Since the Saudi government relies largely on oil revenues to fund its outlays, its tax rates are among the lowest in the world and foreign investors generally view the kingdom as a highly favourable environment for tax purposes.

According to the World Bank’s Doing Business report in 2010, Saudi Arabia ranks 11th for the overall ease of doing business and the World Economic Forum lists it 7th with regard to ease of paying taxes. Even so, it is important to understand the various types of taxes applicable to foreign investors in the kingdom, as well as prevailing tax rates for each category.

Taxes in Saudi Arabia are governed by the Income Tax Law of 2004 (the Tax Law), royal decrees, ministerial decisions, and publications from the Department of Zakat and Income Tax (DZIT), which is responsible for the administration of all tax matters.

Who is subject to tax in Saudi Arabia?

Article 2 of the Tax Law holds the following subject to various forms of taxation:

• A resident capital company on non-Saudi shares.
• A resident non-Saudi natural person who does business in Saudi Arabia.
• A non-resident who does business in the kingdom through a permanent establishment (such as a limited liability firm, joint stock company, or branch of a foreign firm).
• A non-resident on other income subject to tax from sources within Saudi Arabia.
• An entity engaged in natural gas investment activities.
• An entity engaged in hydrocarbons production. As stated in the Tax Law, the place of residency is an important factor in determining who is subject to the withholding tax in the kingdom. Article 3 of the Tax Law states that a natural person is considered a resident in the tax year if he meets either of the following conditions:
• He has a permanent home in Saudi Arabia and is physically present in the kingdom for a period totalling not less than 30 days in the tax year.
• He is physically present in Saudi Arabia for a period not less than 183 days in the tax year. A firm is considered a resident company if it meets either of the following conditions:
• It is formed under the laws of the kingdom (the Companies Law). This is also referred to as a capital firm as the company itself is registered as a legal entity in Saudi Arabia. For example, a business established in the kingdom with operations outside the country will be subject to taxes in Saudi Arabia.
• Its place of central control and management is situated within the kingdom. For example, a UAE company owned primarily by Saudis who have established a local branch of the firm will be subject to taxes in Saudi Arabia.

What types of tax exist in Saudi Arabia?

The primary taxes administered in the kingdom are income tax, withholding tax and zakat, which is an Islamic tax on wealth.

The income tax rate is a flat 20 per cent for all entities (except those engaged in hydrocarbons-related activities, whose rates range from 30-85 per cent). Article 8 of the Tax Law states that gross income is subject to tax, including all income, profits, and gains of any type from the carrying out of any activity. This also encompasses capital gains and incidental income (other than exempt income). However, employee salaries are not subject to income tax. 

The place of residency is important in determining who is subject to the withholding tax

Yasser al-Khalaiwi, Omar Alrasheed & Partners

Regarding withholding tax, article 68 of the Tax Law states that any resident (which includes corporate entities, regardless of whether it is a taxpayer and whether such payments are considered tax deductible for the payer) of Saudi Arabia making a payment to a non-resident person or entity must withhold taxes ranging from 5-20 per cent of the payment. The type of payments include:

• Rents, air tickets, air freight, maritime freight and international communications services: 5 per cent.
• Royalties: 15 per cent.
• Management fees: 20 per cent. For example, if an entity that is required to withhold tax owns a ship and there is an agreement with a non-resident company to manage this ship, then these management fees are subject to a withholding tax rate of 20 per cent.
• All other payments: No more than 15 per cent.

The entity required to withhold tax must register with the DZIT before settlement of the first tax payment. Thereafter, the withholding entity must settle with the DZIT the tax withheld within the first 10 days of the month following the month in which the taxable payment is made. For instance, if the amount was paid to the beneficiary on 1 September 2012, then the withholding tax must be settled with the DZIT no later than 10 October 2012. If the person who is required to withhold tax does not pay the required tax amount to DZIT in time, then the payer is subject to delay penalties of 1 per cent of the unpaid tax amount for every 30 days’ delay, starting from the due date of the tax.

