Is there company tax in Saudi Arabia?

It’s a common misconception that Saudi Arabia has no tax on business activities. In actuality, every business must pay taxes on its profits. The type of business tax a company has to pay depends on different factors like the structure of their business or the premises they operate from.

Saudi Arabia has been firm with their tax obligations, and every business must obey them to avoid Legal constraints if they want to work efficiently and profitably in KSA. This guide will cover all the taxes imposed on businesses in KSA, how they can register for them, and some tricks to stay legally compliant.

Does Saudi Arabia have a Company Tax?

Company tax is the tax that is paid by the company on part of its profits. Usually, people consider KSA tax-free, but it’s not tax-free for all. KSA does not impose any income tax on personal income, but it does impose a company tax. There are two main company taxes, which include the Corporate Income Tax and the Zakat.

• Corporate Income Tax is paid by foreign-owned companies or those with a mixed ownership structure
• Zakat is paid by the GCC/Saudi owned businesses that meet the criteria of applicability.

Unlike many countries, the company tax in Saudi Arabia is not fixed for every organization, but it depends mainly on the shareholder structure of the company.

The Role of ZATCA in Company Tax

ZATCA is the legal body supervising corporate taxation in Saudi Arabia; it enforces new rules from time to time and ensures that every business operates lawfully. ZATCA mainly looks after:

• Corporate tax regulations and administration
• Collection of ZATCA on listed zakatable assets
• Implementation of VAT on registered businesses
• Compliance with withholding taxes
• E-invoicing obligations
• Tax audit conduct and investigations

Companies are expected to register on time without exceeding the deadlines, with the proper maintenance of accounting records and return files. If they don’t follow ZATCA’s statutory regulations, they expose themselves to legal inquiries and penalties that harm the business financials, operations, and even reputation.

Understanding the Corporate Income Tax

Corporate Income Tax is a direct type of tax that is applied to the taxable profits that a non-Saudi company gains through its business operations in KSA. This means it is mandatory for:

• Overseas-owned limited liability companies
• Branches of international-owned businesses
• Permanent establishment of international businesses
• Foreign ownership part in a mixed ownership business.

The Rate of Corporate Income Tax

There is a standard rate for corporate income tax, which is 20% on the taxable profits. Such as, if a company is earning an annual taxable profit of SAR 1,000,000 they will be eligible to pay SAR 200,000 as part of its 20% corporate income tax. While calculating the taxes, companies are allowed to deduct eligible expenses like salaries, rent, utilities, and insurance as per the Saudi Tax laws.

Understanding Zakat in Saudi Arabia

Zakat is a religious duty that is applied to regional businesses that are owned by Muslims owners from the GCC and Saudi regions. They have to pay Zakat only, but not the Corporate Income Tax. Instead of annual profits, Zakat is paid on the Zakat base, which includes the:

• Capital that is paid up
• Retained earnings and reserves
• Profits of the current year
• Liabilities that are held for the long term
• Balances based on equity

Generally, the net fixed assets and long-term investments are not subject to the Zakat

What is the Rate of Zakat and how is it Calculated?

The Rate of Zakat is 2.5% per lunar year on the Zakat base of a company. This means that the payable Zakat is calculated by multiplying the Zakat base by 2.5%. The computation of Zakat base depends on the detailed changes in regulations and the company’s financial position. To know the precise Zakat liability its important to apply correct additions and deductions.

How is Company Tax in Saudi Arabia on Mixed Ownership Companies Calculated?

Companies in Saudi Arabia that have mixed ownership structures are obliged to pay both Zakat and corporate tax. They pay the Zakat for the Saudi ownership part; on the contrary, they pay corporate income tax on their foreign ownership portion. Such as, if a company has 60% Saudi shareholders and 40% foreign shareholders, the 40% portion will be subject to corporate income tax, while the 60% portion will be subject to Zakat. This unique dual taxation system can sometimes be hard to grasp. Many local accounting companies and tax consultant can help businesses in understanding and implementing their taxes proficiently.

How Companies Can Register for Zakat and Corporate Income Tax?

