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What is the taxation system in Saudi Arabia – KSA?

What is the taxation system in Saudi Arabia – KSA?

Ambiguous about the taxation system in KSA? This blog covers everything you need to know about the taxation system in KSA to help ensure tax compliance.

Arabian countries have always been the center of discussion when it comes to taxation systems. Historically, Saudi Arabia has relied on oil revenue to finance the government. As a part of its Vision 2030 economic diversification plan, various tax reforms have been brought to light by the Saudi Government to reduce the dependence on revenue generated from oil. Tax reforms, being a significant part of this plan, have contributed to stabilizing government finances, leading to economic recovery especially after oil crises. As the door to global business is open in KSA, it is extremely imperative for global investors to have a deeper understanding of KSA’s tax system.

The taxation system in KSA is subject to frequent changes. It is crucial for taxable persons in Saudi Arabia to ensure tax compliance and stay updated. Tax and accounting services in KSA are a major support to ensure adherence with regulations and for effective tax planning.

Let’s discuss the Tax system in Saudi Arabia.

Tax System in KSA

Saudi Arabia has a unique tax system, which some of you may find intricate as well. It is one of the most appealing destinations for foreigners as there is no income, inheritance, local or regional tax; all taxes are federal. An employee in the Kingdom is likely to pay no tax on earnings if no other forms of income exist. However, KSA isn’t a completely tax-free region. Let’s now go through the taxes imposed in KSA and see which authority is responsible for collecting taxes.

The authority responsible for tax collection in Saudi Arabia is Zakat, Tax, and Customs Authority (ZATCA). The financial year in the KSA usually runs from 1 January to 31 December.

Who is Taxable in KSA?

Who is Taxable in KSA

In Saudi Arabia, your tax obligations depend on whether you are considered a tax resident. You are classified as a tax resident if you have permanent residency and spend at least 30 days in the country during the tax year, or if you reside in Saudi Arabia for a minimum of 183 days in the tax year. All residents are required to make social security contributions, while foreign residents who operate businesses must pay business taxes. Everyone, regardless of residency status, must pay VAT and excise duties on goods and services. Additionally, Saudi nationals and other GCC citizens are subject to Zakat, which is imposed on both individuals and businesses. Expats living in Saudi Arabia are not required to pay Zakat, but they can choose to do so voluntarily.

Expats

  • The non-resident residing in KSA is subject to withholding tax if that person is paid legally.
  • The rates of withholding tax may vary from 5% to 20% depending on the business type.
  • The self-employed expats in KSA are typically subject to 20% corporate tax on gain. Expats are exempt from paying Zakat.

Taxes in KSA

Income Tax

Employment earnings in Saudi Arabia is exempt from income tax. However, if you reside in the Kingdom and earn income from other sources, you may be required to pay tax at the same rate as corporate tax if you have a permanent establishment (PE) in Saudi Arabia.

Expats must obtain license from the Ministry of investments to run a business or to become self-employed in Saudi Arabia. Self-employed expats are typically subject to the payment of 20% tax on profits.

It’s important to note that failing to properly register and disclose the accurate structure of your self-employment can result in significant penalties. For instance, the Saudi government may impose a fine of up to SAR 50,000, a prison sentence of up to six months, or even deportation.

Corporate Tax

Corporate tax in Saudi Arabia was introduced in 2017 initially at 50%, declining to 20% in 2020. The corporate tax is levied on non-Saudi and non-GCC investors. The corporate tax of 50%-85% is charged on income generated from oil and hydrocarbon production. The tax base of a person who works in the natural gas business should be independent of the tax base relating to other activities.

Zakat Tax

In most cases, Saudi investors (as well as those from GCC countries who are regarded as Saudi citizens for tax purposes) are required to pay Zakat. The company is typically liable for 2.5% of its Zakat base, which is based on the company’s net worth.

Where a company is owned by both Saudi and non-Saudi interests, the portion of taxable income attributable to the non-Saudi interest is subject to corporate income tax, and the Saudi share goes into the basis on which Zakat is assessed.

VAT in Saudi Arabia

5% Value Added Tax (VAT) was introduced in Saudi Arabia in January 2018 which increased to 15% in July 2020. VAT is the tax charged on goods and services. The zero-rated goods and services involve specific medical equipment and medicines, Supply of precious metals (such as gold and silver) for investment purposes, export of goods and services to non-GCC customers or to outside the GCC region and supply of goods and services within customs duty suspension zones.

 Financial products involving the following are exempt from VAT in Saudi Arabia:

  • Islamic finance products that are in compliance with Shariah
  • The operation of current, checking, and savings bank accounts
  • Life insurance
  • Residential real estate leases (excluding hotels and similar short-term rentals)
  • The issue or transfer of money or security for a month
  • Credit and other financial instruments
  • Interest on loans, credit, or debt security

Resident businesses in Saudi Arabia with taxable income exceeding SAR 375,000 are required to register for VAT. However, businesses with lower revenue can choose to register voluntarily. Individuals, on the other hand, can complete their registration through the government’s online portal.

Excise Tax

The Excise Tax Law, which came into effect in June 2017, is applied to a limited range of products deemed harmful. These include tobacco-related products, energy drinks, and certain beverages. Specifically, the tax rate is 100% for tobacco products, energy drinks, electronic smoking devices and tools, and the liquids used in these devices. Additionally, soft drinks and sweetened beverages are taxed at a rate of 50%.

Custom Duties

Customs duty is payable on imported goods in Saudi Arabia. Most rates are between 0.5% and 15% but can be as high as 25%, depending on the product. For example, imported marble and ceramics, cast iron, and electrical appliances are taxed up to 20%.

Payroll and withholding taxes

In Saudi Arabia, all workers contribute to the social security system on a monthly basis, with the contribution amount varying based on the employee’s nationality:

  • Saudi nationals pay a total rate of 21.5%, with the employer covering 12% and the employee contributing 10%.
  • GCC nationals (excluding Saudis) pay between 17% and 22%, with the employer responsible for 12% and the employee covering the remaining amount.
  • Non-Saudi expatriates contribute 2%, which is deducted through the employer’s payroll system. This contribution is allocated toward occupational hazard costs rather than social insurance benefits like unemployment or pensions.

Penalties

In case of failure of tax compliance, submission of required tax information and false information to tax authorities in KSA may lead to penalties;

Submitting false documents to avoid paying the correct VAT can lead to a fine of up to three times the amount of tax due. If you fail to file a tax return, you may be fined between 5% and 25% of the tax owed. Additionally, not maintaining tax invoices, books, records, and accounting documents could result in a fine of up to SAR 50,000.

Other information regarding penalties can be found on ZACTA’s official website.

Final Word

As the Saudi economy continues to diversify and expand, it is essential to stay updated on the latest tax regulations and ensure tax compliance. Tax and accounting services are game changers. Seeking professional advice from qualified tax experts can provide valuable insights and ensure tax compliance with the evolving regulatory framework. SSCO KSA offers tax and compliance services, staying ahead of global trends and tailoring solutions to client needs.