Navigating Business Taxes in Saudi Arabia | A Guide for Local and Foreign Companies

In Saudi Arabia, an area of concern for local entrepreneurs and foreign investors alike is business taxes. The tax regulations are changing, and there is a lot of digitization going on under ZATCA. Businesses must embrace change and stay compliant; otherwise, they risk being penalized while not benefiting from operational optimization.

1. What Are Business Taxes in Saudi Arabia?

Business tax is one of the elements of a modern regulatory framework, ensuring fiscal responsibility while attracting investment. The two key authorities involved in taxation are:

• ZATCA – Zakat, Tax, and Customs Authority
• Ministry of Finance (MoF) – Policy and public finance strategy

While ensuring national development, taxes also constitute an environment for compliance purposes. For foreign businesses, awareness of tax obligations is critical not just for avoiding penalties but also for cost planning and risk management.

2. Types of Taxes Applicable to Businesses

Corporate Income Tax

• Who Pays: Non-Saudi/GCC ownership interests
• Rate: 20% on taxable income
• Calculation: Net profits after allowable deductions, including salaries, operational expenses, and depreciation

Zakat

• Who Pays: 100% Saudi or GCC-owned entities
• Rate: 2.5% of the Zakat base
• Key Difference: Zakat is a religious wealth obligation, not a traditional income tax

Value Added Tax (VAT)

• Standard Rate: 15% (as of 2020)
• Applies To: Most goods and services
• Zero-rated/Exemptions: Healthcare, education, exports
• Threshold: SAR 375,000 for mandatory registration
• 2025 Note:  Watch out for possible new exemptions or streamlined refund procedures      

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Withholding Tax (WHT)

• When It Applies: When a non-resident is paid for services, interest, or royalties
• Rates:
  • 5%: Dividends
  • 15%: Royalties
  • 15%: Management fees
  • 5–20%: Other services depending on treaty status

Excise Tax

• This applies to: Tobacco, 100% energy drinks, 50% soft drinks
• Encourage: Dissuading harmful consumption and increasing non-oil revenues
• Compliance requires registration with ZATCA and monthly reporting

Customs Duties / Import Taxes

On average, these vary between 5 and 25% depending on the goods, with some being exempted by FTAs.

3. Tax Registration and Compliance Process

• Registration:  Every business must now register with ZATCA in respect of relevant taxes (VAT, Zakat, Income Tax) via its online portal.
• Filing Frequencies:
  • VAT: Monthly or quarterly, depending on revenue
  • Corporate Tax/Zakat: Annually
  • WHT: Monthly
• E-Invoicing: Mandatory for B2B transactions; phase 2 (Integration Phase) underway
• Record-Keeping: Required for 6 years. Includes invoices, contracts, and financial statements

4. Recent Changes

• There is no VAT Rate Increase announced for 2025, although there may be broader zero-rating categories
• SEZs (Special Economic Zones): Increasing use of SEZs like King Abdullah Economic City with special tax treatments
• E-invoicing Enforcement: 2025 has seen ramped-up fines for non-compliance

5. Tax Incentives and Exemptions

Saudi Arabia gives very reasonable incentives to the global investor:

• Who Qualifies:
  • Foreign investors in priority sectors
  • Companies operating in SEZs
  • Businesses established in underdeveloped areas
• Reliefs Offered:
  • Corporate income tax holidays
  • VAT exemptions or reimbursement of capital goods
  • WHT exemptions for payments between members of a group
  • 0% customs duties in Free Zones

6. Penalties, Risks, and Common Pitfalls

Non-compliance can be costly:

• Late Filing or Payment: Penalties up to 25% of the tax due
• E-invoicing Violations: Fines assessed per transaction
• Common Mistakes:
  • Incorrect service classification for WHT
  • Inaccurate input/output VAT reconciliations
  • Ignoring Zakat requirements with respect to GCC ownership
  • Failure to update ZATCA with changes to the company

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7. How Business Taxes Affect Decision-Making & Setup?

Tax structure can influence:

• Operating Costs: Taxes affect cash flows and pricing
• Entity Structure: A full ownership as opposed to a partnership with Saudi/GCC nationals, changes the exposure to tax Location
• Location Matters: Businesses in SEZs can access tax reliefs
• Example: A SEZ-based tech company pays 0% corporate tax and customs benefits, maximizing ROI.

8. How Arnifi Can Help?

Arnifi offers complete tax solutions in Saudi Arabia:

• Tax registration and compliance set-up
• VAT and WHT advisory
• E-Invoicing implementation
• Structuring for SEZ entry and incentives

Checklist for Businesses Entering KSA:

• Register with ZATCA for all applicable taxes
• Determine optimal entity structure for efficiency from a tax perspective
• Understand filing deadlines and requirements for e-invoicing.
• Look into treaties and incentives.
• Conduct periodic audits and reviews for tax compliance.

9. FAQs

Q: What is the corporate tax rate for a company owned by non-Saudis?

A: 20 per cent on net profits.

Q: How is zakat calculated, and does it apply to all companies?

A: Zakat is 2.5 per cent of the zakat base and applies only to Saudi and GCC-owned entities.

Q: Can foreign companies recover VAT?

A: Yes, under certain conditions and with proper documentation.

Q: What is the deadline for withholding tax filing?

A: Within the first 10 days of the coming month.

Q: Are there reduced tax rates under treaties or in special zones?

A: Yes, many DTAs have reduced rates for WHT, SEZs often provide tax holidays.

10. Conclusion

The business taxes in Saudi Arabia are changing towards a more diversified and transparent economy. Domestic and foreign corporations are subject to corporate income tax, value-added tax (VAT), zakat, and withholding taxes. Appropriate structuring of a business entity and taking advantage of tax incentives may translate into significant tax compliance benefits for an entity.

Need any help with tax issues within Saudi Arabia? Reach out to Arnifi today for developing strategic advice and tax compliance services.