Corporate tax in Saudi Arabia

Summary

Corporate Income Tax Rate (%)
Companies Engaged in Natural Gas Investment Activities 30 to 85 (a)
Entities Engaged in Oil and Other
Hydrocarbon Production
85
Other Companies 20
Capital Gains Tax Rate (%) 20
Withholding Tax (%) (b)
Dividends 5
Interest 5
Royalties 15
Net Operating Losses (Years)
Carryback 0
Carryforward Unlimited (c)

a) For further details, see Section B.

b) For further details and a complete listing of withholding taxes, see Section B. The withholding tax rates in Saudi Arabia range from 5% to 20%.

c) See Section C.

Taxes on corporate income and gains

Income tax. Income tax is assessed on profits of the following:

  • A resident capital company (only on profits attributable to shares owned by non-Saudi or non-Gulf Cooperation Council [GCC] shareholders; see below)
  • A resident non-Saudi or non-GCC natural person who carries on a business in Saudi Arabia
  • A nonresident company that carries on business in Saudi Arabia through a permanent establishment
  • A person engaged in the field of natural gas investment
  • A person engaged in the production of oil and hydrocarbon materials
  • A nonresident that derives income subject to tax from sources in Saudi Arabia (tax is assessed through withholding tax)

Partners in personal companies (that is, general partnerships, un­incorporated joint ventures and limited partnerships) are subject to tax rather than the personal companies themselves.

For income tax purposes, non-Saudis do not include citizens (nationals) of countries that are the members of the Gulf Coop­eration Council (GCC). Members of the GCC are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. The share of profits attributable to interests owned by GCC nationals in a company is subject to zakat (see Section D). The share of profits attributable to interests owned by non-GCC nationals in that company is subject to income tax.

Rates of tax. Natural Gas Investment Tax (NGIT) applies to natu­ral or legal persons (including GCC nationals and entities) engaged in natural gas, natural gas liquids and gas condensates investment activities in Saudi Arabia. NGIT does not apply to a company engaged in the production of oil and other hydrocarbons.

The NGIT rate ranges from 30% to 85% and is determined on the basis of the internal rate of return on cumulative annual cash flows. The NGIT rate includes income tax of 30%.

Companies engaged in the production of oil and other hydrocar­bons are subject to tax at a rate of 85%.

Companies not subject to NGIT or the 85% tax are taxed at a rate of 20%.

The tax holidays that were available under the previous Foreign Capital Investment Regulations have been withdrawn. However, projects that were granted tax holidays under the previous regula­tions continue to benefit from the tax holidays for the approved period.

Withholding tax. A Saudi resident entity is required to withhold tax from payments made to nonresidents that do not have a legal registration or a permanent establishment in Saudi Arabia with respect to income earned from a source in Saudi Arabia. This rule applies regardless of whether the payer is considered to be a tax­payer under the regulations and whether such payments are treated as a tax-deductible expense in the Saudi resident entity’s tax declaration. Nonresident GCC nationals and entities are also subject to withholding tax rather than the zakat withholding tax, which applied under the previous rules.

The following are the withholding tax rates.

Type of payment Rate (%)
Rent, payments made for technical and
consulting services to unrelated parties,
payments for air tickets, payments for
freight or marine shipping, payments for
international phone calls, dividends, interest
(see next paragraph), and insurance or
reinsurance premiums
5
Royalties, payments for technical and
consulting services to related parties,
and payments made to the head office
or affiliated companies for services
15
Management fees 20
Payments for other services 15

Loan fees (interest expenses and commissions) on interbank de­posits paid to nonresident banks are exempt from Saudi withhold­ing tax if such deposits remain with the Saudi resident borrower banks for a maximum period of 90 days. Resident borrower banks are required to submit an annual statement attested by the Saudi Arabian Monetary Authority listing the names of the nonresident lending banks, their addresses, periods of lending and the amount of loan fees paid.

