Taxation & VAT in Saudi Arabia
Saudi Arabia has emerged as one of the most attractive destinations for foreign investors, thanks to its strategic location, rapidly growing economy, and pro-business reforms. However, before setting up operations in the Kingdom, it is crucial to understand the Saudi tax framework to ensure compliance and effective financial planning.
Overview of the Saudi Tax System
Foreign companies operating in Saudi Arabia are subject to several fiscal obligations, including corporate income tax, Zakat, and Value-Added Tax (VAT), in addition to other financial levies depending on the nature of their business.
Understanding these obligations in advance helps businesses manage liabilities, avoid penalties, and maintain profitability.
1. Corporate Tax in Saudi Arabia
Saudi Arabia imposes a 20% corporate income tax (CIT) on the taxable profits of foreign-owned companies and non-resident entities earning income within the Kingdom.
1.1 Who Is Subject to Corporate Tax?
Corporate tax applies to:
- Foreign companies operating in Saudi Arabia under a valid commercial license.
- Non-resident entities earning income from Saudi sources through a permanent establishment or contractual relationship.
- Foreign shareholders in Saudi entities, who are taxed on their share of profits.
In contrast, companies owned entirely by Saudi or GCC nationals are subject to Zakat instead of corporate tax.
1.2 Taxable Income and Allowable Deductions
Taxable income includes all revenues generated within the Kingdom, minus deductible expenses such as:
- Employee salaries and benefits.
- Business operating expenses.
- Depreciation of assets.
- Properly documented bad debts.
- Certain authorized donations and contributions.
Personal or entertainment expenses and non-business-related costs are not deductible.
1.3 Withholding Tax (WHT)
Withholding tax applies to payments made by Saudi entities to foreign service providers, deducted at source before payment.
Rates vary according to the nature of the service:
- 5% on dividends, interest, rent, and technical services.
- 15% on management fees.
- Other rates may apply based on tax treaties or specific transactions.
1.4 Corporate Tax Compliance and Filing
Foreign companies must file annual tax returns through the Zakat, Tax, and Customs Authority (ZATCA) within 120 days of the fiscal year-end.
Late filing or underpayment may result in penalties ranging from 5% to 25% of the unpaid tax, emphasizing the importance of timely compliance.
2. Zakat in Saudi Arabia
Zakat is an Islamic financial obligation applied to Saudi-owned businesses and GCC nationals at a rate of 2.5% of the company’s net worth, including assets and retained earnings.
2.1 Who Is Subject to Zakat?
Zakat applies to:
- Saudi and GCC-owned companies (100% or majority ownership).
- The Saudi partner’s share in joint ventures.
- Entities engaged in trading, investment, or industrial activities.
Foreign companies are exempt from Zakat and instead pay corporate income tax. However, mixed-ownership companies (Saudi + foreign) may be partially subject to both.
2.2 Zakat Calculation
Zakat is calculated on the company’s net worth, including:
- Business assets.
- Retained earnings.
- Cash balances and investments.
Unlike corporate tax, Zakat is not based on profits, but rather on the overall financial position of the company.
2.3 Zakat Compliance and Filing
Zakat returns are filed annually via ZATCA, following the same deadline as corporate tax (within 120 days after the fiscal year-end).
Non-compliance or late payment may result in financial penalties.
3. Value-Added Tax (VAT)
Saudi Arabia introduced VAT in 2018 at 5%, later increased to 15% in 2020. VAT applies to most goods and services, impacting both local and foreign businesses.
3.1 VAT Registration Requirements
Businesses must register for VAT if their annual taxable turnover exceeds:
- SAR 375,000 (USD 100,000) – Mandatory registration.
- SAR 187,500 (USD 50,000) – Voluntary registration (for small businesses).
Foreign entities conducting taxable activities in the Kingdom must register for VAT and may need to appoint a local VAT representative.
3.2 VAT Rates in Saudi Arabia
The standard VAT rate is 15%, applied to most goods and services such as electronics, apparel, and professional services.
Certain supplies are zero-rated (0%), including:
- Exports of goods and services.
- International transport.
- Healthcare and education services.
Some transactions are exempt, such as certain financial services, residential real estate, and life insurance policies.
3.3 VAT Compliance and Filing
- Large businesses must file monthly VAT returns; smaller ones may file quarterly.
- All invoices must include VAT details.
- Businesses can claim VAT refunds on eligible input costs to reduce net tax liability.
Non-compliance penalties include:
- Late filing: 5–25% of unpaid VAT.
- Incorrect return: up to 50% of the underreported VAT.
- Failure to register: fixed penalty of SAR 10,000 (USD 2,600).
4. Other Taxes and Financial Obligations
4.1 Excise Tax
Applied to harmful or luxury products, including:
- 100% on tobacco and energy drinks.
- 50% on soft drinks and sugary beverages.
4.2 Customs Duties
Foreign businesses importing goods into Saudi Arabia are subject to customs duties ranging from 5% to 25%, depending on the product type.
4.3 Payroll and Social Insurance Contributions
Employers must contribute to the General Organization for Social Insurance (GOSI):
- 22% of the employee’s salary, shared between employer and employee.
- Applicable to both Saudi nationals and expatriates.
Conclusion
Saudi Arabia’s tax system aims to foster investment while maintaining financial transparency and compliance.
Understanding the obligations under corporate tax (20%), Zakat (2.5%), and VAT (15%) is essential for all businesses operating in the Kingdom.
Additionally, excise tax, customs duties, and social insurance contributions must be considered in overall financial planning.
By maintaining proper compliance and adopting a sound tax strategy, foreign investors can enhance profitability and operate successfully within the Saudi regulatory framework.
Need Help with Tax Compliance?
If you are planning to expand your business into Saudi Arabia, ensure that your company is properly registered and compliant with ZATCA requirements.
Consult a tax professional to navigate Saudi Arabia’s evolving tax landscape efficiently.
