Corporate Tax in Saudi Arabia: Your Guide to a Business-Friendly Environment

Generally, non-Saudi investors are subject to income tax in Saudi Arabia. In most cases, Saudi citizen investors (as well as citizens of the Gulf Cooperation Council [GCC] countries, who are considered Saudi citizens for Saudi tax purposes) are subject to Zakat, Islamic tax law. If the company is jointly owned by Saudi and non-Saudi shareholders, the non-Saudi shareholders’ share of taxable income will be subject to income tax, while the Saudi shareholders’ share will be the basis for assessing Zakat.

For companies operating in Saudi Arabia or considering it as a potential market, it is important to understand the complexities of corporate income tax. This article discusses the basics of corporate income tax in Saudi Arabia and explains the key issues that every business entity needs to consider.

What is income tax?

A direct tax imposed by the provisions of the income tax system issued by Royal Decree (No.1) dated 15/1/1425AH, and its amendments, on the shares of non-Saudi partners in financial companies, and on non-Saudi residents who practice commercial activity within the Kingdom, and non-residents who generate income from Practicing a commercial activity in the Kingdom.

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Scope of taxation:

1. Resident capital company about shares of non-Saudi partners.
2. A non-Saudi person doing business in the Kingdom.
3. Non-citizens conducting business in Saudi Arabia permanently.
4. Non-citizens who earn other taxable income from sources within  Saudi Arabia.

Note *: capital company refers to A joint stock company, a limited liability company, or a company limited by shares. For purposes of this Law, investment funds shall be considered capital companies.

Taxable Income: 

Taxable income refers to all income, profits, and gains of any kind and any form of payment arising from the carrying on of a particular activity, including capital gains and any unexpected income, minus exempted income.

Tax-Exempt Income :

These types of income are exempt from income tax :

1. Capital gains obtained from the sale of securities sold on the Kingdom stock exchange, within the limits established by the regulation.
2. Gains derived from the disposal of property other than the assets used in the project.

Tax Base & Tax Rates:

1. The Tax rate of the tax base is twenty percent (20%) for each of the following:
2. Resident capital companies.
3. Non-Saudi natural persons conducting business.
4. Non-citizens conducting business in Saudi Arabia permanently.
5. Tax base:
6. The tax base of a resident capital company shall be the share of the non-Saudi partners in the taxable income from activities arising from any source within the  Kingdom, less expenses permitted by The Law.
7. The tax base of a non-Saudi resident is his taxable income from activities carried out in the Kingdom from any source, less expenses permitted by this Law.
8. The tax base of a non-citizen who carries out activities in the Kingdom on a permanent  basis shall be his taxable income derived from or related to the activities of that institution less the expenses permitted by this Law.
9. The tax base of Each individual is determined independently.
10. The tax base of a capital company is determined individually by the shareholders or partners.

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Implementation Regulations

Taxation Rules of Partnerships: 

• • Taxes are imposed on the partners, not on the company itself. However, the corporation must file a tax declaration showing the amount of income, profits, losses, expenses, liabilities, and other items or matters related to the taxation of the corporation for the taxable year. Submissions will be subject to the rules of procedure, including the sanctions imposed for the submission of contributions under this Law.The partnership, not its partners, will be responsible for choosing the taxable year, the accounting method, the inventory method, and any other accounting policy consistent with this Law. it will be responsible for submitting notifications and reports appropriate to the nature of its activity.
  • The provisions of this Act relating to corporations shall apply to the shares of a limited partner in a limited partnership.

Rules of taxation on capital companies:

• In a partnership limited by shares, A tax is imposed on the shares of general partners, as in a partnership. Since then, a partner’s shares are generally deducted in determining the partnership’s taxable income.
• If there is a change of fifty percent (50%) or more in the ownership or control of the capital company, non-Saudi shares will not be deducted from losses incurred before the change by the provisions of (Article 21) of this Law in taxable years following the change.

Steps for submitting income tax declaration

1. Log in to your account via the Authority’s website.( https://zatca.gov.sa ).
2. Click on (Declarations) and then fill out the prescribed form.
3. Submit the declaration after verifying the data and accepting the terms and conditions.
4. Pay the due amount after the invoice is issued.

Obligations of establishments which are subject to income tax

1. Registration in the Zakat, Taxes and Customs Authority system.
2. Maintaining books and accounting records in Arabic.
3. Submitting declarations within the legal deadlines.
4. Pay the due amount of tax.

Providing the Authority with the required additional information.

Failure to register for income tax:

Failure to register will be punished with a fine of not less than one thousand (1,000) rials nor more than ten thousand (10,000) rials. Regulations should specify the limits and amounts of penalties for different categories of taxpayers.

The penalty for not submitting an income tax declaration is imposed in the following cases:

1. Failure to submit the declaration according to the prescribed form.
2. Failure to submit the return within 120 days from the date of the fiscal year.
3. Failure to notify the Authority of ceasing to practice the activity and submit a declaration for the period ending on the date of cessation.
4. Failure to pay the tax due during the filing period.
5. Failure to submit an information declaration for private companies within 60 days of the end of the financial year.

Fine for Failure to File the Declaration:

• Taxpayers will be subject to a fine equivalent to one percent (1%) of their total income, but the amount will not exceed twenty thousand (20,000) rails.
• Five percent (5%) of the unpaid tax will be paid no later than thirty (30) days following the date required by law.
•  If more than thirty (30) days but not ninety (90) days have passed since the date required by law, ten percent (10%) of the unpaid tax must be paid.
• If the period has elapsed for more than ninety (90) days but not more than three hundred and sixty-five (365) days counted from the date required by law, twenty percent of the unpaid tax must be paid.
• If the amount owed is greater than three hundred and sixty-five (365) days from the date required by law, twenty-five percent (25%) of the unpaid tax will be owed. 

Some considerations for companies:

• Scope Clarification: Companies should carefully evaluate their operations to ensure compliance with the broad scope of operations within the income tax regime.
• Non-Saudi Shares: While non-Saudi shares in companies listed on the Saudi stock market are exempt from corporate income tax, shares held for speculative purposes and in mixed business structures should be considered.
• Strategic Tax Planning – Due to the complexity of corporate income tax laws, strategic tax planning is essential for businesses in Saudi Arabia. Seeking professional guidance can help you navigate the nuances and effectively comply with your tax obligations.
• Regulatory compliance: For residential capital companies with non-Saudi partners, regulatory compliance is essential. Understanding the difference between taxable and non-taxable dividends is important for accurate tax compliance and reporting. 

Understanding corporate income tax in Saudi Arabia requires a thorough knowledge of the law, particularly as it relates to non-Saudi stocks and taxable business activities. Staying on top of regulatory changes, strategic tax planning, and compliance with implementing regulations are key strategies for companies to improve their financial plans and succeed in the Saudi market.

Therefore, we have tried in this article to collect as much as possible of the most important materials that regulate the tax law, To Create a complete guide to corporate taxes in the Kingdom of Saudi Arabia.

Resources

wto.org

zatca.gov.sa

 Income tax system. Retrieved from