An outline of taxes for individuals and businesses in Saudi Arabia

Saudi Arabia is ranked 10th out of the G20 countries for ease of paying taxes, a notable achievement for a country with a GDP of over $650bn. With due care and commitment to compliance, businesses can enjoy the advantages of the Kingdom’s tax system.

Although the current tax law was enacted in 2004, it is commonly referred to as the New Income Tax Law. And while the system is basic, it is not simple. Tax regulations are fairly brief and their provisions are relatively clear in respect to items that they address directly. However, there are many areas that remain open and subject to interpretation, and businesses should take a position on unclear areas and be prepared to defend their position during tax audits.

Requirements are reasonable but non-negotiable; for example, only one corporate income tax return per year is to be filed, but there are no deadline extensions or adjusted resubmissions without penalties.

Tax legislation can be characterised as stable. Taxpayers can comfortably plan their tax affairs and budget costs for the foreseeable future – an advantage that very few economies offer. The stability of tax rules is notable given the regulatory reforms in recent years in many other areas of society and business, e.g., foreign investment, labour, immigration, finance and securities.

Upcoming Changes

Although the fundamental principles, tax rates and key concepts have remained unchanged, taxpayers have seen the introduction of amendments and additions to various parts of the tax rules. The overall objective of these changes has been to clarify grey areas and ensure that a consistent approach is applied in all cases of a similar nature.

Changes have been introduced in various forms, including official interpretations from the tax authority in response to frequently asked questions posted on its website, decisions by appeal bodies of various levels, changes in implementing by-laws and changes to the law itself. That said, in the near future taxpayers should expect to see additional tangible changes to the rules, including the following.

Budget Tax Items

The Kingdom’s National Budget for 2017 showed a progressively lower budget deficit in the years to 2020, with the aim of reaching break-even that year. The government has considered additional taxes as potential new sources of revenue, such as the introduction of certain new and revised levies on expatriates, excise tax and value-added tax (VAT).

Excise Tax

The Excise Tax Law was published by the General Authority of Zakat and Tax (GAZT) on May 26, 2017 and entered into effect on June 11, 2017. The implementation of excise tax follows the agreement of the GCC states on the GCC Unified Agreement for Excise Taxes, which sets the common rules and principles of a region-wide excise tax system.

According to Article 6 of the Excise Tax Law, businesses that undertake any of the following activities must register for excise tax purposes: 1. Import of excisable goods; 2. Production of excisable goods; and/or 3. Acquisition of excisable goods under a duty suspension arrangement. The Excise Tax Executive Regulation, published on June 6, 2017, provides additional guidance regarding the application of the law and taxpayers’ responsibilities in terms of registration and compliance. The regulations entered into force on June 11, 2017 with the law.

Value-Added Tax

The official VAT Law was published by the GAZT on July 28, 2017 and came into force from the start of the fiscal year following the date of its publication in the Official Gazette ( January 1, 2018).

The VAT Law is based on the principles agreed upon in the Unified GCC Agreement for VAT. The law required taxpayers to register for VAT within 30 days of the date of the law being published by the GAZT (July 28). The VAT Law also required taxable persons to submit their advance VAT registration by August 24, 2017, although this deadline has been extended.

Many details on the application of VAT, including specific VAT requirements, have been clarified in the implementing regulations. In addition, the GAZT indicated that the VAT regulations will be supported by user guides to help taxpayers in their understanding and interpretation of the legislation, and the authority may pass a number of advanced rulings setting precedent for the treatment of certain business-specific cases with regards to the application of VAT.

Zakat

Zakat is a payment under Islamic law that is used for charitable or religious purposes. The Ministry of Finance issued a Ministerial Resolution on February 28, 2017 introducing the implementing regulations relating to rules and procedures for determining zakat liability and its collection. It should be noted that this is not a new legal framework for zakat, but rather a consolidation into one document of the current zakat practices with a few key changes.

The issuance of the new zakat implementing regulations is an important step forward in the developing legal framework around tax and zakat regulation in the Kingdom.

It is worth noting that these implementing regulations may act as source guidance in determining zakat treatment; however, it is not clear how these will coexist with some fatwas, or religious rulings, that govern zakat treatment of specific items/ transactions.

Advance planning and preparation should help with assessing the monetary impact of the changes. The Ministerial Resolution states the effective date of the implementing regulations as February 28, 2017.

