Tax Structure in the Kingdom of Saudi Arabia

A: At a Glance

(a)   For further details, see Section B.

(b)   For further details and complete listing of withholding taxes, see

        Section B.  The withholding tax rates in Saudi Arabia range from 5% to 20%.

      (c)    See Section C.

B. Taxes on Corporate Income and Gains

Income Tax

Income tax is assessed on profits of the following:

• Non-Saudi shareholders of a resident capital company;
• A resident non-Saudi natural person who does business in Saudi Arabia;
• Anon-resident who does business in Saudi Arabia through a permanent establishment;
• A non-resident who derives income subject to tax from sources within Saudi Arabia;
• A person engaged in the field of natural gas investment; and
• A person engaged in the production of oil and hydrocarbonic materials.

          Partners in personal companies (that is, general partnerships, joint adventures 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 the 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            The tax holidays that were available under the previous Foreign Capital Investment Regulations have been withdrawn.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 non-residents 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 tax-payer under the regulations and whether such payments are treated as a tax-deductible expense in the Saudi resident entity’s tax declaration.  Non-resident GCC nationals and entities are also subject to withholding tax rather than the zakat withholding tax, which applied under the prior rules.

The following are the withholding tax rates:

            The party withholding the tax must register with the Department of Zakat and Income Tax (DZIT) before the settlement of first tax payment.  The party withholding the tax must settle he tax withheld with the DZIT within the first 10days of the month following the month in which the taxable payment is made and issue a certificate to the non-resident 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 on sales by non-Saudi shareholders of shares in 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).  Gain on the disposal of property other than assets used in the business activity are also exempt from tax.

Administration

          All persons subject to tax (excluding non-residents 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 fine ranging from SR 2,000 to SR 10,000.

             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 annual audited financial statements within 120 days following the end of the tax year and pay the income tax due with the tax declaration.

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

            Fines for non-submission of tax declarations by the due date may be imposed at a rate 1% of the total revenue, with a maximum fine of SR 20,000.  However, a fine may also be calculated based on percentages of the underpaid tax.  Such a fine is payable if it exceeds 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 days and not more than 365 days from the due date; and

·        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 sixth, ninth and twelfth 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 payments in a year if the tax liability for the preceding year was less than SR 2,000,000. 

            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 non-residents are subject to withholding tax at a rate of 5% (see Withholding Tax above).

Foreign Tax Relief 

            Saudi Arabia does not provide relief for foreign taxes paid.

 C: 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

            The following expenses are not deductible:

• 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; and
• 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

            The allocation of costs by a head office to a branch is not allowed.  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 deductible if they can be substantiated by certain documents, such as technical services agreements, local employers’ certificate, head office, auditors’ certificates and invoices.

            Under the new 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 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.  Accordingly, the DZIT does not allow a deduction for agency fees paid to Saudi agents with respect to contracts entered into with government bodies after 30 July 2001. 

Contributions to Foreign Social Insurance, Pension and Savings Plans

            Any charge with respect to payments for foreign social insurance, 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 & Reserves

            Provisions for doubtful debts, termination benefits and other similar items are not deductible. Special write-offs and actual employment termination benefit payments that comply with Saudi Arabian labour laws are deductible.

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 tax law provided the following depreciation rates:

            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 contact.

            Cost of repairs or improvements of fixed assets are deductible, but the deductible expanse for each year may net exceed 4% of the remaining 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 and 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 doe not provide for the carryback of losses.

            If 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.

D: Zakat

            Zakat is a religious levy on Saudi or GCC nationals and companies that are wholly owned by Saudi or GCC nationals. The rate of zakat is 2.5% of capital employed that is not invested in fixed assets, long term investments and deferred costs, as adjusted by net results of operations for the year. Complex rules apply to the calculation of zakat liabilities, and it is therefore suggested that zakat payers seek specific advice suited to their circumstances.

E: Miscellaneous Matters

            Foreign Exchange Control 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 tax regulations.

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

• Invoice from the foreign supplier;
• Customs clearance documents;
• 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 contacted 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 of subcontractors, reported by a tax payer in its tax return, are subjected to close scrutiny by the DZIT. The taxpayer is expected to withhold tax  due on payments to non-resident subcontractors and to deposit it with the DZIT, unless the taxpayer is required can provide a tax file number of 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, a tax payer is required to retain 10% of the subcontract value until the subcontractor furnishes evidence that he has fulfilled his tax and zakat obligations to DZIT with respect to the contract. 

Imports from Head Office and Affiliations

            A Saudi mixed company is expected to deal on an arm’s length with its foreign share holders or any affiliated company of its foreign shareholders. The company is required to submit to 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 is also applies to foreign branches importing materials and goods from the head office for the fulfillment of their Saudi contracts.

F: Tax Treaties

            Saudi Arabia has entered into a double tax treaty with France, which covers corporate tax, professional tax, inheritance tax, capital tax and zakat. The treaty was renewed for an additional five year from 31 December 2003. Saudi Arabia is negotiating double tax treaties with Germany, Netherlands and the United Kingdom. India and Saudi Arabia have signed an Agreement on Avoidance of Double Taxation and Investment Promotion and an agreement on Bilateral Trade Promotion and Protection Agreement (BIPA) during the visit of His Majesty King Abdullah Bin Abdul Aziz Al-Saud’s visit to India in January 2006.

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

Courtesy: Ernst & Young, Jeddah, Kingdom of Saudi Arabia

For further details, you may contact: Ernst & Young, Jeddah, Kingdom of Saudi Arabia