintain records for verification.
• Establishments must issue VAT-inclusive invoices at a rate of 15% for services to non-Saudi nationals and report these in their VAT returns.

VAT on Medicines and Medical Equipment

The VAT treatment of medicines and medical equipment in Saudi Arabia depends on whether they are classified as qualifying or non-qualifying.

Qualifying Medicines and Equipment

• Supplies of qualifying medicines and medical goods specified by the Ministry of Health or other competent authorities are zero-rated for VAT. 
• Lists of these qualifying items are updated regularly and can be found on the Saudi Food and Drug Authority (SFDA) website.
• Suppliers must determine which products qualify for zero-rating and apply the correct VAT treatment. 
• Evidence supporting the VAT treatment should be maintained for tax audits. Tax invoices must be issued for all zero-rated supplies.

Exemption from Import VAT

Imports of zero-rated goods, including qualifying medicines and medical equipment, are exempt from import VAT. This exemption does not affect customs duties, which remain applicable. Importers must ensure correct VAT treatment upon importation.

Non-Qualifying Medicines and Medical Equipment

Imports and supplies of non-qualifying medicines and medical equipment are subject to VAT at the standard rate of 15%.

Conclusion

The application of Value Added Tax (VAT) on healthcare services in Saudi Arabia involves distinct rules for government and private providers. Government healthcare services provided in their public capacity are generally exempt from VAT, ensuring accessibility without additional tax burdens. Conversely, private healthcare services are fully subject to VAT at 15%, even when similar services are offered by government entities. The VAT treatment includes provisions for invoicing, itemization of charges, and considerations for non-GCC residents and insurers.