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Since the Saudi government relies largely on oil revenues to fund its outlays, its tax rates are among the lowest in the world and foreign investors generally view the kingdom as a highly favourable environment for tax purposes.
According to the World Bank's Doing Business report in 2010, Saudi Arabia ranks 11th for the overall ease of doing business and the World Economic Forum lists it 7th with regard to ease of paying taxes. Even so, it is important to understand the various types of taxes applicable to foreign investors in the kingdom, as well as the prevailing tax rates for each category.
Taxes in Saudi Arabia are governed by the Income Tax Law of 2004 (the Tax Law), royal decrees, ministerial decisions, and publications from the Department of Zakat and Income Tax (DZIT), which is responsible for the administration of all tax matters.
Who is subject to tax in Saudi Arabia?
Article 2 of the Tax Law holds the following subject to various forms of taxation:
• A resident capital company on non-Saudi shares.
• A resident non-Saudi natural person who does business in Saudi Arabia.
• A non-resident who does business in the kingdom through a permanent establishment (such as a limited liability firm, joint stock company, or branch of a foreign firm).
• A non-resident on other income subject to tax from sources within Saudi Arabia.
• An entity engaged in natural gas investment activities.
• An entity engaged in hydrocarbons production.
As stated in the Tax Law, the place of residency is an important factor in determining who is subject to the withholding tax in the kingdom. Article 3 of the Tax Law states that a natural person is considered a resident in the tax year if he meets either of the following conditions:
• He has a permanent home in Saudi Arabia and is physically present in the kingdom for a period totalling not less than 30 days in the tax year.
• He is physically present in Saudi Arabia for a period not less than 183 days in the tax year.
• A firm is considered a resident company if it meets either of the following conditions:
• It is formed under the laws of the kingdom (the Companies Law). This is also referred to as a capital firm as the company itself is registered as a legal entity in Saudi Arabia. For example, a business established in the kingdom with operations outside the country will be subject to taxes in Saudi Arabia.
• Its place of central control and management is situated within the kingdom. For example, a UAE company owned primarily by Saudis who have established a local branch of the firm will be subject to taxes in Saudi Arabia.
What types of tax exist in Saudi Arabia?
The primary taxes administered in the kingdom are income tax, withholding tax and zakat, which is an Islamic tax on wealth.
The income tax rate is a flat 20 per cent for all entities (except those engaged in hydrocarbons-related activities, whose rates range from 30-85 per cent). Article 8 of the Tax Law states that gross income is subject to tax, including all income, profits, and gains of any type from the carrying out of any activity. This also encompasses capital gains and incidental income (other than exempt income). However, employee salaries are not subject to income tax.
Regarding withholding tax, article 68 of the Tax Law states that any resident (which includes corporate entities, regardless of whether it is a taxpayer and whether such payments are considered tax deductible for the payer) of Saudi Arabia making a payment to a non-resident person or entity must withhold taxes ranging from 5-20 per cent of the payment.
