Tax Considerations for Individuals and Investors in Saudi Arabia

Saudi Arabia is one of the major economies in the Middle East and has groomed itself to be a hub for business through a rapidly diversifying economy due to its Vision 2030 initiative. For individuals and investors who seek to invest and benefit from some of the opportunities the Kingdom offers, understanding the complex tax framework is essential. Unlike many other countries around the world, Saudi Arabia’s tax system is rather simple and friendly to both individuals and businesses. This post will therefore discuss the most relevant tax implications to individuals and investors regarding Saudi Arabia.

Tax System Overview

The Zakat, Income Tax, and Value Added Tax (VAT) laws mainly govern the administration of taxation in Saudi Arabia. Unlike most countries, income earned by individuals is not taxed in the Kingdom. However, owing to certain tax regimes unrelated to income taxes that expatriates and investors should familiarize themselves with, the lack of income tax readily attracts foreign expatriates and investors to Saudi Arabia. Knowledge of local taxation policies facilitates compliance and avoids facing problems.

1. Zakat for Saudi Nationals and GCC Citizens

Zakat is regarded as a religious wealth tax that is obligatory for all Saudi nationals and Gulf Cooperation Council (GCC) citizens. It is imposed at the rate of 2.5% on individual annual net wealth. Zakat is on several forms of assets: cash savings, investments, and property holdings. It is not levied, however, on personal items, like a car or a home, used for private purposes.

The Zakat is paid on an annual basis after the lunar calendar; thus, it is equally pertinent for Saudi nationals and GCC citizens to keep records of their assets and liabilities for proper Zakat calculation. Enforcement of Zakat compliance becomes more serious, with the imposition of fines and punishments.

2. Income Tax for Foreign Nationals

While Zakat is imposed on Saudi nationals and GCC citizens, income tax is generally applied to foreign nationals on income earned within Saudi Arabia. The tax is generally withheld at source and is paid by both individuals working for local employers and foreign investors operating a business within the Kingdom.

With favorable taxation perks for foreign nationals, the rates of individual income tax are very low in Saudi Arabia. In any case, there is currently no personal income tax on income made by salaries and wages in Saudi Arabia. This makes the country very desirable to expatriate communities, especially those high-net-worth individuals, professionals, and others wishing to earn incomes that are tax-free.

3. Corporate Income Tax

While individuals may not be personally taxed, corporations within Saudi Arabia are subject to corporate income tax. The general corporate income tax rate, standing at 20% applies mainly to foreign investors or foreign-owned enterprises. Saudi-owned companies, as stated previously, are subject to zakat.

Saudi Arabia provides a range of incentives to foreign investors in sectors that are relevant to the aims of Vision 2030, like technology, healthcare, renewable energy, and entertainment. These incentives often include tax breaks and tax exemptions.

4. Withholding Tax on Payments to Non-Residents

In Saudi Arabia, withholding tax will apply to certain payments to non-residents. The applicable rates differ according to the type of payment, and they can range from five percent to twenty percent. Typical transactions liable to withholding tax are:

• Dividends: 5%
• Interest: 5%
• Royalties: 15%
• Technical Services Fees: 20%

5. Value Added Tax (VAT)

Introducing VAT at a rate of 5% on practically all goods and services was one of the crucial changes that Saudi Arabia made to enhance state budgetary resource stocking at a time when oil revenues were tapering. VAT applies to the sale of nearly every consumer good and service, with some exceptions for fundamental provisions, including food staples and health services.

VAT compliance is of utmost importance for investors, in particular, investors in sectors dealing with goods and services. Businesses must register for VAT once taxable sales exceed a set threshold, issue VAT invoices, file regular returns with the Saudi tax authorities, and pay the relevant tax. Investors would need to factor VAT into their pricing models and cash flow forecasts.

6. Real Estate Tax Considerations

Real estate in Saudi Arabia can raise tax considerations for the investor. One of the major introductions in 2020 is the Real Estate Transaction Tax (RETT), which applies to the sale and transfer of property. The RETT is charged at 5% of the sale price or of the property market value, whichever is higher. The tax is applicable to the transfer of both residential and commercial properties.

7. Double Taxation Treaties

Over the years, Saudi Arabia has entered into a good number of double taxation treaties (DTTs) with many countries so as to eliminate or reduce the double taxation risk on cross-border income. Such treaties usually reduce withholding tax on dividends, interest, and royalties, thus making Saudi Arabia an attractive destination for foreign investors.

8. Exemptions and Incentives for Investors

In an attempt to diversify its economy, the Saudi Government offers a variety of tax exemptions and incentives aimed at attracting foreign investment. The incentives and exemptions include:

• Investment Incentives: Businesses in the preferred sectors may be granted a tax exemption or tax reduction for a specific period of time. For instance, companies engaged in tourism, entertainment, and renewable energy may qualify for tax relief.
• Free Zones: Some industrial and trading zones in Saudi Arabia provide reduced tax rates and customs exemptions to foreign entities.

9. Tax Residency and Taxation of Non-Residents

Crucial considerations for individuals and investors are tax residency. Individuals and entities may be regarded as tax residents of Saudi Arabia for the whole tax year if they remain in the Kingdom for a period beyond 183 days of that tax year.

Saudi Arabia is working toward facilitating the attraction of foreign talent to join its ranks under the Saudi Green Card program for residency and other benefits. Foreign investors pay tax only to the extent that they generate income within the Kingdom and, where available, may claim relief under the relevant double taxation treaties.

Conclusion

Saudi Arabia offers an easier tax system, which is highly appealing to individuals as well as investors. The absence of individual income tax, coupled with lower business-related tax rates and other incentives for investments, has made the Kingdom quite a favorable platform for foreigners and businesses. Nevertheless, keeping abreast of the constantly changing tax rules of the country, such as VAT, withholding tax rates, real estate transaction tax, etc., remains imperative for any business wishing to stay compliant and rationalize its tax planning.

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