In this article, we hear from Omer Saleem, Chief Finance Officer for Proven SA, based in our Riyadh corporate office.

Taxation, or lack thereof, is often cited as one of the key marketing points for the GCC region. However, it is also one of the most misunderstood elements for establishing and operating a business in the Middle East. I have provided a high-level overview of the various taxation areas that businesses should be mindful of when operating in Saudi Arabia.

It should be noted that individuals, both Saudi, and expatriates, living in Saudi Arabia are not subject to personal income tax. Thus, individuals earning income through gainful employment do not see any deductions from their salaries. Social Insurance (GOSI) is the responsibility of the employer and is paid as such on their behalf with no net impact on the employee. However, employees, especially expatriates, should be mindful of indirect expenses such as exit re-entry fees and dependent fees.

Business entities fall into two categories for consideration of taxes within the Kingdom of Saudi Arabia. The first is a non-resident entity and the second is a resident entity. The non-resident entity is any company outside of the GCC doing business in Saudi Arabia without a SAGIA license. Those registered within Saudi or GCC countries are deemed as resident entities.

Non-resident entities pay 20% tax on income derived from commercial activities within Saudi Arabia. Meanwhile, resident entities pay 2.5% of their income from commercial activities in the form of Zakat. If the ownership of a company is split between a resident and a non-resident then a pro-rata tax basis is applied to each party’s share in the company. There are two exceptions to the corporate tax rates. The first is related to companies operating in the production of oil or the hydrocarbons value chain and these companies pay an 85% rate. The second is on companies engaged in natural gas investment fields and these companies pay a 30% rate.

The fiscal tax year for companies is generally a year from the issuance of the commercial registration or license. Companies can however request a different fiscal year based on a number of operating criteria if applicable. Zakat and corporate taxes are filed once a year based on the audited financials through the GAZT (General Authority for Zakat and Income Tax) also referred to as DZIT (Department of Zakat and Income Tax).

Zakat is applicable to capital that is not invested in long-term investments or fixed assets. Companies owing Zakat should be mindful of end-of-service accruals, depreciation, owners’ capital, owners’ outstanding profit share accruals, statutory reserves, and end-of-service indemnities.

Any dividends received in Saudi Arabia are treated as income and are subject to the above-mentioned treatment for tax purposes. There is a 5% withholding tax applicable on dividends paid to non-residents. There is also a 5% withholding tax applicable to non-resident third-party entities engaged in technical services and this rate goes up to 15% for related parties engaged in technical services.

In 2018 there is another layer of complexity that will be added to GCC taxation with the establishment of Value Added Tax. Starting January 2018, Saudi Arabia and the UAE will be the first GCC economies to commit to implementing VAT. The Saudi Arabian economy is still primarily driven by the petrochemical industry, natural resources, commodities, and service sectors. Therefore, the downstream effects of VAT will be significant for all KSA operating businesses.

The corporate taxation system in Saudi Arabia may seem daunting but is in fact quite simpler and easier to manage compared to the majority of OECD nations. Companies operating within Saudi Arabia should allocate adequate resources for the management and oversight of their financial responsibilities.