A deep understanding of the tax system is one of the most critical factors for business success in any country, and Saudi Arabia is no exception. As the Kingdom continues to develop its tax laws and regulations, businesses need to be well-informed to navigate this evolving landscape. 

Over the years, Saudi Arabia has continuously developed its tax system to diversify revenue streams and bolster economic growth. In this article, we’ll provide an overview of the key taxes within the Kingdom and explain how each is calculated and applied.

1. Value Added Tax (VAT)

Value Added Tax (VAT) is an indirect tax imposed on most goods and services purchased and sold within the Kingdom.

Calculation: VAT is set at 15% of the invoice's net value (Sales VAT - Purchase VAT).

Conditions: Businesses are required to register for VAT if all the following conditions apply: 

1. Annual revenue exceeds $100,000. 
2. Goods or services are provided within Saudi Arabia. 
3. Payments are received within the Kingdom.

Liability: The seller or service provider is responsible for filing and paying VAT.

Filing Frequency: Monthly or quarterly.

Payment Cycle: Quarterly.

Example:

A computer costs SAR3,000.

VAT = 3,000 × 0.15 = SAR450.

The total price, including VAT, is SAR3,450.

This is an example of an invoice to help you understand:

2. Zakat

Zakat is a religious tax imposed on the wealth and assets of only Saudi citizens and businesses owned by Saudi nationals, in compliance with Islamic Sharia law.

Calculation: Zakat is 2.5% of the Zakat base (i.e., wealth subject to Zakat).

Conditions: Zakat is levied on wealth that has reached the minimum threshold (Nisab) and has been held for one lunar year. Wealth subject to Zakat includes cash, trade goods, investments, gold, livestock, and crops.

Liability: (Zakat Registered) Saudi citizens and businesses (all) must file and pay Zakat.

Filing Frequency: Annually.

Payment Cycle: Annually.

Example Calculation: Assuming a company is wholly owned by one person with the following assets:

• Cash: SAR500,000
• Investments: SAR300,000
• Goods: SAR200,000

Zakat Wealth = Cash + Investments + Goods

Zakat Wealth = 500,000 + 300,000 + 200,000 = SAR1,000,000

Zakat Due = 1,000,000 × 2.5% = SAR25,000

3. Withholding Tax

Withholding Tax is imposed on payments made to foreign individuals or entities in exchange for services provided within Saudi Arabia or goods supplied from abroad.

Who is considered a non-resident?

Any company or individuals not registered in the tax system (without a tax number). Even a Saudi owning a company outside the Kingdom that is not registered in the tax system is considered a foreign company.

Calculation: The rate ranges from 5% to 20%.

5% for:

• Air and sea freight services
• Interest and payments on loans
• Dividends paid to non-residents
• Technical and administrative consulting services
• Payments related to insurance and reinsurance contracts
• Payments related to the supply of goods or services

15% for:

Rentals

1. Income from intellectual property rights
2. Other unclassified services

20% for:

• Payments to professionals in entertainment or sports fields

Conditions: Payments must be made to non-residents within the Kingdom or for amounts paid for services outside the Kingdom. This includes professional service fees, income from intellectual property, profits or returns on stocks and bonds, rentals, and payments for technical and administrative services.

Liability: The Saudi partner or the business registered in the tax system is responsible for filing and paying withholding tax.

Filing Frequency: Monthly.

Payment Cycle: Monthly.

4. Income Tax

Income Tax applies to the profits of foreign companies, foreign shareholders in joint ventures, and entities with foreign ownership operating within Saudi Arabia.

Calculation: Income tax is 20% of net profits for most companies. For oil companies, the tax rate ranges from 50% to 85%.

Conditions:

• A net profit must be achieved.
• The company must be foreign.
• Audited financial statements are required.

Liability: Foreign companies are responsible for filing and paying income tax.

Filing Frequency: Annually.

Payment Cycle: Annually.

Exemptions:

Saudi citizens and citizens of Gulf Cooperation Council (GCC) countries (who own shares in companies operating in Saudi Arabia) are exempt from income tax and are instead subject to Zakat.

5. Capital Gains Tax

Capital Gains Tax is imposed on the profit derived from selling or transferring ownership of an asset, such as shares, real estate, or other financial assets.

Calculation: Capital gains tax is 20% of the net profit (i.e., sales price - purchase price).

Conditions:

• Saudi companies and individuals without a tax number (outside the Kingdom).
• Saudi companies and individuals with equity stakes in foreign companies both inside and outside the Kingdom without a tax number.
• Profits resulting from the sale of financial assets (like stocks and bonds) and tangible assets (like real estate).

Filing Frequency: Annually.

Payment Cycle: Annually.

6. Real Estate Transaction Tax

Real Estate Transaction Tax is levied on any sale or transfer of real estate ownership in Saudi Arabia.

Calculation: The rate is 5% of the property value at the time of sale or transfer of ownership.

Conditions: Applicable to property sales and transfers of ownership except for gifts and inheritance-driven transfers.

7. Excise Tax

The Excise Tax is imposed on specific goods deemed harmful to health or the environment or considered luxury items.

Calculation:

• Tobacco and electronic cigarettes: 100%
• Soft drinks: 50%
• Energy drinks: 100%
• Sweetened beverages: 50%

Liability: Submission is the responsibility of the Saudi partner registered in the tax system.

Filing Frequency: Monthly.

Payment Cycle: Monthly.

This tax aligns with the Kingdom’s initiatives to reduce the consumption of harmful goods while generating additional revenue for public health and environmental goals.

For any further inquiries or confusion about taxes in Saudi, you can visit our Frequently Asked Questions page, where many additional concerns are answered. 

Saudi Expansion Series

This article is part of the Saudi Expansion series, where we aim to educate international entrepreneurs and business owners on Saudi Arabia's foreign investment regime for a smooth landing. This article is written by Tawaref, a tech investment community that finances top regional startups & offers entrepreneurial services