The party withholding the tax must register with the Department of Zakat and Income Tax (DZIT) before the settlement of the first tax payment. The party withholding the tax must settle the tax withheld with the DZIT within the first 10 days of the month fol­lowing the month in which the taxable payment is made and issue a certificate to the nonresident party. A delay fine of 1% for each 30 days of delay is computed beginning 30 days from the due date of tax until the date the tax is paid. An annual withholding tax return must be filed within 120 days following the end of the tax year.

Capital gains. In general, capital gains are treated as ordinary in­come and taxed at the regular corporate rates. Capital gains real­ized by nonresident shareholders on the disposal of shares in a Saudi Arabian company are subject to tax at a rate of 20%.

However, capital gains arising on the sale by non-Saudi sharehold­ers of shares in a Saudi joint stock company traded on the Saudi stock exchange are exempt from tax if the shares (investments) were acquired after the effective date of the new tax regulations (30 July 2004).

Gains on the disposal of property other than assets used in a busi­ness activity are also exempt from tax.

Administration. All persons subject to tax (excluding nonresidents who derive income from a source in Saudi Arabia and are subject to final withholding tax) are required to register with the DZIT before the end of their first fiscal year. Failure to register with the DZIT results in the imposition of a fine ranging from SAR1,000 to SAR10,000.

A taxable entity that has a permanent establishment or commer­cial registration in Saudi Arabia must file its annual tax declara­tion with the DZIT based on its accounting books and records within 120 days following the end of the tax year and pay the in­come tax due with the tax declaration. However, the DZIT may and generally does request audited financial statements before issuing the final tax assessments.

The Saudi Arabian Income Tax Regulations require certification of annual tax declarations reporting taxable revenue in excess of SAR1 million. A locally licensed chartered accountant is required to certify the validity of the information contained in the taxpay-er’s return and also certify the following:

  • The information contained in the declaration is taken from the taxpayer’s books and records (maintained in Arabic and in Saudi Arabia) and is in accordance with such records.
  • The return is prepared according to the standards, requirements and provisions of the Saudi Arabian Income Tax Regulations.

The partners of a personal company are subject to tax rather than the personal company itself. However, a personal company is re – quired to file an information declaration within 60 days follow­ing the end of the tax year.

Fines for non-submission of tax declarations by the due date may be imposed at a rate of 1% of the total revenue, with a maximum fine of SAR20,000. A fine is also calculated based on a percent­age of the underpaid tax. Such a fine is payable if it ex ceeds the amount of the fine based on total revenue. The following are the percentages applied to underpaid tax:

  • 5% of the underpaid tax if the delay is up to 30 days from the due date
  • 10% of the underpaid tax if the delay is more than 30 and not more than 90 days from the due date
  • 20% of the underpaid tax if the delay is more than 90 and not more than 365 days from the due date
  • 25% of the underpaid tax if the delay is more than 365 days from the due date

An advance payment on account of tax for the year is payable in three installments. The installments are due by the end of the 6th, 9th and 12th months of the tax year. Each installment of advance payment of tax is calculated in accordance with the following formula:

25% x (A – B)

For the purposes of the above calculation, A equals the taxpayer’s liability as per the tax declaration for the preceding year and B equals tax withheld at source for the taxpayer in the preceding year.

A taxpayer is not required to make advance tax payments in a year if the tax liability for the preceding year was less than SAR2 million.

A delay fine of 1% for each 30 days of delay is computed begin­ning 30 days from the due date of tax until the date the tax is paid.

Dividends. Dividends paid to nonresident shareholders are subject to withholding tax at a rate of 5% (see Withholding tax).

Foreign tax relief. Relief is not provided for foreign taxes paid (un­less covered by a double tax treaty).

Determination of tax payable

Taxable profits. Tax liabilities are assessed by the DZIT on the basis of the audited financial statements, as adjusted for tax pur­poses. In certain cases (for example, foreign airlines and foreign freight and land and marine transport companies operating in Saudi Arabia), tax may be assessed under the “presumptive basis.” Under the presumptive basis, no financial statements are present­ed, and the tax liability is assessed on deemed profit calculated at rates specified in the tax regulations.

