Taxes in Saudi Arabia

Taxation in Saudi Arabia has evolved into a comprehensive system, with VAT now implemented in over 160 countries around the world. As part of Saudi Arabia’s broader economic reforms, the Saudi tax landscape combines modern fiscal policies with traditional religious obligations. The General Authority of Zakat, Tax and Customs oversees these regulations, and most importantly, the administration of Saudi VAT and Saudi Zakat – a religious tax on wealth, assets and savings that is levied only on Saudis. In addition to these core components, we have observed how the Saudi government has actively worked to enhance its tax framework by introducing e-invoicing and updating regulations to align with international standards. The tax authority’s commitment to transparency and compliance reflects Saudi Arabia’s dedication to creating a strong and diversified economy that extends beyond oil revenues.

Overview of Saudi Arabian Tax System

We observe that the Kingdom of Saudi Arabia maintains a distinctive tax structure that differs significantly from global standards. Specifically, the Kingdom does not impose an individual income tax on business profits. This creates a fertile environment to support investors in expanding their businesses and encourage them to open a company in Saudi Arabia or obtain a Saudi commercial license and create new job opportunities that do not burden employees and investors.

Types of taxes in Saudi Arabia

The primary taxes in Saudi Arabia comprise:

Value Added Tax (VAT): Currently set at 15% on goods and services
Corporate Income Tax: Applied at 20% on foreign investors' net adjusted profits
Zakat: Religious wealth tax at 2.5% for Saudi and GCC citizens
Withholding Tax: Ranges between 5% to 20% on payments to non-residents

Recent tax reforms and changes

Furthermore, Saudi Arabia has introduced significant reforms to modernize its tax framework. The Zakat, Tax and Customs Authority (ZATCA) released new draft laws in October 2023, which aim to:

Align Saudi tax regulations with international practices
Improve transparency in tax procedures
Unify protocols for tax and zakat regulations

Moreover, the proposed amendments include specific provisions for green investment incentives and business activity transfers. These changes will take effect 90 days after publication in the Official Gazette.

Key regulatory authorities

The Zakat, Tax and Customs Authority acts as the primary regulatory body overseeing tax administration in the Kingdom of Saudi Arabia. Whether for Saudi individuals or companies that have obtained a commercial registration license in Saudi Arabia, its responsibilities include:

Core Functions

Description

Tax Collection

Managing VAT, corporate tax, and withholding tax

Zakat Administration

Overseeing religious wealth tax collection

Compliance Monitoring

Ensuring adherence to tax regulations

ZATCA has consequently implemented electronic filing systems and enhanced reporting requirements to streamline tax compliance. Additionally, the Dispute Resolution Committee (DRC) handles tax disputes between ZATCA and taxpayers.

Value Added Tax (VAT) Requirements

Let us examine the essential VAT requirements in Saudi Arabia, which have become particularly important for businesses operating in the kingdom.

VAT registration process in Saudi Arabia

We find that businesses must register for VAT when their annual taxable supplies exceed SAR 375,000. Nevertheless, companies with annual revenue between SAR 187,500 and SAR 375,000 can register voluntarily. During the registration process, businesses must submit:

Commercial Registration number
Bank account details (IBAN)
Annual turnover documentation
Tax representative details (for non-resident businesses)

However, for foreign companies, it is mandatory to register for VAT and issue a religious zakat certificate without obligation, as well as issue a VAT certificate

VAT rates and calculations

The standard VAT rate in Saudi Arabia has evolved over time:

Period

Rate

Implementation Date

Initial Rate

January 2018

Current Rate

15%

July 2020

Accordingly, certain supplies qualify for zero-rating (0% VAT), including:

Exports of goods and services
Qualifying medicines and medical goods
Investment precious metals

Filing VAT returns and compliance

We observe that filing frequency depends on annual turnover. Businesses with annual taxable supplies exceeding SAR 40 million must file monthly returns. Otherwise, quarterly filing is required.

The filing process involves reporting:

Standard rated domestic sales
Zero-rated sales
Exempt supplies
Input VAT on purchases

Undoubtedly, businesses must submit their returns through ZATCA's electronic portal by the last day of the month following the tax period. Furthermore, record keeping is mandatory for six years, with all documentation maintained in Arabic.

This is what Motaded seeks to provide to the foreign investor wishing to open a company in Saudi Arabia, as it provides tax filing services as well as translation of documents certified by the Chamber of Commerce, making the matter streamlined and systematic for government agencies.

