Does Saudi Arabia have a business tax?

To serve society’s needs and economic growth, the government imposes taxes on businesses and citizens to raise revenue. These taxes are then utilized for social projects and country’s developments. For ages, Saudi Arabia did not impose any taxes and mainly relied on oil revenues, but to reduce dependency on oil and to modernize the country, KSA, over time, introduced different types of taxes. It is still considered a tax-friendly destination for entrepreneurs and businesses with no income tax and low business tax rates. However, the idea that Saudi Arabia has no business tax at all is history now. Saudi Arabia has a distinct tax system that depends on business type, nationality of shareholders, and business activities. This guide will deeply dive into the Saudi Taxation Framework for businesses, the eligible businesses, and its importance for the Saudi Economy.

The Saudi Tax Framework for Businesses

The Kingdom of Saudi Arabia is known for its favorable tax environment with no taxes imposed on personal income tax, salary tax, or capital gains. However, there are certain types of taxes imposed on businesses, including Corporate Income tax, Value Added Tax, Zakat Tax, Excise tax, and Withholding taxes. To supervise taxes, the Zakat, Tax, and Custom Authority (ZATCA) was created. ZATCA offers the legal tax guidelines, enforces compliance, and imposes strict penalties for non-compliance. The most confusing thing for many businesses, especially multinational businesses, is to understand the difference between Zakat tax and corporate income tax. What distinguishes the Zakat and Corporate tax is the nationalities, as Zakat is only subject to Saudi and GCC investors, while Corporate Tax is subject to foreign nationals. Businesses with mixed ownership can allocate their taxes based on the percentage ratio of each nationality.

Various Types of Taxes Applicable to Businesses in KSA

Understanding business tax may seem like a hassle, but it’s highly critical to keep your business operations running smoothly in KSA. The different kinds of taxes that are applicable in Saudi Arabia include:

1.     Zakat: The Core Business Levy for Saudi and GCC-Owned Companies

Zakat is an Islamic Duty not a traditional tax. This obligation is mandatory based on Islamic Principles in KSA for businesses that are owned by Muslims, in other words, Saudi or GCC citizens. Zakat is also applied to the GCC/Saudi part of mixed ownership companies, depending on their percentage share. The fixed rate for Zakat is at the fair rate of 2.5% on the Zakat base, which is applied on Zakatable assets rather than profits. This Zakat base generally covers:

• The working Capital
• The Net Assets
• Earnings that are Retained
• Specific adjusted liabilities

In case of non-compliance, ZATCA imposes hefty fines and penalties and takes strict legal actions.

2.     Corporate Income Tax in Saudi Arabia

The corporate Income tax is only imposed on the businesses owned by non-GCC foreigners, branches of foreign companies, or joint ventures for the portion of foreign investors. The flat rate of corporate tax in 20%, which is applied on the net adjusted profits. Mixed ownership companies pay 20% for the foreign share and 2.5% for the Saudi/GCC share, with separate calculations for each portion.

3.     Withholding Tax (WHT)

Withholding tax is applicable only when a Saudi business pays payments to non-resident businesses. The common WHT rates are 5% for interest, dividends, rent, and technical services. While the management fee is 20% and the royalties’ rate in 15%. The Saudi Payer must subtract this tax at the source and submit it to the ZATCA. It is important to file these returns on time; any delay or failure to comply results in fines.

4.     Value Added Tax (VAT) in Saudi Arabia

Value-added tax was introduced initially with a rate of 5% in 2018, but later the rate was increased to 15% in 2020. Businesses with annual taxable supplies above SAR 375,000 are required to pay VAT. While the businesses with annual revenue between SAR 187,500 and 375,000 can register voluntarily. VAT is generally imposed on the sales of goods and services, imported items, and some of the digital and cross-border services. The businesses that are exempt from VAT eligibility criteria are financial services, life insurance, and residential real estate leasing. Businesses must comply with VAT obligations, as it is one of the most emphasized and heavily audited areas of ZATCA.