Exchange-Listed Entities

The Ministry of Finance issued Ministerial Resolution 2083 in March 2017. This amended Article 1.1 of the implementing regulations of the Saudi tax law to clarify that shares of non-Saudi/non-GCC investors in a joint stock company traded on the Saudi Stock Exchange (Tadawul) are not considered foreign-held shares for the purposes of the tax law.

Therefore, listed companies should continue determining their zakat and tax commitments under the rules currently in place, and do not have to take into account the effect of non-GCC participation in the capital resulting from acquisition of their shares in the Tadawul secondary market.

Customs

In April 2008 the government issued a resolution to reduce the Customs duty rates on 193 tariff lines corresponding to highly consumed products in the Kingdom by removing and/or subsidising the “protection duties” that were previously levied. The 2008 resolution was originally intended to be applied for a limited period, but was extended several times.

The decision of the government to not renew the subsidies on these 193 products has resulted in an increase in the cost of procuring the affected products for importers in Saudi Arabia. This will not only impact upcoming shipments (some of which are already at the border), but also and more importantly all future imports of these products into the Kingdom.

Businesses are recommended to assess the impact of this new measure on their supply chain. This includes engaging internally and, as appropriate, with suppliers and customers to evaluate how the price of the products is affected, who is responsible for the payment of the increased duties (if the impact can be absorbed by the final consumer or not), and whether there are alternative territories to source the product that enjoy preferential access to the Saudi market.

The Tax System

The Kingdom operates two parallel tax systems. One tax regime applies to companies owned by Saudi or GCC nationals and another to non-Saudi/non-GCC companies. Resident companies owned by Saudi/GCC nationals are subject to zakat payment, while all other resident companies pay corporate income tax.

Zakat liability for corporates originates from Islamic rules. Regulations require identifying the ultimate beneficiary owners of Saudi resident companies. However, zakat liability does not extend to foreign holding companies located outside of the GCC. In other words, if a Saudi company (or group) is owned by an entity outside of the GCC, this Saudi company will be subject to corporate income tax.

Which tax system applies depends only on the ownership structure of the taxpayer; other factors, such as activity, industry of operation and geographic location, have no impact. Mixed companies, i.e., businesses jointly owned by Saudi or GCC nationals and foreign individuals or entities, are subject to both zakat and corporate income tax, applied to the respective stakes of shareholders in the business.

Foreign companies that have created a permanent establishment (PE) in Saudi Arabia are subject to corporate income tax via self-assessment in a manner similar to Saudi companies. Foreign companies that earn income from domestic sources without creating a PE are subject to tax by way of withholding. All corporate employers are also liable for their share of social insurance contribution. There are no other corporate taxes in Saudi Arabia.

The GAZT is the government body responsible for the implementation of policies, the collection of dues and ensuring compliance by zakat and taxpayers. The General Organisation for Social Insurance (GOSI) has similar responsibilities for social taxes.

The following covers aspects related to the second tax system that pertains to non-Saudi/non-GCC companies: corporate income tax.

Regulatory Framework

Corporate income tax rules are governed by the Income Tax Law (Tax Law), which came into force in 2004. The Tax Law is supplemented by implementing regulations (by-laws). In addition, the Ministry of Finance issues resolutions concerning aspects of tax and zakat, and the GAZT regularly issues circulars and responses to frequently asked questions containing its interpretation or position on various parts of the tax system.

Tax administration and enforcement practices in the Kingdom can be characterised as being driven by both substance and form. The tax authorities may – and often do – scrutinise transactions to understand their workings and may challenge taxpayers if they view transactions as being motivated by tax advantages.

At the same time, all documentation (contracts, invoices, etc) and supporting transactions have to be in place and accurately reflect the taxpayer’s intent and the substance of the transaction.

The authorities may choose to base their judgement and conclusion on the provision of documentation alone; for example, extended description of activities in a cross-border service contract may be sufficient to claim creation of a PE even if the in-country component of the service has not in fact been delivered.

International Agreements

In the majority of cases, provisions of international agreements to which Saudi Arabia is a party prevail over the provisions of domestic tax legislation when addressing an issue. An exception to such provisions is made under the anti-avoidance rules contained in Article 63 of the Tax Law (see the double tax treaties section).

Tax Accounting

The tax system is mainly based on financial accounting and reporting, which should be based on Saudi generally accepted accounting principles (GAAP) – standards issued by the Saudi Organisation for Certified Public Accountants.

However, international financial reporting standards will be adopted for all listed companies in the Kingdom starting in 2017, and in 2018 for all unlisted companies. The Tax Law applies its own rules with respect to certain areas, e.g., depreciation methods, accounting for long-term contracts, etc.