Businesses in Saudi Arabia register for taxes through the ZATCA e-portal; for that, they have to gather all the complete legal documentation, which includes their CR, MISA investment license, a national business address, and other sector-specific licenses. Once they have all the data collected. They then have to apply by following the steps:

• Creating a ZATCA account by visiting the ZATCA e-portal and signing up using the commercial registration details.
• Corporate Tax and Zakat Registration is done by selecting Zakat or corporate tax, then completing the application and uploading all the legal data, including the financial year details, the company’s structure, and contact information.
• Submit your application by reviewing the request and uploading all the supporting documents as well if asked by the ZATCA
• Get your Confirmation after approval from ZATCA; your company’s income tax account will be created, which will allow you to file the tax returns and make payments digitally.
• After registration, file your annual corporate income tax returns and zakat before the due date and archive all the records thoroughly to assist you in time of any audits conducted by ZATCA.

Other Company Tax Obligations on Businesses in KSA

Apart from the corporate tax and Zakat, businesses in Saudi Arabia are also exposed with other tax obligations that they must fulfil for statutorily aligned operations and prevent legal consequences. These include:

• Value Added Tax: VAT is mandatory for businesses that exceed the VAT registration threshold. This is an indirect tax that businesses charge on their taxable services and supplies. They collect VAT from their consumers and then remit it to the ZATCA.
• Withholding Tax (WHT): When a business makes a payment to a non-resident for their services, royalties, or dividends, they subtract a certain amount of WHT that depends on the nature of the payments and applicable treaties
• Excise Tax: Organizations that take part in the production, import, or sale of excise products that are hazardous to health are imposed with excise tax. These products include energy drinks, electronic smoking devices, and tobacco products
• Real Estate Transaction Tax (RETT): If a Business transfer their ownership of real estate, they are imposed with a specific amount of RETT; however, RETT can be avoided under certain exemptions.
• Transfer Pricing Compliance: Businesses that take part in transactions with related parties have to comply with the transfer pricing laws, which are calculated by using the arm’s length principle.
• Fatoora E-Invoicing: For all VAT-registered businesses, e-invoicing in KSA is mandatory. They have to issue and store their invoices digitally through the verified systems.
• Customs Duties: Businesses that import their goods to KSA have to pay customs duties, and the rate depends on the origin of the country and the type of imported product.
• Social Insurance Contribution: Although the social insurance contribution is not a tax, it is also a legal requirement according to which companies have to register and pay their employees social insurance as per the Saudi Labor laws.

What Happens If a Company Fails to Comply with Tax Obligations in KSA?

Complying with the tax laws in Saudi Arabia is critically important, and if a company doesn’t emphasize it, it has to deal with adverse legal damages which disrupt its business operations, harm their financials, and lose their credibility. ZATCA expects every business to register for taxes on time, calculate their returns precisely, and file them before the deadline arrives, along with complete legal documents. Most of the time the legal inquiries and penalties occur due to:

• Registering for the applicable taxes late and not following the given timeframe
• Failing to submit their tax returns before the due date or not paying the tax at all
• Filing the taxes incorrectly like not calculating the tax accurately or submitting incomplete data
• Not maintaining the tax and accounting records along with the supporting documents for at least 6 years.
• Not adhering to the e-invoicing laws and integrating their systems with ZATCA for invoice verifications.

ZATCA conducts audits and investigations of a company that is involved in any misconduct or non-compliance with legal laws. It not only imposes monetary fines, but also suspends business licenses for repeated violations.

How can businesses stay compliant with the company tax in Saudi Arabia?

If you want to stay compliant with the legal tax laws in Saudi Arabia, it’s important to take the following optimal approaches:

• Ensure registering with ZATCA on time by understanding which taxes apply to your business structure and type
• Make sure to keep a safe record of not just the financial data but also other supporting paperwork related to your industry
• Start to prepare for tax filing proactively and don’t wait until the eleventh hour.
• Double-check everything before submitting your tax returns under the supervision of a tax specialist
• Make sure to regularly conduct tax health checks and develop internal controls to prevent any last-minute hassle
• Seek professional help from tax and accounting services providers in Saudi Arabia

The Role of SS&Co Accounting Services in Staying Compliant with Company Tax in Saudi Arabia

SS&Co is one of the leading accounting services in KSA, with years of expertise in the regional market. Our Tax experts are fully aware of how to keep you guarded from tax fines and legal stumbling blocks. We implement the most optimal approaches to not lower your tax liabilities by realizing the allowed deductions and incentives and keeping you away from ZATCA audits. Get in touch with our tax consultants today and let us be your tax compliance partner.