Is Saudi Arabia tax-free for foreigners?

Saudi Arabia is generally considered a no-tax zone for businesses, but tax-free is referred to as no personal income tax in Saudi Arabia on wages and salaries. This makes it a major attraction for expats to move to the Kingdom; however, it can also confuse them about other taxes they are actually obliged to pay. The legal taxation system of Saudi Arabia includes VAT, corporate tax, zakat, withholding tax, etc., which highly impacts the cost of living and establishing a business in KSA. This article explores what it means by “tax-free” means in KSA, other mandatory taxes, and compliance obligations for foreigners.

The Core Principle: No Personal Income Tax

The most pivotal and appealing trait of the Saudi Taxation System is the non-existence of personal income tax on the wages that they earn from their employment in KSA.  This means that tax authorities don’t deduct any direct tax on gross salaries, wages, allowances, or bonuses, and this law applies to both residents and non-residents. Additionally, KSA also doesn’t impose any tax on an individual’s investment income, like gains, wealth, inheritance, or gifts. This complete mechanism makes KSA a “tax-free” zone, making it a major attraction for highly skilled individuals from KSA and around the globe.

Mandatory Legal Contributions

The tax-free environment is only bound to wages and salaries; however, it disappears when any expat takes part in business activities or earns any form of non-employment income in Saudi Arabia. The list of taxes that businesses are required to contribute to is:

1.     Corporate tax and Zakat

Non-Saudi or Non-GCC businesses or shareholder in a company that is engaging in business activities in KSA are subject to a standard rate of corporate income tax, which is 20% on their part of the company’s annual profits.

Considerations for Expats:

• A foreigner who is self-employed or owns a business in KSA is mainly considered as a permanent establishment (PE) and is subject to 20% CIT on their part of profits.
• If a company is operating under both Saudi/GCC and foreign ownership, then it will be subject to zakat (2.5%) for the Saudi part and corporate income tax for foreigners.

2.     Value-Added Tax (VAT) and indirect taxes

A pivotal part of the Saudi Taxation system is Value Added Tax (VAT). It was introduced in 2018 with a small rate of 5% but later was increased to 15% in 2020. It is imposed on most goods and services and on imports (except for certain items that are exempt or rated zero). It impacts the consumers directly and businesses through compliance and cash flow.

3.     Withholding taxes

International businesses and companies that receive any Saudi source of payment are subject to Withholding tax (WHT) at source. The general withholding tax rates are:

• Dividends: 5%
• Interest: 5%.
• Royalties: commonly 15%.
• Management, technical, and service fees: 15–20% (As per service type)

These rates can change under the double tax treaties that Saudi Arabia has signed with certain countries. If any expats from that country are doing business in KSA, then they can get tax relief under DTAs. WHT is one of the widely implemented taxes by the Saudi Authorities for non-residents without any local taxable presence.

4.     Social Security Contributions (GOSI)

Saudi and GCC national and GCC nationals are only required to take part in GOSI contributions, where employees and employers both contribute. However, the non-Saudis don’t contribute to GOSI, but they have other obligations. These payroll obligations increase employers’ expenses and overall impact the net package calculations in expatriate compensation discussions.

5.     Excise Tax

There are some specific goods where businesses must pay excise taxes on items that are listed as hazardous to health and customs duties on imported items. This also affects the cost of living and operating the business. Excise tax doesn’t have any link to value-added tax (VAT)

Incentives and Reliefs on Tax for Foreigners

There are many areas where expatriates can get the benefits of incentives, reduction in taxes, and even a complete waiver of certain amounts; they must be aware of this obligation in their home country, such as:

• Any USA-based citizen or Green card holder is required to report and file taxes on their international income despite of where they are operating. They can use mechanisms like Foreign Earned Income Exclusion (FEIE) to lessen or eliminate U.S. tax liability on their Saudi salary.
• The Saudi Double taxation treaties with multiple countries allow businesses to avoid the same income from being taxed in both their parent country and Saudi Arabia. Tough KSA doesn’t have any DTT with the USA.
• Through the Regional Headquarters (RHQ) programs, businesses can build their local headquarters in KSA and get a tax relief of up to 30 years, including the benefits of 0% corporate income tax and 0% withholding tax on the applicable RHQ activities.
• There are some special Economic zones (SEZs) which offer huge incentives like lower amount of corporate income tax rates (usually 5%) and some other customs and VAT benefits.

