Taxes in Saudi Arabia for Businesses in 2024: What You Need to Know

Saudi Arabia, the largest economy in the Middle East and a key player in the global oil market, offers a unique and evolving tax landscape for businesses. With the government’s ongoing economic diversification efforts under Vision 2030, Saudi Arabia is becoming an increasingly attractive destination for international investors and companies looking to establish a foothold in the region. Understanding the tax system, compliance requirements, and incentives is crucial for any business planning to operate in the Kingdom. This article provides a comprehensive guide to the tax environment for businesses in Saudi Arabia in 2024, covering corporate taxes, Zakat, VAT, and recent developments that impact the business community.

Overview of the Tax System in Saudi Arabia

Saudi Arabia’s tax system is unique in the region due to the coexistence of a traditional corporate tax regime and Zakat, an Islamic tax. The Kingdom does not impose personal income tax on individuals, which makes it an attractive jurisdiction for expatriates and skilled professionals. However, businesses must navigate a complex web of regulations that includes corporate taxes, withholding taxes, VAT, and excise duties.

Key Tax Authorities

The Zakat, Tax, and Customs Authority (ZATCA) is the primary regulatory body responsible for administering and enforcing tax laws in Saudi Arabia. Formerly known as the General Authority of Zakat and Tax (GAZT), ZATCA ensures compliance with local tax regulations and oversees customs duties, Zakat, and corporate taxes.

Corporate Taxation

Corporate tax in Saudi Arabia is primarily levied on foreign companies and non-GCC (Gulf Cooperation Council) shareholders. For Saudi-owned and GCC-owned companies, the primary obligation is the payment of Zakat rather than corporate tax.

Corporate Tax Rates

• Foreign Companies: The standard corporate tax rate for foreign companies is 20% of the net adjusted profits. This rate applies to non-Saudi and non-GCC shareholders engaged in commercial activities within the Kingdom.
• Petrochemical and Hydrocarbon Industries: Companies operating in these sectors are subject to a higher corporate tax rate of 30-85%, depending on the size and type of operations. This is in line with the government’s strategy to maximize revenue from natural resource exploitation.

Deductions and Allowances

Saudi tax law provides several deductions and allowances that can reduce the taxable income of corporations. These include depreciation of assets, research and development expenses, and contributions to approved charitable organizations.

Withholding Tax

Saudi Arabia imposes a withholding tax on payments made to non-residents. The rates vary depending on the nature of the payment:

• Royalties and Technical Services: 15%
• Dividends: 5%
• Interest: 5%

It is important for businesses to ensure compliance with these withholding tax obligations, as non-compliance can lead to significant penalties.

Zakat

Zakat is a religious obligation for Muslims, which acts as a wealth tax. In Saudi Arabia, Zakat is applicable to Saudi and GCC-owned companies. The Zakat rate is 2.5% of the company’s Zakat base, which is calculated on the total equity and certain liabilities of the company. Zakat is an annual obligation and must be paid even if the company is not profitable during the fiscal year.

Calculation of Zakat Base

The Zakat base includes items such as capital, retained earnings, loans, and profits that are not invested in long-term assets. It is crucial for companies to accurately determine their Zakat base to avoid penalties or disputes with ZATCA.

Value Added Tax (VAT)

Saudi Arabia introduced VAT in 2018 as part of its broader economic reforms. The current VAT rate is 15%, increased from the initial rate of 5% in 2020. The increase was part of the government’s efforts to strengthen non-oil revenues and mitigate the economic impact of fluctuating oil prices and the COVID-19 pandemic.

VAT Compliance and Reporting

• Registration: All businesses with annual revenue exceeding SAR 375,000 (approximately USD 100,000) are required to register for VAT.
• Reporting: VAT returns must be filed quarterly or monthly, depending on the company’s annual revenue. Businesses must ensure timely filing and payment to avoid penalties.
• Exemptions and Zero-Rated Supplies: Certain goods and services are exempt or zero-rated, including healthcare, education, and the export of goods. Understanding these categories is essential for accurate VAT compliance.

Excise Taxes

Saudi Arabia imposes excise taxes on specific goods that are considered harmful to health or the environment, such as tobacco, energy drinks, and carbonated beverages. The excise tax rates are as follows:

• Tobacco and Tobacco Products: 100%
• Energy Drinks: 100%
• Carbonated Beverages: 50%

Excise taxes are levied at the point of import or production, and businesses dealing in these products must comply with the associated excise tax regulations.

Transfer Pricing

Saudi Arabia has implemented comprehensive transfer pricing regulations in line with the OECD’s Base Erosion and Profit Shifting (BEPS) framework. These regulations require related-party transactions to be conducted at arm’s length and mandate detailed documentation, including a Master File and Local File, for companies that meet certain criteria.

Key Transfer Pricing Compliance Requirements

• Disclosure Form: Businesses must submit a disclosure form along with their annual tax return if they engage in related-party transactions.
• Documentation: Companies exceeding SAR 6 million in related-party transactions are required to maintain detailed transfer pricing documentation.

Recent Developments and Future Outlook

Saudi Arabia continues to refine its tax system in response to both domestic and international developments. Some of the recent changes and potential future developments include:

• Digital Services Tax (DST): The government is considering the introduction of a DST to capture revenue from digital transactions conducted by multinational companies operating in the Kingdom.
• Green Tax Initiatives: As part of its Vision 2030 strategy, Saudi Arabia is exploring green tax incentives to promote investment in renewable energy and sustainable business practices.

These ongoing reforms reflect the government’s commitment to creating a competitive and investor-friendly tax environment while maintaining fiscal stability.

Compliance and Penalties

Compliance with Saudi tax regulations is strictly enforced by ZATCA. Penalties for non-compliance include fines, interest charges, and potential restrictions on business activities. Companies are advised to engage with local tax advisors to ensure full compliance and avoid any disruptions to their operations.

Common Penalties

• Late Filing of Tax Returns: 1% of the unpaid tax per month, up to a maximum of 25% of the tax due.
• Failure to Pay VAT: 5% to 25% of the unpaid VAT, depending on the duration of the delay.

Conclusion

The Saudi Arabian tax landscape presents both opportunities and challenges for businesses. While the lack of personal income tax and attractive Zakat regime can be advantageous, the complexity of corporate taxation and VAT regulations requires careful planning and compliance. Businesses operating or planning to enter the Saudi market in 2024 must stay informed about the latest developments to optimize their tax strategy and remain compliant.