What are the current tax obligations when operating a business in Saudi Arabia?
Saudi Arabia’s tax regulations are governed by the Income Tax Law 2004 (Tax Law), and this is appended by the addition of further by-laws. Zakat, a religious levy, is governed by its own separate regulations and the Ministry of Finance is the ministerial governing body for both. The General Authority of Zakat and Tax (GAZT) is a government agency set up under the Ministry of Finance and is responsible for the assessment and collection of Zakat and taxes including VAT in the Kingdom.
The predominant current tax burden for businesses operating in Saudi are centred on the following;
- Corporation Income tax
- Withholding Tax (WHT)
What is the corporate tax rate in Saudi Arabia?
Saudi Arabia levies corporate income tax on the non-resident’s share of taxable profit from a permanent establishment (PE) based in the Kingdom. This applies to both foreign owned LLC’s and branches and is currently subject to 20% corporate income tax in addition to 5% withholding tax (WHT) applied to the distribution of dividends which are taxed as income. The tax base is considered the income arising from an organisation’s commercial activities less allowable expenses.
Saudi and GCC nationals in corporate structures are subject to Zakat a religious levy derived from the ‘Zakat-able Base’, determined by a formula linked to the number of shares of the company and other values. This is currently 2.5%
Capital gains tax is also 20% and generally imposed on the disposal of shares in a resident company by a non-Saudi although there are some notable exceptions to this around trading stocks and intercompany exemptions.
What is the current rate of VAT in Saudi?
On 1 January 2018, Saudi Arabia implemented a value added tax at a standard rate of 5% on most goods and services. In July 2020 as part of fiscal measures the Kingdom has taken after the economic fallout from the COVID-19 crisis, this rate was raised at least temporarily to 15%.
The standard mandatory VAT registration threshold is annual turnover of SAR 375,000. Businesses may also apply to register voluntarily if they have annual turnover of at least SAR 187,500. GAZT will impose a fine of 10,000 SAR for failure to register by the required deadline and non-residents providing taxable supplies to non-taxable customers in the Kingdom must register within 30 days from the first such supply.
What is WHT and what are the commercial implications?
All entities who are not resident and provide services or trade across the Kingdom are subject to WHT ranging from 5% and 20% depending on the service. Accordingly, WHT is imposed on the total amount paid to the non-resident entity, notwithstanding expenses incurred to make that income and any rate reduction under a tax treaty.
Often service providers are not aware of the tax structure across the Kingdom, therefore the notion of withholding tax is often omitted from the contractual agreement and invoicing. It is important to understand these tax obligations, ensuring this is effectively documented and accounted for alongside the original fees agreed. Failure to do so could result in a tax liability of up to 15% of the fee value for the service provider.
What is the Expat levy?
To continue the country’s vision to diversify its sources of income and improve the representation of Saudi nationals in the private sector, companies that employ foreign nationals are liable to pay a monthly levy on every non-national employee. This is really a tax nonetheless and it is payable before a new exit/re-entry permit or residence permit (Iqama) is issued and applied to both employees and their dependents. It was introduced in the 2017 budget and has been increasingly annually. In 2020 the following applied.
- Foreign nationals will have to pay a monthly fee of 400 SAR for each dependent they sponsor.
- Companies employing more foreign nationals than Saudi nationals would have to pay a monthly fee of 800 SAR per foreign national employee or 700 SAR if they employ more Saudi nationals.
What are the rules and regulations for taxpayers in Saudi Arabia?
In general, the tax year is the state’s fiscal year, but there are exceptions, if the taxpayer is a member of a group of companies or a branch that uses a different year, for instance.
Each taxpayer must register his activity prior to the end of his first tax year and it is now mandatory for all taxpayers to be registered on the GAZT portal and all filings are required to be made through this online system.
All taxpayers are required to keep the necessary books in the Kingdom and in Arabic and must include at least the following:
- Daily Journal
- General ledger
- Inventory book
Applicable tax penalties
In accordance with the Companies Act, all companies are required to have mandatory annual audits of their financial statements. This must be carried out by a licensed Certified Public Accountant (CPA) working under the Saudi Organization for Certified Public Accountants (SOCPA) as the accounting and auditing standard-setter and regulator based on IFRS.
How can PRO Partner Group help?
PRO Partner Group and their locally based tax and audit specialists can assist you with advice on all tax related matters. Saudi tax law is still subject to significant interpretation, and it is critical for any business considering setting up in the Kingdom to ensure they are aware and have planned to meet their tax obligations.
If you need assistance with setting up a company in The Kingdom of Saudi Arabia (KSA) or any other related company set up, restructuring, local partner or PRO support matter in Saudi Arabia or indeed, Abu Dhabi, Dubai, the wider UAE, Oman, and Qatar, then please do get in touch with us on +971 (0)4 456 1761 for Dubai or +971 (0)2 448 5120 for Abu Dhabi, or alternatively email us at email@example.com or complete the contact form below and we will be delighted to assist you.