Saudi Arabia has the digital infrastructure needed for tokenized real estate to work, but fiscal frameworks will need to catch up before investors feel comfortable enough to risk their money. The Zakat, Tax and Customs Authority (Zatca) faces complicated questions on whether the new class of assets will be treated as financial securities or fractional property, or a whole new model tailored to the changing times.

Tokenized real estate?

The Real Estate General Authority (REGA) announced last month it successfully completed the first tokenization of a real estate asset, and traded it between the National Housing Company (NHC) and several unnamed investors, putting Saudi “among the first countries globally to regulate property tokenization,” according to the authority.

SOUND SMART- Think of a token as a digital certificate of ownership that lives a decentralized ledger (called the blockchain) rather than in a filing cabinet. Real estate tokenization takes an asset — like an office tower — and slices it into mns of identical digital units, similar to how a company issues shares of stock. Tokens are “programmable,” meaning the rights attached to them are baked into the code: a token can represent a direct fraction of the property deed or simply a right to a share of the rental income.

What it brings to the table

Tokenization is all about liquidity. Tokens can be traded instantly on the blockchain, creating a marketplace with minimal friction. The ability to buy and sell fractions of a building as easily as stocks can help expand the investor base and speed up financing of real estate projects — at least that’s what REGA is going for.

The big question lies with the taxman

Zatca will need to issue clear rulings on how these novel types of digital assets will be treated, an analysis by Bloomberg Tax shows. Until then, developers and exchanges will be operating in a grey zone (which won’t be good for business).

Is it really that complicated? Yup.

First comes whether a token will be treated as a piece of property or a traded security. If it’s the first, a token changing hands would technically trigger the 5% real estate transaction tax (RETT), causing friction costs that can drastically impact levels of liquidity on the market. On the other hand, securities are exempted from RETT since and have their own taxation rules.

Corporate treasurers will also face Zakat-related questions. Intent matters when calculating and collecting Zakat fees: If tokens are bought to be flipped on the market, they could be treated as inventory and you pay 2.5% on the full market value of the tokens at year-end. Buying them for the dividend or yield would classify them as fixed assets, in which case the asset value will be deducted from the Zakat base and only pay on the yield. Without clear documentation, companies risk having long-term holdings reclassified as trading assets, spiking their Zakat liability.

Another layer is related to foreigners: Non-Saudi investors buying tokens from abroad could unexpectedly find themselves liable for corporate income tax or withholding tax on what they thought was a simple passive investment if the transaction is routed through a Saudi platform.

The gist? The industry is waiting for Zatca to decide.

Expect institutional money to stay on the sidelines, and major players to seek private clarification requests before we see the launch of any large-scale tokenized funds.

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