Like other GCC nations, Saudi Arabia continues to avoid personal income taxes, instead relying on a range of indirect taxes such as Value-Added Tax (VAT). However, while Saudi and GCC nationals, who are resident in the Kingdom, are exempt from certain forms of taxation, different rules apply to resident expatriates from outside of the GCC area.
For new market entrants, the below are the main forms of taxation in Saudi Arabia and their corresponding rules and regulations.
Value-Added Tax (VAT)
Value-Added Tax (VAT) is the most recent form of taxation to be introduced in Saudi Arabia. A VAT rate of 5% was first introduced in January 2018, as part of a broader package of government reforms aimed at boosting revenue and stimulating the economy. In 2020, the government announced a further increase, bringing the rate of VAT to 15%. They declared that this would be a temporary measure in place for a maximum of 5 years, to improve the government's financial position in wake of the global pandemic.
Corporate Income Tax
There is currently no personal income tax in Saudi Arabia for citizens and residents from GCC countries. Expatriate employees (non GCC) are not required to pay any tax on their personal income either, but if they conduct business within the Kingdom then they may be required to pay tax on their business profits. Furthermore, the following natural/corporate persons may also be subject to corporate income tax in KSA:
- Resident capital company to the extent of its non-Saudi shareholding percentage;
- Non-resident conducting business in Saudi Arabia through a Tax Permanent Establishment (“PE”);
- Non-resident with other taxable income from sources from within Saudi Arabia;
- Persons engaged in the field of natural gas investment; and
- Persons engaged in the field of oil and hydrocarbons production.
The current corporate income tax rate stands at 20% of net adjusted profits. However, if a business is engaged with activities related to the oil and hydrocarbon industries, then it will be taxed at a far higher rate ranging from 50% - 85%, depending upon the amount of capital investment in the business.
If a business is jointly owned by a Saudi and a non-Saudi/non-GCC resident, then the corporate income tax will only be applied to the proportion of the business which is not Saudi-owned. The Saudi/GCC portion will only be charged Zakat based on the Zakat rate (obligatory Shari'ah-based tax).
Moreover, the Saudi Tax Laws also include provisions for subjecting withholding tax on payments remitted by resident persons, capital companies and Tax PE’s to non-resident entities in exchange for certain services. The withholding tax rates range from 5% to 20% depending on the nature of service being rendered as well as whether there is any shareholding relationship between the resident and non-resident entities.
If a resident capital company incurs Tax losses, please note that these may be carried forward indefinitely, subject to a maximum offset each year of 25% of the annual taxable profits, as reported on the Tax Return. Corporations may carry forward losses, irrespective of whether there has been a change in ownership or control, provided they continue to perform the same activity. Further, a transfer of assets within a group of companies is not considered as a change in ownership or control. Losses may not be carried back.
The Transfer Pricing (“TP”) By-Laws were introduced in KSA in 2019 and were applicable for taxpayers from the year ended December 31, 2018, onwards. Under the TP regulations, KSA resident capital companies, which fulfilled certain criteria, were required to disclose their annual intercompany transactions to the ZATCA by preparing a TP Disclosure Form and file these (with the ZATCA). Furthermore, there was also a requirement to prepare TP Local Files, Master Files and Country-by-Country Notification and Reporting with the ZATCA, as applicable.
Whilst TP is not a form of Tax, it is however a requirement for applicable capital companies to prepare and file the relevant documents as and when required by the ZATCA.
In Saudi Arabia, Capital Gains are generally taxed as ordinary income combined with income earned in the same period, at a rate of 20%. Again, this only applies to resident foreigners from non-GCC nations. However, if an individual receives income from the sale of a share, this will not be subject to capital gains tax provided the shares were acquired after 2004 and they were disposed of in compliance with the Capital Market Law in Saudi Arabia.
Capital Gains Tax (“CGT”) may also be subject (at the same aforementioned 20% rate) on the non-resident shareholders of KSA resident capital companies, in the event these non-resident shareholders dispose/sell their shares (in the KSA resident capital companies) to another party.
Excise Tax was introduced in KSA in 2017 to subject certain goods, such as sugar sweetened goods and tobacco related products amongst others, to Tax.
Where the Excise Tax is chargeable on the importation or production of excisable goods released for consumption in Saudi Arabia, the excise duty rate is 50% on soft drinks and sweetened drinks, and 100% on energy drinks and tobacco products (including electronic devices and liquids used for smoking or vaping).
Any person intending to import, produce, or hold any excisable goods in Saudi Arabia must register for Excise Tax and submit a Return on a bimonthly basis (one return every two calendar months).
Zakat is an obligatory Shari'ah-based tax on net worth. It is levied on the assets of certain individuals and businesses. Zakat calculation can be complex, but it is generally computed at a rate of 2.5% of the net worth of Saudi and GCC nationals’ resident in Saudi Arabia who are engaged in business activities in the Kingdom.
Please note that even GCC nationals, resident in GCC countries, may be subject to Zakat on their shareholding in KSA resident capital companies.
On March 14, 2019, the Minister of Finance had issued the Ministerial Resolution Number 2216 by which a new Zakat By-Law has been released. The new Zakat By-Law was applicable to the fiscal year January 1, 2019 onwards, for Zakat payers filing their respective Zakat returns based on accounting records.
How To File Taxes in Saudi Arabia
For those liable, a Tax/Zakat self-assessment/Return must be filed on the ZATCA’s online portal – ERAD – and relevant tax and/or Zakat dues settled within120 days after the end of the tax year. Any delay in filing and/or settlement would result in delay penalties, as applicable.
The penalties for failure to file a Tax Return are the higher of 1% of revenue (up to a maximum of SR 20,000), or between 5% and 25% of the unpaid tax, depending on the length of the delay. In addition, there is a fine of 1% of the unpaid tax for every 30 days' delay in settlemen