Doing business guide 2021 Understanding Saudi Arabia’s tax position Doing business guide | Understanding Saudi Arabia’s tax position

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02 Doing business guide | Understanding Saudi Arabia’s tax position

Contents

04 About the Kingdom of Saudi Arabia

06 Market overview

08 Industries of opportunity

10 Entering the market

03 Doing business guide | Understanding Saudi Arabia’s tax position

About the Kingdom of Saudi Arabia

The Kingdom" of Saudi A country located in the Arabian Peninsula, Throughout this guide, we have provided the Kingdom of Saudi Arabia (KSA, Saudi our comments with respect to KSA, unless Arabia is the largest Arabia or The Kingdom) is the largest oil- noted otherwise. oil-producing country producing country in the world. in the world Government type Monarchy

" Population (2019) 34.2 million

GDP (2019) US$ 793 billion

GDP growth (2019) 0.33%

Inflation (2019) -2.09%

Labor force (2019) 14.38 million

Crude oil production, petroleum refining, basic petrochemicals, ammonia, Key industries industrial gases, sodium hydroxide (caustic soda), cement, fertilizer, plastics, metals, commercial ship repair, commercial aircraft repair, construction

Source: World Bank, General Authority of Statistics

04 Doing business guide | Understanding Saudi Arabia’s tax position

05 Doing business guide | Understanding Saudi Arabia’s tax position

Market overview

• Saudi Arabia is an oil-based economy Government with the largest proven crude oil reserves Government type Monarchy in the world. According to OPEC, Saudi Arabia is also the largest exporter of Chief of State King Salman Bin Abdul-Aziz Al Saud

petroleum and possesses around 17 Head of Government King Salman Bin Abdul-Aziz Al Saud percent of the world’s total proven petroleum reserves. Islamic (Sharia’) legal system with some elements of Egyptian, French, Legal system and customary law; note - several secular codes have been introduced; commercial disputes are handled by special committees. • Saudi Arabia has sought to diversify its revenue base to protect itself from oil 13 provinces (mintaqat, singular - mintaqah); Al Bahah, Al Hudud ash Shamaliyah (Northern Border), Al Jawf, Al Madinah (Medina), Al Qasim, Ar price fluctuations. Administrative divisions Riyad (Riyadh), Ash Sharqiyah (Eastern), 'Asir, Ha'il, Jazan, Makkah (Mecca), Najran, Tabuk. • The non-oil sectors, especially construction, real estate, healthcare Source: Central Intelligence Agency Factbook, the Economist Intelligence Unit and education, still offer business opportunities although most businesses " are currently more conservative in their declared as the King and Supreme Leader The country is divided plans compared to the past. of the country following the death of the into 13 provinces, with late King Abdullah Bin Abdul-Aziz Al Saud. • Saudi Arabia holds membership of a governor and deputy several councils and international • The King governs with the help of the governor in each one. organizations, such as: Council of Ministers, also called the Cabinet. There are 23 government - United Nations (UN) " ministries that are part of the Cabinet. • As Saudi Arabia is an Islamic state, its - World Trade Organization (WTO) Each ministry specializes in a different judicial system is based on Islamic law - Organization of Petroleum Exporting part of the government, such as foreign (Sharia’). The King acts as the final court of Countries (OPEC) affairs, education and finance. appeal and can issue pardons. There are - Gulf Cooperation Council (GCC) also courts in the Kingdom. The largest - Arab League • The King is also advised by a legislative are the Sharia’ courts, which hear most - Organization of Islamic Cooperation body called the Consultative Council cases in the Saudi legal system. (OIC) (Majlis Al-Shura). The Council proposes - G20 new laws and amends existing ones. • In recent years, conscious efforts have been made by the government to reduce Government The Council members are appointed by bureaucracy at all levels and transform • Saudi Arabia is a monarchy based on the King for four-year terms that can be renewed. government departments by introducing Islam. The government is headed by online services and increasing automation the King, who is also the commander in in several ministries. chief of the military. On January 23, 2015, • The country is divided into 13 provinces, King Salman Bin Abdul-Aziz Al Saud was with a governor and deputy governor in each one. Each province has its own • King Salman chairs the Saudi Supreme council that advises the governor and Economic Council, which is in charge deals with the development of the of overseeing the formulation of province. economic policy and encouraging foreign investment.

06 Doing business guide | Understanding Saudi Arabia’s tax position

Economy – overview " • The economy of Saudi Arabia is primarily Saudi Arabia is also working on dependent on revenues from the oil and gas sector. Rising oil prices in the last improving the business climate and decade (until 2014) fueled the Kingdom’s growth and resulted in the lowering of increasing access to finance, especially government debt and an increase of fiscal surpluses. However, post summer 2014, for small and medium enterprises. the economy has been under the impact of declining oil prices. "

• In order to reduce its reliance on the oil • To increase household savings from 6% to • To increase the Public Investment Fund’s and gas sector, the government aims to 10% of total household income assets, from SR600 billion to over SR7 diversify its economy by continuously trillion utilizing the revenues from the oil and • To raise ranking on the E-Government gas sector to support the growth of Survey Index to be among the top 5 • To increase the localization of oil and gas non-oil sectors, such as infrastructure, nations sectors from 40% to 75% construction, education, tourism and manufacturing. • To raise ranking in the Government • To move from the current position as the Effectiveness Index, from 80 to 20 19 th largest economy in the world into the • Saudi Arabia is also working on improving top 15 the business climate and increasing • To increase non-oil government revenue access to finance, especially for small and from SR163 billion to SR1 trillion • To increase women’s participation in the medium enterprises. workforce from 22% to 30% • To raise the share of non-oil exports in • The construction of “economic cities” non-oil GDP from 16% to 50% • To increase SME contribution to GDP from is central to development plans. The 20% to 35% government has launched projects to • To raise global ranking in the Logistics establish new cities at different locations Performance Index from 49 to 25 and • To lower the rate of unemployment from across the country. These cities are ensure the Kingdom is a regional leader 11.6% to 7% planned as hubs for petrochemicals, mining and logistics industries as well as • To increase the private sector's • To have three Saudi cities be recognized for a knowledge-based economy. contribution from 40% to 65% of GDP in the top-ranked 100 cities in the world

Vision 2030 • To increase foreign direct investment The Council of Ministers has approved from 3.8% to the international level of Vision 2030, and the salient features are as 5.7% of GDP follows: • To raise the non-profit sector’s • To rise from the current position to contribution to GDP from less than 1% to the top 10 countries on the Global 5% Competitiveness Index

07 Doing business guide | Understanding Saudi Arabia’s tax position

Industries of opportunity

" • Real estate, hospitality and construction The summary of procedures is as follows: Government is also are the key industries in terms of • Obtain the investment license from focusing on developing opportunities in Saudi Arabia. A growing the Saudi Arabian General Investment population, increasing urbanization, Authority (SAGIA) economic cities, inflow of religious tourism, ease of doing industrial hubs and business, and a focus on economic • Open a bank account with a local bank in diversification have all paved the way for KSA for depositing the initial capital healthcare facilitates that increased investment potential in the offer investment and country. • Obtain a commercial registration (CR) from the Ministry of Commerce and business opportunities. • The government plans to construct Industry (MOCI) multiple schools and hospitals in the " Kingdom in the next 5 years. Moreover, • Register with the Chamber of Commerce the government is also focusing on developing economic cities, industrial • Register with the Customs department hubs and healthcare facilitates that offer investment and business opportunities. • Obtain a municipality license

Doing business in Saudi Arabia • Register with the Ministry of Labor The official language is Arabic, therefore all documents are first required to be • Register with the General Organization translated into Arabic by an official for Social Insurance (GOSI) translator and thereafter submitted to the relevant government authority. • Register with the General Authority of Zakat and Tax (GAZT)

08 Doing business guide | Understanding Saudi Arabia’s tax position

Procedures for starting a business in Saudi Arabia Any non-resident who intends to set up a branch or an LLC in KSA is required to Number Procedure Minimum time to Associated cost obtain the investment license from Saudi complete Arabian General Investment Authority (SAGIA) before starting the above Reserve the company name and 01 5 days on average No charge submit articles of association procedures. Given that all the required documents should be translated into Notarize the articles of association with Arabic language for filing with the 02 1 days No charge the Notary Public authorities, it may take approximately 3 to 4 months to obtain the commercial SR1,200 for commercial registration + SR2,000 registration (CR) from the Ministry of Less than one day fee to become member 03 Pay company registration fees Commerce and Industry. (online procedure) of Chamber of Commerce + SR 500 e-magazine publication fee