These benefits are provided by the Saudi Government to attract foreign investments, and businesses should be fully familiar with all the laws to understand whether they fall into this category or not. They must also have all the original and complete documentation from their home city to utilize these benefits.

Compliance Obligations Expats and Foreign Companies Mustn’t Ignore

Operating in the highly regulated environment of KSA demands that businesses always stay aligned and proactive with the local obligations. The government has also offered guidelines and training to foster compliance; however, non-compliance leads to severe legal consequences, with even the suspension of licenses for severe non-compliance cases. Therefore, businesses must emphasize the following compliance obligations.

1. VAT Registration and Filing: Businesses applicable for VAT and fall under the VAT threshold must timely register, charge VAT, and file returns to keep complete records and invoices. Late registration or failure to register can expose penalties
2. Withholding Tax Procedures: Saudi payers are obliged to calculate their WHT accurately and remit it to the ZATCA. It is important that foreign investors apply for the benefit of DTT and relief if they are from the listed countries.
3. Corporate Tax consulting and Zakat Filings: Companies that are exposed to corporate tax or zakat or both must pay their returns before the deadlines. As late filing triggers audits and penalties
4. Payroll and GOSI Compliance: Employers are contributing and withholding taxes where they are eligible to pay these taxes.
5. Record Keeping: Saudi Authorities require thorough documentation and enforce the maintenance of accurate records of books, agreements, and bank reconciliations. Expats must prioritize record-keeping to handle any tax disputes or queries.

Planning Tips & Best Practices for Foreigners

• Don’t consider “tax-free” as “no tax requirements”. Make sure that your income you are getting within KSA is solely employment income; if not, then understand which taxes you are eligible to pay legally.
• If your local country is categorized in the Saudi DTA, then you can utilize it to lower your taxes or even eliminate full payments of WHT on certain areas.
• Categorize and manage ownership structures (including Saudi and Non-Saudi Part) and identify whether zakat or corporate tax applies. It is necessary to guard from any unexpected legal consequences.
• Hire a regional External service provider to understand the local legal structures fully. These advisors don’t just have familiarity with legal structures, but they also streamline legal procedures for expats.

How Accounting Firms Help Foreigners in Saudi Tax Compliance

1.     Clarifying Rules

They explain what no personal income tax on wages means and the applicability of other taxes like corporate tax, VAT, zakat, and WHT. They help expats and international businesses in avoiding confusion between the multiple legal taxation structures.

2.     Corporate Tax & Zakat

They compute and apply 20% of corporate income tax for foreigners and 2.5% of zakat for the Saudi part. Not just that, they also file returns on time with ZATCA and professionally take care of mixed ownership plans.

3.     VAT Support

The VAT registration process can be demanding for newbies; skilled experts know the right procedure and computation methods. They apply 15% VAT and file returns and make certain that all the e-invoicing rules are fully adhered to. Likewise, they also help in applying WHT and treaty benefits to minimize tax costs.

4.     ZATCA Audits

They act on behalf of their clients if the authorities ask for audits and have any queries. They present the right paperwork, and with their expert approach, even the valid penalties can be minimized.

5.     Advisory & Updates

Tax specialists underline any forthcoming risks, like underreporting, errors, or miscalculations. These minor faults can be overlooked by less skilled teams, but accountants keep an eye on even minor gaps. They also stay informed about any recent changes in the guidelines and regulations.

We are Ready to Help!

Supervising Saudi Arabia’s tax system can be highly demanding for expatriates, but with SSCOKSA, these complex procedures can be transformed into simple and stress-free steps that even amateur expats can understand. From registration of VAT and corporate tax consulting to DTT computation and ongoing compliance, with cover it all under one package. Our teams work as a dedicated part of your workforce and offer you matchless mentorship, assistance, and solutions that facilitate you in avoiding penalties so you can progress with purpose!