Corporate And Income Tax Obligations In Saudi Arabia Under The Evolving Fiscal Framework

The Kingdom of Saudi Arabia has experienced a lot of changes in the fiscal policy setting in the last ten years. One of the most important spheres of this reform is the formation of the national tax system such as the incidence tax, the corporate tax, and other fiscal activities. Although the employment income is not generally taxed as a personal income tax in Saudi Arabia, other kinds of taxes such as corporate income tax, Zakat and withholding tax provide significant influence on the development of the business and investment climate.

Being acquainted with these tax mechanisms is crucial both to an entity operating in the Kingdom. It is also crucial to foreign investors in Saudi Arabia. They must understand the regime of rules and requirements they should deal with regarding the Saudi Arabia tax rate.

Corporate Income Tax Regime in Saudi Arabia

The tax on corporate income of foreign-owned entities and non-resident businesses that make a profit in Saudi Arabia is charged by the Saudi government. Corporate income tax applies a 20 percent general rate to the net adjusted profits of the company. This rate is for interests by foreign shareholders in businesses, branches of foreign enterprises, and non-resident service providers with Saudi source income.

Individuals who are citizens of Saudi Arabia, and companies solely owned by Saudi or Gulf Cooperation Council (GCC) citizens, are exempt from corporate income tax. Instead, they are taxed on Zakat, which is a religious wealth tax at 2.5 percent of the Zakat base. For mixed ownership, there is a dual obligation. The foreign part is taxed with the corporate income tax rate, whereas the Saudi part is assessed on Zakat.

Failure to comply with corporate income tax may lead to fines, suspension of commercial registration, or failure to obtain state contracts. Therefore, due diligence in law and finance is extremely essential for full compliance.

Scope and Taxation of Permanent Establishments

The Saudi tax law revolves around the idea of a permanent establishment (PE). A PE arises once a foreign business has a permanent establishment in the Kingdom through a dependent agent. Upon formation of a PE, the foreign venture falls under the income tax rate charged in Saudi Arabia.

The existence of a PE carries various obligations. These include being registered with the Zakat, Tax and Customs Authority (ZATCA). Additionally, they must provide annual end-year financial statements. It also entails keeping proper accounting books in Arabic. Moreover, a team of qualified legal counsel must be consulted to determine if business operations in Saudi Arabia amount to a PE under the Income Tax Law and the Implementing Regulations.

Withholding Tax on Cross-Border Payments

The Saudi Arabian Government levies a withholding tax on payments reported to non-resident parties for services, royalties, dividends, interests, and rent. The withholding tax rates differ according to the type of payment made, ranging from 5 to 20 percent.

For example, management fees have a withholding rate of 20 percent. In comparison, technical services are subject to a withholding tax of 15 percent. These rates can be decreased with Double Taxation Avoidance Agreements (DTAAs). However, this applies only if such an agreement is applicable and duly recorded. Companies must pay the withheld amount to ZATCA within ten days of the month succeeding the payment date.

Failure to withhold taxes is one of the causes of audit risk. Therefore, it is recommended to seek legal assistance to ensure proper classification of payments. Additionally, one should leverage the benefits of treaties wherever applicable.

Indirect Taxation and VAT Considerations

Despite not having a personal income tax in Saudi Arabia, Value-Added Tax (VAT) was implemented in the Kingdom in 2018. The general rate is 15% on sales at the moment.

Who is required to register:

Most goods and services are subject to VAT. VAT registration is compulsory for businesses with annual taxable supplies above 375,000 SAR. This is applicable for any person residing in the KSA, if:

• The value of their taxable supplies exceeds SAR 375,000 during the previous 12 months, or
• It is expected that their taxable supplies will exceed this threshold in the upcoming 12 months.

Registration Deadline:

A registration application must be submitted within 30 days from reaching the mandatory threshold or expecting to.

Voluntary Registration:

• The voluntary registration threshold is SAR 187,500 for any person residing in the KSA, if:
• The value of their taxable supplies or taxable expenses exceeds SAR 187,500 during the previous 12 months, or
• It is expected that this threshold will be exceeded in the upcoming 12 months.