5.     Excise Tax in Saudi Arabia

The products that are hazardous to health are charged a huge amount of taxes to restrict the use of tobacco products, energy drinks, smoking devices, and e-liquids. These products are mostly charged to 100% excise tax, apart from soft drinks, which are subject to 50% excise tax. Businesses that produce these products, import them, or sell them must make sure to register, file timely returns, and make certain that they have transparent inventory records for compliance and audits.

The Importance of Taxes to the Government

Behind every strong economy and social development, taxes play an important role. Without taxes, no country can progress speedily, especially in developing countries like the KSA. The key benefits of taxes in KSA include:

1. Funding National Development

The business taxes in KSA, like Zakat and Corporate tax, aid the government in funding the public services, infrastructure projects, health care, education sector, and digital transformation goals across the country.

2. Supporting Vision 2030 Goals

As of now, the key initiative is Vision 2030 in KSA, which aims to lower the dependency on oil income while creating a modernized, digitized economy with sustainable choices. All these goals are fulfilled through taxes, which is why they are imposed strictly with heavy penalties for breaches

3. Ensuring Fair Wealth Distribution

The unique system of Zakat in KSA is obligatory, which facilitates social responsibility by distributing the amount to support the social welfare plans, community development, and poverty reduction. This also aligns the country with the mandatory Islamic principles.

4. Strengthening Global Trade Relations

KSA is actively working to attract foreign investors and build better trade relationships with other countries. Through a structured and internationally followed tax framework global market considers the Kingdom as a competitive land for cross-border trade and investment.

5.     Encouraging Long-Term Economic Sustainability

By depending on non-oil reservoirs, Saudi Arabia stabilizes its economy from the constant oil price fluctuations. Through a fixed revenue, they can better invest and build a strong economy in line with the leading countries to position themselves higher in the global market.

The Importance of Taxes on Business

The corporate tax plays a critical role in maintaining the financial health of a business; many businesses consider it just a revenue-generating source for the government, but it is also beneficial for a business. How? Let’s have a look:

1.     Funding Public Sector Development

Paying taxes on time shows that you are not just a responsible citizen/business but also dedicated to the progression of your country. As taxes are the primary source of revenue for the government, tax compliance benefits society as a whole. Specifically, zakat in KSA is distributed among the needy, charitable Bodies and social welfare programs.

2.     Staying Protected

A legally sound business shows its strength; the company that fails to meet compliance legislation is exposed to fines, penalties, strict audits, and even suspension of licenses for continuous non-compliance. These hefty sums can hurt the financial health of a company and cause irreversible harm to its reputation.

3.     Building Credibility

A well-reputed firm shows that it is financially responsible to pay its taxes on time. These ratings highly impact the customers; they also build trust among the legal authorities and gain better benefits. On the contrary, tax non-compliance not just results in poor credit ratings but also closes many doors of possibilities.

4.     Boosting Investors’ Confidence

Investors and stakeholders also rely on businesses with transparent financials and consistency in meeting tax obligations. The potential investors look for reliable firms; through the sound legal history, their confidence rises, and they prefer to invest their money in these firms.

5.     Peace of Mind

To operate productively without any stress, it is important to pay taxes on time. With the routine overburdening tasks, the stress of audits, penalties, and legal queries not just raises concerns but also damages the routine business operations continuity. A stress-free environment contributes to better-motivated teams and smart decision-making

How to Prepare for Tax Compliance?

To stay guarded from any kind of tax criticisms, legal questioning, and reputational damage, it is necessary to prepare proactively. Which demands foresight, agility, and cross-functional coordination, the important areas that businesses must emphasize include:

• Understanding your tax obligation thoroughly, computing the right amount of taxes, and filing timely
• Embedding tax policies into the wider financial structure of the business
• Using the right E-invoicing portals for VAT submission and staying informed with ZATCA guidelines
• Keeping the records clear and planning of what’s coming by staying updated
• Hire tax professionals if you don’t have enough skilled experts internally

Some of the best chartered accountants and tax experts in KSA, like SSCOKSA, can be of great help for businesses that need guidance in tax compliance. by utilizing the top-notch tools and through the expert supervision SS&CO offers all-in-one tax services that facilitates businesses or all sizes and industries in tax compliance.