04 Open a bank account 1 day No charge

Obtain a business location license 05 4 days SR 1,000 from the Municipality

06 Register with the Ministry of Labor 1 day No charge

Less than one day 07 Register with the post office ‘Wasel’ SR500 (online procedure)

08 Make a company seal 1 day SR50

Register with the General Organization 09 1 day No charge for Social Insurance (GOSI)

Register with the General Authority of 10 3 days No charge Zakat and Tax (GAZT)

11 Register with in the Qiwa portal 1 day Varies

Standard account: No Register with the Mudad Business charges. Advanced 12 1 day Portal Account: Annual fees SAR. 460-920

Source: Doing Business Report Saudi Arabia, World Bank Group

09 Doing business guide | Understanding Saudi Arabia’s tax position

Entering the market

Doing business in Saudi Arabia venture “shall enjoy all the benefits, process for foreign companies, minimizing Foreign investment incentives incentives and guarantees enjoyed by the number of bureaucratic steps required and restrictions a national project”. The FIA includes before investment can take place. The ISC In April 2000, the Supreme Economic guarantees on the free repatriation of comprises three divisions, each focused on Council enacted the Foreign Investment profits and capital, and it provides a particular steps in the investment process: Act (FIA), which is a broad framework clause that foreign-owned assets may within which non-Saudis are permitted to be expropriated only in exceptional • The Investors Service Unit – ensures invest in the Kingdom in minority, majority circumstances, in return for full that initial approval forms are completed or 100%-foreign-owned ventures. In compensation. It offers the right to buy and that documentation is handled February 2001, Saudi Arabia’s Supreme property and allows ventures to sponsor properly. Economic Council approved a “negative list” their own employees (previously denied to of economic sectors barred to majority- 100%-foreign-owned ventures). • The License Follow-up Unit – rechecks foreign-owned firms, thus clarifying the investment applications, notifies the issue of where in the economy foreigners " investor of any omissions, collects the may invest. The list was published as SAGIA’s primary goal appropriate application fees and then secondary legislation to the FIA and was is to facilitate and registers the new venture. earmarked for annual revision. It is also, in the words of the government, to be encourage investment • The Government Relations Unit – helps interpreted “flexibly”. By default, those (both local and foreign). investors to establish contacts with sectors not included on the list should other government agencies to eliminate be regarded as legally open to majority- " obstacles hindering the licensing of a foreign-owned companies. project. Nine ministries are represented The FIA established SAGIA, an entity with at the ISC. sole responsibility for approving foreign- In August 2002, a new, shorter list investment projects. This includes a consisting of 15 areas of the economy The government has courted foreign mandate to regulate the investments made restricted from foreign investment companies willing to invest in the by foreign entities to ensure consistency replaced the original negative list of 22 petrochemicals business (which is not with national interests. SAGIA also has areas. The present negative list includes included on the negative list), especially responsibility for developing more detailed oil exploration, drilling and production; around the industrial cities of Jubail and legislation to flesh out the framework real estate brokerage; and land and air Yanbu. The substantial incentives it has established by the FIA. However, SAGIA’s transport. Foreign investment is now primary goal is to facilitate and encourage officially permitted in insurance, power investment (both local and foreign) transmission and distribution, education wherever possible. and pipelines. SAGIA’s Investors Service Center (ISC) (www.sagia.gov.sa/en/) serves as a one- The FIA aims to provide equal treatment for stop shop to facilitate the investment non-Saudi firms, stating in Article 5 of the Implementing Regulations for the Foreign Investment Law that a foreign

10 Doing business guide | Understanding Saudi Arabia’s tax position

made available have already attracted a with Saudi partners in other sectors as well. " number of firms to the sector. However, Prior to the passage of the FIA, operations Fully foreign-owned the foreign investors that have been most that were 100%-foreign-owned could not successful in petrochemicals have typically gain access to the same tax treatment, companies still remain been those seeking joint ventures with funding and other incentives available the exception rather Saudi Arabian Basic Industries Corporation to joint ventures. Fully foreign-owned (SABIC), the majority-state-owned companies still remain the exception rather than the norm. industrial giant. The government has than the norm. looked most favorably on joint ventures "

11 Doing business guide | Understanding Saudi Arabia’s tax position

" There is a series of labor regulations that informational technology and digital-based There is a series of labor require foreign companies operating in services and cloud computing services and regulations that require the Kingdom to employ and train Saudi related activity by offering tax and non-tax nationals. All investment schemes must based incentives to prospective investors. foreign companies show that they meet requirements on However, the law has not been formally operating in the Kingdom employing and training Saudi nationals. introduced as yet. After the commencement of the project, to employ and train depending upon the nature of its work, Financial incentives Saudi nationals. an entity should, on a continuing basis, • The ability to carry forward tax losses maintain its Saudization ratio; a failure on balance sheets indefinitely (subject to do so may lead to problems with to change of ownership and performing " authorities in renewals. Labor-intensive same activity rules). projects receive preferential treatment • Foreign investors have access to Tax rules for Special Integrated since the government seeks to combat generous regional and international Logistics Zone issued by the General rising local unemployment. Priority is financial programs, including: Authority of Civil Aviation (GACA) given to high-technology projects which - Arab Fund for Economic and Social The Zone is located adjacent to the Riyadh offer significant skills transfer. These Development (AFESD) - participates international airport that offers certain requirements have been in place for some in financing economic and social incentives for prescribed activities to time but are being enforced with increasing development projects in Arab countries. entities operating in the Zone. rigor, and the licensing process offers - Arab Monetary Fund - promotes the

officials a good opportunity to ensure that development of Arab financial markets The following Incentives are offered to the standards are being met. and trade among member states; advises zone entities: member states on investment of resources.

100% foreign ownership is now allowed in - Arab Trade Financing Program - provides • 50 years tax holiday; including VAT and trading activity on a case-by-case basis. medium and long-term loans to individuals customs suspension and organizations for private and • No requirement to withhold tax from Tax incentives commercial trade. payments to non-residents subject to The government has granted 10-year - Inter-Arab Investment Guarantee certain conditions tax concessions to six underdeveloped Corporation - provides insurance coverage • 100% foreign ownership is allowed provinces in the Kingdom, with the for inter-Arab investments and export • 100% suspension of customs and import intention of attracting more investment on credits against commercial and non- restrictions the start of any project. Investors will be commercial risks. • No restrictions on capital repatriation granted a tax credit against the annual tax - Islamic Development Bank (IDB) - • Non-residents undertaking activities payable in respect of certain costs incurred participates in equity capital and grants in the Zone would not create taxable on Saudi employees. loans for productive projects and presence (permanent establishment) in enterprises. It accepts deposits to mobilize KSA The tax credits will be offered in the financial resources through Sharia’- following regions: compatible avenues. • Ha’il • Jazan Exchange controls • Najran There are no significant restrictions on • Al-Baha the inward or outward movement of • Al-Jouf funds by companies. Transfer operations • Northern territory are increasingly sophisticated and rapid, although occasional constraints on working In early 2019 the GAZT published a draft hours or working days may cause a delay of Special Economic Cloud Zone Law for one or two days in implementing orders. general comments. The purpose of this law is to make Saudi Arabia a hub for new digital services, including cloud computing, through attracting investments in

12 Brochure / report title goes here | Section title goes here

Although there are no restrictions, the denominated syndicated loans or foreign- " Saudi Arabian Monetary Authority (SAMA currency syndicated transactions arranged Saudi Arabian Monetary – the central bank) closely monitors for non-residents. SAMA has shown Authority (SAMA – the foreign exchange transactions to deter considerable flexibility in its approach to speculation, fraud and money-laundering. such arrangements, however, and has co- central bank) closely Banks must report the export of riyal bank operated speedily with the vast majority of monitors foreign notes to SAMA and gain approval prior to transactions. exchange transactions to the participation of foreign banks in riyal- deter speculation, fraud and money-laundering. " Choice of business entity and setting up a company Principal business entities Limited liability company (LCC) , joint stock company (JSC) and branch of a foreign entity.