The company is obligated to submit the value-added tax return on a quarterly basis if annual sales are less than 40 million SAR. If annual sales exceed 40 million SAR, the return must be submitted monthly.

The return measures the difference between VAT amounts received from customers and VAT amounts for purchases and services costs. This difference is transferred to the Zakat and Income Authority.

Severe penalties may be given on late filings, wrong invoicing or non-compliance. It is on this basis that companies are advised to incorporate VAT compliance with their general tax strategy.

If your organization needs help with VAT registration, documentation, or dispute resolution, our legalists offer complete advisory and representation services.

Transfer Pricing Regulations and Disclosure Requirements

Saudi Arabia adopts strict transfer pricing regulations. These conform to Base Erosion and Profit Shifting (BEPS) norms facilitated by OECD. The regulations relate to controlled transactions involving related parties. Transfer pricing documentation should be maintained in a master file and local file by entities.

There are also entities that should provide a Country-by-Country Report (CbCR) if they reached the given thresholds. A related party transaction disclosure is also mandatory under the annual tax return. Noncompliance can end up in fines, increased inspection, or re-examination of taxable revenues by ZATCA.

Due to the technicality of transfer pricing rules and documentation requirements, legal and tax personnel should be involved by businesses. This is especially important for multinational companies to ensure compliance with Saudi law and other transfer pricing standards.

Personal Income Tax Status in Saudi Arabia

Under the current legal regime, wages, salaries, employment benefits, and similar earnings are not subject to personal income tax in Saudi Arabia. This can significantly enhance the Kingdom's attractiveness to foreign workers and expatriate professionals.

However, individuals involved as sole owners or shareholders in businesses owned by foreigners are taxed on profits earned by such businesses. First, the registration should be done through ZATCA, followed by payment of corporate tax.

It is crucial to consider that foreign nationals might be taxed, according to local legislation, even while residing domestically. Double taxation agreements may apply. Thus, expatriates are advised to consult legal specialists for clarity on their tax status in different jurisdictions.

FAQs

Is there a personal income tax in Saudi Arabia for foreign employees?

No. The personal income tax is not imposed in Saudi Arabia on salaries and employment benefits, regardless of nationality and staying there or not.

Can foreign investors avoid double taxation on profits earned in Saudi Arabia?

Yes, provided that there is an agreement on Double Taxation Avoidance (DTAA) signed between Saudi Arabia and the country in which the investor is a citizen, there may be relief using a tax credit or some other lower tax rate, on proper submission of documentation.

Are dividends paid by Saudi companies to non-residents subject to tax?

Yes. The withholding tax on dividends received by non-resident shareholders is 5% and it can be mitigated at an internationally agreed rate.

What are the penalties for late corporate tax filings in Saudi Arabia?

Delay in Filing VAT Return:
Delay in submitting the VAT return Fixed fine of= SAR 1,000 per tax period
Delay in paying the due VAT5% penalty for each month of delay on the unpaid VAT amount
The penalty is calculated monthly on the unpaid amount, even if the return itself was submitted on time.

Delay in Filing Income Tax / Zakat Return:
Delay in filing the annual return A fine of 1% of revenue, up to a maximum of SAR 20,000, or a fixed amount determined by the authority based on the case
Delay in payment 1% monthly late payment penalty on the due tax amount, until payment is made.

Submission of Inaccurate or Incomplete Return:
Providing incorrect or incomplete information Fine of up to 25% of the unreported tax difference.

Failure to Register or Notify of Activity Cessation:
Failing to register for VAT after exceeding the threshold = SAR 10,000 fine
Failure to notify the Authority of business cessation = SAR 1,000 fine. There can also be some additional interest.

Are offshore digital services provided to Saudi clients taxable?

Yes. The services delivered by non-resident entities to their clients in Saudi Arabia can give rise to VAT and in some cases, withholding tax, which will depend on the organization of the transaction and kind of service offered.