A firm is considered a resident company if it is formed under the laws of the kingdom

Zakat is an Islamic tax levied on Saudi or GCC nationals and firms that are wholly owned by GCC nationals. Although the exact calculation of zakat is complex, it effectively results in a rate of 2.5 per cent of net worth for a person or of total capital resources for a company, excluding capital invested in fixed assets, long-term investments and deferred costs. However, it includes profit from foreign investments that do not consist of investment in real property (profits from that are estimated to be 15 per cent of revenue in instances where no specific information is provided). For income tax and zakat purposes, citizens of GCC countries will be liable to the same extent as Saudi entities.

How are official tax payments determined?

Tax obligations are assessed by the DZIT on the basis of audited financial statements, which must be provided in Arabic. However, in certain instances, firms that operate in Saudi Arabia, but are headquartered in another jurisdiction, may be taxed on a presumptive basis. That means no financial statements are provided and the tax liability is assessed on presumptive profits.

How is income calculated in Saudi Arabia?

The Tax Law in Saudi Arabia does not generally distinguish between different income categories. Instead, gross income consists of all profits, gains and other net income derived from business transactions carried out within the kingdom. Generally, income is considered to be from a source in Saudi Arabia if it is derived from an activity that occurs in the kingdom, in full or in part. Accordingly, if transactions are only carried out in part, all income derived from such transactions will be considered taxable income.

There is no personal income tax on employee salaries and related benefits

For income tax purposes, a contract to supply goods to Saudi Arabia is not considered a source of income serviced from an activity in the kingdom unless it includes related work that is performed in the country. In such instances, only the income relating to the work performed in Saudi Arabia is considered to be derived from an activity in the kingdom and is therefore taxable.

Are there taxes for parties providing payments to related entities?

Withholding tax rates on payments made by a branch to its head office or by a company to a related entity are subject to a 15 per cent withholding tax rate. A related entity simply means a non-resident sister firm owned partially (51 per cent or above) or entirely by the head office (the mother company).

For example, if a Spanish firm (Company A) owns 51 per cent or more of a Saudi business (Company B), and also owns 51 per cent or more of a Jordanian company (Company C), Companies B and C are considered as related entities according to the Tax Law. Consequently, if Company C provided services to Company B, then the amount paid against these services is subject to withholding tax at 15 per cent because it is a service provided by a related entity. However, for the payment of technical and consulting services fees to a non-resident related entity, a recent court decision in Riyadh (Higher of the Committee) holds that a withholding tax of 5 per cent, rather than 15 per cent, is required.

For dividends, any distribution made by a resident business to a non-resident shareholder, and any profits transferred from a permanent entity to related parties, will be subject to a withholding tax rate of 5 per cent (also referred to as a branch remittance tax in certain instances).

Is there a personal income tax in Saudi Arabia?

There is no personal income tax on employee salaries and related benefits.

Is there a capital gains tax in Saudi Arabia?

Capital gains taxes are treated as ordinary income and considered part of the standard income tax calculation. However, in certain instances there are exemptions from capital gains taxes. Sales by non-residents in Saudi joint stock companies are exempt from taxes if such shares were acquired after the effective date of the Tax Law (30 July 2004).

There is also an exemption on the disposal of certain properties not used in business activities.

Are different business entities subject to different tax rates?

In general, from a tax liability standpoint, no distinction is made among the various forms of business organisations and taxes are calculated on the same basis, regardless of whether the entity is a limited liability firm, joint stock company, branch of a foreign business, or another form of company.

Are companies allowed to carry forward and carry back losses in the kingdom?

Losses may be carried forward indefinitely. However, the maximum loss that can be offset against a year’s profit is 25 per cent of the profits for that year. Losses related to exempt activities may not be deducted or carried forwards. Companies are not allowed to carry back losses.

Are there real estate taxes in Saudi Arabia?

There is no real estate tax in Saudi Arabia, except in certain instances when real estate is held for speculative purposes.

Is there a Sales Tax or Value-Added Tax in Saudi Arabia?

No.

Does Saudi Arabia have tax-free zones?

While the Saudi government does provide various incentives to foreign investors, there are no tax free zones in the kingdom. Any exemptions from corporate income tax require a royal decree.