Saudi Arabia is well known as a tax free country, but that doesn’t mean there are no taxes at all. The tax rules in Saudi Arabia are quite complex and depend on your residency status and income sources. In this comprehensive guide, we will walk through the key things you need to know about taxes in Saudi Arabia.
Income Tax in Saudi Arabia
There is no personal income tax for Saudi citizens in Saudi Arabia. Saudi citizens who work in either the public or private sectors do not pay any taxes on their income. Income earned from employment, real estate, investments, and other sources is not taxed for Saudis.
For non-Saudis living and working in Saudi Arabia, the income tax rules depend on their residency status:
- Non-Saudi residents do not pay income tax on employment income earned in Saudi Arabia. This includes salaries, wages, allowances, bonuses, commissions, and other benefits.
- Non-residents pay tax on Saudi-sourced income based on Saudi tax law. This includes income from investments in Saudi companies, real estate, and other assets located within Saudi Arabia. The income tax rate can range from 5% to 20% depending on the type of income.
In summary, Saudis pay no personal income taxes while resident expatriates are exempt from paying taxes on employment income. Non-residents pay tax on Saudi-sourced income only.
Corporate Income Tax
While individuals largely enjoy income tax exemptions in Saudi Arabia, companies incorporated in Saudi Arabia are subject to corporate income tax.
The corporate income tax rate in Saudi Arabia is a flat 20% for most companies. Special rates apply for natural gas investment activities (30%), oil and hydrocarbons companies (50-85%), and companies engaged in natural gas investment activities (30%).
Companies engaged in petrochemical production benefit from much lower tax rates ranging from 7% to 12%, depending on the type of activity. Transportation of gas and oil also qualifies for preferential rates.
All companies operating in Saudi Arabia must file annual tax returns and pay any corporate income tax dues. The deadline is 120 days after the end of the tax year.
Value Added Tax (VAT)
Saudi Arabia implemented a Value Added Tax (VAT) starting January 1, 2018. This is a consumption tax applied on the supply of most goods and services in Saudi Arabia.
The standard VAT rate is 5% in Saudi Arabia. A zero tax rate applies on certain essential goods and services like healthcare, education, and basic food items.
VAT is applied to sales made by Saudi companies as well as imports into the kingdom. Registered businesses collect VAT from customers on taxable sales and remit it to the government after deducting VAT paid on business expenses.
Who Must Register for VAT
Businesses with annual taxable sales over SAR 375,000 (USD 100,000) are required to register for VAT in Saudi Arabia. Voluntary registration is allowed for businesses with annual sales between SAR 187,500 and SAR 375,000 (USD 50,000-100,000).
VAT Compliance
VAT registered businesses must file VAT returns and remit VAT payments to the General Authority of Zakat and Tax (GAZT) on a monthly or quarterly basis. Late payment penalties can apply for non-compliance.
Proper VAT invoices must be issued for all taxable sales. Records should be maintained to support VAT transactions and returns.
Withholding Tax
Saudi Arabia imposes withholding taxes on certain types of payments made to non-residents where income tax treaties allow:
- Dividends – 5%
- Interest – 5%
- Royalties – 15%
- Technical/management services fees – 20%
- Rental payments – 15%
These taxes are not applied on payments to treaty countries that expressly prohibit such taxes. Reduced rates may also apply under certain treaties.
The payer of such amounts is required to withhold the tax and remit it to GAZT. Withholding agents failing to withhold tax are subject to penalties.
Capital Gains Tax
Saudi Arabia does not impose any capital gains tax on profits earned on investments, property sales, or other asset disposals for individuals. Companies are also exempt from capital gains tax, with minor exceptions.
Inheritance Tax
There is no inheritance or estate tax in Saudi Arabia. The assets of deceased individuals can be transferred to heirs without any tax implications.
Excise Tax
In 2017, Saudi Arabia introduced a selective excise tax on certain goods deemed harmful to public health and the environment. These include:
- Tobacco products – 100%
- Carbonated drinks – 50%
- Energy drinks – 100%
The tax is paid by manufacturers, importers, and other persons involved in bringing excisable goods into Saudi Arabia. The prices of targeted products have increased significantly since the new tax.
Property Transfer Fees
Saudi Arabia imposes a real estate transfer tax on properties changing ownership. The tax rate is 5% of the property value and applies to all real estate transfers except new property (with sale within 3 years of completion).
This tax is paid by the property buyer, not the seller. It is collected by the notary public completing the sale deed registration.
Is Saudi Arabia Tax Free for Expats?
Whether Saudi Arabia is tax free for expats depends primarily on their residency status.
Expatriates with Saudi residency permits do not pay income tax on their employment income and other Saudi-sourced income. They only pay VAT on purchases and property transfer fees on real estate buys.
Non-resident expats pay Saudi income tax on earnings from Saudi businesses, real estate, and equity. Withholding taxes can apply on passive income like dividends, interest, and royalties.
So in essence, Saudi Arabia is largely tax free for resident expats on employment and investment income. Non-residents face Saudi taxes on local sources of income.
Tax Benefits for Foreign Investors
Saudi Arabia offers significant tax incentives to attract foreign investment in key sectors and activities:
- No capital gains tax – Gains on sale of real estate and securities are not taxed
- No withholding tax on dividends – For foreign shareholders in listed companies
- Tax holidays – 10 years for strategic sectors like renewables, tourism, and industrial manufacturing
In addition, Saudi Arabia has signed over 60 double tax avoidance agreements with countries like China, India, and major European nations. These treaties provide beneficial tax treatment for cross-border businesses and investments.
Zakat in Saudi Arabia
While Saudi Arabia has limited income taxes, it imposes religious dues called Zakat on Saudis meeting certain criteria:
- Adult Saudi Muslims with holdings above a minimum threshold (SAR 42,875 in 2022) must pay 2.5% of their assessable assets as Zakat every year.
- This applies to cash, bank deposits, gold, shares, funds, retail inventory, and other assets.
- Zakat contributions are distributed by the government to assist the needy and for other charitable causes.
Expats and companies are exempt from paying Zakat in Saudi Arabia. However, some expats may choose to pay Zakat voluntarily.
Conclusion
In summary, Saudi Arabia offers significant income and capital gains tax exemptions for individuals and companies. The country aims to use these tax incentives to boost foreign investment, create jobs, and diversify the economy.
Resident expats enjoy tax free employment income but still pay VAT on purchases. Non-residents face Saudi income tax on local sources of income. While not completely tax-free, Saudi Arabia offers one of the most favorable tax regimes in the Gulf region.