Saudi Arabia Individual Tax Guide

Saudi Arabia

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Al Khobar GMT +3

EY Street address: Mail address: Adeer Tower, 15th Floor P.O. Box 3795 Prince Turki Bin Abdulaziz Street Al Khobar 31952 Al Khobar Saudi Arabia Saudi Arabia

Executive and immigration contact

Farhan Zubair

+966 (13) 840-4866 Email: farhan.zubair@sa.ey.com

Jeddah GMT +3

EY Street address: Mail address: 13th floor, King’s Road Tower P.O. Box 1994 King Abdulaziz Road Jeddah 21441 Jeddah Saudi Arabia Saudi Arabia

Executive and immigration contact

Irfan Alladin +966 (12) 221-8510 Email: irfan.alladin@sa.ey.com

Riyadh GMT +3

EY Street address: Mail address: Al Faisaliah Office Tower – Level 6 P.O. Box 2732 King Fahad Road, Olaya Riyadh 11461 Riyadh Saudi Arabia Saudi Arabia

Executive and immigration contacts

Asim J. Sheikh +966 (11) 215-9876 Email: asim.sheikh@sa.ey.com Imran Iqbal +966 (11) 273-4730 Email: imran.iqbal@sa.ey.com

A. Income tax

Who is liable. Saudis and nationals of other Gulf Cooperation Council (GCC) states who are resident in Saudi Arabia are not subject to income tax. The GCC states are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. Non-Saudi and nonresident GCC nationals and entities with a permanent establishment in Saudi Arabia are subject to income tax on their business income in Saudi Arabia. Taxable payments to nonresidents are subject to withholding tax (for details, see Rates).

An individual is considered to be resident in Saudi Arabia for a tax year if the person meets any of the following conditions:

• The person has a permanent place of abode in Saudi Arabia and resides in Saudi Arabia for a total period of at least 30 days during the tax year.

• The person resides in Saudi Arabia for a period of at least 183 days in the tax year.

Income subject to tax

Employment income. Employment income and allowances received by expatriates are not subject to tax in Saudi Arabia.

Self-employment and business income. Non-Saudi and non-GCC individuals are generally not allowed to carry on trading activities in Saudi Arabia. However, non-Saudi and non-GCC profession als and consultants may carry on activities in Saudi Arabia if appropriate licenses are obtained from the Ministry of Investment of Saudi Arabia.

Income tax is levied on profits arising from a source in Saudi Arabia derived by self-employed non-Saudi and non-GCC pro fessionals and consultants from their activities conducted in Saudi Arabia.

Investment income. In principle, foreign individuals are taxed on income derived from investments in Saudi projects at a rate of 20%. However, such investments do not include the opening of all types of bank accounts (current, term and savings) or trading in the shares of companies registered in the Saudi Stock Exchange by resident persons that are not subject to tax, if certain conditions are met.

It is suggested that foreign individuals seek professional advice on the taxation of their investment income.

Taxation of employer-provided stock options. In general, employer-provided stock options are not subject to tax in the hands of the recipient employee.

Capital gains. In general, capital gains are treated as ordinary income, together with other income earned for the same period, at a rate of 20% if the individual is a person subject to tax in Saudi Arabia and if the gain is realized in connection with the person’s business activities. However, capital gains arising on the sale of shares traded on the stock exchange are exempt from tax if the following conditions are met:

• For the disposal of shares traded on the Saudi Stock Exchange (Tadawul), the disposal must be done in compliance with the Capital Market Law in Saudi Arabia.

• For the disposal of shares traded on a foreign stock exchange, the securities must also be traded on the Saudi Stock Exchange (Tadawul) for the tax exemption to apply.

• In all cases, the shares must have been acquired after 30 July 2004 (the date of enforcement of the Income Tax Law).

Based on a Circular issued by the Zakat, Tax, and Customs Authority (ZATCA), capital gains realized from the following sales of shares in a listed entity are also eligible for tax exemption if the above conditions are met:

• Sale of founders’ shares

• Sale of bonus shares (or stock dividends)

• Sale of shares through a privately negotiated transaction (pursu ant to the Saudi Capital Market Authority Law and implement ing regulations)

Gains on the disposal of property other than assets used in a business activity are also exempt from tax.

Deductions. A taxpayer may deduct all necessary, provable and certifiable expenses incurred for the purposes of the business to the extent allowed under the tax regulations.

Unutilized provisions, as well as private and personal expenses, are not deductible.

Rates. A flat income tax rate of 20% is applied to the tax-adjusted profit of resident non-Saudi and non-GCC individuals.

Nonresidents who do not have a legal registration or a permanent establishment in Saudi Arabia are subject to withholding tax on their income derived from a source in Saudi Arabia. A Saudi resident entity must withhold tax from payments made to such nonresidents with respect to income derived from Saudi Arabia. This rule applies regardless of whether the Saudi resident entity is subject to tax or Zakat. The following are the withholding tax rates.