Types of licenses, minimum capital requirements and percentage of Saudi partnership

No, License type Minimum capital (SR) Minimum Saudi participation (%)

26,666,667

01 Commercial with Saudi partner Foreign capital shareholding not less than 25% SR 20,000,000 and partnership not more than 75%.

100% Foreign commercial 30,000,000 –

02 Communications – 40%

03 Communications value added – 30%

04 Insurance – 40%

05 Reinsurance – 40%

06 Property financing – 40%

The value of each project is not less than SR 30,000,000 (covering land and 07 Property investment construction); the land and building will - be outside the perimeter of the two holy mosques

Management of construction 08 projects, detailed engineering – 25% design and EPC contracts

Public transport (bus 09 500,000 30% transportation within cities)

Public transport (metro 10 500,000 20% transportation within cities)

11 Joint stock company 500,000 -

12 Practice other transport activities 10,000,000 -

*Related to the limit of the cost of a single project to be constructed. There is no minimum limit for the capital of property development projects. Source: sagia.gov.sa/media/1100/sagia-investment-manual-7th-edition-jan-2019-final.pdf

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Restrictions on licenses

No, Activity Restrictions

Trading licenses • Train 30% of Saudis 01 (With a Saudi partner) • Not to open more than one shop per district

• The licensee must apply to the Ministry of Industry and Mineral Resources to 02 Industrial licenses obtain an industrial license along with the General Presidency of Meteorology and Environmental Protection to acquire environmental approval

• The office may study the markets regarding the activity type of the company and prepare reports on any such study for the headquarters. The office shall submit to the Ministry of Investment annual summary on its activity • Office may not implement any contracts nor carry out any commercial or investment activity directly or indirectly in the Kingdom nor may it charge any Scientific and fees for training the Saudi technicians 03 technical office • The company shall comply with all regulations and instructions applicable in the Kingdom of Saudi Arabia and this license will be withdrawn if the company has breached its terms and the relevant official entities will be so notified • The Ministry of Investment has the right to terminate or not renew the license whenever it is deemed that the role of the office is outside the purpose for which it is authorized

• The office may study markets and prepare reports of this study for concerned Consulting license bodies in the countries that want to have a license. The office shall submit an for technical & annual summary of its businesses to the Ministry of Investment 04 economic • The office is prohibited to execute any contracts, businesses, or investments in communication the Kingdom, directly or indirectly offices • The Ministry of Investment has the right to revoke the license or not to renew it whenever it deems that the office's role is beyond the authorized purpose

• Obtaining the prior approval of the Ministry of Investment for each project to be 05 Activities of holding companies established and any investment in it.

• Obtaining the prior approval of the Ministry of Investment on any property to be owned or invested in so that the cost of any project is not less than 30 million 06 Real estate license riyals for the land and building, provided that they are not within the boundaries of the cities of Mecca or Medina

The License Applicant(s) / Entity shall be committed to the following:

• Obtaining the required post- Ministry of Investment license’s governmental documents within 3 months of issuance of the Ministry of Investment license and obtaining the necessary documents or licenses from related government agencies - where required- before or after obtaining a Ministry of Investment license and the Ministry of Investment should be notified by the investor if difficulties are faced in doing so not less than 3 months from the project's scheduled start of operation. • Operating within the licensed field/ industry. • Implementing the project within the timeframe indicated in the application and within the licensed location or branch. General restrictions • Using the licensed name - as per the Ministry of Investment and investment and conditions to licensein in all government documents. be followed by the 07 • Renewing the Ministry of Investment license annually on time. investor after • Receiving the Ministry of Investment follow-up officers, cooperating with receiving the them and furnishing all required documents and proof requested during license the visit. • Not marketing or selling any non-licensed items inside the Kingdom of Saudi Arabia. • Respecting the intellectual property rights of others. • Taking all necessary measures to protect the environment. • Respecting all local laws and regulations issued by Saudi ministries/ agencies for the entity and its employees. • Notifying the Ministry of Investment of any change in contact address, P.O Box, email or phone and fax numbers within (10) working days of the change using Ministry of Investment designed forms no (13.01) from this manual. • Being aware of the Ministry's entitlement to licensing fees, and the financial compensation for subscription to the services of the Investor Relations

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No, Activity Restrictions

07 General restrictions Centers, for the entire period required for the license, and the inability to and conditions to claim a refund for it or part of it when the facility's activity stops or the be followed by the license is canceled before the end of its term for any reason. investor after receiving the The Investor(s) acknowledges and undertakes: license - To abide by all rules and regulation stated in the Foreign Investment Act issued under the Royal Decree No (M/1) dated (15/01/1421 H) and all of its corresponding Executive Rules and guarantee the authenticity of the documents, information and data presented herein with this application. - That the licensee shall be using the license issued by the Ministry of Investment only for the purpose for which the license issued. The Saudi Arabian Government and Ministry of Investment will not be held responsible towards any part for any acts of misconduct committed, directly or indirectly, by the licensee, whether inside or outside Saudi Arabia, in violation of any laws of Saudi Arabia or elsewhere. Furthermore, the Ministry of Investment reserves the right to revoke the license at any time if the licensee is convicted of any illegal acts or is deemed to pose a national threat. - That the purposes of this application is to obtain an investment license to start legitimate investment activity/activities. The investment license is revocable if at any time the data and information presented are found false or inaccurate. - That no final ruling/verdicts have been issued against the investor in violation of the Foreign Investment Act. - That no ruling/verdicts have been issued against the investor in monetary or commercial related violations whether inside or outside the Kingdom of Saudi Arabia. - That the investor(s) will transfer the capital declared in this application to a local bank once the investment license is issued. - That the investor(s) is not currently resident within the Kingdom of Saudi Arabia and that the investor(s) was not resident within the Kingdom of Saudi Arabia during the last 3 years. - That the applicant who has obtained the investment license shall use it for the licensed purposes and that the Saudi Government and the Ministry of Investment will not directly or indirectly assume any liability towards third parties whether inside or outside the Kingdom of Saudi Arabia for any non-statuary action - That the investor(s) have read and understood the above terms and conditions, commitments, obligations and undertakings and have agreed to them. - That the name(s) and signature(s) on this application belong to him/them or his/their legal representative and the signature of the letter is considered as his/theirs.

Source: https://misa.gov.sa/media/1302/misa-service-manual-v3-8th-edition-en-v10.pdf

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" New Saudi Company Law - Special treatment for family companies The procedure for • The Saudi Arabian Ministry of Commerce and a legal framework specifically for setting up a branch of a and Investment (MOCI) introduced a holding companies new Company Law, effectiveMay 2, 2016. - Introduction of provisions relating to foreign company or LLC Some of the key changes compared to the the issuance of debt instruments and normally takes three to old Company Law are as follows: sukuk financing by “listed companies” in - The ability for a LLC to be formed by accordance with the regulations of the six months. one shareholder rather than a minimum capital markets " of two as required previously - Allowing companies to mortgage their - Reducing the minimum share capital for shares and the shareholders of listed JSCs (SR500,000 instead of SR2,000,000) companies to participate in annual - Reducing the minimum number of general meetings and vote on the shareholders in JSCs to become two decisions via modern technology shareholders instead of the previous (i.e. no need for physical presence) minimum requirement of five - Requirement for companies to value shareholders their in-kind share capital contribution - Enforcing the need for an audit by a certified valuer committee to monitor the company’s - Reduction from 50% to 30% of the business statutory reserve which needs to be - Prohibition on the role of the chairman put aside each year by the company of the board and any other executive role in a company being combined • Following are the different types of - Dictating the “accumulated voting” business structure provided under the methodology in electing the board of regulations for companies: directors (i.e. each shareholder has - Branches of a foreign company - voting rights equivalent to the number commonly used for foreign investors of shares it holds, which can be used - LLC - commonly used for foreign for one nominee, or divided between investors nominees, without any duplication of - JSC votes. This system tends to favor - Limited partnership minority shareholders) - Joint ventures - Shareholders in an LLC can no longer - General partnership be held personally liable for a company's debts if losses exceed 50% • The procedure for setting up a branch of of the company's capital. Instead the a foreign company or LLC normally takes company is dissolved by operation of three to six months. law unless the shareholders resolve otherwise - The MOCI is responsible for supervising and regulating matters relating to all types of companies under the new regulation, except for “listed companies” as these will be the specialty of the Capital Market Authority (CMA)

