To begin with, let’s define Value Added Tax (VAT) as a non-direct tax imposed on goods and services purchased and sold by taxable entities. There are three types of Value Added Tax applied in the Kingdom of Saudi Arabia:

Standard Rate Value Added Tax: 15%
Zero-Rate Value Added Tax: 0%
Exempt Value Added Tax (“Exempt Sales”)
Zero-Rate Tax:
This tax is imposed at a zero rate according to legal provisions, and its rate can be increased at any time without amending the law. Examples include:

Qualified medicines and medical equipment.
Investment metals.
Goods exported outside the Gulf Cooperation Council (GCC) countries.
International transportation services for goods and passengers.
Exempt Tax:
Exempt Value Added Tax (“Exempt Sales”) is an exemption from Value Added Tax for some goods and services provided within the Kingdom of Saudi Arabia. If there is any adjustment to the taxable value of the exempted goods and services, a legal provision is required to modify it to any percentage to which the amendment is made.

Examples of exempted sales from Value Added Tax include:

Life insurance.
Financial services where the consideration is in the form of implicit or explicit margin (e.g., interest on loans).
Issuance or transfer of debt or capital bonds.
Personal luggage and used household items brought in by non-resident citizens or foreigners coming to reside in the country for the first time.
Rental of residential units.
It’s worth noting that any exempt services within the territory of the Kingdom of Saudi Arabia that are exported abroad are subject to a zero-rate. Thus, the supplier or taxpayer has the right to deduct the input tax on these supplies.

For example, providing life insurance services within the Kingdom of Saudi Arabia is exempt from tax, but if this service is provided to a non-resident individual in the Kingdom, it is subject to a zero-rate. (Article 31, Paragraph 2)

In conclusion, one of the most significant differences between zero-rated and exempt VAT is that the zero-rate does not require a legal provision to change its rate, while the exempt VAT requires a legal provision to change it to be subject to VAT regardless of the rate. Additionally, all goods and services subject to the zero-rate can have their input tax deducted, while exempt services and goods cannot.