The Saudi riyal is the currency for tax accounting. The tax year is a Hijri calendar year (i.e., lunar year). The Gregorian calendar year or a different calendar tax year may be used, with the latter being subject to certain restrictions. Books must be maintained in country and in the Arabic language.

Persons Subject To Tax

Under the Tax Law, the following persons are defined as being subject to tax:

• A resident capital company in respect of the shares of non-Saudi/non-GCC nationals;

• A resident non-GCC individual who conducts business in Saudi Arabia;

• A non-resident who conducts business in Saudi Arabia through a PE;

• A non-resident with other taxable income from sources within Saudi Arabia;

• A person engaged in natural gas investment; and

• A person engaged in the field of oil and hydrocarbons production.

Tax Residents

A natural person is resident in Saudi Arabia if one of the following conditions is met:

• He or she has a permanent place of residence in Saudi Arabia and resides in Saudi Arabia for at least 30 days in a tax year; or

• He or she resides in Saudi Arabia for at least 183 days in a tax year without having a permanent place of residence. A company is considered resident in Saudi Arabia if one of the following conditions is met:

• It is formed in accordance with the Saudi Arabia Companies Law; or

• Its central management is located in Saudi Arabia.

Taxable Income

Taxable income is generally gross income including all revenues, profits or gains and any form of payment resulting from carrying out an activity, including capital gains and incidental revenues less any exempted income.

The Tax Law provides that income derived from the following types of activities and sources is considered taxable in Saudi Arabia:

• Use of licence in Saudi Arabia for industrial or intellectual properties – this category of income also covers software licences;

• Activities within Saudi Arabia;

• Immovable property located in Saudi Arabia, including gains from the disposal of an interest in such immovable properties;

• Disposal of shares in a resident company or a resident partnership;

• Lease of moveable properties used in Saudi Arabia;

• Dividends, management fees or director’s fees paid by a resident company;

• Services rendered by a resident company or PE to the company’s head office or to an affiliated company;

• Payments made by a resident for services performed in whole or in part in Saudi Arabia; and

• Income of a Saudi PE. Taxpayers are required to prepare financial statements in line with Saudi GAAP and IFRS requirements for listed companies in 2017 and unlisted companies in 2018, and are expected to have them audited. Net income according to those financial statements, as adjusted for tax purposes, is the base subject to corporate income tax.

Tax Rates

Standard corporate income tax is charged at a flat 20% rate. A 30% rate applies to the income of taxpayers engaged in only “natural gas investment activity”. Another special rate of 50-85% applies to income from the production of hydrocarbons.

Non-residents – those who do not have a branch or PE in the country – deriving income from a Saudi source are subject to withholding tax at a rate between 5% and 20%, depending on the nature of the income derived.

A number of withholding tax rates that are applicable to income from certain sources in Saudi Arabia are discussed further in this overview.

Loss Carry-Forward

Tax losses may be carried forward indefinitely until fully utilised. Deduction of tax losses is limited and should not exceed 25% of the tax base of a particular year.

In the event of a change in control of 50% or more of the shares or voting rights of a taxpayer, carried-forward losses can still be utilised provided the company’s business activity remains the same. Loss carry-backs are not allowed.

Based on the recent tax audit experience of PwC, the GAZT has been disallowing the offset of carry-forward losses that were incurred in the initial years of setting up of a company and where the revenue was nil. The GAZT believes that since the company did not generate revenue during the period, the cost incurred is pre-operative in nature and does not meet the expense deductibility criteria as per the by-laws of the Tax Law.

Further, PwC is aware of a case where the GAZT disallowed the offset of losses against the taxable profit generated as a result of the tax assessment of a particular year (i.e., wherein the company originally had losses as per the tax return) based on the general reading of Article 11 of the by-laws, which states that the maximum profit that can be used to offset cumulative losses should not exceed 25% of the year’s profit as reported in the taxpayer’s return and not as a result of tax assessment.

Thin Capitalisation

There is no special legislation governing thin capitalisation for tax purposes. A Saudi business may deduct interest payments to affiliates – but not to the firm’s head office – provided that the amount of debt and rate of interest are at arm’s length, and that the interest deductibility formula mentioned below is met. Banks are excluded from the application of these regulations.

A Saudi entity may be financed with minimum capital and there is no limit to the amount of debt that may be used. The GAZT generally does not challenge the capital adequacy of a company.

