Saudi Arabia: Tax System

Tax Rate For Foreign Companies

A resident company is taxed on income sourced in Saudi Arabia. Only non-Saudi investors are liable for income tax in Saudi Arabia, and GCC nationals are considered Saudi citizens for tax purposes. If a company has both Saudi and foreign shareholders, the corporate income tax is calculated on the portion of taxable income attributable to the non-Saudi, while the Saudi part contributes to the tax base of Zakat.

A non-resident company carrying out business activities in Saudi Arabia through a permanent establishment is taxed on income arising from or related to the permanent establishment.

No foreign tax relief is provided for foreign entities in Saudi Arabia.

Capital Gains Taxation

The disposal of shares in a resident company by a non-resident shareholder is subject to a capital gains tax of 20%. Capital gains are subject to the normal income tax or Zakat rate, as appropriate. However, capital gains deriving from the disposal of securities traded on foreign stock markets are tax-exempt if they are also traded on the Saudi stock market.

Capital gains and losses on depreciable assets are not taken into consideration in determining the tax base. No gain or loss arises on the transfer of assets between companies belonging to the same group provided that the companies are wholly owned directly or indirectly within the group and the assets are not disposed of outside the group for two years from the date of transfer.

Main Allowable Deductions and Tax Credits

All costs and expenses paid or incurred during the tax year to earn taxable income such as salaries and wages, travel expenses which are connected with the business or enterprise, and rent on properties used in the business, are deductible from the tax base, provided that they respect certain conditions: the expenses are supported by a verifiable document or other qualifying evidence; they are related to the generation of taxable income and to the subject tax year; they are of a non-capital nature.

Other expenses which may be deducted from the tax base include: employers’ contributions paid for the employees to retirement funds; research and development expenses incurred to generate an income that is subject to taxation; costs of repair, maintenance and improvement of depreciable fixed assets, school fees paid for the employees’ children (provided that such benefit is stated in the employment contract and that fees are paid to a local licensed school). Start-up expenses can generally be fully expensed in the first financial year or can be capitalised and amortised. Bad debts are also deductible (conditions apply), same as for donations to certain approved charitable organizations. Operational losses can be carried forward (the maximum yearly profit percentage that could be used to offset cumulative losses should not exceed 25% of the year’s taxable profit). Carryback of losses is not permitted.

Non-deductible expenses include: taxes, entertainment expenses incurred for certain events, expenses of an individual for personal consumption, insurance commission in excess of 3% of total premiums collected in Saudi Arabia through an agent or other, payments made to headquarter offices located abroad by wholly owned local subsidiaries or branches.

The Saudi government grants a 10-year tax incentive on investments in the following six underdeveloped provinces: Hail, Jizan, Abha, Northern Border, Najran and Al-jouf. Machinery and raw materials that are required for approved projects are exempted from customs duties (when they are not available in the local market).

Other Corporate Taxes

There is no capital duty, stamp duty or payroll tax in Saudi Arabia. While there is no real estate tax, Zakat (religious tax) may be payable on real estate if held for speculation.
A Real Estate Transaction Tax ("RETT") applies to the disposal of real estate, at a rate of 5%.

Zakat also applies to companies that are resident in Saudi Arabia and other GCC nations. It is levied at a flat rate of 2.5% and is chargeable on the total of the taxpayer's capital resources held for more than 12 months and income not invested in fixed assets. These include the company’s capital, net profits, retained earnings and reserves not created for specific liabilities.

Saudi employees are responsible for the monthly payment of the social insurance tax, which is levied at 2% for non-Saudi employees and 12% for Saudi employees (who also have to contribute with 10%), calculated on the basic wage, housing allowance and commissions (capped at SAR 45,000).

Other Domestic Resources

Zakat, Tax and Customs Authority

Consult Doing Business Website, to obtain a summary of the taxes and mandatory contributions.

Country Comparison For Corporate Taxation

Accounting System

Accounting Standards

Saudi Arabia uses accounting standards issued by the Saudi Organisation for Certified Public Accountants (SOCPA) which are fully compliant with IFRS. Saudi standards includes requirements on matters that are not covered by IFRS (such as Zakat or religious tax). SMEs currently use standards issued by SOCPA, however the transition to IFRS for SMEs is expected to take place in 2018.

Accounting Regulation Bodies

SOCPA, Saudi Organisation for Certified Public Accountants

Accounting Law

Saudi Accounting Laws. Also refer to the SAGIA web site.

Difference Between National and International Standards (IAS/IFRS)

Saudi accounting standards are entirely based on IFRS. They also include requirements on matters that are not covered by IFRS such as Zakat (religious tax).

Accounting Practices

Tax Year

The tax year is the State's fiscal year. A taxpayer's tax year begins on the date the taxpayer obtains a commercial registration or license, unless otherwise provided.
A taxpayer may use a different tax year in the following circumstances:
- the different year was approved by the Directorate before the effective date of the income tax regulations;
- the taxpayer uses a Gregorian financial year;
- the taxpayer is a member of a group of companies or a branch of a foreign company that uses a different financial year.

Accounting Reports

The companies need to maintain their accounting reports, especially the balance sheet and the profit and loss account.

Publication Requirements

The balance sheet and profit and loss account need to be published every fiscal year. Many Saudi companies are making their financial reports available on the Internet.

Accountancy Profession

Accountants

The Saudi Organisation for Certified Public Accountants (SOCPA) promotes the accounting and auditing profession in the country. The accountancy professional can practice provided their name is listed in the 'Register of Certified Public Accountants' with the Ministry of Commerce and Industry. The minimum qualification for registration is a Bachelor's degree in Accountancy or any other equivalent Certificate as may be deemed acceptable by the competent authorities in charge of equivalency of degrees.

Professional Accountancy Bodies

SOCPA, Saudi Organisation for Certified Public Accountants

Member of the International Federation of Accountants (IFAC)

Yes

Member of Other Federation of Accountants

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)

Audit Bodies

Only licensed auditors, recognised by the Ministry of Commerce and Industry can perform auditing in Saudi Arabia.

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is an Islamic international autonomous non-profit corporate body that prepares accounting, auditing, governance, ethics and Sharia standards for Islamic financial institutions and the industry.

Allowable Deductions and Tax Credits

There is no individual income tax scheme in Saudi Arabia, and as such no deductions are needed.

Special Expatriate Tax Regime

Resident Saudis and non-residents who conduct business through a permanent establishment and/or with income sourced from Saudi Arabia are subject to tax. However, they are not taxed on personal or employment income but only on business income earned. Individuals not conducting business or professional activity are not taxed on interest or dividend income.
An annual dependent levy of SAR 4,800 applies per expat dependent residing in Saudi Arabia.

Capital Tax Rate

A 20% capital gains tax is imposed on the disposal of shares in a resident company by a non-resident shareholder.
Saudi employees contribute 10% of their basic income, allowances and commissions to social security (9% social insurance + 1% unemployment insurance).
A "White Land" tax applies at a rate of 2.5% on the market value of urban vacant land designated for residential or commercial use.