Payments Rate (%)

Management fees 20

Dividends, interest, rent, payments made for technical and consulting services to unrelated parties, payments for air tickets, freight or marine, shipping, international telephone services (other than those paid to a head office or a related party), and insurance or reinsurance premiums 5 Royalties, payments to the head office or any other related companies for services including technical or consultancy services, and services for international telephone calls 15 All other payments 15

Relief for losses. Losses may be carried forward indefinitely. However, the maximum loss that can be offset against a year’s profit is 25% of the tax-adjusted profits for that year. Saudi tax regulations do not provide for the carryback of losses.

B. Net worth tax (Zakat)

Net worth tax in Saudi Arabia, or Zakat, is a religious levy pay able by a Saudi or a GCC national on the net worth or the Zakat base as adjusted for Zakat purposes. Zakat is imposed on a Saudi or a GCC national who is resident in Saudi Arabia and is engaged in business activities intended for profit or gain, such as invest ment; services; or commercial, industrial or financial activities.

Zakat is assessed in accordance with the following rules:

• If the Zakat base is higher than net adjusted profits attributable to Saudi and GCC national shareholders, Zakat is calculated at 2.578% of the net assessable funds or the Zakat base (excluding net adjusted profits) plus 2.5% of net adjusted profits.

• If the Zakat base is lower than net adjusted profits, Zakat is calculated at 2.5% of net adjusted profits.

Broadly, net assessable funds comprise net assets less amounts invested in fixed assets, long-term investments and deferred costs, plus or minus the adjusted income for the year.

Complex rules apply to the calculation of Zakat liabilities, and it is therefore suggested that Zakat payers seek specific advice suited to their circumstances.

C. Social security

Employers must pay Saudi social insurance tax (GOSI) on behalf of their employees on a monthly basis. The contributions are levied on basic salary, including housing allowances. Saudi nationals are subject to pension contributions and unemploy ment insurance (SANID) at 18% and 2%, respectively (shared equally between employer and employee). Other GCC nationals’ contributions are based on their respective country laws. However, pension contributions are not required with respect to other foreign employees. Employers must pay contributions for occupational hazards insurance at a rate of 2% for both Saudi and non-Saudi employees.

The minimum and maximum monthly earning levels of con tributory wage for Saudi employees are SAR1,500 and SAR45,000, respectively. For non-Saudi employees, the mini mum and maximum monthly earnings levels on which to calcu late contribution are SAR400 and SAR45,000, respectively.

Different rates apply to employees that are nationals of other GCC countries. Broadly, the rates that apply to Saudi employers with respect to nationals of other GCC countries are generally equal to the rates that would otherwise apply if the relevant individuals were employed in their country of origin, plus the manda tory 2% workplace insurance levy.

D. Tax filing and payment procedures

Tax filing. A resident self-employed foreign professional or a resident foreign individual carrying on business activity in Saudi Arabia must file a tax return and must pay the tax due within 120 days after the end of the tax year.

Advance tax. An advance payment on account of tax for the year is payable in three installments by the end of the sixth, ninth and twelfth months of the tax year. Each installment of advance payment of tax is calculated at 25% of the tax due for the preced ing year, in accordance with the following formula: 25% x (A – B)

For the purposes of the above calculation, A equals the taxpayer’s liability as per the tax declaration for the preceding year and B equals tax withheld at source for the taxpayer in the preceding year.

A taxpayer is not required to make advance payments if the amount of each payment calculated above would be less than SAR500,000.

Delay fines. A delay fine of 1% for each 30 days of delay is com puted after the elapse of the first 30 days from the due date of tax until the tax is paid.

Fines for non-submission of tax declarations by the deadline are payable at a rate of 1% of the total revenue, subject to a maximum delay fine of SAR20,000. However, fines based on unpaid tax are

payable instead of the fine described in the preceding sentence if the fines based on the unpaid tax are higher. The following are the applicable fines:

• 5% of the unpaid tax if the delay is up to 30 days from the due date

• 10% of the unpaid tax if the delay is more than 30 and not more than 90 days from the due date

• 20% of the unpaid tax if the delay is more than 90 and not more than 365 days from the due date

• 25% of the unpaid tax if the delay is more than 365 days from the due date

Withholding tax. The withholder of tax is required to register with the ZATCA before the settlement of the first tax payment. The withholder of tax must settle the tax withheld with the ZATCA by the 10th day of the month following the month in which the taxable payment is made and issue a certificate to the nonresident party. A delay fine of 1% for each 30 days of delay is computed from the due date of tax until the tax is paid.

E. Tax treaties

Saudi Arabia’s double tax treaties that are in force and effective as of 1 January 2021 are listed below.

To benefit from the reduced rates or exemptions under the double tax treaties, additional conditions should be met (for example, the recipient is required to be the beneficial owner of the related gain). Readers should seek professional advice with respect to the application of Saudi tax treaties.

The treaty benefits are not applicable automatically and should be claimed from the ZATCA in each particular case by submitting the Q7-B form and other supporting documents (for example, a tax residence certificate). The taxpayer may claim the treaty ben efit upfront and follow double tax treaty rules, or the taxpayer may pay the tax under domestic income tax law and then claim a refund from the ZATCA.