Nondeductible expenses. Certain expenses are not deductible in calculating taxable profit, including the following:

  • Expenses not connected with the earning of income subject to tax
  • Payments or benefits to a shareholder, a partner or their rela­tives if they constitute salaries, wages, bonuses or similar items or if they do not represent an arm’s-length payment for property or services
  • Entertainment expenses
  • Expenses of a natural person for personal consumption
  • Income tax paid in Saudi Arabia or another country
  • Financial penalties and fines paid or payable to any party in Saudi Arabia except those paid for breach of contractual terms and obligations
  • Payments of bribes and similar payments, which are considered criminal offenses under the laws of Saudi Arabia, even if paid abroad

Allocation of overhead and indirect expenses. A branch of a non­resident company cannot claim deductions for head office costs that are allocated to the branch on an estimated or allocation basis. However, certain certifiable direct costs incurred abroad are deductible.

Technical costs. For tax purposes, in general, technical costs are expenses that relate to engineering, chemical, geological or in­dustrial work and research even if incurred wholly abroad by the main office or other offices. These costs are generally allowed as deductions if they can be substantiated by certain documents, such as technical services agreements, head office auditors’ cer­tificates and invoices.

Under the tax regulations, payments for technical and consul­tancy services rendered by third parties (including foreign share­holders, regardless of whether they are enjoying a tax holiday) are subject to withholding tax at a rate of 5%, regardless of the place of performance of services (for details regarding withhold­ing taxes, see Section B).

Agency fees. In a meeting on 30 July 2001, the Council of Min­isters cancelled the law governing the relationship between a foreign contractor and a Saudi service agent. A foreign contractor may now operate in Saudi Arabia and contract with government agencies without appointing a Saudi service agent. In some cases, the DZIT has contested deductions for agency fees paid to Saudi agents with respect to contracts entered into with government bodies after 30 July 2001 on the basis that they are no longer a necessary cost of doing business in Saudi Arabia.

Contributions to foreign social insurance, pension and savings plans. Any charge with respect to payments for foreign social in surance, employee pension plans and savings plans, and contributions to Saudi social insurance with respect to an employee’s share are not deductible from Saudi-source revenue.

Provisions and reserves. Provisions for doubtful debts, termina­tion benefits and other similar items are not deductible. Specific write-offs and actual employment termination benefit payments that comply with Saudi Arabian labor laws are deductible. Provisions for doubtful debts are allowed as deductible expenses for banks if they are confirmed by the Saudi Arabian Monetary Agency.

Interest deductibility. Deductions may be claimed for loan fees (interest expenses and commissions) incurred with respect to the earning of income subject to tax. However, the maximum deduc­tion for loan fees is restricted to the lower of the following:

  • Loan fees paid during the year
  • Total of loan income plus 50% of tax-adjusted profits (exclud­ing loan fees and loan income)

Loan fees exceeding this restriction are disallowed as a deduction and may not be carried forward to future years. Banks are exclud­ed from the above limitation.

Saudi Arabian tax law does not contain any specific provisions on thin capitalization other than the limit on the interest deduction described above.

Depreciation. Depreciation is calculated for each group of fixed assets by applying the prescribed depreciation rate to the remain­ing value of each group at the fiscal year-end.

The remaining value for each group at the fiscal year-end is calcu­lated as follows:

The total remaining value of the group at the

end of the preceding fiscal year                                              X

– The depreciation charge for the preceding year                     (X)

+ 50% of the cost of assets added during the

current year and the preceding year                                        X

– 50% of the proceeds from assets disposed of

during the current year and the preceding year,

provided that the balance is not negative                             (X)

= Remaining value for the group                                                X

The tax law provides the following depreciation rates.

Asset Rate (%)
Land (non-depreciable) 0
Fixed buildings 5
Industrial and agricultural movable buildings 10
Factories, plant, machinery, computer hardware
and application programs (computer software)
and equipment, including cars and cargo vehicles
25
Expenses for geological surveying, drilling,
exploration expenses and other preliminary
work to extract natural resources and develop
their fields
20
All other tangible and intangible depreciable
assets that are not included in the above
groups, such as furniture, aircraft, ships,
trains and goodwill
10

Assets acquired under build-operate-transfer (BOT) or build-operate-own-transfer (BOOT) contracts must be depreciated over the period of contract or the remaining period of contract.

