Tax in Saudi Arabia

Saudis and nationals of other Gulf Cooperation Council (GCC) states who are resident in Saudi Arabia are not subject to income tax in Saudi Arabia. The GCC states are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. Non-Saudi and non-resident GCC nationals and entities with a permanent establishment in Saudi Arabia are subject to income tax on their business income in Saudi Arabia. Payments to non-residents are subject to withholding tax.

An individual is considered to be resident in Saudi Arabia for a tax year if the person meets any of the following conditions:

• the person has a permanent place of abode in Saudi Arabia and resides in Saudi Arabia for a total period of at least 30 days during the tax year
• the person resides in Saudi Arabia for at least 183 days in the tax year

Employment income - Employment income and allowances, including education allowances, received by expatriates are not subject to tax in Saudi Arabia.

Self-employment and business income - Non-Saudi and non-GCC individuals are generally not allowed to carry on trading activities in Saudi Arabia. However, non-Saudi and non-GCC professionals and consultants may carry on activities in Saudi Arabia if appropriate licenses are obtained from the Saudi Arabian General Investment Authority.

Income tax is levied on profits arising from a source in Saudi Arabia derived by self-employed Non-Saudi and non-GCC professionals and consultants from their activities conducted in Saudi Arabia.

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 carry back of losses.

Investment income - In principle, foreign individuals are taxed on income derived from investments in Saudi projects at a rate of 20%. However, such investments do not include the opening of all types of bank accounts (current, term and savings) or trading in the shares of companies registered in the Saudi Stock Exchange by resident persons that are not subject to tax, if certain conditions are met. It is suggested that foreign individuals seek professional advice on the taxation of their investment income.

Taxation of employer-provided stock options - In general, employer-provided stock options are not subject to tax in the hands of the recipient employee.

In general, capital gains are taxed as ordinary income, together with other income earned for the same period, at a rate of 20% if the individual is a person subject to tax in Saudi Arabia and if the gain is realised in connection with the person’s business activities. However, capital gains arising on the sale of shares traded on the stock exchange are exempt from tax if the following conditions are met:

• for the disposal of shares traded on the Saudi Stock Exchange (Tadawul), the disposal must be done in compliance with the Capital Market Law in Saudi Arabia
• for the disposal of shares traded on a foreign stock exchange, the securities must also be traded on the Saudi Stock Exchange (Tadawul) for the tax exemption to apply
• in all cases, the shares must have been acquired after 30 July 2004 (the date of enforcement of the Income Tax Law)
• based on a recent Circular issued by the General Authority of Zakat and Tax (GAZT), capital gains realized from the following sales of shares in a listed entity are also eligible for tax exemption if the below conditions are met:
• sale of founders’ shares
• sale of bonus shares (or stock dividends)
• sale of shares through a privately negotiated transaction (pursuant to the Saudi Capital Market Authority Law and implementing regulations)

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

Net worth tax in Saudi Arabia, or Zakat, is a religious levy payable by Saudi or GCC nationals on the net worth or the Zakat base as adjusted for Zakat purposes. Zakat is imposed on a Saudi or a GCC national who is resident in Saudi Arabia and is engaged in business activities intended for profit or gain, such as investment; services; or commercial, industrial or financial activities.

Zakat is assessed in accordance with the following rules:

• if the Zakat base is higher than net adjusted profits attributable to Saudi and GCC national shareholders, Zakat is calculated at 2.578% of the net assessable funds or the Zakat base (excluding net adjusted profits) plus 2.5% of net adjusted profits
• if the Zakat base is lower than net adjusted profits, Zakat is calculated at 2.5% of net adjusted profits

Broadly, net assessable funds comprise net assets less amounts invested in fixed assets, long-term investments and deferred costs, plus or minus the adjusted income 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.

Employers must pay Saudi social insurance tax (GOSI) on behalf of their employees. The contributions are levied on basic salary, including housing allowances. Saudi nationals are subject to pension contributions and unemployment insurance (SANID) at 18% and 2%, respectively (shared equally between employer and employee). Other GCC nationals’ contributions are based on their respective country laws. However, pension contributions are not required with respect to other foreign employees. Employers must pay contributions for occupational hazards insurance at a rate of 2% for both Saudi and non-Saudi employees.

Different rates apply to employees that are nationals of other GCC countries. Broadly, the rates that apply to Saudi employers with respect to nationals of other GCC countries are generally equal to the rates that would otherwise apply if the relevant individuals were employed in their country of origin, plus the mandatory 2% workplace insurance levy.

A resident self-employed foreign professional or a resident foreign individual carrying on business activity in Saudi Arabia must file a tax return and must pay the tax due within 120 days after the end of the tax year.

An advance payment on account of tax for the year is payable in three instalments by the end of the sixth, ninth and twelfth months of the tax year.

A taxpayer is not required to make advance payments if the amount of each payment would be less than SAR 500,000.

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

Fines apply for non-submission of tax declarations by the deadline.

The withholder of tax is required to register with the General Authority of Zakat and Tax (GAZT) before the settlement of the first tax payment. The withholder of tax must settle the tax withheld with the GAZT by the 10th day 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 from the due date of tax until the tax is paid.

Saudi Arabia has tax treaties in force with 51 countries.

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