Saudi Arabia has tax treaties that are in force and effective as of 1 January 2021 with the following jurisdictions.

Albania Algeria Austria Azerbaijan Bangladesh Belarus Bulgaria China Mainland Cyprus Czech Republic Egypt Ethiopia France Georgia Greece Hong Kong Hungary India

Ireland Italy Japan Jordan Kazakhstan Korea (South) Kosovo Kyrgyzstan Luxembourg Macedonia Malaysia Malta Mexico Netherlands Pakistan Poland Portugal Romania

Russian Federation Singapore South Africa

Spain Sweden

Syria Tajikistan Tunisia Turkey Turkmenistan

United Arab Emirates United Kingdom Ukraine Uzbekistan Venezuela Vietnam

Saudi Arabia has signed tax treaties with Gabon, Iraq, Latvia, Mauritania, Morocco, Switzerland and Taiwan, but these treaties were not yet in force as of December 2020.

Saudi Arabia is negotiating tax treaties with Barbados, Belgium, Bosnia and Herzegovina, Botswana, Croatia, Lebanon, Gambia, Ghana, Guernsey, Jersey, Mauritius, New Zealand, Seychelles, Sudan and Sri Lanka.

Saudi Arabia has also entered into limited tax treaties with the United Kingdom, the United States and certain other countries for the reciprocal exemption from tax on income derived from the international operation of aircraft and ships.

F. Entry visas

All foreign nationals must obtain valid entry visas to enter Saudi Arabia, with the exception of GCC nationals.

Foreign nationals may enter the country under visit visas, tourist visas, pilgrim visas, work visas (see Section G) and family visas (see Section I). The Saudi Arabian government does not issue any type of permanent visa.

Visas are issued to nationals of countries that have diplomatic ties with Saudi Arabia. In general, those who are deported from Saudi Arabia as a result of violation of Saudi Arabian regulations are prohibited from re-entering the country.

In general, an applicant may not enter the country while his or her visa papers are being processed.

Visit visas. Visit visas are granted to short-term visitors who visit Saudi Arabia for business purposes. The visa allows its bearer to undertake any activity deemed to be usual and necessary for his or her visit, including attending meetings and establishing busi ness contacts. An applicant must submit his or her passport and the approved visit visa document (provided by the Saudi inviter) to the Saudi embassy in the applicant’s home country.

Pilgrim visas. Pilgrim visas are issued to Muslim pilgrims for the performance of Haj and Umrah. This type of visa is primarily restricted to the cities of Mecca and Medina. However, holders of pilgrim visas for Umrah may obtain permission from the appropriate government department to travel to other cities. A foreign national visiting for pilgrimage purposes may not conduct business or engage in other activities in Saudi Arabia.

G. Work visas and self-employment

Saudi Arabia depends substantially on foreign workers for its labor requirements. However, the government is making concerted efforts to increase the number of Saudi nationals in the workforce and, consequently, considers the availability of Saudi national workers before granting a work visa to a foreign national.

Work visas are issued to foreign workers who come to Saudi Arabia to work under employment contracts with local employ ers for a maximum initial period of two years. A local employer may be an individual, a registered company, the Saudi Arabian government or a branch of a foreign company. A work visa is

renewable by the Ministry of Labor on renewal of the employ ment contract.

To obtain a work visa, an application is submitted to the Saudi embassy or consulate in an applicant’s home country together with a passport, a copy of the employment contract, a medical certificate and proof of professional qualifications. It takes approximately two to four weeks to obtain a visa after all of the documents are submitted. On entry into Saudi Arabia, an application is then made by the employer for a Residence Permit (Iqama) for the employee (see Section H). An employee may work while a Residence Permit is being processed or renewed.

It is possible to change employers with the approval of the exist ing employer.

Foreign nationals may not carry out trading activities in Saudi Arabia. A foreign national who is a professional (for example, an accountant, engineer, lawyer or consultant) may conduct business in Saudi Arabia by setting up a professional partnership with a Saudi national, according to the professional partnership regulations.

A foreign company may set up a subsidiary or a branch headed by a foreign national after obtaining the necessary approval from the authorities.

H. Residence Permits

Residence Permits are issued after arrival in Saudi Arabia to those entering the country with work visas. Residence Permits are called Iqamas and must be carried at all times.

I. Family and personal considerations

Family members. Family visas are issued to spouses and depen dents of foreign workers in designated professions. Family visas may also be issued to the parents of foreign workers. Family visas must be applied for independently of the work visa.

Marital property regime. No community property or similar mari tal property regime applies in Saudi Arabia.

Driver’s permits. Resident foreign nationals may not drive legally in Saudi Arabia with their home country driver’s licenses. Shortterm visitors holding visit visas may drive with international driver’s licenses issued in their home countries.

Saudi Arabia has driver’s license reciprocity with certain countries in Europe and North America.

To obtain a local Saudi Arabian driver’s license, an applicant must take an eye test, a blood test and a practical driving test.