The Saudi Income Tax System: A Comprehensive Guide

The Saudi Income Tax System: A Comprehensive Guide

Do you have sufficient background about the Saudi income tax system? This system has emerged among the important topics that concern individuals and companies alike, as they wonder about what it is, how to calculate it, and the procedures for registering and submitting returns. Whether you are a resident employee, a startup owner, or a foreign investor, understanding the details of this tax has become an indispensable necessity. This article serves as a comprehensive guide that answers all your questions, thus giving you the ability to manage your income and tax obligations efficiently.

What is income tax in Saudi Arabia?

Income tax in Saudi Arabia is a tax imposed on the income of certain entities, excluding the income of individual citizens. It is applied to:

1. Companies residing and registered in the Kingdom.
2. Non-Saudi investors, whether individuals or companies.
3. Companies operating in some specific sectors such as the oil and gas sector.

Income tax on salaries in Saudi Arabia is not applied to Saudi citizens, and instead the zakat system is applied, which is calculated at 2.5% of the net assets subject to zakat.

Income tax calculation in Saudi Arabia

As for how to calculate income tax in Saudi Arabia, it is done through the following steps:

1. Determine total income, including profits, revenues, and all gains resulting from carrying out the taxable activity.
2. Determine net income after deducting expenses allowed in accordance with the Saudi income tax system.
3. Applying the income tax rate in Saudi Arabia to the net income that has been determined, and this rate varies depending on the type of entity and the sector to which it belongs.

Income tax rate in Saudi Arabia

The income tax rate in Saudi Arabia is determined in accordance with the system and its executive regulations as follows:

1. Imposing a 20% tax rate on annual taxable incomes for non-Saudi resident individuals.
2. Imposing a 20% rate on companies operating in the field of natural gas production and processing.
3. Imposing a rate ranging from 50% to 85% on petroleum enterprises engaged in the production of oils and hydrocarbons.

Criteria for determining the source of income subject to the Saudi income tax system

It is essential to be familiar with the conditions and rules that determine whether resident individuals and companies are subject to the income tax system in Saudi Arabia. This is not limited to simply residing or establishing a company in the Kingdom, but also requires meeting certain conditions related to the source of income to determine whether it is subject to tax or not. The details of these conditions are as follows:

Regarding commercial and real estate activities:

1. Activities carried out within the Kingdom, whether commercial, industrial, professional or service activity, are carried out in whole or in part within the Kingdom.
2. Real estate in the Kingdom, including income resulting from owning, renting, selling, or any form of disposal of real estate located within the Kingdom, whether land or buildings.

Regarding investments and property rights

3. Profits resulting from selling shares in companies residing in the Kingdom or exiting partnerships in these companies.
4. Income resulting from the rental of movable property used within the Kingdom, such as machinery, equipment and vehicles.
5. Income resulting from the sale or license to use intellectual property rights, such as: patents, trademarks, and copyrights, or industrial property, such as: industrial designs and models in the Kingdom.
6. Profits resulting from owning shares in companies residing in the Kingdom, as well as management fees and board members’ fees paid by these companies.

In relation to transactions and services

7. Amounts paid as a result of internal transactions between parent companies and their subsidiaries or associated companies, if these transactions are related to activities in the Kingdom.
8. Amounts paid for services performed in whole or in part within the Kingdom, regardless of the place of residence of the payer.
9. Income resulting from the use or exploitation of any of the Kingdom’s natural resources, such as oil, gas, and minerals.

Non-taxable income

Below we summarize the most important points that answer your question about personal income tax or types of non-taxable income:

1. No tax is imposed on any income belonging to a Saudi citizen, except for income resulting from oil and gas sector activities, with the aim of encouraging Saudi citizens to invest, own companies, and benefit from their country’s resources.
2. The income tax rate in Saudi Arabia on foreign residents and investors is an important factor that attracts or expels foreign investments in any country, and it is used in the Kingdom as a tool to attract foreign investments or direct them towards specific sectors.
3. The Kingdom imposes high income taxes on the oil and gas sector with the aim of encouraging investment in economic sectors other than oil and diversifying sources of national income.

Regarding corporate income tax, there are cases in which taxes are exempt, as follows:

1. Profits resulting from the sale of property are not significantly related to the assets of the company’s main business activity.
2. Profits resulting from the sale of current assets in accordance with the Kingdom’s terms, including: securities, the financial market inside or outside the Kingdom.
3. Dividends to shareholders, provided that the company’s ownership percentage in the capital is not less than 10% for a full year.

Steps to register for income tax in Saudi Arabia and submit a tax return

You can now register electronically for income tax in Saudi Arabia, as the entire system is subject to the Zakat and Income Authority website, which aims to collect zakat, collect taxes and customs duties, and achieve tax and customs compliance by taxpayers, by applying the relevant rules, regulations, and instructions accurately and transparently.

The Authority also provides distinguished and high-quality services that enable taxpayers to understand and fulfill their obligations easily and conveniently, and to take the necessary measures to ensure the collection of all dues owed to them, in a way that achieves justice and the required revenues for the state, and the following are the registration steps:

1. Log in to the website of the General Authority of Zakat and Income.
2. Income tax registration.
3. Fill in the data and attach all required documents.

The Authority will review your application and, if approved, send you the tax certificate and transaction number.

You can also submit an income tax return on salaries in Saudi Arabia electronically, by going to the Income Tax Services section on the portal and choosing the Returns section, from which you select the option “Income Tax Return”, then fill in the required data in the return, ensuring its accuracy, and click on the “Submit” button.

If the return is sent, you will receive an electronic notification via email or SMS indicating the amount of income tax due, so that you can pay it electronically within the specified time period.

Penalty for failure to register for income tax in Saudi Arabia

The Saudi income tax system stipulates the imposition of financial fines in cases of non-compliance with its provisions, including: failure to submit the tax return on time and delay in paying the due tax, as well as cases of manipulation or fraud with the aim of reducing the value of the tax.

The system has set these fines in fair proportions commensurate with the size of the violation and the losses resulting from it, as follows:

1. The late payment fine ranges from 5% to 25% of the unpaid tax value, and this percentage increases upward with the increase in the period of delay.
2. A fine for tampering with data. If tampering is proven or incorrect information is provided with the aim of reducing the value of the tax due, a fixed fine of 25% of the real tax value is imposed.

These penalties aim to ensure compliance with the provisions of the Saudi income tax system, achieve justice among those charged with it, and deter violations and manipulations that may affect the state’s public revenues.

In conclusion, we hope that this guide has provided you with a comprehensive and clear overview of the Saudi income tax system. However, tax systems may change or some of their provisions require a good understanding to ensure full compliance and avoid any future legal issues. So, if you need professional assistance in understanding the details of individual or corporate income tax or the types of income tax and applying them to your specific situation, The Office of Lawyer Abdul Majeed Al Rashid Law Firm and Legal Consultations stands ready to provide legal support and specialized tax consultations.