Ultimate guide on GCC Taxation. Павел Игоревич Герасимов
activity in Saudi Arabia through an agent is considered a PE of the non-resident even though the agent is not authorised to negotiate and conclude contracts on behalf of the non-resident.
CORPORATE – OTHER TAXES
VALUE-ADDED TAX (VAT) AND EXCISE TAX
VAT Law and implementing regulations have been published and are applicable from 1 January 2018.
VAT is imposed at a rate of 5 % for most goods and services, with certain exceptions applicable. Effective 1 July 2020, the standard VAT rate was increased by the government to 15 %.
The Excise Tax Law became effective on 11 June 2017 in Saudi Arabia, with only tobacco products (at 100 %), soft drinks (at 50 %), and energy drinks (at 100 %) selected as goods subject to the excise tax in Saudi Arabia.
In order to comply with the Saudi Arabian Excise Tax Law, manufacturers and importers of excisable goods are required to register with the GAZT. Businesses that qualify to be under the scope of the Excise Tax Law that fail to register and comply with the guidance issued by the GAZT will be considered as tax evaders and will be imposed penalties.
CUSTOMS DUTIES
Customs duties are imposed on imports according to tariff rates that are effective on the payment date in accordance with the Saudi Customs regulations. Customs duties are imposed on the price of the imported goods. This price is assessed based on the actual cost paid or on the agreed upon cost denominated in the currency of the exporting country. The price consists of the price of the imported goods as packed for shipping from the port of export plus freight and insurance cost to the Saudi port, which is converted to Saudi riyals at the exchange rates published by the Saudi Central Bank (SAMA) on the date of the declaration. In case this procedure is not achievable, the imported goods will be priced based on the most proximate comparable value that could be ascertained. Imported goods that are subject to customs duties based on weight are assessed based on the gross weight or the net weight as shown in the tariff schedules. The gross weight of the goods includes the goods weight, including all internal and external packing materials. Net weight of the goods excludes all internal and external packing materials, including the items used for separating and arranging the goods.
To encourage joint ventures in manufacturing, the government grants tariff protection from competing imports to locally produced, quality goods. Rates can be as high as 25 %.
Penalties on smuggling goods vary from confiscation to collections of customs duties and penalties to imprisonment.
PAYROLL TAXES
Since there is no individual income tax regime in Saudi Arabia, earnings from employment are not subject to income tax. Only the social insurance tax is applied on the payroll.
SOCIAL INSURANCE TAX
Social insurance tax is paid monthly based on (i) basic wage, (ii) cash or in-kind housing allowance, and (iii) commissions, with an upper limit of 45,000 Saudi riyals (SAR), is computed at 2 % for non-Saudi employees, and is paid by the employer. For Saudi employees, the rate is 21.5 % and is paid by both the employee (9.75 %) and the employer (11.75 %).
REAL ESTATE TRANSACTION TAX (RETT)
RETT is imposed at a rate of 5 % of the total real estate disposal value regardless of its condition, shape, or use at the time of the disposal.
This includes the land and what is being constructed or built on it, whether the disposal occurred on this land at its current state or after an establishment was built on it, irrespective of whether the entire property was disposed of or only a part of it such as a detachment, a communal, a residential unit, or any other types of real estate, and whether the disposal was authenticated or not.
RETT also applies on transfer of real estate rich entities (as defined for RETT purposes).
The rules provide for certain exemptions that could be available in certain cases.
OTHER TAXES
There is no form of stamp duty, transfer, sales, turnover, or production taxation, except in so far as they may fall within the scope of Zakat, which is applicable only to Saudi nationals.
CORPORATE – BRANCH INCOME
Taxable income from a branch of a non-Saudi based corporation is taxed at 20 %. Certain charges incurred by the headquarters are not deductible in the branch tax return.
CORPORATE – INCOME DETERMINATION
INVENTORY VALUATION
The weighted average-cost method is used for valuing inventory under Saudi tax law.
CAPITAL GAINS
Capital gains are subject to income tax or Zakat, as appropriate, at the normal income tax or Zakat rate. However, capital gains realised from the disposal of shares in Saudi stock companies listed in the Saudi market are tax exempt, subject to certain conditions.
DIVIDEND INCOME
Dividend income that is received by a resident party is subject to income tax at the normal income tax rate unless exempt. Dividends can be exempt from income tax in Saudi Arabia if the following conditions are met, generally:
● The percentage of ownership in the company invested in is not less than 10 %.
● The period of ownership of shares is not less than one year.
Dividends paid by resident entities to a non-resident party are subject to WHT at 5 %.
INTEREST INCOME
Interest income is subject to income tax at the normal income tax rate. Interest paid to a non-resident party is subject to WHT at 5 %.
ROYALTY INCOME
Royalty income is subject to tax at the normal income tax rate. Royalties paid to a non-resident party are subject to WHT at 15 %.
Royalty is defined as per article one of the Saudi income tax law as follows:
“Payments received for use of or the right to use intellectual rights, including, but not limited to, copyright, patents, designs, industrial secrets, trademarks and trade names, know-how, trade secrets, business, goodwill, and payments received against the use of information related to industrial, commercial, or scientific expertise, or against granting the right to exploit natural and mineral resources.”
IMPORTS AND SUPPLY CONTRACTS
Saudi tax law provides that no profit will be considered to arise from a contract for the supply of goods to Saudi Arabia, provided delivery of the goods is either free on board (FOB) or cost, insurance, and freight (CIF) to a Saudi port. However, should the contract provide for the delivery and/or installation of materials at a point inside Saudi Arabia, the supplier may be considered to be carrying on business within Saudi Arabia, and, as a consequence, the contract may be subject to Saudi income taxation as follows:
● If the material cost was identified in the supply contract separately from the cost of work performed in Saudi Arabia, then, in the absence of a PE, a WHT on the work that will be performed in Saudi Arabia may be assessed, based on the type of services. However, if the contract qualifies the supplier to have a PE in Saudi Arabia, then income tax will be applied according to the Saudi tax regulations as for a normal taxpayer.
● If the supply contract indicates a total cost without segregation in the value of supply and the value of the other activities in Saudi Arabia, then the work performed in Saudi Arabia will be assigned a value equal to 10 % of the contract value for each type of activity.
FOREIGN INCOME
The gross income derived by a capital company resident in Saudi Arabia from its operations and of its branches inside and outside Saudi Arabia is subject to tax in Saudi Arabia. However, in order to avoid double taxation on the same income, the following exceptions and clarifications are to be considered:
●