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Key differences between foreign branch, LLC and JSC corporation; the share of Saudi and GCC nationals is subject only to a religious levy Branch of foreign LLC JSC called Zakat, which is levied on net equity. company If a company is a joint venture between a Saudi/GCC shareholder and a foreign Normally SR500,000 Minimum SR500,000 or SR5,000,000 (but can be lower or shareholder, the portion of taxable income capital SR500,000 (in case of single higher depending upon requirement shareholder) attributable to the foreign shareholder the nature of activity) is subject to income tax and the Saudi One shareholder shareholder's share of net equity is subject If the number of to Zakat. shareholders exceeds 50, Two shareholders the company has to be Single shareholder is allowed Minimum converted into a JSC within • Corporate tax rates for foreign companies Not applicable with a minimum capital of shareholder a year. If the company is SR5,000,000 and certain vary widely among GCC states. The Saudi not converted into a JSC, other conditions. cabinet approved a new tax law on 12 the LLC will be dissolved by operation of law with certain January 2004. The executive by-laws conditions. covering the new corporate tax law If losses exceed 50% of were published in August 2004. The tax If losses exceed 50% of capital, the shareholders In case of a foreign branch, regulations provide the income tax flat capital, the shareholders will not be held personally the HO’s liability may not will not be held personally liable for company debts. rate of 20%, effective for accounting be restricted to the extent liable for company debts. Shareholders, once aware, of the branch's capital. years commencing on or after 30 July Shareholders must meet must meet within 45 days Losses 2004. Investments in certain strategic within 90 days and decide in an extraordinary general exceed 50% If losses exceed 50% of whether to dissolve or meeting and decide whether resources are still taxed at higher rates: of capital capital, the shareholders continue the business and to dissolve or increase must meet within 90 days 20% for gas and at rates ranging from publish their decision. The share capital. If the increase and decide whether to company will be deemed to in share capital is not 50% to 85% depending on the capital dissolve or continue the dissolve by operation of law materialized, the company business. investments for taxpayers engaged in if no decision is made. will be deemed to dissolve by operation of law. the production of oil and hydrocarbons materials. The tax structure offers some Transfer 10% of net profit Transfer 10% of net profit Maintenance Transfer 10% of net profit benefits to companies choosing to invest to statutory reserve until to statutory reserve until of statutory to statutory reserve until it it reaches 30% of share it reaches 30% of share in LLCs or JSCs in Saudi Arabia. Such reserve reaches 30% of share capital. capital. capital. companies are free to establish branches throughout the Kingdom and only need Accounting principles/financial • The audited financial statements are to file one combined return, provided statements required to be uploaded within four they are branches of only one legal entity. • All the financial statements from 2018 months from the end of the financial year The GAZT often scrutinizes the reported are now prepared in accordance with on the MOCI’s web portal. expenses and charges of a branch. International Financial Reporting Standards (IFRS) as endorsed in Saudi Taxation in Saudi Arabia The general tax burden of a Saudi Arabia and other standards and Overview entity owned by foreign companies pronouncements endorsed by the • Like most other states in the GCC, Saudi • The share of taxable profit owned by the Saudi Organization for Certified Public Arabia levies corporate income tax on the non-Saudi/non-GCC shareholder will be Accountants (SOCPA) non-resident's share in a resident subject to 20% corporate income tax in

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addition to 5% withholding tax (WHT) the law will ultimately be dependent upon Related party applicable on the distribution of dividends the practices developed by the GAZT and The tax law has introduced the concept to the non-resident (including non-resident how the particular appeals play out in the of related party. Thus, for companies, GCC) shareholders. However, the Saudi/ courts. The GAZT will always lift the veil of ownership or control of 50% or more by GCC shareholder will be subject to Zakat. incorporation to determine the nationality the same persons or related persons shall of the shareholders. They will go up the be considered to be companies under one For financial years commencing on or after chain of ownership to the last level. common control. 1 January 2019, Zakat is assessed at 2.5% In addition to corporate income tax and on the higher of the Zakat base (balance Zakat, WHT is levied on payment to non- Source of income sheet basis) and the net adjusted profit of residents from an “in-Kingdom source”. There are extensive rules; however, in Zakat payers following the Hijri year. WHT, on the other hand, ranges from summary, income is considered to be 5% to 20%, depending on the nature of realized in the Kingdom if it arises from For Zakat payers following the Gregorian payment, place of performing services and an activity occurring in the Kingdom; if it year, the rate applicable to the Zakat base relationship with the non-resident. is dividends or management fees and a is 2.577683% (balance sheet basis). A manager’s fee paid by a resident company; simple calculation of the balance sheet Residence amounts paid by a resident for services basis includes the Saudi shareholder’s • The 2004 tax law also introduced the rendered in the Kingdom either fully or share of equity plus long-term liabilities less concept of residency for individuals partly; or an amount paid by a resident fixed assets. and corporations, which is of particular company to its head office or a related importance in assessing liability to WHT. company for services rendered, etc. (the • As per the domestic regulations, the • A natural person is considered resident if detailed list is included in the tax law). accounting treatment for Zakat and he has a permanent residence (defined) income tax in joint venture companies and is available in the Kingdom for a Supply of goods is charged to the company’s income period that in total is not less than 30 There is no WHT on payments made to statement. consecutive/non-consecutive days in a non-residents for the import of goods. tax year. Additionally, a natural person Income derived by a non-resident party Summary of the Saudi Arabian income is considered resident if he resides in from a contract for supply of goods from tax law 2004 the Kingdom for a period not less than abroad is not considered as a Saudi-source The Saudi tax regulations came into effect 183 consecutive/non-consecutive days income (i.e. not subject to tax in Saudi from 30 July 2004, which has introduced in a tax year, even if he does not have a Arabia) unless it includes associated work certain new concepts and/or modified permanent residence. in Saudi Arabia, such as transportation, existing practices. The taxation system installation, training or other similar work. in the past was much less codified and a • For a company, residency in a tax year is In such a case, only associated work is significant portion of the tax system had considered if the company is established considered to be derived from an activity evolved over a number of years through in accordance with the companies’ performed in Saudi Arabia and is liable to various practices. However, the law is still regulations or is headquartered in the tax. subject to significant interpretation. The Kingdom. final treatment of any particular section of In case of delivery of goods from abroad with “in-Kingdom associated work”, where " value is not separately specified in the There is no WHT on payments made contract for the “in-Kingdom associated work”, income for each associated work to non-residents for the import of shall be estimated at 10% of the total gross goods. value of the contract for tax purposes. "

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19 Doing business guide | Understanding Saudi Arabia’s tax position