Corporate Tax and Zakat Obligations

Initially, we must understand the dual taxation system in Saudi Arabia, which uniquely combines religious and modern fiscal obligations.

Understanding Zakat calculations

We find that Zakat, a fundamental Islamic assessment, applies to Saudi and GCC citizens at a rate of 2.5% on the Zakat base. Rather than focusing on income, Zakat calculations consider the net worth of a business, technically referred to as the 'Zakat base'. For companies following the Gregorian calendar, the rate is 2.5778% for the Zakat base, although the rate remains 2.5% for net adjusted profit.

Note that a foreign investor who does not hold citizenship of any Gulf country is not subject to religious tax, even if the investor is Muslim.

Corporate tax rates and applicability

The corporate tax structure varies based on ownership and sector:

Tax exemptions and incentives

Saudi Arabia has already offered significant tax incentives to attract international investment: those wishing to open a company in the Special Economic Zones or obtain a license in the Free Zones:

A 30-year tax exemption package offering:
- Zero percent corporate tax rate
- Zero percent withholding tax on approved activities

The kingdom offers additional incentives for investments in less developed provinces, therefore providing:

10-year tax incentives in regions like Abha, Al-jouf, Hail, Jizan, Najran, and Northern Border
Tax credits against training costs and Saudi employee salaries

For small and medium enterprises, special considerations apply when annual turnover is below SAR 1.5 million, offering reduced rates on specific goods and services.

Penalties for non-compliance

Subsequently, ZATCA has implemented a comprehensive penalty framework, primarily covering:

Late Registration Fines
Delayed Payment Penalties
Late Filing Penalties
VAT Return Amendment Penalties
E-invoicing Violation Fines

First: Fine for failure to submit the declaration:

Imposed in the event of failure to submit the declaration on the specified date according to the approved form and failure to pay the tax based on it, where one of the following two fines is imposed, whichever is greater:

1-% of the total revenues and a maximum of 20 thousand riyals or

- According to the following percentages:

• 5% of the unpaid tax if the delay does not exceed (30) days from the regular date.

• 10% of the unpaid tax if the delay exceeds (30) days and does not exceed (90) days from the regular date.

• 20% of the unpaid tax if the delay exceeds (90) days and does not exceed (365) days from the regular date.

• 25% of the unpaid tax if the delay exceeds (365) days from the regular date.

Second: Late payment fine

In addition to the fine for not submitting the declaration, it is imposed in the event that the tax is not paid based on the declaration by the date specified by the system, and its rate is 1% of the unpaid tax for every thirty days of delay. This fine is not imposed for any period less than (30) days.

Third: Evasion fine

It is imposed in the event that a tax due is discovered that was hidden in the tax declaration intentionally or as a result of an intentional error, or any tax for which the taxpayer did not provide correct data or in the event that the declaration is not submitted with the intent to evade the tax, and its rate is 25% of the value of the tax due as a result.

Fourth: Other fines (penalties)

In the event of failure to pay the tax and the fines due, or in the event of tax evasion or assistance therein, the taxpayer may be temporarily or permanently prevented from practicing the activity, as well as prevented from traveling. His movable and immovable assets may also be seized and confiscated.

Presently, an amnesty initiative offers relief from these penalties until June 30, 2025. To qualify for this exemption, businesses must:

Register with ZATCA
Submit outstanding returns
Pay tax liability or apply for an installment plan

The tax authority emphasizes reconciliation between payroll records and the General Organization for Social Insurance (GOSI) documentation. For non-resident businesses, a Saudi tax representative must maintain all invoices, books, records, and accounting documents.

Tax Registration Process

We now turn our attention to the practical aspects of registering for taxes in Saudi Arabia, where understanding the process is crucial for business success.

Steps for tax registration

Primarily, businesses must complete their registration through ZATCA's official online portal. The process involves:

Creating an account on ZATCA's web portal
Submitting business identification details
Providing financial information
Verifying contact information
Receiving confirmation and tax identification number

Required documents and forms

Essentially, the following documentation must be prepared before initiating registration:

Business name and identification information
Physical address and email contact details
Commercial Registration (CR) number
Annual value of taxable supplies
Electronic identification number (if previously issued by ZATCA)
IBAN details for tax-related transactions

Conclusion

Saudi Arabia's tax system stands as a unique blend of traditional religious obligations and modern fiscal policies. Through our comprehensive analysis, we see how ZATCA manages both VAT at 15% and Zakat at 2.5%, creating a balanced approach to taxation. Therefore, businesses operating in the kingdom must understand these distinct requirements while maintaining proper documentation and meeting strict compliance standards.

