The Tax System in the Kingdom of Saudi Arabia: A Guide for Investors and Foreign Companies
Saudi Arabia has become a global investment destination thanks to its strategic location, growing economy, and regulatory reforms that have created a more attractive business environment for foreign investors. However, gaining a clear understanding of the Saudi tax system is essential before starting any business activity in the Kingdom to ensure compliance and proper financial planning.
First: Taxes, Zakat, and Value Added Tax (VAT) in Saudi Arabia
Foreign companies operating in the Kingdom are subject to several financial obligations, including corporate income tax, zakat, value added tax (VAT), and other fees depending on the nature of the activity.
Understanding these obligations in advance helps avoid penalties and enables effective financial management that supports sustainable profit growth.
1. Corporate Income Tax for Foreign Companies
Corporate income tax applies to foreign-owned companies operating in Saudi Arabia that are not owned by Saudi or GCC nationals. It is calculated at a rate of 20% of the taxable net income.
1.1 Entities Subject to Tax
The tax applies to:
- Foreign companies commercially licensed in Saudi Arabia.
- Non-resident entities generating income from within the Kingdom, whether through a permanent establishment or commercial contracts.
The tax also applies to the foreign shareholders’ share of profits generated within Saudi companies.
Saudi-owned companies and GCC nationals are subject to zakat instead of income tax.
1.2 Taxable Income and Allowable Deductions
Taxable income includes all revenue generated within Saudi Arabia after deducting allowable expenses such as:
- Salaries and employee benefits
- Operating expenses
- Depreciation of assets
- Statutorily proven bad debts
Personal or entertainment expenses are not considered deductible.
1.3 Withholding Tax (WHT)
Withholding tax applies to payments made by Saudi entities to foreign parties and is deducted at the source before transfer.
Rates vary according to income type:
- 5% on dividends, interest, rent, and technical services
- 15% on management fees
Rates may differ depending on international tax treaties.
1.4 Registration and Reporting Requirements
Companies must file an annual tax return with the Zakat, Tax and Customs Authority (ZATCA) within 120 days from the end of the financial year.
Late filing or failure to file incurs penalties ranging from 5% to 25% of the unpaid tax.
2. Zakat in Saudi Arabia
Zakat is imposed on Saudi and GCC-owned companies at a rate of 2.5% on net worth and certain financial bases.
2.1 Entities Subject to Zakat
Zakat applies to companies fully or partially owned by Saudi or GCC nationals.
For mixed ownership companies, zakat applies only to the Saudi-owned portion.
2.2 Calculation Method
Zakat is calculated based on:
- Net assets
- Working capital
- Retained earnings
- Cash investments
Unlike income tax, zakat is based on the company’s financial position rather than profits alone.
2.3 Filing and Deadlines
Companies must submit their zakat declaration within 120 days from fiscal year-end through ZATCA’s platform.
Delays result in financial penalties.
3. Value Added Tax (VAT)
VAT was introduced in 2018 at 5% and later increased to 15% in 2020. It applies to most goods and services in the Kingdom.
3.1 Mandatory Registration
Companies must register for VAT if their annual revenues exceed:
- SAR 375,000 – Mandatory registration
- SAR 187,500 – Optional registration
Foreign businesses conducting taxable activities must appoint a local tax representative.
3.2 VAT Categories
- 15% standard rate for most goods and services
- 0% for exports, medical services, education, and international transport
- Certain exemptions for financial services and residential real estate
3.3 Reporting and Invoicing Requirements
Businesses must issue compliant tax invoices and file monthly or quarterly VAT returns based on turnover.
Input VAT refunds are allowed on eligible business expenses.
Penalties may reach 50% of undeclared VAT or SAR 10,000 for failure to register.
4. Additional Taxes and Fees
4.1 Excise Tax
Applied to harmful products:
- 100% on tobacco and energy drinks
- 50% on soft drinks and sweetened beverages
4.2 Customs Duties
Customs duties range from 5% to 25% depending on the imported goods.
4.3 Social Insurance (GOSI)
Employers must pay 22% of the monthly wage as social insurance contributions, shared between employer and employee.
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Conclusion
Tax System in Saudi Arabia:
Saudi Arabia’s tax system aims to balance investment incentives with financial compliance.
Foreign investors are subject to a 20% income tax, while Saudi and GCC-owned companies pay 2.5% zakat. Most commercial transactions are subject to 15% VAT.
Timely compliance with tax regulations and accurate filing are essential for business continuity and avoiding penalties.
Need Specialized Tax Consultation?
You can contact Elite Law Firm through our website:
🔗 www.elite-law.com
for tailored legal and tax advisory services to support the expansion of your business in the Kingdom of Saudi Arabia.