Income tax

Tax rate 20% generally applicable, 20% for Tax losses Carry forward is allowed indefinitely. Books and All taxpayers (except non-residents exploitation of natural gas and ranges The maximum limit allowed to be records who do not have a permanent 50% to 85% for production of oil and deducted in each year must not establishment in the Kingdom) are hydrocarbons materials depending on exceed 25% of the annual taxable required to keep the necessary capital investment. profit. books in the Kingdom in the Arabic As from 1 January 2020, a tax rate language. They must at least include of 20% applies for five years on the Capital companies will be allowed to the following: tax base from oil and hydrocarbon carry forward losses, irrespective of • Daily journal downstream activities; however, whether there has been a change in • General ledger the taxpayer must separate its ownership or control, provided they • Inventory book downstream activities during the five continue to perform the same year period or otherwise will be subject activity. For computerized records, the to tax based on capital investment computer should be located in the amounts. Kingdom. Currency No consideration is given to For taxpayers operating through a Levied on • The resident corporation – on the translation unrealized currency translation gains permanent establishment that has a share of the non-Saudi shareholders. or losses arising from revaluation for central computer system abroad, the • The resident, natural, non-Saudi tax purposes. local terminal must be in the person who conducts activities in the Kingdom to generate all statements, Kingdom. transactions, etc. • The non-resident person who Estimated The GAZT may assess the tax for conducts activities in the Kingdom taxes activities associated with worldwide through a permanent enterprise. (deemed expenses on an estimated basis, Assessment Detailed guidelines have been laid • The non-resident person that has profit tax) when local expenses for practicing and out in the tax regulations. Following other taxable income from an in- such activities are mixed with appeal are the two appellate committees: Kingdom source without having worldwide expenses and it is difficult procedures • Tax Violation and Dispute Resolution permanent establishment. to separate these expenses related Committee (TVDRC) to activity in the Kingdom accurately • Tax Violation and Dispute Appeal and hence it is impossible to submit Committee (TVDAC) Income • Capital gains realized from the actual accounts for the local activity. exempt disposal of financial instruments from tax traded in the Kingdom’s stock The minimum deemed profit rates Income An independent Internal Settlement exchange acquired after on various activities range from 80% exempt Committee (ISC) is formed in the implementation of the new tax law (for management fees) to 10% (for from tax GAZT to assess open disputes and gains resulting from the disposal construction work contracts). between taxpayers and the GAZT for of assets that are not part of the both direct and Indirect taxes to activity. reach an amicable settlement. • Capital gains realized from the Taxable In general, the tax year is the state’s disposal of securities traded on a year fiscal year. stock exchange outside the Kingdom Accelerated Accelerated tax payment procedures provided the securities also are A different year can be used in the tax have been introduced based on a traded on the Saudi stock exchange following circumstances: payment formula. If the prior year’s tax liability (Tadawul), irrespective of whether • If it is approved by the GAZT prior to is SR2 million or more, the taxpayer the disposal occurred through a the effective date of law is required to settle accelerated tax stock exchange or through any other • If it is a Gregorian year payments in 3 equal installments. means. • If the taxpayer is a member of a group • Cash or in-kind dividends received of companies or a branch of a foreign from investments made by a Saudi company that uses a different financial Non Penalties for non-submittal of the tax resident capital company in a Saudi year. submittal return by the due date are the higher resident or non-resident company and of 1% of the total revenues up to a provided the dividend recipient owns delay maximum of SR 20,000, or they range at least 10% of the investee company Registration Each taxpayer must register his penalties from 5% of the unsettled tax for a and for a period of at least one year. activity prior to the end of his first tax delay not exceeding 30 days to 25% year, otherwise a penalty may be of the unsettled tax if the delay imposed ranging from SR1,000 to exceeds 365 days. Allowable Ordinary expenses necessary for the SR10,000, depending upon the expenses realization of taxable income. Expenses classification of the taxpayer. Penalties for delay in settlement such as bad debt write-offs, interest It is now mandatory for all taxpayers amount to 1% of the unsettled tax deduction, depreciation expense to be registered on the GAZT online for each 30 days of delay. This repairs and maintenance, etc. are portal and all filings with the GAZT includes the delay in the WHT and subject to certain rules. are required to be made through the accelerated tax payments. online system. A financial penalty amounting to 25% will be imposed on the tax differences resulting from submitting incorrect information or fraud.

20 Doing business guide | Understanding Saudi Arabia’s tax position

WHT " The non-resident, on any amount received from any sources in the Kingdom, shall be All taxpayers (except subject to WHT deductible from the gross amount according to the following rates: non-residents who do

Nature of payment WHT rate (%) not have a permanent establishment in the Management fee 20 Kingdom) are required Royalties, payments against technical or consultancy services, or services for international telephone calls paid to the head office or 15 to keep the necessary any other related entities books in the Kingdom in Dividends distributed 5 the Arabic language. Rent, return on loans (interest) & insurance (including related 5 parties) " Technical & consulting services 5

Airline tickets/air or sea freight 5

Insurance & reinsurance premiums 5

International telecommunication services 5

In-Kingdom land transportation 15

Any other payments 15

1% of unsettled tax for every 30 days Delay penalty of delay

The party making a payment to a Responsibility for payment non-resident is required to withhold tax

Statutory compliance deadlines A Saudi entity is required to comply with the following main filing requirements by law:

Statutory compliance requirements Deadline

Filing of annual tax/Zakat return 120 days from year-end (60 days for consortium)

10 days from the end of month in which payment Filing of monthly WHT return was made

Filing of annual WHT return 120 days from year-end

Within 3 months of signing the contract or amendments to the contracts signed with Contract Information Form (CIF) suppliers (services or materials) if value is SR100,000 or more

To pay advance income tax in 3 equal instalments calculated at 25% of the immediately preceding Filing of accelerated tax payment year’s tax liability (SR2 million or more), if due, by the sixth, ninth and twelfth month of the year

Filing of audited financial statements with the MOC Within 4 months of year-end

21 Doing business guide | Understanding Saudi Arabia’s tax position

" Transfer pricing Capital gains tax is The transfer pricing (TP) regulations are generally consistent with Organization for Economic assessed at 20% on the Co-operation and Development (OECD) TP guidelines and apply to all income tax paying entities. 100% Zakat payers are not subject to the TP regulations, with the exception of disposal of shares by the country-by-country reporting. Although the TP regulations do not apply to 100% Zakat paying foreign shareholder in a entities, the Zakat regulations require that related party transactions should be conducted in line with the arm’s length principle. resident company. " The table below provides a summary of the TP requirements. Capital gains S/n Applicability • Capital gains tax is assessed at 20% on TP documentation requirements Threshold

the disposal of shares by the foreign Income tax Zakat paying shareholder in a resident company. paying entity entity Capital gains on the disposal of shares No monetary traded on the Saudi stock exchange 1 TP Disclosure Form and affidavit  * threshold (Tadawul) are tax exempt if the shares were acquired after 30 July 2004. Capital Related party transactions 2 Local File  x gains realized from the disposal of exceeding SAR6 securities traded on a stock exchange million** outside the Kingdom will be exempt Related party from tax, provided the securities are transactions 3 Master File  x also traded on Tadawul, irrespective of exceeding SAR6 million** Applicability whether the disposal occurred through a stock exchange or through any other Consolidated revenue of the 4 Country-by-Country Report ***  means. group exceeding • No gain or loss will be computed on SAR3.2 billion transfers of assets between group Consolidated companies, provided: revenue of the 5 Country-by-Country Notification   - The companies are wholly owned (directly group exceeding SAR3.2 billion or indirectly) within the group; and - The assets are owned within the group *CbCR notification only. for two years from the date of transfer. ** In certain cases, the tax authority may at its discretion direct any taxpayer to prepare and maintain TP documentation. The burden of proof is on the taxpayer to maintain robust documentation to support that the arm’s length value of transactions is less than the threshold of SAR 6million. *** The secondary filing of a country-by-country report is required only in certain cases.

The TP regulations in KSA have an extended related party definition, due to the introduction of effective control criteria. This is in addition to the ownership and common control criteria already present in the Income Tax law.

The TP disclosure form is to be submitted along with the annual tax return and should include details of the related party transactions, the applicable TP method and a confirmation that the TP documentation is maintained in accordance with the TP regulations. Together with the TP disclosure form, taxpayers are also required to submit an affidavit issued by a licensed auditor in KSA, certifying that the related party transactions are consistent with the TP policy.

The TP local file has certain additional requirements above the OECD standard local file, including the requirement to include an industry analysis and specific requirements for a comparability analysis. It is recommended that TP documentation, including the TP master file, is maintained at the time of filing the tax return and should be submitted to the tax authority within 30 days from the date of request.

