Understanding Income Tax in Saudi Arabia

When people think of Saudi Arabia, one of the first economic benefits that comes to mind is the lack of personal income tax. While this is true for most residents, there is still a complex and evolving tax system in place, particularly for businesses, foreign entities, and certain professionals. This guide will help you understand how income tax, tax returns, and filing requirements work in the Kingdom of Saudi Arabia (KSA), both for nationals and expatriates.

By the end of this article, you’ll understand:

• Who needs to file an income tax return in Saudi Arabia
• Current taxation laws and updates
• What to expect if you receive an income tax notice
• The role of professional firms like Expandway in ensuring compliance

Let’s get into it.

Overview of Income Tax Saudi Arabia

Saudi Arabia is widely known for not imposing personal income tax on salaries or wages. However, that does not mean the country is tax-free. The Saudi tax regime includes other taxes, particularly on businesses and non-Saudi investors.

Who Is Subject to Income Tax in KSA?

• Foreign-owned businesses: Companies owned by non-GCC nationals are subject to a 20% income tax on net profits. They must maintain audited financial records, register with ZATCA, and file annual tax returns. Timely compliance ensures smooth operations and avoids financial penalties.
• GCC nationals: Treated like Saudis for tax purposes—usually exempt from income tax and instead subject to Zakat. This exemption encourages investment within the GCC region and simplifies the tax obligations for Gulf-based individuals and businesses.
• Mixed ownership companies: These are companies with both Saudi/GCC and non-GCC ownership. The foreign shareholder’s share is taxed under the income tax regime, while the GCC shareholder’s portion is subject to Zakat, requiring dual calculations and filings.
• Freelancers/Contractors: Foreign individuals offering professional services in KSA may need to register with ZATCA and file an income tax return. This is especially relevant for consultants, technical experts, and remote professionals contracted by Saudi firms.

Note: Saudi citizens and GCC nationals only pay Zakat, a form of religious wealth tax, which is calculated based on net worth and assessed annually.

GCC nationals: Treated like Saudis for tax purposes usually exempt.

Types of Tax in Saudi Arabia

While personal income tax isn’t applicable to most, several other types of taxation form the foundation of the Saudi fiscal system. These taxes impact businesses, foreign investors, and certain individuals based on their status and financial activity.

1. Corporate Income Tax

Foreign-owned entities in Saudi Arabia are required to pay corporate income tax at a standard rate of 20% on net profits. This includes branches of foreign companies and any business where non-GCC nationals hold shares. Businesses must also comply with documentation and reporting requirements to determine accurate tax liabilities. The income tax is calculated on the basis of the net income reported in the audited financial statements, adjusted for disallowed expenses or exempt income.

2. Withholding Tax

Withholding tax applies to payments made from Saudi entities to non-resident parties, including royalties, dividends, technical services, rent, and interest. Tax rates vary depending on the nature of the payment:

• 5% for dividends
• 15% for royalties
• 15% for technical and consultancy services
• 20% for other categories, such as rent or management fees

Businesses are responsible for deducting the correct amount and remitting it to ZATCA. Failure to comply may result in audits or penalties.

3. Zakat

Zakat is a religious obligation applicable only to Saudi and GCC nationals and their businesses. It is calculated at 2.5% of the zakatable base, which includes certain assets and revenue items. The Zakat base is assessed annually, and entities must file returns with ZATCA. While not considered income tax, it operates in parallel and is administered by the same authority.

4. Value-Added Tax (VAT)

VAT is a consumption-based tax currently set at 15%, implemented across most goods and services. Businesses with taxable revenues exceeding SAR 375,000 must register for VAT. Companies are required to file VAT returns periodically, usually monthly or quarterly, based on turnover. Proper bookkeeping, issuance of VAT-compliant invoices, and timely filing are critical to staying compliant.

VAT applies to both goods and services provided within the Kingdom and imports, although exemptions exist in sectors like education, healthcare, and financial services under certain conditions.

