A Beginner’s Guide to Taxes for Businesses in Saudi Arabia

Starting a business in Saudi Arabia is an exciting opportunity, thanks to the country’s rapidly growing economy and favorable business environment. However, navigating Saudi Arabia’s tax landscape can be challenging, especially if you’re unfamiliar with local regulations. Understanding the tax requirements is essential for any successful business setup in Saudi Arabia.

This guide covers the essential tax information for companies operating in Saudi Arabia, including Value-Added Tax (VAT), Zakat, corporate income tax, and withholding tax. Whether you’re a local entrepreneur or an international investor, knowing these basics will help you stay compliant and avoid unnecessary tax penalties.

1. An Overview of Saudi Arabia’s Tax System
Saudi Arabia’s tax system is unique, with separate tax obligations for foreign-owned and Saudi-owned businesses. This dual structure includes corporate income tax for foreign businesses and Zakat for Saudi-owned companies.

The tax authority in Saudi Arabia, known as the Zakat, Tax and Customs Authority (ZATCA), enforces tax regulations and ensures compliance. ZATCA provides detailed guidelines to help businesses understand their tax obligations, so it’s important to follow their instructions closely. Understanding the basics of this tax system can make company formation in Saudi Arabia a smoother process.

2. Corporate Income Tax: What You Need to Know
Corporate income tax in Saudi Arabia primarily affects foreign-owned companies. If your business has foreign (non-Saudi) shareholders, you’ll likely need to pay this tax, which is set at a rate of 20% on your net taxable income.

Key Points:
Who Pays Corporate Income Tax? Foreign-owned companies and non-Saudi shareholders.
Rate: 20% of net taxable income.
Taxable Income: Your total income after deducting business expenses.
Example:
Imagine your business earns SAR 1,000,000 in a year, and you have SAR 400,000 in deductible expenses (like rent, salaries, and equipment). You’d calculate the tax like this:

Income after Expenses: SAR 1,000,000 – SAR 400,000 = SAR 600,000.
Corporate Income Tax: 20% of SAR 600,000 = SAR 120,000.
By calculating your taxable income accurately, you ensure that you’re only paying what’s necessary. Filing on time and maintaining detailed financial records can help you avoid penalties and stay on good terms with ZATCA.

3. Zakat: A Requirement for Saudi and GCC-Owned Businesses
Zakat is a unique tax in Saudi Arabia that applies to companies owned by Saudi or GCC nationals. It’s considered a religious duty and is calculated at 2.5% of a company’s net worth. For Saudi-owned companies, paying Zakat is an essential part of maintaining compliance.

How Zakat Works:
Rate: 2.5% of the company’s net worth.
Who Pays Zakat? Saudi-owned and GCC-owned companies.
Calculation: Zakat is based on assets and equity, so it’s important to keep thorough records.
Zakat payments contribute to community welfare in Saudi Arabia, and companies are encouraged to view it as part of their social responsibility. Many Saudi businesses incorporate Zakat planning into their financial strategies to make the process easier.

4. Value-Added Tax (VAT) in Saudi Arabia
Introduced in 2018, Value-Added Tax (VAT) applies to most goods and services in Saudi Arabia. It’s currently set at 15% and is collected at each stage of the supply chain. Businesses in Saudi Arabia that meet specific revenue thresholds are required to register for VAT and file regular returns.

VAT Registration and Rates:
VAT Rate: 15% on taxable goods and services.
Mandatory Registration: Required for businesses with annual revenue of SAR 375,000 or more.
Voluntary Registration: Available for companies with revenue between SAR 187,500 and SAR 375,000.
VAT Filing:
VAT returns must be filed on a quarterly or monthly basis, depending on the company’s revenue. Accurate record-keeping is essential for VAT compliance, as ZATCA requires detailed documentation of all VAT-related transactions. Using digital accounting systems can simplify VAT tracking and ensure accurate filing.

5. Withholding Tax: When to Apply It
Withholding tax applies to payments made by Saudi businesses to non-resident entities or individuals. This tax is withheld at the source, meaning that the Saudi business is responsible for deducting it and paying it to ZATCA. Rates vary depending on the nature of the payment:

Withholding Tax Rates:
Dividends: 5%
Management Fees: 15%
Technical Services: 20%
Withholding tax is especially relevant for companies that work with foreign vendors or contractors. If you’re making payments to a non-resident service provider, it’s essential to apply the correct withholding tax rate to avoid penalties.

6. Tax Incentives and Exemptions for Businesses in Saudi Arabia
Saudi Arabia offers tax incentives to attract foreign investment and support specific industries. Businesses that set up in economic zones such as the King Abdullah Economic City (KAEC) or NEOM may benefit from reduced tax rates or customs duty exemptions. These areas are particularly attractive for industries like technology, renewable energy, and tourism.

Benefits of Economic Zones:
Reduced Tax Rates: Certain industries qualify for lower tax rates.
Customs Duty Exemptions: Import-export businesses can save significantly on costs.
Sector-Specific Incentives: Industries such as manufacturing and IT receive extra support.
If your business operates in one of these sectors, exploring these economic zones can provide financial benefits and reduce tax burdens.

7. Filing Deadlines and Compliance Tips
Meeting filing deadlines is essential for avoiding fines. Each type of tax has specific deadlines:

Corporate Income Tax and Zakat: Due within 120 days of the fiscal year-end.
VAT: Typically filed quarterly, but larger companies may file monthly.
Withholding Tax: Due by the 10th of the following month after payment to a non-resident.
Late filings can lead to penalties, so plan accordingly. Working with a tax consultant or service provider, such as Accurate Accountings, can help you keep track of deadlines and avoid unexpected fines.

8. Record-Keeping Essentials for Saudi Arabian Businesses
Good record-keeping is critical for tax compliance in Saudi Arabia. ZATCA requires businesses to keep records of all financial transactions, including receipts, invoices, and contracts, for a minimum of 10 years. Keeping organized records not only simplifies tax filing but also helps resolve any disputes with the tax authority.

Digital accounting software can help you store and organize records more efficiently, ensuring that everything is easily accessible for audits or inspections. Accurate and up-to-date records are a key part of staying compliant with Saudi tax regulations.

9. Common Challenges for Foreign Businesses and How to Overcome Them
Foreign companies in Saudi Arabia often face challenges related to corporate income tax, VAT, and withholding tax compliance. Navigating these requirements can be complex, especially if you’re unfamiliar with local laws. Partnering with a local tax consultancy, such as Accurate Accountings, can help you stay compliant and focus on your business growth.

At Accurate Accountings, we offer a range of services, from tax planning to Zakat calculation and VAT filing assistance, helping you ensure smooth and compliant business operations in Saudi Arabia.

Conclusion: Simplifying Tax Compliance with Accurate Accountings
Understanding taxes is essential for a successful business setup in Saudi Arabia. From corporate income tax to Zakat and VAT, being compliant with tax regulations can seem overwhelming. However, with the right guidance, you can simplify this process and avoid penalties.

Accurate Accountings offers expert tax services to support your company formation in Saudi Arabia. Our team of professionals can assist with tax planning, filing, and compliance, ensuring that your business operates smoothly and legally. Contact Accurate Accountings today to make your tax experience in Saudi Arabia efficient and hassle-free.