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Foreign income and tax treaties The 2019 Zakat regulations were published A fine of SAR10,000 is imposed for failure Saudi Arabia has signed treaties with on the GAZT's website on 14 March 2019 to register by the required deadline. France, China, India, Pakistan, Malaysia, and are effective for the accounting period Businesses also may apply to register Austria, Italy, Ireland, Greece, Japan, Korea, commencing on or after 1 January 2019 voluntarily if they have annual turnover Poland, Bangladesh, Vietnam, Ukraine, by replacing the existing Zakat regulations of at least SAR 187,500. Non-residents Netherlands, Russia, Singapore, South that were issued in early 2017. The GAZT's providing taxable supplies to non-taxable Africa, Spain, Turkey, United Kingdom, current practices are more or less compiled customers in Saudi Arabia must generally Uzbekistan, Belarus, Romania, Czech in the Zakat regulations. The GAZT also register (through tax representatives) Republic, Tunisia, Malta, Azerbaijan, published rules for computing Zakat on within 30 days from the first such supply. Hungary, Kazakhstan, Luxembourg, banks and finance companies licensed by Tajikistan, Algeria, Ethiopia, Macedonia, SAMA. The Ministerial Resolution has been Filing and payment Portugal, Sweden, Venezuela, Kyrgystan issued providing the framework that the VAT tax periods may be monthly or Turkmenistan, Egypt, Hong Kong, Jordan, State will bear the Zakat and Tax on Sukuks quarterly. Taxpayers must submit the Mexico, Albania, Bulgaria, Cyprus, Georgia, and Bonds issued by Ministry of Finance VAT return electronically by the end of Syria and United Arab Emirates. locally in Saudi Riyals. the following month, together with the payment required. VAT reporting can be The GAZT in recent years has issued Value Added Tax (VAT) carried out on a “cash accounting” basis internal guidance recommending a VAT was introduced in Saudi Arabia on for small businesses with turnover of stronger position on service permanent 1 January 2018 at a standard rate of 5% less than SAR 5 million. Businesses with establishments (PEs). The guidance states on most goods and services. With effect an annual turnover of less than SAR 40 that if a non-resident provides services for from 1 July 2020 the standard VAT rate million may use a quarterly filing period. a period exceeding the agreed services increased to 15%. Transitional rules allow The VAT obligations go together with strict PE duration under an applicable tax treaty the application of the 5% rate until 1 July documentation requirements (in Arabic). (i.e. 183 days in a 12-month period), the 2021 under strict conditions. non-resident will be deemed to have The GAZT is very active in identifying a PE in KSA, regardless of whether the Taxable transactions businesses that have failed to comply with services were physically rendered in KSA. VAT applies to almost all supplies of the VAT law, and issues assessments and Consequently, a foreign service provider services and goods (including imports), often significant penalties accordingly. To rendering services in KSA for more than subject to limited exceptions. Exempt avoid penalties, businesses should ensure 183 days may create a PE even if it does not supplies include margin-based financial they are compliant from a VAT perspective. have any personnel or employees actually services, life insurance, residential property A strong indirect tax control framework is in KSA. rental and since 4 October 2020 the desirable. supply for residential and commercial real Zakat estate property. Education and healthcare General overview Zakat is payable by Saudi (and GCC services provided to Saudi citizens are not When goods are imported into KSA, an national) shareholders in their share of the subject to VAT. import declaration should be submitted. Zakat base in a company. The rate is 2.5% As of 20 June 2020, the Saudi government (This 2.5% could be changed to 2.577683% Rates decided to raise the Customs duty rates for the Zakat payer following the Gregorian The current standard rate of VAT is 15%. applied on a range of products. The list of year and paying Zakat on the Zakat base) Certain goods and services are zero-rated impacted HTS codes on which the higher and is calculated on the higher of the in accordance with the GCC’s Framework duty rate applies can be found on the Saudi Saudi’s share in the adjusted net income or Agreement, which specifies some Customs official site. Unless there is a duty his share on the “balance sheet” basis. mandatory areas for zero-rating in all six exemption or duty relief in place, most GCC member states (including exports of goods are normally subject to Customs The Zakat regulations effective from goods and services to outside KSA, and duty at a rate between 0% to 20%. 1.6.1438H (February 28, 2017) replace the supply of qualifying medicines, medical Customs duty is calculated on the CIF value all previous resolutions, circulars and goods and investment metals). of imports when goods are ‘sold for export’, instructions relating to Zakat collection and payable in cash or by a certified check from the date of this resolution. Registration drawn on a local bank. The standard mandatory VAT registration threshold is having an annual turnover of SAR 375,000 for residents.

23 Doing business guide | Understanding Saudi Arabia’s tax position

KSA is part of the GCC Customs Union. Depending on the nature of goods being Key Customs trends and areas of focus As such goods in free circulation in the shipped, and whether goods are restricted in KSA GCC or of GCC origin would normally not or require a specific import permit, a - There appears to be a significant be subject to duty upon import into KSA. specific approval, a separate notification onslaught of post clearance audits However, when goods move into KSA from and approval process from the relevant (PCAs) initiated by Saudi Customs in recent another GCC country, Customs reporting ministry may be necessary. years. The focus of these audits tends to has to be done. The nature of the Customs be around accurate documentation to reporting depends on whether these goods GCC Unified Customs Tariff 2017 support duty reliefs sought, validation of have been Customs cleared at another Importers should review their import valuation methodologies used for Customs GCC country, such that duties and import product portfolio in relation to the Unified declaration purposes, among others. clearance would have been done at ‘first Customs Tariff and ensure the HTS point of entry’ in the GCC, in which case codes/product descriptions are followed. - Saudi Customs has been promoting the no Customs import clearance is necessary Incorrect classification of goods on Authorized Economic Operator (AEO) when goods arrive in KSA. Given the higher import may lead to action by the Customs certification. AEO is a trade securitization rates of duty that apply in KSA on certain Authorities, even where no duty rate program aimed at enhancing the products, the key point to note here is that increase results. Saudi Customs Authorities relationship between Customs authorities depending on the regime under which the have added four additional digits to the and businesses. AEO certified businesses goods move and the nature of the goods, a eight digit codes provided by the Gulf reap several benefits including faster duty differential payment may be due when Cooperation Council creating the new clearance times, reduced guarantees, etc. goods enter KSA. Integrated Customs Tariff system based on among others. twelve digit tariff codes. Usually the importer of record and/or the - In recent time, we have noticed that data declarant is the entity that declares the Understanding the fundamental and information between government goods for import or export purposes when Customs drivers bodies in respect of taxpayer information goods are declared at the Saudi border for In addition to complying with Customs may be shared. There are several cases, movement into or out of the country. Even reporting and notification requirements, where information exchange between if a Customs broker is in place, subject to to understand the level of Customs duty the GAZT and Saudi Customs has contractual arrangements, the owner of exposure, it is important to understand the resulted in audits being initiated. the goods and/or consignee may be held following three areas: liable for the duty and related compliance - Classification of goods. How goods are - Many businesses and facilities continue obligations. As such, careful consideration classified and whether HTS codes used for to apply for the industrial exemption should be given to the broker selection and Customs declaration are in order; program, which allows the duty free contracting process. - Origin of goods. Where are the goods import of goods when the importer imported from and if any free trade has an industrial exemption in place. The documents required for all commercial agreement bene Obtaining such an exemption and ongoing shipments to KSA, irrespective of value or - Valuation of goods. What is the value compliance in this respect continues to be mode of transportation, are: of the goods being imported? This will an area of focus for both businesses and - Commercial invoice therefore form the basis of the duty bill Saudi Customs. - Certificate of origin calculation. - Bill of lading (or airway bill) - Steamship (airlines) company certificate Some consideration should also be given - Insurance certificate (if goods are insured to operational and regulatory issues that by the exporter) arise from non-fiscal Customs affairs - Packing list – particularly export controls, trade - Evidence of payment to non-resident embargoes affecting movement of goods - Vendor or bank guarantee among other things. There has been a significant focus in the KSA on introduction of renewed and revised regulatory framework, particularly in light of Vision 2030, to bolster and implement such non- fiscal measures in respect of trade control.

24 Doing business guide | Understanding Saudi Arabia’s tax position

25 Doing business guide | Understanding Saudi Arabia’s tax position

Excise duty Real estate transfer tax (RETT) " In June 2017, Saudi Arabia introduced RETT was introduced in Saudi Arabia The liability for RETT is excise tax, another GCC harmonized with effect from 4 October 2020. Unless initiative within the GCC Framework specifically exempted, RETT applies to all with the transferor, albeit Agreement. Some of the key points are sales, assignments, transfers and similar of that the transferee is listed below: land and property as well as rights thereto. All RETT transactions (including those jointly liable. - Excise tax is chargeable on the exempted) must be reported. No threshold importation or production of certain excise applies. The liability for RETT is with the " goods released for consumption in KSA on transferor, albeit that the transferee is or after June 11, 2017. jointly liable. Although in general the levy of RETT corresponds with an exemption - The excise tax is, ordinarily, chargeable from VAT, there are transactions that by reference to the “tax base” of the goods (intentionally) may be subject to both RETT concerned. The tax base is the higher of and VAT. either the retail selling price of the goods, or a list price which will be determined and Land tax published by the authorities. The Council of Ministers issued the white land tax law and its implementation - The categories of excise goods are, regulations in June 2016 and levied 2.5% broadly, soft carbonated drinks and sugar ‘land tax’ on all undeveloped residential sweetened beverages (50% rate), energy and residential/commercial plots within drinks (100% rate), and tobacco products, urban boundaries. The land valuation is including electronic devices and liquids performed by the Ministry of Housing and used for smoking (100% rate). is applicable to individuals and private sector legal entities. - All those holding excise goods valued in excess of SR60,000 were required Personal taxation to submit a one-off transitional return • Presently, there is no employment tax in and pay excise due within 45 days of the Saudi Arabia. implementation of the tax. This means many shops and other businesses were • In the 2017 federal budget, the liable to pay tax on stocks on hand. government announced its intention to levy 6% tax on the remittance of salary - In addition to any transitional return, by expatriate individuals working in excise tax licensees must submit returns Saudi Arabia. However, this has not been reporting their total excise tax liabilities on introduced as yet. a bi-monthly basis (i.e. one return every two calendar months). Returns must be submitted together with payment within 15 days of the end of the tax period.