Cost of repairs or improvements of fixed assets are deductible, but the deductible expense for each year may not exceed 4% of the re maining value of the related asset group at year-end. Excess amounts must be added to the remaining value of the asset group and depreciated.

Relief for losses. Losses may be carried forward indefinitely. How­ever, the maximum loss that can be offset against a year’s profit is 25% of the tax-adjusted profits for that year. Saudi tax regula­tions do not provide for the carryback of losses.

If a change of 50% or more occurs in the underlying ownership or control of a capital company, no deduction is allowed for the non-Saudi share of the losses incurred before the change in the tax years following the change.

Zakat

Zakat is a religious levy imposed on the shareholders in Saudi Arabian companies that are Saudi or GCC nationals. In practice, zakat is calculated and paid by a Saudi Arabian resident capital company on behalf of its individual or corporate shareholders. Zakat is levied on the zakat base of a resident capital company at a rate of 2.5%. The zakat base is broadly calculated as capital employed (for example, share capital and retained earnings) that is not invested in fixed assets, long-term investments and de­ferred costs, as adjusted by net results of operations for the year that is attributable to Saudi or GCC shareholders. Complex rules apply to the calculation of zakat liabilities, and it is therefore suggested that zakat payers seek specific advice suited to their circumstances.

Miscellaneous matters

Foreign-exchange controls. Saudi Arabia does not impose foreign-exchange controls.

Supply and erection contracts. Profits from “supply only” opera­tions to Saudi Arabia are exempt from income tax (whether the contract is made inside or outside Saudi Arabia) because the sup­plier trades “with” but not “in” Saudi Arabia. The net profits of operations that include supply, erection or maintenance are subject to tax, and the contractors are required to register with the DZIT and submit a tax declaration in accordance with the tax regulations.

The following information must generally be submitted in support of the cost of imported materials and equipment:

  • Invoices from the foreign supplier
  • Customs clearance document
  • If the supplying entity is the head office of the Saudi Arabian branch, a certificate from the external auditor of the head office confirming that the cost claimed is equal to the international market value of the equipment supplied (usually the contracted selling price)

In general, no profit results in the Saudi Arabian books on mate­rials and equipment supplied, because the revenue from the sale of equipment equals the cost based on the sales value declared for customs.

Subcontractors. Payments to subcontractors, reported by a tax­payer in its tax return, are subject to close scrutiny by the DZIT. The taxpayer is required to withhold tax due on payments to non­resident subcontractors and to deposit it with the DZIT, unless the taxpayer can provide a tax file number or tax clearance cer­tificate as evidence that such subcontractor is settling its tax lia­bility.

Tax is not required to be withheld from payments to subcontrac­tors resident in Saudi Arabia. However, government procurement regulations provide for the retention of 10% of the contract value until the completion of the statutory formalities including the sub­mission of the certificate from the DZIT.

Imports from head office and affiliates. A Saudi mixed company is expected to deal on an arm’s-length basis with its foreign share­holders or any company affiliated with its foreign shareholders. The company may be required to submit to the DZIT a certificate from the seller’s auditors confirming that the materials and goods supplied to the Saudi Arabian company were sold at the inter­national market price prevailing at the date of dispatch. This re­quirement also applies to foreign branches importing materials and goods from the head office for the fulfillment of their Saudi contracts.

Tax treaties

Saudi Arabia has entered into double tax treaties with Austria, Azerbaijan, Bangladesh, Belarus, China, Czech Republic, France, Greece, Hungary, India, Ireland, Italy, Japan, Korea (South), Luxembourg, Malaysia, Malta, the Netherlands, Pakistan, Poland, Romania, the Russian Federation, Singapore, South Africa, Spain, Syria, Tunisia, Turkey, Ukraine, the United Kingdom, Uzbekistan and Vietnam. These tax treaties are in effect.

