Tax Regimes by the Government in Saudi Arabia

As Saudi Arabia grows as a business hub in the Middle East, foreign investors are showing increasing interest. They are eager to explore opportunities in the Kingdom. However, understanding the tax regimes is an essential component of setting up a business in Saudi Arabia. The country’s tax system plays a crucial role in determining the feasibility and profitability of operating a business.

Saudi Arabia’s tax framework has undergone significant changes in recent years, with the introduction of new taxes and reforms aimed at modernizing the economy, promoting investment, and increasing non-oil revenues. This article will explore the different tax regimes in Saudi Arabia, focusing on corporate income tax, Zakat, value-added tax (VAT), withholding tax, and other tax considerations important to foreign and domestic businesses.

1. Corporate Income Tax (CIT)

One of the primary concerns for businesses when setting up a business in Saudi Arabia is corporate income tax (CIT). The Kingdom has a unique tax system that distinguishes between foreign and Saudi-owned companies, as well as between profits earned by Saudi and non-Saudi shareholders.

For Non-Saudi-Owned Businesses

Foreign companies and foreign shareholders of Saudi companies are subject to corporate income tax at a flat rate of 20% on profits. This applies to most business sectors, except for oil and hydrocarbon-related activities. Those sectors are taxed at much higher rates.

For Saudi-Owned Businesses

Saudi-owned businesses are generally subject to Zakat, rather than corporate income tax, which we will discuss in detail below. However, for joint ventures or companies with both Saudi and foreign ownership, a combination of CIT and Zakat is levied based on the ownership percentage.

2. Zakat

Zakat is an Islamic tax on wealth paid by Saudi and GCC nationals and businesses. It is based on religious principles and is a key part of the Kingdom’s tax system. Unlike corporate income tax, Zakat applies only to Saudi and GCC-owned businesses. It is calculated based on a company’s capital and profits.

Zakat Rate

The Zakat rate is set at 2.5% of the company’s total Zakat base. The base includes the equity of the business and retained earnings, as well as some forms of long-term financing. Importantly, Zakat is only levied on Saudi and GCC nationals, and their proportion of ownership in the business determines how much Zakat is payable.

Zakat applies to:

• Companies that are fully Saudi or GCC-owned
• The Saudi or GCC portion of mixed-ownership companies (with the remaining portion subject to CIT)

The Zakat regime is overseen by the Zakat, Tax, and Customs Authority (ZATCA), which is responsible for administering and collecting Zakat payments.

3. Value-Added Tax (VAT)

Saudi Arabia introduced value-added tax (VAT) in January 2018 as part of its efforts to diversify its revenue sources under Vision 2030. VAT is a consumption tax on most goods and services sold in the Kingdom. It is an important part of starting a business in Saudi Arabia, as companies must comply with VAT regulations.

VAT Rate

The standard VAT rate was initially set at 5%, but in July 2020, the Saudi government increased the rate to 15%. This rate applies to most goods and services, although there are some exemptions and zero-rated categories, such as healthcare, education, and financial services.

VAT Registration

Businesses with annual revenues exceeding SAR 375,000 (approximately USD 100,000) are required to register for VAT with ZATCA and comply with VAT filing requirements. Smaller businesses with revenues below this threshold are exempt from mandatory VAT registration but may choose to voluntarily register if they meet specific criteria.

VAT is collected from customers at the point of sale and paid to the government. Businesses can also claim input VAT on goods and services they buy for business use, which reduces their overall VAT liability.

Zero-rated and Exempt Supplies

Some goods and services are either zero-rated (subject to 0% VAT) or exempt from VAT, including:

• Exported goods and services
• International transportation
• Medicines and medical equipment
• Financial services, such as loans and insurance (subject to certain conditions)

Understanding VAT is essential for any company setting up a business in Saudi Arabia, as it affects pricing strategies, accounting systems, and overall business operations.

4. Withholding Tax (WHT)

Withholding tax (WHT) is another key tax regime in Saudi Arabia, applying specifically to payments made by Saudi-based businesses to foreign entities for services or transactions. This tax is levied on various types of payments, such as royalties, technical services, management fees, and dividends, which are sent abroad.

WHT Rates

The withholding tax rates vary based on the type of payment being made to the foreign entity:

• 5% on dividends
• 5% on interest payments
• 15% on royalties
• 15% on technical and consulting services
• 20% on entertainment and sports fees

The WHT is deducted at the time of payment to the foreign entity and must be reported and paid to ZATCA within a specified time frame. It is important for companies setting up a business in Saudi Arabia to consider the implications of withholding tax, especially if they plan to make significant payments to foreign affiliates or service providers.

Additionally, Saudi Arabia has signed numerous tax treaties with other countries to avoid double taxation. Withholding tax rates may be reduced or eliminated under these agreements.

5. Excise Tax

In addition to VAT, Saudi Arabia charges excise taxes on certain goods that are harmful to health or the environment. This tax was introduced to promote public health and reduce the consumption of unhealthy products.

The excise tax applies to:

• Tobacco products (100%)
• Energy drinks (100%)
• Carbonated drinks (50%)
• Sweetened beverages (50%)

Businesses involved in the importation, production, or distribution of these goods must register with ZATCA and comply with excise tax regulations. The excise tax is based on the retail price of the goods. It must be paid when the products are ready for use in Saudi Arabia.

6. Social Insurance Contributions

While not a tax in the traditional sense, social insurance contributions are a mandatory requirement for businesses employing workers in Saudi Arabia. The General Organization for Social Insurance (GOSI) administers social insurance contributions, which cover pensions, unemployment benefits, and workplace injury insurance.

Contribution Rates

Employers must contribute to GOSI for both Saudi and expatriate employees.

• For Saudi employees, the employer must contribute 12% of the employee’s salary, and the employee contributes 10%.
• For non-Saudi employees, the employer contributes 2% to cover workplace injury insurance.

These contributions are mandatory. They should be accounted for in the overall cost of employment. This is especially important when setting up a business in Saudi Arabia.

7. Other Considerations for Businesses

In addition to the main tax regimes mentioned, businesses setting up in Saudi Arabia should consider other tax-related factors. These considerations can impact overall business operations. It’s crucial to understand all tax obligations before starting a business in the country.

• Customs duties: Businesses importing goods into Saudi Arabia are subject to customs duties, which vary depending on the type of goods. Certain goods are exempt from taxes or have reduced rates in industries targeted for growth under Vision 2030.
• Municipal taxes: Some municipalities in Saudi Arabia impose taxes on businesses operating within their jurisdiction, particularly for businesses involved in real estate or commercial leasing.

Conclusion

Understanding the tax regimes in Saudi Arabia is crucial for businesses looking to establish a foothold in the Kingdom. Corporate income tax affects foreign investors. Zakat is important for Saudi-owned businesses. VAT and withholding taxes also play a significant role. Each of these tax regimes shapes a company’s financial and operational strategies in different ways. These tax regimes influence decision-making and financial planning in various ways. Understanding each tax’s implications is crucial for effective business management.

Businesses can successfully navigate the complexities of the Saudi tax system by working with experienced tax advisors. Ensuring compliance with local regulations will help them seize the opportunities of setting up a business in Saudi Arabia. As the Kingdom evolves its tax policies under Vision 2030, staying informed and adaptable will be crucial for long-term success.

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