Types of Taxes in Saudi Arabia
Are you looking forward to setting up business in Saudi Arabia? I’m sure you must be anxious about taxes in Saudi Arabia and challenges that comes with tax compliance. This blog covers information regarding the types of taxes in Saudi Arabia.
Arab countries have historically been known for being a major oil producer and exporter. Oil production has contributed most to the GDP of Saudi Arabia. Therefore, Saudi Arabia has always relied on revenue generated from oil and natural gas production to finance the government. When it comes to taxes in Saudi Arabia, it has been the subject of discussion globally.
With the introduction of Vision 2030, Saudi Arabia opened doors for businesses, investments and tourism. Economic diversification plan of Vision 2030 has brought to light various tax reforms as Saudi Government plans to reduce the dependence on oil generated revenue. These tax reforms have been an imperative part of this plan and contributed to economic recovery after the oil crisis by funding government finances. As people from across the world are tempted to invest and expand businesses in Saudi Arabia, it is crucial for then to comprehend types of taxes in Saudi Arabia so they can ensure tax compliance.
Taxation in Saudi Arabia
Aforementioned, the taxation system in Saudi Arabia is subject to frequent variations and it is important to ensure adherence with tax regulations to avoid penalties. Let’ss discuss how this system works.
Zakat, Tax and Customs Authority (ZATCA) is responsible for tax collection in Saudi Arabia. The general financial year in Saudi Arabia is like Calander year i.e. from January to December.
Saudi Arabia is appealing destination due to its unique tax system. Although there are certain taxes in Saudi Arabia but there is no income, inheritance, local or regional tax; all taxes are federal. No tax is charged on earnings if no other forms of income exist. Let’s discuss the types of taxes in Saudi Arabia.
Corporate Tax
Corporate tax in Saudi Arabia was introduced in 2017 at a rate of 50%, which was gradually reduced to 20% by 2020. This tax is imposed on non-Saudi and non-GCC investors. Income derived from oil and hydrocarbon production is taxed at a higher rate, ranging from 50% to 85%. The tax base for individuals involved in natural gas activities is separate from the base applied to other business activities.
Zakat Tax
Saudi investors, as well as those from GCC countries considered Saudi citizens for tax purposes, are generally required to pay Zakat. The company is liable for 2.5% of its Zakat base, which is determined based on the company’s net worth.
VAT in Saudi Arabia
Saudi Arabia introduced a 5% Value Added Tax (VAT) in January 2018, which was increased to 15% in July 2020. VAT is applied to goods and services, with certain goods and services being zero-rated. These include specific medical equipment and medicines, the supply of precious metals (such as gold and silver) for investment purposes, exports of goods and services to non-GCC countries or outside the GCC region, and supplies within customs duty suspension zones.
Certain financial products are exempt from VAT in Saudi Arabia, including:
- Islamic finance products that comply with Shariah principles
- The operation of current, checking, and savings bank accounts
- Life insurance
- Residential real estate leases (excluding hotels and similar short-term rentals)
- The issuance or transfer of money or securities
- Credit and other financial instruments
- Interest on loans, credit, or debt securities
Businesses in Saudi Arabia with taxable income exceeding SAR 375,000 must register for VAT. Businesses with lower revenue may choose to register voluntarily. Individuals can complete their VAT registration via the government’s online portal.
Property tax
Capital Gains Tax
In Saudi Arabia, income from capital gains, such as profits from property sales, is treated as regular income. If the gain is considered business income and is subject to taxation, the tax rate can be as high as 20% of the capital gain. However, capital gains from the sale of stock market shares may be exempt if certain conditions are met. Additionally, gains from property sales may be exempt from tax in specific business restructuring scenarios.
White Land Tax (WLT)
The White Land Tax (WLT) is an annual tax of 2.5% imposed on owners of urban vacant land designated for residential or commercial use. Essentially, this tax serves as a penalty for landowners who do not develop their land.
This tax applies to land that is:
- Vacant
- Designated for residential or commercial use according to the approved plan from the relevant authorities
- Located within the urban boundary limits
- Located in areas where WLT applies
The Ministry of Municipal, Rural Affairs, and Housing is responsible for enforcing and collecting this tax.
Real Estate Transaction Tax (RETT)
While there is no stamp duty on property purchases in Saudi Arabia, a Real Estate Transaction Tax (RETT) applies when selling a property. RETT is charged at a flat rate of 5% on the sale of any property, including land, buildings, or individual parts of a property. To ensure compliance with RETT, real estate transactions can be reported online through ZATCA.
Excise Tax
The Excise Tax Law, which was implemented in June 2017, applies to a select group of products considered harmful. These include tobacco products, energy drinks, and certain beverages. The tax rates are as follows: a 100% tax on tobacco products, energy drinks, electronic smoking devices and accessories, as well as the liquids used in these devices. Soft drinks and sweetened beverages are subject to a 50% tax rate.
Income Tax
In Saudi Arabia, employment income is exempt from income tax. However, if you live in the Kingdom and earn income from other sources, you may be subject to taxation at the same rate as corporate tax, provided you have a permanent establishment (PE) in Saudi Arabia.
Expats wishing to operate a business or become self-employed in Saudi Arabia must obtain a license from the Ministry of Investment. Self-employed expats are generally required to pay a 20% tax on their profits.
It’s crucial to ensure proper registration and accurate disclosure of your self-employment status, as failure to do so can result in significant penalties. The Saudi government may impose fines of up to SAR 50,000, a prison sentence of up to six months, or even deportation.
Customs Duties
Customs duties are applicable to imported goods in Saudi Arabia. The majority of duty rates range from 0.5% to 15%, but they can reach as high as 25% depending on the type of product. For instance, imported marble, ceramics, cast iron, and electrical appliances are subject to taxes of up to 20%.
Summary
Although it is important to stay updated on taxes in Saudi Arabia, but to ensure tax compliance and to avoid penalties professional help is crucial.
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