Saudi Arabia is negotiating tax treaties with Albania, Algeria, Australia, Barbados, Bosnia and Herzegovina, Ecuador, Egypt, Ethiopia, the Hong Kong Special Administrative Region (SAR), Jersey, Jordan, Kazakhstan, Kyrgyzstan, Macedonia, Mexico, Morocco, Portugal, Sri Lanka, Sudan, Tajikistan, Turkmenistan and Venezuela.

Saudi Arabia has also entered into limited tax treaties with the United Kingdom, the United States and certain other countries for the reciprocal exemption from tax on income derived from the international operation of aircraft and ships.

The Ministry of Finance has announced its prescribed method for the availing of tax treaty benefits such as reduced withholding tax rates or exemptions with respect to payments to residents in a country with which Saudi Arabia has entered into a double tax treaty. Circular 3328/19 requires that tax is withheld on all pay­ments to nonresidents at the rates required under domestic tax law (without recourse to the double tax treaty). To benefit from a reduced withholding tax rate or exemption, the Saudi Arabian resident taxpayer (that is, the withholder) must submit a request for refund of “overpaid” tax to the DZIT together with supporting materials (for example, the tax residency certificate of the non­resident).

In August 2013, the DZIT issued Circular 5068/16/1434, which allows Saudi resident entities to claim exemption or withhold tax based on the beneficial rates specified in the tax treaties by sub­mitting prescribed documents. The circular has provided signifi­cant relief to the Saudi entities because it allows them to claim treaty benefits by submitting prescribed documents as opposed to settling withholding tax and requesting a refund from the DZIT as per the earlier Circular 3328/19.

The table below shows the maximum withholding rates for divi­dends, interest and royalties provided under Saudi Arabia’s double tax treaties that were available at the date of writing. To benefit from the advantageous rates under the double tax treaties, addi­tional conditions may be required (for example, the recipient is required to be the beneficial owner of the related gain). Readers should obtain detailed information regarding the treaties before engaging in transactions.

  Dividends

%

Interest

%

Royalties

%

Austria 5 5 (a) 10
Azerbaijan 7 7 (a) 10
Bangladesh 10 7.5 10
Belarus 5 5 10
China 5 5 10
Czech Republic 5 0 10

 

   
France 0/5 (b) 0/5 (b) 0/15 (b)
Greece 5 5 10
Hungary 5 0 5/8 (c)
India 5 10 10
Ireland 5 0 5/8 (c)
Italy 5 5 10
Japan 5 10 5/10 (c)
Korea (South) 5 5 5/10 (c)
Luxembourg 5 0 5/7 (c)
Malaysia 5 5 8
Malta 5 0 5/7 (c)
Netherlands 5 5 7
Pakistan 5 10 10
Poland 5 5 10
Romania 5 5 10
Russian Federation 5 5 10
Singapore 5 5 8
South Africa 5 5 10
Spain 0/5 (d) 5 8
Syria 0 7.5 15
Tunisia 5 2.5/5 (h) 5
Turkey 5 10 10
Ukraine 5 10 10
United Kingdom 5/15 (e) 0 5/8 (c)
Uzbekistan 7 7 10
Vietnam 5/12 (f) 10 7.5/10 (g)
Non-treaty countries 5 5 15

a) A 0% rate generally applies to payments to government bodies.

b) These rates do not apply if the income is effectively attached to activities carried on by the recipient in Saudi Arabia.

c) The 5% rate applies to royalties paid for the use of industrial, commercial or scientific equipment. The higher rate applies to other royalties.

d) The 0% rate applies if the Spanish company receiving the dividends owns at least 25% of the share interests in the Saudi Arabian company.

e) The 5% rate applies to dividends beneficially owned by the central bank or by an entity that is wholly owned by the government of a contracting state.

f) The 5% rate applies if the beneficial owner is a company (other than a part­nership) that holds directly at least 50% of the capital of the company paying the dividends or has invested USD20 million or more or any equivalent cur­rency in the capital of the company paying the dividends.

g) The 7.5% rate applies to royalties paid for the rendering of services or assis­tance of a technical or managerial nature. The higher rate applies to other royalties.

h) The 2.5% rate applies to interest paid to banks.