The deduction of interest expense is limited to the lower of the actual expense or interest income plus 50% of the taxable income before interest income and interest expense. Interest or loan fees in excess of the stated deductibility limit is a permanent disallowance under the Tax Law and its by-laws.

Additionally, if the accumulated losses of a company exceed 50% of its share capital, a shareholders’ meeting must be called to determine whether to continue the business’ activity. This resolution must be published in the Official Gazette.

Permanent Establishments

Saudi tax law defines a PE as “a permanent place of the non-resident’s activity through which it carries out business, in full or in part, including business carried out through its agent”. The following constitute PEs:

• Construction sites, assembly facilities and the exercise of supervisory activities connected therewith;

• Installations, sites used for surveying natural resources, drilling equipment, ships used for surveying for natural resources, as well as the exercise of supervisory activities connected therewith;

• A fixed base where a non-resident natural person carries out business;

• A branch of a non-resident company licensed to carry out business in the Kingdom; and

• Holding an interest in a Saudi resident partnership. It should be noted that even though the Tax Law and the by-laws address the definition of a PE, neither of them addresses the period or threshold of onshore presence that leads a non-resident entity to qualify as a PE in Saudi Arabia.

In practice, the GAZT has accepted certain activities lasting up to three months as not creating a PE; there are cases when the GAZT has even accepted six months of operations.

The GAZT has recently begun applying the concept of “virtual” PEs, in which it establishes a PE for the non-resident entity even if there was no presence required (i.e., services provided offshore), as long as the term of the services exceeds the threshold. This is a relatively new practice and it is currently being challenged.

Article 4 of the by-laws specifies that a dependent agent is someone who has any of the following authorities:

• Negotiate on behalf of the principal;

• Conclude contracts on behalf of the principal;

• Maintains a stock of goods owned by the principal on hand in Saudi Arabia to supply customers on behalf of the principal; or

• Is an insurance/reinsurance agent (even with no powers to negotiate). Deduction of certain inter-company transactions is limited for PEs. The after-tax profit of PEs is subject to an additional 5% withholding tax upon repatriation. The Tax Law states that this tax applies upon actual or deemed repatriation.

Withholding Tax

Income of non-residents from Saudi sources is subject to withholding tax if they do not have a PE in the country. A Saudi person or a PE of a non-resident making a qualifying payment to a non-resident is responsible for withholding the applicable tax.

Supply of equipment and goods is not subject to withholding tax. However, Customs documents are crucial for claiming tax deductions, as well as proof for the authorities that such supply does not include revenue from any service element.

The Tax Law specifically assigns responsibility for withholding to tax agents, and it imposes penalties on tax agents for failure to withhold, pay or report amounts to the GAZT.

However, the Tax Law further states that the beneficiary remains liable in cases where tax is not withheld, and the GAZT may recover the tax from the “beneficiary or its agent or sponsor”.

Tax agents should report to the GAZT on their tax withholding and pay the withheld tax to the authority within the first 10 days following the month of payment to a non-resident.

Similar to income tax, tax agents should submit an annual report on withholding tax within 120 days after the end of the tax year.

Since October 2014 it has been compulsory to file withholding tax returns online. Tax and zakat payers are required to register on the GAZT’s website (www. gazt.gov.sa). Withholding tax forms are completed and submitted online. When done, an invoice number is generated which is then used to carry out payment through the online SADAD system only.

Full or partial relief may be obtained by applying bilateral tax treaties. The following section gives further details on such agreements.

Double Tax Treaties

More than 30 Saudi double tax treaties (DTTs) are currently in force, and the aim is to continue signing double tax avoidance agreements to promote foreign investments and allow for a more competitive and internationally accepted taxation regime in the Kingdom. Saudi DTTs generally follow the OECD model treaty.

The benefits of these tax treaties vary among countries and specific items of income; some treaties provide a reduced rate or exemption from withholding tax on royalties, dividends and interest, while others provide limited relief from capital gains tax.

Refund Or Automatic Application

Under the GAZT’s previous circular, the Saudi service recipient is required to withhold and pay tax at the rates applicable under domestic tax law.