- Importers of excise goods that are not entered into a tax suspension arrangement will be required to pay excise tax upon importation to the Customs authorities.

26 Doing business guide | Understanding Saudi Arabia’s tax position

Permissible business activities Social security, pension The Saudi Ministry of Foreign Affairs has The General Organization for Social Insurance (GOSI) is a government institute which aims advised that, until further guidance is to ensure compliance of businesses in the private sector with the social security rules. It issued, there are no changes in terms sets a mandatory fixed contribution share of employee's contributory wage (basic salary of the permissible activities under the and housing allowance) which is required to be paid by employer, employee or both on Business Visit Visa. The permitted activities a monthly basis. These shares are collected for the purposes of employees' annuity, depend on the activities and job title unemployment and/or occupational hazards. (See GOSI breakdown table). mentioned in the letter of invitation.

Annuity Occupational hazards The following are examples of activities permissible for applicants with managerial Employer’s Employee’s Employee’s Total share share share job titles and above (e.g. Business Development Manager, Sales Manager, Saudi nationals 22% 10% 10% 2% Finance Manager):

Foreign employees 2% _ _ 2% • Attending business meetings or (expatriates) discussions • Receiving hands-on technical training Visa entry and requirements GOSI sets a specific range of the contributory • Buying goods for sale outside the country • All visitors are required to obtain a visa prior wage for Saudi and resident foreign national • Negotiating contracts to travel to Saudi Arabia except: employees, respectively, as well as an age • Attending and participating in a trade - Nationals of GCC countries limit. show - Transit passengers with valid onward • Visiting facilities and plants tickets The minimum monthly contributory wage • Attending seminars or conferences - Holders of re-entry permits, and landing for Saudi national employees is SR1,500, permits issued by the Saudi Ministry of SR400 for foreign national employee, and The following are examples of activities Foreign Affairs the and maximum contributory wage for all permissible for applicants with technical employees is SR45,000. job titles (e.g., Engineer, Consultant, Saudi Arabia does offer e-visas and visas Technician, Foreman, Surveyor): on arrival; however, these visas are only Retirement benefits (Annuity) are payable to issued for tourist purposes and cannot be insured Saudi national employees at the age • Technical repairs and maintenance used for business travel. 60, while there is no Annuity contribution for • Facilitating technical training expatriate employees. • Technical oversight Foreign nationals who wish to take short- • Systems installation term trips to Saudi Arabia to conduct The purpose of having Employer's • Auditing business activities may obtain a Business Occupational Hazard contribution is to ensure • Consulting Visit Visa. The Business Visit Visa is the that if any employee undergoes an incident • Market integration new unified business visa that replaced during business hours/assignment, they are • Preparing inventory for evaluation the Businessmen Visit Visa, Commercial compensated for (i.e. percentage of their Visit Visa, and Work Visit Visa. In addition wage) until a final medical report is issued Visa validity to the unified visa, the Saudi Ministry of with a health status (i.e. recovery or disability). • Single entry – valid for 90 days upon Foreign Affairs has also started issuing a Any further decision will be made by GOSI issuance new format of letter of invitation, which no accordingly. •Multiple Entry Visa – US and UK nationals longer states the purpose of the visit (for are eligible for visas for up to 5 years; example, a work visit). GOSI sets specific measures for the French and Japanese for up to 4 years; employee's total disability, partial disability other nationalities can obtain a maximum Foreign nationals who hold a Business Visit and/or death. of up to 1 year Visa are not considered residents of Saudi Arabia and cannot obtain a Residence GOSI is not applicable to individuals visiting General requirements to obtain Permit or sponsor their dependents for Saudi Arabia on a Tourist, Business or a Visit business visa Family Visas. Business visitors are not Visa. • Valid passport or travel document with at permitted to open a bank account or lease least six months’ validity a house. However, business visitors are • Valid health insurance approved by the authorized to lease a car when using an authorities in Saudi Arabia international driver’s license. • Commercial registration from the inviting company in Saudi Arabia

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• Letter of invitation from a Saudi company, Block visa/quota Ajeer and third-party sponsorship and To employ any foreign national in Saudi Companies can also temporarily engage • Letter of introduction from the visitor Arabia on a Work Visa, the intended foreign national employees from dedicated company that contains the applicant’s job employer must obtain approval from and licensed manpower companies or title and purpose of visit the Ministry of Human Resources and from other local companies in Saudi Arabia Social Development (MHRSD) in the form through a regulated system called Ajeer. There may be additional requirements of a Block Visa (or quota) through the Maintaining a mid-green Saudization rate depending on the country of residence or Qiwa Portal. At a central level, these are or higher is required for companies seeking nationality. overseen by the Ministry to regulate how secondment options. many foreign nationals are coming into the Temporary work visa country, from which country and what work Saudization Saudi Arabia has introduced a short-term activities they will be engaged in. The Saudi Nationalization scheme (Nitaqat) work visa called a temporary work visa. was developed by the Saudi Ministry of The requirement to obtain to a Block Labor, officially named the Ministry of The visa is multi-entry and allows foreign Visa is the first step in obtaining a Work Human Resource and Social Development nationals to work in the kingdom for 6 Visa, following which there is a consular (MHRSD), to increase the employment months from the date of entry and can application process that is typically initiated rate of Saudi nationals in the private then be extended for an additional 6 in the country of citizenship of the foreign sector. Each company is rated based on months. The temporary work visa is valid national. The application for a Block Visa the number of Saudi nationals it employs for one year from issuance. must contain a specific job title for the as part of its overall headcount and foreign employee to be sponsored, which depending on the sector. Each company is The application is a two-step process corresponds to the foreign employee’s ranked according to a color coded system whereby employers obtain a visa quota professional qualifications. When filing a that rewards (or penalizes) companies for and foreign nationals obtain the visa from Block Visa application, the company must meeting Saudization targets. the Saudi consulate before traveling to the know in advance the exact position to be country. filled. The MHRSD strictly enforces the While the market is open for foreign activities performed by the foreign national nationals, some professions are reserved Employers can obtain quotas for the new according to the job title. The profession of for Saudi nationals only, while others have visas through Qiwa online portal. In order an employee must relate to the activities special Saudization targets assigned to to be eligible for a quota, employers must: stated in the Commercial Registration of them to ensure equal opportunities. the company. - Have a Nitaqat status of medium green or Gulf Cooperation Council nationals are higher A shared visa quota for block visas and treated the same as Saudi nationals under - Ensure that all foreign workers have valid in-country transfers has been introduced an agreement between the countries. work permits recently. Employers are now required, more than ever, to focus efforts on maintaining Eligible employers can purchase quotas in and/or increasing their Saudization rate. packages of one, five, 10 or 50. One visa quota costs 1,000 SAR (approx. USD$267); New entities have the option of obtaining a package of 50 costs 45,000 SAR. an establishment visa quota and purchasing visa packages. Employment of foreign nationals Foreign nationals intending to engage in active, productive work in Saudi Arabia must obtain a work visa which will be converted to a work permit and residency permit (Iqama) upon completion of the in-country processes in Saudi Arabia. The Iqama is required to lawfully work and reside in Saudi Arabia. For Saudi companies to be eligible to employ foreign nationals, they must have or obtain a Block Visa approval and have a High Green or Platinum Nitaqat Saudization rating (see below).

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The Nitaqat threshold impacts the ability of the company to hire expatiate employees overseas and in-country transfer of expatriate employees as well as other factors as identified in the table below.

Not able to: renew Work Permits, apply for residence permits, apply for new Block Visas, hire non-Saudi nationals, or transfer sponsorship (can only transfer Red employees to a company with higher Nitaqat category but cannot receive a new employee). The Commercial Registration will be blocked until the company moves to a Green category.

