Recent changes to the tax code in Saudi Arabia have left many individuals and companies unsure of their tax obligations. The implementation of the new tax law in Saudi Arabia has elicited mixed responses. While some regard it as a necessary step towards economic development, others worry it will hurt people and businesses.
Because there is a lot of misinformation and misperception about the law, many find it difficult to appreciate its complexities. This article will break down the key components of the Kingdom’s new tax law in a crisp manner.
Individuals and business owners must stay current on emerging trends to maintain legal compliance and make wise financial decisions. Let’s look at the details and bust some misconceptions about these recently implemented tax laws.
What do the laws say?
The newly passed tax laws seek to standardise the processes for zakat and tax rules, improve transparency, and align Saudi Arabia’s tax laws with the best international practices. It will make it possible for the laws to align with the Kingdom’s ‘Vision 2030’ economic plan.
The Zakat Tax and Customs Authority released the ‘Income Tax Law Draft’ on the ‘Istitlaa Portal’ on October 25, 2023. Its goal is to amend the Kingdom’s current income tax system, which is governed by the ‘Income Tax Law’. The law establishes protective measures to stop transactions with tax havens.
The primary aim of the proposed legislation is to enhance the applicability of income tax to individuals and non-residents involved in business, investment, or real estate-related activities.
Status of residence
The proposed law distinguishes between residents and non-residents because non-Saudi citizens are liable to income tax. Along with those legally constituted in Saudi Arabia, entities having their functional principal place of management located within the Kingdom will also be recognised as ‘Legal Persons’.
Additionally, individuals who possess a residence permit, have their domicile in Saudi Arabia and have lived in the Kingdom for thirty days consecutively or collectively over 365 days are considered Natural Resident Persons.
If either of these conditions is met, individuals who spend 183 days consecutively or collectively in the Kingdom during a tax year, or who stay for 90 days consecutively or collectively in a tax year on top of having spent a total of 270 days consecutively or collectively over the previous three tax years, are also considered ‘Natural Resident Persons’.
It will be simpler to comprehend who is deemed to be taxable along these lines.
Breaking down things further
Regarding taxation, a legal person involved in any activity related to the extraction of oil or hydrocarbons, investments in natural gas, or ownership of any interest or units, whether directly or indirectly, by a non-Saudi business, will be subject to taxation.
Taxation of non-resident individuals: Individuals who operate through Permanent Establishments (PE) and are regarded as non-residents are nonetheless subject to taxation.
In addition, non-resident individuals who trade or invest in the stocks of publicly traded companies, open bank accounts in the Kingdom, and non-resident individuals who do not maintain a permanent establishment but receive income from Saudi Arabian sources will be considered taxable persons.
The majority of taxable income under the proposed law originates from Saudi Arabian sources. It offers tax exemptions on several capital gains, particularly those resulting from restructuring transactions that further economic development goals.
Among other things, non-recoverable input VAT and real estate transaction tax have been added to the list of deductible expenses. The law also limits the amount of monetary expense that can be subtracted to promote accountability and openness.
New provisions that alter WHT (Withholding Tax) rates and exempt particular payments from WHT are included in the ITL revisions. This includes exclusions from listed corporations’ payments to non-resident shareholders and a 10% WHT on payments made to non-residents for services delivered.
A 5% WHT on loan fees to related parties is another suggestion made by the proposals. Amendments to Article 16 of the VAT implementing rule will regulate the treatment of costs related to research, development, and innovation to better align with the Kingdom’s priority on technological improvement.
Fallouts on Saudi economy
The five-year statute of limitations for tax assessments is lowered to three years under the proposed plan, which also allows for extensions under specific circumstances.
The penalties for noncompliance have increased significantly, especially when it comes to tax evasion, where fines can reach 100% to 300% of the unpaid tax or Zakat. The Kingdom’s resolve to maintain tax compliance is shown by these actions.
The reforms are essential to Saudi Arabia’s economic future, particularly in encouraging investments. It is projected that increasing tax revenues and enhancing economic stability will result from the emphasis on tax compliance and transparency.
Foreign investment and fiscal policy
In Saudi Arabia, Foreign Direct Investment (FDI) is a major factor in economic growth and development. The country’s appeal as an investment destination may be impacted by the planned revisions to the tax code. Saudi Arabia may become less competitive in the region when compared to other nations due to higher business tax rates.
The fiscal policy of Saudi Arabia will be greatly impacted by the modifications made to its tax code. The government will have more money to spend on social welfare initiatives, infrastructure development, and economic diversification projects if non-oil sectors generate more revenue. It is anticipated that these actions will boost economic expansion and lessen the nation’s reliance on foreign energy.
Corporate tax
The proposed modifications to Saudi Arabia’s tax code are primarily intended to boost government coffers. With the introduction of value-added tax (VAT) and higher corporation tax rates, the planned revisions to the tax code are anticipated to have a major effect on the Saudi Arabian economic environment. The country’s enterprises may incur higher expenses as a result of these actions.
To support firms during the transition phase, the government has also announced several incentives and exemptions, which is crucial to highlight.
Foreign companies that place their regional headquarters in the Kingdom will receive a 30-year corporate income tax exemption, as announced in 2023.
Saudi Arabia’s Ministry of Investment said foreign firms who move their regional headquarters to the Kingdom can benefit from zero income tax from the date of the regional headquarters issuing permission.
The Ministry of Investment and the Royal Commission for Riyadh City collaborated to entice foreign corporations to locate regional headquarters in Saudi Arabia.
The regional headquarters programme encourages foreign corporations to create regional headquarters in Saudi Arabia across the Middle East and North Africa (MENA) region by demonstrating the Kingdom’s many incentives.
According to Saudi Arabia’s Minister of Investment Khalid Al Falih, global companies opening regional offices in the Kingdom will receive preferential rewards for Saudization compliance.
He noted that over 200 companies have moved their headquarters to Saudi Arabia due to its economic climate.
Saudi Finance Minister Mohammed Al-Jadaan said further, “The new tax exemptions, granted on the activities of regional headquarters of international companies in the Kingdom will give these firms more clarity of vision and stability, which will enhance their capabilities for future planning and expanding their business in the region.”
Al-Falih claimed in November 2023 that Saudi Arabia had exceeded the regional headquarters programme’s goal of attracting 160 multinational enterprises by the year’s end.
Al-Falih told Bloomberg that the regional headquarters programme is a long road and that the Kingdom is working with international organisations to provide a suitable environment for their offices in Saudi Arabia.
Recent Saudi Arabia headquarters openings include PwC Middle East and GE Healthcare.
According to him, Saudi Arabia is a safe place for foreign investment despite geopolitical and economic issues.
A significant step in modernising the tax code and bringing it into line with international standards is the ‘Saudi Arabian Draft Income Tax Law’.
Foreign investors and businesses operating in the Kingdom must carefully consider how the upcoming tax adjustment may impact their operations in Saudi Arabia.
For foreign enterprises and Saudi taxpayers, this dynamic structure presents both opportunities and challenges. It is subject to change based on public response.