Where a lower rate or exemption applies as a result of enforcing the articles of a DTT, the withholder is required to file a claim for a refund of the withholding tax paid. In doing so, the Saudi resident is required to submit the following documentation: 1. Letter from the withholder certifying and explaining that withholding tax should not apply under a DTT; 2. Request from the non-resident recipient to claim a refund; 3. Tax residence certificate of the recipient; 4. Copy of the withholding tax form; 5. Copy of a bank receipt showing the amount of withholding tax paid to the GAZT; 6. Completed refund request form; and 7. Certificate of registration of the withholder. In 2013 the GAZT issued a new circular on certain amendments for claiming tax treaties’ benefits as provided in the previous circular. The GAZT had formerly requested other documentation to verify that the conditions of the treaty were met, such as agreements and the articles of association.

Based on the new circular, the Saudi Arabian business making a taxable payment to a non-resident entity can apply the provisions of effective tax treaties if it complies with the following requirements:

• Reporting of all payments to non-resident parties (including those payments which are either not subject to withholding tax or are subject to withholding at lower rates as per the provision of effective tax treaties) in the monthly withholding tax returns in Form No. K7/A;

• Submission of a formal request for application of effective tax treaties’ provisions in Form No. K7/B, including a tax residency certificate issued by the tax authorities in the country where the beneficiary is residing confirming that the beneficiary is indeed resident in that country in accordance with the provisions of Article 4 of the treaty and does not have a PE in Saudi Arabia, and that the amount paid is subject to tax in that country; and

• Submission of Form No. K7/C by the Saudi Arabian entity that it would pay any tax or fine due on the non-resident payees as a result of incorrect submitted information or a computation error or misinterpretation of the provisions of a tax treaty (on a prescribed format). The 2013 circular also states that Saudi entities that cannot comply with the above requirements may follow the procedure provided in the previous circular (i.e., payment of withholding tax at the rates prescribed in Saudi Arabian tax regulations and claiming the refund of overpaid taxes on the basis of provisions of tax treaties).As the new circular was issued fairly recently, there is little practical experience with respect to applying for exemptions available under a DTT in accordance with the circular.

There are also a number of issues that are currently being addressed and discussed with the GAZT concerning the procedures laid down in the circular – for example, the requirement to obtain a statement issued by tax authorities confirming that the recipient of the income does not have a PE in Saudi Arabia.

As there is a degree of uncertainty in applying for treaty benefits under the new circular, many Saudi Arabian entities continue to withhold tax and seek a refund as prescribed under the previous circular.

Capital Gains

No special tax treatment exists for capital gains; such unearned income is added to the total taxable income of Saudi taxpayers. Capital gains received by non-residents from the disposal of shares in a Saudi-resident company are subject to tax at a rate of 20%.

In a recent amendment to the tax law, intragroup transfers of cash, shares, financial securities and other tangible and intangible assets can now be done in a tax-neutral manner. The cost base of such intragroup transactions will be net book value to achieve the no gain/no loss result. Previously, there was no specific exemption for intragroup transfers of assets.

Under the new ministerial resolution, the seller is liable to notify the GAZT of the sale and pay the due taxes within 60 days of the selling date, and the purchaser is jointly responsible with the seller to pay any capital gains tax due to the GAZT as a result of such sale. Accordingly, the company whose shares are being disposed of is no longer responsible for the settlement of capital gains tax. RESIDENT TAXPAYERS & PE : Taxpayers must file one return per year. Returns with taxable income exceeding SR1m ($267,000) before deductions should be reviewed by a Saudi-certified public accountant. Corporate income tax returns should be filed within 120 days after the tax year-end.

Taxpayers should be aware that a large amount of preparatory paperwork is expected to be filed along with the tax return.

This paperwork includes, but is not limited to: audited financial statements; the GOSI certificate, a breakdown of all purchases made within the year, an annual withholding tax form, a breakdown of repair and maintenance costs, and details of changes in shareholding (including copies of sale-purchase agreements, and updated commercial registration and licences).

The resulting tax liability should be settled by the filing deadline, i.e., 120 days after the end of the tax year. Taxpayers should make three quarterly advance tax payments at the end of the sixth, ninth and 12th months of the financial year, unless it is the firm’s first tax year or the amount of tax liability for the preceding year is less than SR2m ($533,000).

Since March 2015 it has been compulsory to file corporate income tax returns online. Corporate income tax returns should be completed and submitted online. When submitted, an invoice number is generated which is then used to make payment through the online SADAD system only.

Penalties & Fines

Non-registration of a taxable entity, late filings and late payment of taxes due are potentially subject to penalties.