Not able to apply for Block Visas or transfer sponsorship of more than one Low green employee.

Not able to apply for Block Visas; eligible to receive a transferred foreign employee Medium green and renew a foreign employee’s visa without limitations.

Able to apply for Block Visas; preferred by government in awarding a business contract if competing against low-Saudization companies in a bid; eligible to High green receive a transferred foreign employee and renew a foreign employee’s visa without limitations.

Fast-track services at MHRSD; adequate number of Block Visas granted; given preference as suppliers for government projects and bids; eligible to receive Platinum a transferred foreign employee and renew a foreign employee’s visa without limitations.

Parallel Saudization Training and development As an alternative to maintaining Training of 12% of the total Saudi national Saudization by hiring Saudi employees, population is mandatory for companies the authorities have introduced a scheme with 50 or more employees. called Parallel Saudization wherein a monthly fee that equates to ‘Saudization Student training program credits’ can boost a company’s Saudization All companies based in Saudi Arabia with rate. The fee is based on how many Saudi 25 or more employees are mandated to employees are under employment as well train Saudi national students as interns as how many credits are required. As it is under the ‘Saifi’ Summer Training Program. intended to ‘top up’ Saudization rather than The internship can take place anytime replace it, the fees become higher the more during the summer break. The targets for one relies on this scheme as opposed to companies are determined based on the hiring Saudi nationals. total number employees in the company.

Employment of GCC nationals Nationals of the Gulf Cooperation Council (GCC) may work and reside in Saudi Arabia without a work authorization. These countries include Bahrain, Kuwait, Oman the United Arab Emirates and Qatar. The Saudi Nationalization Scheme (Nitaqat) regulations rules apply to GCC nationals while GOSI rules apply to them based on mutual country-to-country Social Security Agreements.

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• Fully paid Maternity leave: A pregnant Headcount Number of students to " woman is entitled to one-month maternity All companies based be trained leave before the delivery and six weeks in Saudi Arabia with 25 - 500 4% of total headcount after. An employer may not terminate a contract of a sick female employee during 25 or more employees 501 - 3000 3% of total headcount pregnancy or during her maternity leave. are mandated to train • End of service benefits are due upon 3001 and higher 2% of total headcount termination of the contract: the employee Saudi national students will be entitled to half a month’s pay for Companies can comply with this requirement as interns under the each of the first five years of service, and by either: one month’s pay for each subsequent year. ‘Saifi’ Summer Training If the employee resigns, they will be entitled • Offering Internship opportunities to Program. to (i) one-third of the end of service benefit students within the company for summer if they spend a minimum of two years and training, or " up to five years in service, (ii) two-thirds of • Offering training opportunities through an the end of service benefit if they spend five external certified training provider. to ten years in service and (iii) the full end of service benefit if they spend more than Wages and benefits ten years in service. Salaries in the private sector are determined • Medical Insurance for employees and by the market based on the job category, the their dependents residing in Saudi Arabia sector, and the internal compensation plan of (in accordance with the rules of the Council a company. Wages are broken down to basic of Cooperative Health Insurance (CCHI)). salary, housing allowance and transportation • Compensation packages for expatriate allowance, other allowances could be applied employees generally include provisions for too. Unskilled workers may be provided annual leave tickets. with accommodation in lieu of a housing allowance. There is no compulsory annual bonus, but a bonus is paid by most companies. In addition to wages, there are other mandatory employee benefits to be paid by the employer and include the following:

• Annual paid vacation (21 days is due after one year of service and up to five years. If the employee is with the same employer for more than five years, s/he will be entitled to 30 days paid annual vacation), compassionate leaves, study leaves, and sick leaves.

30 Doing business guide | Understanding Saudi Arabia’s tax position

Employee share plans Contract Authentication These changes will require employers to Before April 2018, when an organisation Employers in Saudi Arabia are required to revisit their strategies around compliance, issued its KSA resident employees with upload and update employment contracts retention, recruitment and policies relevant shares (or other equity awards) in a through the contracts authentication to managing the impacts of these reforms non-Saudi entity as part of an employee service via Mudad Business portal to on their workforce. incentive arrangement or otherwise, it ensure compliance with labor regulations would have had to comply with certain and avoid legal implications. It should be noted that these reforms legal requirements, for example, the award are part of the National Transformation had to be made through an “authorized Labor Reforms Initiative (LRI) Program that is aimed at reforming the person”. On 14 March 2021, the Saudi Ministry of Saudi labor market in line with Vision 2030, Human Resources and Social Development and so further reforms are to be expected New legislation introduced from April 2018 (MHRSD) implemented a series of labor around visas and labor law. has removed many of the administrative reforms. and reporting requirements. The key requirement remaining is that the relevant The reforms increase expatriate employee regulatory authority should be notified mobility by removing the requirement to when shares (or other equity awards) are obtain an employer consent and so making awarded to KSA resident employees by it easier for employees to transfer their the end of the relevant quarter. Certain employment from one company to another. information in relation to the award also needs to be disclosed. The reforms also allow expatiate employees to apply for and obtain exit/re- Payroll compliance entry permits and the final exit permit, with In 2013, the Ministry of Human Resources a notification sent to the employer which and Social Development (MHRSD) launched does not require the employer's consent. the Wage Protection System (WPS) as a mandatory requirement for all businesses in the private sector. This has now been " incorporated into the "Mudad Business" On 14 March 2021, the Saudi Ministry platform. The system monitors payment of salaries to employees to ensure they are of Human Resources and Social paid the amounts due and on time. Development (MHRSD) implemented In addition, the MHRSD has incorporated broader regulation to include monitoring a series of labor reforms. of: " • GOSI: to ensure that the salaries (e.g. basic and housing subject to GOSI contribution) reported to GOSI match the employment contract. • GAZT: to use this information for tax purposes and compare the salaries as reported in WPS versus in tax returns.

31 Doing business guide | Understanding Saudi Arabia’s tax position

Deloitte in Saudi Arabia – valued services – built on decades of services since 2010 by the International How can you benefit? insight and experience – we can solve Tax Review’s World Tax Awards. Top tier Deloitte Middle East (DME) is committed tough problems, advise you on the local rankings are provided to firms that have to providing client insight and delivering market and assist you in establishing your “an international network and leading thought leadership to help our clients business in KSA while providing a full suite reputation” which is “reflected in the size keep abreast of key developments in the of services and end-to-end solutions. The and quality of transactions” in the relevant tax landscape. Having been established in high quality and efficiency of Deloitte and jurisdiction. 1926, Deloitte Middle East is the longest Touche & Co. - Chartered Accountants’ standing professional services firm in the services have helped shape the business We would welcome the opportunity to region. Deloitte’s experts are dedicated landscape of the Kingdom in the last half discuss your needs further and provide you to providing confidence in markets and century. with a better understanding of the issues finding innovative solutions that contribute discussed in this material. Please do not to a stronger economy and healthier Deloitte’s Middle East practice has been hesitate to contact one of our specialists. society. Enabled by a team of local experts awarded a Tier One ranking in tax based in KSA and a global network of

32 Doing business guide | Understanding Saudi Arabia’s tax position

Want to do business in Saudi Arabia?

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We welcome the opportunity to discuss your needs further and provide you with a better understanding of the issues discussed in this material. Please do not hesitate to contact one of our specialists.

The ‘Doing business guide’ series is supplemented by the Middle East Tax Handbook, which provides a summary of basic tax information in a country-by-country snapshot.

33 Doing business guide | Understanding Saudi Arabia’s tax position

Your KSA Tax contacts

ME Tax Leader

Nauman Ahmed [email protected]

Business Tax

Nasser AlSagga Farhan Farouk Kashif Jahangiri Wissam Merhej Aamir Majeed [email protected] [email protected] [email protected] [email protected] [email protected]

Issa Ayash Syed M. Naqvi Sajjadullah Khan Dinesh Khator Mahmoud Azouz [email protected] [email protected] [email protected] [email protected] [email protected]

Indirect Tax Customs and Global Tax Management Trade Advisory Consulting

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International and Business Process Transfer Pricing Global Employer M&A Tax Solutions Services

Alex Law Vishal Sharma Basit Hussain Danial Khalid Hadi Allawi [email protected] vishalsharma@@deloitte.com [email protected] [email protected] [email protected]

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