Saudi Income Tax: Rules, Rates, and Filing Process

Saudi Arabia’s tax system differs from many Western countries, as it does not levy a personal income tax on salaries or wages. Instead, its system is built upon two pillars: Zakat, a religious obligation for Saudi and other Gulf Cooperation Council (GCC) nationals, and income tax, which is directed at the business income of foreign investors and non-resident entities. This approach means tax liability is determined by nationality, residency status, and the nature of the income-generating activity. The Zakat, Tax and Customs Authority (ZATCA) is the governmental body responsible for administering these regulations.

Determining Tax Liability in Saudi Arabia

Zakat is an Islamic financial contribution calculated at a rate of 2.5% on the Zakat base, which includes items like working capital. This is obligatory for Saudi and GCC citizens, as well as companies wholly owned by them. For businesses with mixed ownership between GCC and non-GCC nationals, the portion of income attributable to the GCC partner is subject to Zakat, while the foreign partner’s share is subject to income tax.

The income tax regime applies to non-Saudi individuals and entities generating income from sources within the Kingdom. A resident company with foreign ownership is taxed on the income corresponding to the non-Saudi partner’s stake. Similarly, a non-Saudi individual who is a resident and conducts business activities in the country is subject to income tax on their profits.

A central concept for non-resident entities is the “permanent establishment” (PE). A non-resident company is considered to have a PE in Saudi Arabia if it has a fixed place of business, such as a branch or office, through which it carries out its activities. The existence of a PE triggers a corporate income tax liability on the profits generated by that establishment.

Calculating the Taxable Base

For entities subject to corporate income tax, the taxable base is the company’s net profit. The calculation begins with the company’s gross income for the fiscal year, which includes all revenues from its primary activities and capital gains from the disposal of assets within the Kingdom.

From this gross income, the Saudi tax law permits the deduction of business expenses incurred to generate that income. Deductible costs include employee salaries, rent for office space, and utility payments. These direct operational costs are subtracted from the gross income to arrive at the adjusted profit figure.

Another deduction relates to the depreciation of assets. Businesses can deduct the depreciation of their tangible and intangible assets over their useful life, in accordance with rates approved by ZATCA. After subtracting all allowable expenses and depreciation from gross income, the resulting figure is the taxable base.

Applicable Tax Rates and Other Key Taxes

The standard corporate income tax rate in Saudi Arabia for foreign investors is a flat 20% of net adjusted profits. This rate applies to the share of income attributable to non-Saudi partners in resident companies and to the profits of a non-resident’s permanent establishment. Specific industries, such as those involved in oil and hydrocarbon production, are subject to a different tax rate structure.

Withholding taxes are also applied to certain payments made from a Saudi resident entity to a non-resident. These taxes are levied at the source of payment and include:

• Dividends: 5%
• Royalties: 15%
• Management fees: 20%
• Technical and consulting fees: 5% to 15%

The Kingdom also imposes a Value Added Tax (VAT) of 15% on most goods and services. Businesses with annual revenues exceeding SAR 375,000 are required to register for VAT, collect the tax, and remit it to ZATCA.

The Tax Filing and Payment Process

The tax compliance process requires adherence to specific timelines. Any entity subject to tax must first register with the Zakat, Tax and Customs Authority (ZATCA) to receive a Tax Identification Number (TIN) for all filings.

Following the end of a company’s financial year, it must prepare and file an annual tax return within 120 days. For example, if a company’s financial year concludes on December 31, its tax return must be filed by April 30 of the following year. This return details the company’s income, deductible expenses, and final tax liability.

The submission of the tax return and the corresponding payment are handled electronically through ZATCA’s e-services portal. This system facilitates a streamlined process for taxpayers to meet their obligations. The calculated tax amount must be paid by the same deadline.