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Income Tax in Saudi Arabia



Personal Income Tax:

There is no individual income tax scheme in Saudi Arabia.

Income tax is not imposed on an individual's earnings if they are derived only from employment in Saudi Arabia.

Non-employment income is taxed as an entity or permanent establishment (PE).

A non-resident person with no PE who derives income from a source in Saudi Arabia is taxed based on the withholding tax (WHT) regulations.

Residency Rule:

An individual is considered a resident in Saudi Arabia for a taxable year if one meets any of the two following conditions:

· One has a permanent place of residence in Saudi Arabia and resides in Saudi Arabia for a total period of not less than 30 days in the taxable year.

·  One resides in Saudi Arabia for a period of not less than 183 days in the taxable year.

With regards to counting the number of days, residence in Saudi Arabia for part of a day is considered residence for the whole day, except in case of a person in transit between two points outside Saudi Arabia.

Corporate Income Tax:

Income tax. Income tax is assessed on profits of the following:

·  A resident capital company (only on profits attributable to shares owned by non-Saudi or non-Gulf Cooperation Council [GCC] shareholders;

· A resident non-Saudi or non-GCC natural person who carries on a business in Saudi Arabia

· A nonresident company that carries on business in Saudi Arabia through a permanent establishment

·  A person engaged in the field of natural gas investment

· A person engaged in the production of oil and hydrocarbon materials

·  A nonresident that derives income subject to tax from sources in Saudi Arabia (tax is assessed through withholding tax)

Partners in partnerships (that is, general partnerships, unincorporated joint ventures and limited partnerships) are subject to tax rather than the partnerships themselves.

For income tax purposes, non-Saudis do not include citizens (nationals) of countries that are the members of the GCC. Members of the GCC are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. The share of profits attributable to interests owned by GCC nationals in a company is subject to zakat (see Section D). The share of profits attributable to interests owned by non-GCC nationals in that company is subject to income tax.




Rates of tax:

 Natural Gas Investment Tax (NGIT) applies to natural or legal persons (including GCC nationals and entities) engaged in natural gas, natural gas liquids and gas condensates investment activities in Saudi Arabia. NGIT does not apply to a company engaged in the production of oil and other hydrocarbons.

The NGIT rate ranges from 30% to 85% and is determined on the basis of the internal rate of return on cumulative annual cash flows. The NGIT rate includes income tax of 30%.

Companies engaged in the production of oil and other hydrocarbons are subject to tax at a rate of 85%.

Companies not subject to NGIT or the 85% tax are taxed at a rate of 20%.

Withholding tax:

 A Saudi resident entity, including a permanent establishment of a nonresident, is required to withhold tax from payments made to nonresidents that do not have a legal registration or a permanent establishment in Saudi Arabia with respect to income earned from a source in Saudi Arabia. This rule applies regardless of whether the payer is considered to be a taxpayer under the regulations and whether such payments are treated as a tax-deductible expense in the Saudi resident entity’s tax declaration. The following are the withholding tax rates.

Type of Payment
Rate (%)
Payments for technical or consultancy services to unrelated parties, payments for services for international telephone calls, rental, airline tickets, air or sea freight charges dividends distributed, returns on loans and insurance or reinsurance premiums
5
Royalties, payments to the head office or any other related companies for services, including technical or consultancy services and services for international telephone calls
15
Management fees
20
All other payments
15

Loan fees (interest expenses and commissions) on interbank deposits paid to nonresident banks are exempt from Saudi withholding tax if such deposits remain with the Saudi resident borrower banks for a maximum period of 90 days. Resident borrower banks are required to submit an annual statement attested by the Saudi Arabian Monetary Authority listing the names of the nonresident lending banks, their addresses, periods of lending and the amount of loan fees paid.

The party withholding the tax must register with the General Authority for Zakat and Tax (GAZT) before the settlement of the first tax payment. The party withholding the tax must deposit the tax withheld with the GAZT within the first 10 days of the month following the month in which the taxable payment is made and issue a certificate to the nonresident party. A delay fine of 1% for each 30 days of delay is computed after the lapse of 30 days from the due date of tax until the date on which the tax is paid. An annual withholding tax return must be filed within 120 days following the end of the tax year.

Capital gains:

 In general, capital gains are treated as ordinary income and taxed at the regular corporate rates. Capital gains realized by nonresident shareholders on the disposal of shares in a Saudi Arabian company are subject to tax at a rate of 20%.

However, capital gains arising on the sale by non-Saudi shareholders of shares in a Saudi joint stock company traded on the Saudi stock exchange are exempt from tax if the shares (investments) were acquired after the effective date of the new tax regulations (30 July 2004).

Gains on the disposal of property other than assets used in a business activity are also exempt from tax.




Administration:

All persons subject to tax (excluding nonresidents who derive income from a source in Saudi Arabia and are subject to final withholding tax) are required to register with the GAZT before the end of their first fiscal year. Failure to register with the GAZT results in the imposition of a fine ranging from SAR1,000 to SAR10,000.

A taxable entity that has a permanent establishment or commercial registration in Saudi Arabia must file its annual tax declaration with the GAZT based on its accounting books and records within 120 days following the end of the tax year and pay the income tax due with the tax declaration. However, the GAZT may and generally does request audited financial statements before issuing the final tax assessments.

The Saudi Arabian Income Tax Regulations require certification of annual tax declarations reporting taxable revenue in excess of SAR1 million. A locally licensed chartered accountant is required to certify the validity of the information contained in the taxpayer’s return and also certify the following:

· The information contained in the declaration is taken from the taxpayer’s books and records (maintained in Arabic and in Saudi Arabia) and is in accordance with such records.

· The return is prepared according to the standards, requirements and provisions of the Saudi Arabian Income Tax Regulations.

The nonresident partners of partnerships are subject to tax, rather than the partnerships themselves. However, partnerships must file an information declaration within 60 days after the end of the tax year.

Fines for non-submission of tax declarations by the due date may be imposed at a rate of 1% of the total revenue, with a maximum fine of SAR20,000. A fine is also calculated based on a percentage of the underpaid tax. Such a fine is payable if it exceeds the amount of the fine based on total revenue. The following are the percentages applied to underpaid tax:

· 5% of the underpaid tax if the delay is up to 30 days from the due date

· 10% of the underpaid tax if the delay is more than 30 and not more than 90 days from the due date
· 20% of the underpaid tax if the delay is more than 90 and not more than 365 days from the due date
· 25% of the underpaid tax if the delay is more than 365 days from the due date

An advance payment on account of tax for the year is payable in three installments. The installments are due by the end of the 6th, 9th and 12th months of the tax year. Each installment of advance payment of tax is calculated in accordance with the following formula:

25%*(A-B)

For the purposes of the above calculation, “A” equals the taxpayer’s liability as per the tax declaration for the preceding year and “B” equals tax withheld at source for the taxpayer in the preceding year.

A taxpayer is not required to make advance tax payments in a year if the tax liability for the preceding year was less than SAR2 million.

A delay fine of 1% for each 30 days of delay after the lapse of 30 days from the due date of tax until the date the tax is paid.

Dividends:

 Dividends paid to nonresident shareholders are subject to withholding tax at a rate of 5%.

Foreign tax relief:

 Relief is not provided for foreign taxes paid (unless covered by a double tax treaty).





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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.


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This blog is Created by CA Anil Kumar Jain.