Delay in payment triggers a penalty of 1% of the unpaid taxes for each 30 days of delay. Failure to file an income tax return by the deadline could potentially attract the greater of:

• 1% of gross revenue up to SR20,000 ($5330); or

• Between 5% and 25% of the unpaid tax. Delay in the payment of withholding tax is subject to a penalty of 1% of unpaid tax for every 30 days of delay. The penalty is not cumulative, so one should expect to pay 1% for each month. After the implementation of online filing, the web system of the GAZT calculates the fine for late filing, although the tax liability may have been settled on or before the due date. In order to reverse such a delay fine, an application is required to be submitted along with payment proof.

In addition to the above penalties, a taxpayer may also be subject to a fine of 25% on the difference of tax paid and tax due where that difference is a result of fraud or false information provided by the taxpayer or its certified accountant.

Statute Of Limitations For Assessment

The general statute of limitations for the GAZT is five years and 10 years in cases where the tax return was not filed, or if filed, was found to be incomplete or incorrect with the intent to evade tax.

Legal Base Of Zakat

The existing zakat system is rooted in the requirement of Islamic rules to share excess wealth. Zakat rules are largely uncodified. There are by-laws issued by the GAZT that cover procedural matters, but zakat is mainly governed by fatwas, the pronouncements of religious authorities.

The new zakat implementing regulations were issued in February 2017, which consolidate to one document the current zakat practices with a few key changes.

Persons Subject To Zakat

Two categories outline which persons and entities pay zakat:

• Saudi individuals or nationals of GCC states who conduct business in the Kingdom; and

• Saudi resident companies of all types owned by Saudi nationals, including shares of Saudi/GCC nationals in mixed companies.

Zakat Base & Rate

The base on which zakat is calculated is the higher of either net adjusted profit (determined in similar manner to the income tax base) or “net worth” determined. Zakat payers are advised to carefully review all relevant rules and fatwas before taking a position on any particular issue. Liability is calculated by applying a 2.5% rate to the zakat base.

Gosi System

Social taxes and activities of GOSI are governed by the Social Insurance Law and supplemented by implementing regulations. Employers should contribute to monthly GOSI occupational hazard insurance at the rate of 2% of all employee salaries (both foreign and Saudi nationals), provided that they are under the sponsorship of the reporting entity.

The GOSI base generally consists of the monthly base salary and cash housing allowance of an employee.

However, if housing is provided in kind, the amount to be included for GOSI purposes is computed as two months of the basic annual salary.

There is also a mandatory contribution to annuities insurance, which is calculated on the following basis:

• 10% by the employer on Saudi employees’ income; and

• 10% by the Saudi employees themselves. The contribution by Saudi employees is calculated, withheld from salary and paid to GOSI by the employer. Also, it should be noted that the minimum monthly salary used to calculate contributions is SR1500 ($400) and the maximum monthly salary is SR45,000 ($12,000).

Customs Duties & Other Taxes

The GCC has established a common external tariff of 5% for most imported goods. There are no other duties or taxes for products going into Saudi Arabia.

Saudi law prohibits the importation of weapons, alcohol, narcotics, pork, pornographic materials, distillery equipment and certain sculptures.

There is no form of stamp duty, transfer pricing, excise, sales, turnover, production, real estate, property or other material taxes that currently apply to businesses in Saudi Arabia.

Tax Status Of Individuals

Both the Tax Law and zakat regulations mention individuals as subject to the respective payments. A number of articles of the Tax Law contain references to individuals. As indicated in the corporate income tax section, persons subject to tax include:

• A resident non-GCC individual who conducts business in Saudi Arabia; or

• A non-resident with other taxable income from sources within Saudi Arabia. Tax residents include:

• A person who has a permanent place of residence in Saudi Arabia and resides in Saudi Arabia for at least 30 days in a tax year; or

• A person who resides in Saudi Arabia for 183 days in a tax year without a permanent place of residence. In the Tax Law, the definition of “activity” – income from which is subject to tax in Saudi Arabia – is quite broad and also contains activity that would be undertaken only by individuals. An activity is a commercial activity in all its forms, or any vocational, professional or other similar activity for profit.

However, in practice the Tax Law has never been interpreted and enforced to charge income tax to individuals. Irrespective of the duration of stay and status of residence, to date employment income of individuals has remained free from taxation in Saudi Arabia. That said, tax agents will deduct tax from income subject to withholding tax even if it is paid to individuals.

Zakat is the responsibility of an individual, as per the original rules of Islam, and zakat on corporates is seen as the government helping individuals fulfil their obligation. Similar to income tax, the authorities do not enforce compliance by individuals. In practice, only corporate zakat payers must meet GAZT requirements.