The Kingdom of Saudi Arabia is well reputed for business incentives, opportunities, innovative developments and access to unparalleled business opportunities. Whereas the Kingdom is on the verge of attracting and incentivizing foreign capital, greenfield investors (and not only) would need to consider the tax implications of investing and repatriating fund from the territory of the Kingdom of Saudi Arabia.
The Kingdom is not a tax free jurisdiction and has been a member of the Organization of for Economic Cooperation and Development (OECD) since 2005. In 2024, January, the Kingdom entered a new Memorandum of Understanding with OECD, committing to strengthen the co-operation in several policy areas, in view of supporting Saudi Arabia’s Vision 2030 and exploring alignment with the relevant OECD standards.
Further, the business and, inherently, the tax regime of the Kingdom is derived from the country’s acquis generated by its membership in the World Trade Organization, organization of the Islamic Cooperation, to name just a few.
In brief, the Kingdom of Saudi Arabia applies both indirect and direct taxes.
In terms of indirect taxes, there is a flat 15% Value Added Tax added on the supply of goods and services in the Kingdom. Whereas VAT applies, in simple terms, on all supplies including imports, there are few exempt supplies that include margin based financial services, life insurance, rental of residential property, education and healthcare services provided to Saudi citizens etc.
For the direct taxation, the Kingdom of Saudi Arabia generally applies:
1. Income tax
The general income tax rate 20%. The same rate is applicable for natural resources exploitation and increases from 50 to 85% for oil and hydrocarbon production. In such case, the level of taxation depends on the capital investment. Downstream oil and hydrocarbon activities are 20% taxed, for five years, being therefore advisable that the downstream activities to be accounted for separately in each organization (to avoid general tax rules applicable to all the operational activities of that specific operator).
The income tax is levied on:
- Resident companies, on the share of the non-Saudi shareholders;
- Non-Saudi natural persons that conducts business activities in the Kingdom;
- Non-resident person that has a permanent establishment in the Kingdom and conducts activities thereto;
- Non-resident persons that have taxable income from the Kingdom, even without having a permanent establishment.
Saudi shareholder’s share of net equity is subject to Zakat, currently at the rate of 2.5%.
In terms of exemptions from tax, some of these apply on specific forms of capital gains and cash or in-kind dividends received from investments made by a Saudi resident capital company in a Saudi resident or non-resident company, on the condition that the dividend receivers owns, for a period of at least one year, minimum 10% of the investee company. Qualifying income can be zero rated, in the conditions prescribed by law.
2. Withholding tax (WHT)
The non-resident, on any amount received from any sources in the Kingdom, shall be subject to WHT and this shall be deducted from the gross amount, in line with certain rates determined by law:
| Example of activity (non limitative) | WHT % |
| Management fees | 20 |
| In land transportation | 15 |
| Dividends distributed | 5 |
| Consulting services (management, technical) | 5 |
| Rent, interest on return of loans | 5 |
3.Capital Gains
Capital gains tax is assessed at 20% on the disposal of shares by the foreign shareholder in a resident company, as a general rule. However, capital gains resulted from the disposal of shares in the Saudi Stock Exchange are exempt when the shares have been acquired prior to July 30 2004. Capital gains resulted from disposal of securities traded on stock exchange are also exempt.
4.Transfer pricing (TP)
The TP regulations are generally in line with the OECD standards and apply to all income tax paying entities. However, save as the case of country-by-country reporting, the Zakat payers are not subject to TP regulations.
As in the case of other jurisdictions that implement the OECD standards, for the Kingdom, related party transactions need to be conducted in line with the arms’ length principle.
5.Free zones and other tax incentives
A ten-year tax concession has been granted by the Government of the Kingdom in six underdeveloped regions, in view of attracting further investments and improving their balance of payments, as well as the business prospectus: Ha’il, Northern Territory, Al Baha, Al Jouf, Jazan, Najran.
The Special Integrated Logistics Zone issued by the General Authority of Civil Aviation is a free commercial zone area, located next to the Riyadh International Airport. In certain conditions, the entities operating in this zone benefit of:
- 50 years tax holiday, including customs and VAT;
- 100% foreign ownership is allowed;
- No WHT on repatriated capital;
- Non-residents operating in the zone do not create a permanent establishment in the Kingdom, by this benefitting from other tax lenience and incentives, as the case may be.
ZATCA has introduced, as of February 2024, special tax incentives for “Regional Headquarters” (RHQ). The RHQ is defined as ‘a unit of a Multinational Group duly established under the laws of Saudi Arabia and the concept of regional headquarters activities of international companies applies according to the National Classification of Economic Activities’.
In certain conditions, a RHQ may benefit of:
- 0% income tax on qualifying income;
- 0% WHT on payments to non residents, on the condition that these are payments of dividends, payments to related parties or payments made to third parties, necessary for the RHQ activity.
Conclusively, doing business in the Kingdom of Saudi Arabia offers a unique blend of opportunities and challenges within a dynamic market environment. The Kingdom presents a wealth of prospects for international investors and businesses alike. However, navigating the intricacies of the local business culture, regulatory framework, and customs requires a thorough understanding and strategic approach. By leveraging local partnerships, respecting cultural nuances, and aligning with the nation’s long-term development goals, businesses can establish a strong foothold and thrive in this evolving market landscape.
Authors
Dr Bader AlBusaiyes
Founder and Managing Partner
AlSuwaiket & AlBusaiyes Lawyers and Legal Consultants Co.
Al Khobar Saudi Arabia
Email: dr.bader@sbsaudilawyers.com
Mob: +966 50 5945306
In collaboration with
Dr. Lura Voda
Partner
Fichte & Co Legal
Dubai, United Arab Emirates
Email: laura.voda@fichtelegal.com
Mob: +971 50 5827667