Filing an Income Tax Return in Saudi Arabia

Income Tax Filing Process

Foreign companies and liable professionals must:

1. Register with ZATCA (Zakat, Tax and Customs Authority). This includes obtaining a Tax Identification Number (TIN) and creating an online account on the official ZATCA portal to facilitate digital communication and submission.
2. Maintain proper accounting records. These should include accurate books of account, general ledgers, trial balances, bank statements, and relevant source documents. Companies are expected to follow the International Financial Reporting Standards (IFRS) to ensure transparency and accuracy.
3. Submit their tax return annually. The tax return should reflect actual revenue, deductible expenses, and supporting financial data. It must be filed within the statutory deadline, usually 120 days after the end of the fiscal year. Late submissions can result in financial penalties, additional scrutiny, and even suspension of tax compliance certificates needed for contract bidding or operational licensing.

Documents Required

• Financial statements, including audited balance sheets, income statements, and cash flow statements that clearly reflect the company’s financial position and performance.
• Supporting invoices and ledgers that document all incoming and outgoing financial transactions, categorized accurately for tax assessment.
• Shareholder and ownership data, such as shareholder certificates, nationality details, and the percentage of ownership, to determine the applicable tax treatment under Saudi tax law.

Filing Deadlines

• Returns are typically due within 120 days after the end of the financial year. Companies must be proactive in collecting and verifying financial data well in advance to ensure timely filing. ZATCA provides digital tools on its portal to assist in preparing and submitting returns efficiently.

Consequences of Late Income Tax Filing

Late submission may lead to income tax notice penalties and audits. These penalties may include fines that range from a fixed amount to a percentage of unpaid taxes, depending on the duration of the delay.

Potential Penalties and Audit Risks

In some cases, late submissions may trigger a detailed audit, putting additional scrutiny on financial records and increasing the risk of further penalties. Businesses that consistently fail to comply could also face limitations on renewing business licenses or participating in government tenders. Proactively engaging a tax advisory firm can help prevent such issues and maintain good standing with ZATCA.

Common Income Tax Challenges for Foreigners

Common Pitfalls in Saudi Tax Compliance

Many foreign investors face challenges like:

• Misunderstanding of tax in Saudi Arabia, especially the difference between Zakat and income tax regulations
• Filing incorrect or incomplete tax data, often due to unfamiliarity with IFRS standards and local reporting expectations
• Ignoring withholding tax obligations when making cross-border payments, particularly in service contracts and royalty agreements

Importance of Professional Support

Language barriers, regulatory updates, and system complexity can make compliance daunting. Without expert support, businesses may struggle to fulfill all ZATCA requirements, leading to delays and penalties. Partnering with a professional firm like Expandway ensures full compliance with local laws, accurate filings, and strategic planning that minimizes tax liability while maintaining full transparency.

Why Choose Expandway for Taxation Services in Saudi Arabia?

Expandway stands out as the best firm offering affordable and professional taxation services in Saudi Arabia. Our experienced consultants help with:

• Income tax return preparation
• Corporate services
• ZATCA registration and support
• Ongoing compliance for businesses
• Government Relations Officer (GRO) and Public Relations Officer (PRO) services to manage communication with Saudi ministries and handle official processes
• Business and commercial licensing support for startups and established entities
• Trademark registration to secure intellectual property rights under Saudi law
• Help with labor and immigration services, including Iqama issuance, renewals, and portal updates

With a deep understanding of Saudi tax regulations and business setup protocols, Expandway ensures a stress-free experience for both locals and foreigners. Their comprehensive corporate services allow businesses to operate smoothly while maintaining full legal and regulatory compliance.

FAQs

Conclusion: Navigating Income Tax in KSA with Confidence

While Saudi Arabia is a tax-friendly jurisdiction, navigating its income tax, withholding tax, and Zakat laws requires diligence and local expertise. Foreign investors and professionals must pay close attention to registration and income tax return filings.

For a seamless and compliant experience, working with firms like Expandway offers peace of mind and expert support. Whether you’re setting up a company or managing an existing business, their professional guidance ensures your success.

Take the next step, consult with Expandway to manage your tax obligations in Saudi Arabia effortlessly.