Undoubtedly, recent reforms demonstrate Saudi Arabia's commitment to aligning with global tax practices. Electronic filing systems, enhanced reporting requirements, and streamlined registration processes make tax compliance more accessible for businesses. Above all, the kingdom's tax incentives, especially in less developed regions, show its dedication to attracting international investment and supporting economic growth.

Saudi businesses face specific challenges regarding record retention, with requirements ranging from 6 to 15 years depending on document types. Consequently, proper planning and robust systems become essential for maintaining compliance and avoiding penalties. These measures, combined with ZATCA's amnesty initiatives, reflect the authority's balanced approach to enforcement and support.

We recognize that Saudi Arabia continues to refine its tax framework, making it more transparent and efficient while preserving its unique characteristics. This evolution ensures the kingdom maintains its position as a leading business destination in the Middle East, supporting both domestic growth and international investment opportunities.

The role of Motaded Limited in helping investors with taxes

As a prominent Saudi-based consultancy, Motaded Limited stands at the forefront of supporting businesses with their tax obligations in Saudi Arabia. Essentially, we recognize that navigating the complex tax landscape requires specialized expertise and local knowledge.

Primarily, our comprehensive service portfolio encompasses:

Service Category

Key Features

Tax Advisory

Strategic planning and consultation

Compliance Support

Documentation and filing assistance

Business Setup

Licensing and registration guidance

Partnership Services

Saudi partnership facilitation

We assist investors in obtaining necessary business licenses, which notably includes securing commercial registration certificates and memoranda of association. Simultaneously, our team provides guidance through the entire process of establishing businesses in Saudi Arabia, ensuring compliance with current regulations.

Our expertise extends to various critical areas:

Tax registration and compliance monitoring
Business license acquisition
Commercial registration processing
Investment opportunity analysis
HR services and business incubation

Through our dedicated team of experts, we maintain current knowledge of Saudi tax laws and procedures. This expertise enables us to guide clients through regulatory requirements while ensuring their operations remain compliant with local laws.

For foreign investors seeking to establish operations in Saudi Arabia, we offer specialized support in understanding and accessing various tax incentives. These benefits might include tax exemptions for new projects in specific sectors, such as:

Petrochemical industries
Technology development
Research initiatives
Tourism projects

Our approach focuses on delivering practical solutions while maintaining high ethical standards. Through our extensive experience dealing with ZATCA and other regulatory bodies, we help clients navigate complex tax procedures efficiently. This comprehensive understanding of Saudi business environment enables us to provide tailored advice that aligns with both regulatory requirements and business objectives.

Working alongside international investors, we facilitate access to various regional incentives beyond national-level tax benefits. These often include additional tax reductions and customs facilitations in specific economic zones, thereby maximizing potential advantages for our clients.

FAQs

Q1. What is the current VAT rate in Saudi Arabia? The current Value Added Tax (VAT) rate in Saudi Arabia is 15%. This rate was implemented in July 2020, increased from the initial rate of 5% introduced in January 2018.

Q2. Are there any income taxes for individuals in Saudi Arabia? Saudi Arabia does not impose individual income tax on employment earnings. However, non-employment income may be taxed as an entity or permanent establishment.

Q3. What is Zakat and who is required to pay it? Zakat is a religious wealth tax in Saudi Arabia, applied at a rate of 2.5% on the net worth of businesses owned by Saudi and Gulf Cooperation Council (GCC) citizens. It is calculated based on the company's Zakat base rather than income.

Q4. What are the corporate tax rates in Saudi Arabia? The standard corporate tax rate in Saudi Arabia is 20% for foreign investors. However, oil and hydrocarbon production companies are subject to higher rates ranging from 50% to 85%. Companies with mixed ownership may be subject to both corporate tax and Zakat, proportionally.

Q5. How long must businesses retain tax records in Saudi Arabia? Businesses in Saudi Arabia must retain standard VAT records for a minimum of 6 years. However, capital assets records must be kept for 11 years, and real estate records for 15 years. All records must be maintained in Arabic and stored within Saudi Arabia.

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Taxes in Saudi Arabia