Introduction
In the last instalment of our series “Investment in Saudi Arabia”, we discuss Saudi Arabia's tax legislation, which has been renewed in line with the Saudi Vision 2030 and continues to be updated in pursuit of national goals of integration into the global economic system. In addition to the current tax types and rates present in Saudi commercial life, we will provide explanations on the double taxation avoidance regime in the context of the Türkiye-Saudi Arabia bilateral relationship and the incentive systems applied for investments in Saudi Arabia.
1. Taxes in Saudi Commercial Landscape
Tax environment in Saudi Arabia is regulated and supervised by Zakat, Tax and Customs Authority (“ZATCA”).
While applying conventional tax types such as income tax, WHT and customs duty, Saudi Arabia also has certain uniqueness, incorporating zakat, which is a form of mandatory almsgiving rooted in Islam, and applying personal income tax only on non-residents.
1.1. Income Tax and Zakat
In general, non-Saudi investors are liable for income tax in Saudi Arabia, per Income Tax Law dated 07.03.2004 (“Income Tax Law”). On the other hand, Saudi citizens and citizens of the Gulf Cooperation Council member states are liable for zakat, which is based not on the income but net worth, excluding certain items such as long-term investments and fixed assets.
Per Income Tax Law, the following are in scope of the income tax:
- resident capital companies with respect to shares of non-Saudi partners,
- resident non-Saudi natural persons who conduct business in Saudi Arabia,
- non-residents who conduct business in Saudi Arabia through a permanent establishment,
- non-residents with taxable income from sources other than a permanent establishment, within Saudi Arabia and
- persons engaged in the field of natural gas investment, oil or hydrocarbons production.
For companies, the tax base for the calculation of zakat excludes fixed assets, long-term investments and deferred costs from total capital resources, but includes profits from foreign investments that do not consist of investment in real property. In the case of a company having both Saudi and non-Saudi shareholders, the portion of taxable income attributable to the non-Saudi interest is subject to income tax, and the Saudi share goes into the basis on which zakat is assessed.
The rate of income tax is 20% of the net adjusted profits, and zakat is charged at 2,5% on the company's zakat base. Zakat base represents the net worth of the entity as calculated for zakat purposes.
Notwithstanding the above-given standard rate of 20%, income from oil and hydrocarbon production is subject to a rate ranging from 50% to 85%. In addition, the tax base of a person who works in natural gas investment is taken as independent of the tax base relating to their other activities.
It should also be noted that the Income Tax Law is expected to be replaced in the short-medium term, as the new draft legislation is published in December 2023 for public consultation. While the draft text does not change the scope of the persons subject to income tax, it enhances compliance with international practice with regards to create a more transparent and competitive tax ecosystem.
1.2. Customs Duty
As is with many countries, Saudi customs policy consist certain protective measures to create a competitive edge for the national producers, and the customs duty rates vary, 25% at most.
In accordance with the Saudi customs regulations, customs duties are applied either on the cost, insurance and freight (CIF) of the imported goods, or on the gross weight or the net weight, determined by the tariff schedules.
1.3. Value Added Tax (“VAT”) and Excise Tax
On 01.07.2020, the standard VAT rate, which was previously at 5%, was increased and is applied as 15% since, with exceptions on certain products.
Additionally, since 11.06.2017 an excise tax is implemented in order to discourage the usage of selected goods. The rates vary depending on the product, and the following are the current scope of the excise tax:
- tobacco products (100%),
- soft drinks and sweetened beverages (50%),
- energy drinks (100%) and
- electronic smoking appliances and tools and liquids used in them (100%).
1.4. Real Estate Transaction Tax (“RETT”)
With the Royal Decree No. (A/84) published on 01.10.2020 and effective since 04.10.2020, RETT replaced the VAT in real estate transactions.
As the name suggests, RETT is imposed on sales, financial leasing, barter and similar transactions whose subjects are real estates, and at a rate of 5% of the total value of the real estate. The value subject to RETT is assessed not by the transaction value, but fair market value determined by ZATCA, and the difference between two values can be subjected to additional accrual.
While there are certain exceptions, such as a natural person's acquisition of first home (whose value does not exceed 1.000.000 Saudi riyals), RETT also applies to the transfer of shares of a “real estate rich entity”, defined as a company which real estate comprise 50% of its total assets.
2. Withholding Tax (“WHT”)
According to Income Tax Law, certain payments by residents to a non-resident with no permanent establishment in Saudi Arabia are subject to WHT, whose rate varies depending on the payment:
- rent, interest and dividends (5%),
- royalty or proceeds (15%),
- management fees (20%),
- payments for airline tickets, air or maritime freight (5%),
- payments for international telecommunications services (5%) and
- any other payments determined by secondary legislation (15% at most).
The double taxation agreement between Türkiye and Saudi Arabia foresees that between two countries, WHT on interests and royalties is applied as 10%. Additionally, WHT on dividends is set at 10%, however;
- if the beneficial owner is a company (other than a partnership) that directly holds at least 20% of the capital of the company paying the dividends or
- if the beneficial owner is central bank or an entity that is wholly owned by the government
the WHT is applied at a rate of 5%.
WHT is due on the 10th day following the month in which the payment was made.
3. Tax Incentives in Saudi Arabia
In line with the goal of establishing a lucrative international investment environment, Saudi Arabia offers various incentives for foreign investors, with their scope to be widened in the near future.
3.1. Regional Headquarters (“RHQ”) Exceptions
Saudi Arabia offers generous tax exceptions to multinational group companies who move or incorporate their RHQs to operate from Saudi Arabia.
Regional Headquarters Tax Rules have been published by ZATCA on 16.02.2024. Accordingly, certain activities of RHQs towards strengthening the group's profile in the region, providing strategic supervision, administrative guidance and support for the internal business of the group companies and their affiliates are exempt from:
- income tax,
- WHT on dividends,
- WHT on payments to affiliates and
- WHT on services provided from third parties.
RHQ tax exemptions are effective for 30 years, with the possibility to renew for another 30 years.
3.2. Regional Incentives
With the vision of a coherent and versatile economy by strengthening the less developed regions' economic status, Saudi Arabia offers tax incentives for investments in its certain regions:
- Al-Baha,
- Al-Jouf,
- Ha'il,
- Jazan,
- Najran and
- Northern Borders Province.
If the criteria, which may vary depending on the project's qualifications are met, 50% of annual training and education expenses and salaries of the Saudi personnel can be deducted. Additional incentives such as deduction of the 15% of the foreign investor's capital share are possible, depending on the Saudi personnel's position in the company and the total investment cost.
The incentives are granted for 10 years from the commencement of the project.
Conclusion
Stemming from the pursuit of its national vision to create an internationally attractive, durable and versatile economy, Saudi Arabia continues to implement major reforms in its tax system, while preserving and developing its already strong applications. Together with the changes in its corporate law and the country's general openness to develop its economic and social relations with the rest of the world, the investment ecosystem in Saudi Arabia will only continue to grow and thrive.
With the bilateral trade between Türkiye and Saudi Arabia growing and commercial opportunities increasing, it is vital that investments to be made in Saudi Arabia are evaluated and planned with a holistic approach, including tax legislation, in order to optimize the investment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
