In recent years Saudi Arabia has established itself as one of the strongest and most dynamic economies in the Middle East. Central to this has been the reformation of the tax and zakat (a payment under Islamic law that is used for charitable or religious purposes) systems, both of which are vital for the financing of public services and the realisation of Vision 2030.
Updates are focused on economic diversification, including reduced dependency on oil revenue and private sector development. The Kingdom’s tax and zakat systems combine modern taxation principles with concepts from Islamic finance. Understanding the system’s components and the implications of various developments for private investment is important for businesses that wish to operate in the country.
Establishing A Business
There are several factors to consider when establishing a company in Saudi Arabia, including choosing the right business entity, obtaining the necessary licences and registering with the relevant authorities. Limited liability companies, joint stock firms and branches of foreign entities are the most common types of business in the Kingdom. Foreign investors may establish a wholly-owned foreign entity or a joint venture with a Saudi partner. The choice of legal structure depends on various factors, including the nature of the business and the level of investment, as well as the investor’s long-term goals.
The Ministry of Commerce is the main authority that handles business registration in Saudi Arabia. The registration process usually involves the submission of articles of association and the acquisition of a commercial registration certificate. Furthermore, foreign investors must acquire an investment licence from the Ministry of Investment (MISA).
In addition to business registration, corporations must fulfil regulatory requirements for work permits for foreign employees, complete value-added tax (VAT) registration and open a corporate bank account. The processes for setting up a business have been made more efficient through online portals and simplified procedures aimed at attracting foreign investors.
Commercial Registration
Commercial registration is a necessary step for all businesses in the Kingdom. It signifies the official acceptance of the business entity, and this process is mandatory for undertaking any commercial activity in Saudi Arabia. The registration is handled by the Ministry of Commerce, and it is based on several steps. Businesses must submit an application to the Ministry of Commerce along with supporting documentation, such as the company’s articles of association and identification documents for its shareholders. Upon approval, businesses receive a commercial registration certificate valid for one year that can be renewed annually.
The process requires organisations to maintain accurate registration records, file annual financial statements and adopt corporate governance standards. Failure to comply with these obligations may lead to penalties, business suspension and fines. In addition, commercial registration is a prerequisite for a foreign business intending to obtain any other licences and permits, especially investment licences and work visas for its employees. In recent years the commercial registration process has been streamlined following the introduction of online portals and e-services, improving both efficiency and ease of doing businesses.
Accounting Requirements
Saudi Arabia has adopted International Financial Reporting Standards (IFRS) for all businesses except small and medium-sized enterprises (SMEs). SMEs can opt to apply IFRS if they wish. This enhances transparency, making it convenient for investors and stakeholders to gauge the financial health of businesses operating within the Kingdom.
Businesses in Saudi Arabia must maintain accurate accounting records, including ledgers, journals, invoices and other financial documents, for at least 10 years. These records are essential for compliance and must be retained by management for regulatory purposes.
Financial Reporting
Financial reporting in Saudi Arabia requires companies to prepare and file annual financial statements with a licensed auditor. These documents typically include the balance sheet, income statement, cash flow statement and notes on the financial statements. The annually audited financial statements must be filed with the Ministry of Commerce and the Zakat, Tax and Customs Authority (ZATCA) no later than four months after the end of the financial year.
Auditing in Saudi Arabia follows international standards and involves a thorough examination of financial statements to ensure accuracy and compliance with accounting principles. Auditors also assess the efficiency of internal control systems and report significant findings to company management and relevant authorities. For businesses in Saudi Arabia, compliance with accounting and financial reporting requires transparency to build trust with investors, clients and regulators. Penalties attached to non-compliance may include fines, legal action and reputational damage.
Regulation Of Financial Services
The financial services sector in Saudi Arabia is overseen by several regulators, including the Saudi Central Bank (SAMA), the Capital Market Authority (CMA), the Insurance Authority and the Ministry of Finance. These entities mandate that financial institutions maintain the requisite capital to ensure that the financial system is buoyant and sound. The main requirements for financial services in Saudi Arabia include a good capital adequacy ratio, anti-money laundering (AML) laws and legislation related to consumer protection, among others.
SAMA supervises banks to verify that they maintain adequate capital reserves and adopt prudent risk management practices. It also oversees AML and anti-terrorism financing regulations, requiring financial institutions to implement effective compliance programmes to detect and prevent illicit activities.
The CMA regulates Saudi Arabia’s securities market, overseeing stock issuance and transactions. Its regulations protect shareholder rights, promote transparency and ensure fair practices in securities activities. Investment firms must adhere to CMA guidelines on information disclosure and corporate governance.
Recent developments in the financial services market include the issuance of new regulations on financial technology (fintech) aimed at enhancing innovation while supporting growth of the financial services industry in Saudi Arabia. By and large, this regulatory framework will cover licensing requirements, cybersecurity standards and guidelines on digital payments, blockchain and other emerging technologies.
As an important part of the Saudi economy, the regulatory framework governing the financial services sector has been designed to foster stability and growth in alignment with international standards and best practices. Adherence to these guidelines and regulations is vital for financial institutions since it not only safeguards the interests of customers and investors, but also strengthens the overall resilience of the financial system.
Currency Restrictions
Saudi Arabia offers a relatively open environment when it comes to dealing with foreign currency, allowing capital to move easily across borders. However, certain restrictions are in place to maintain the stability of the Saudi riyal and prevent illegal financial activities.
There is no restriction on the repatriation of profit, dividends or capital by investors back to their countries of origin, provided that the required documentation and approvals from the relevant authorities are readily secured. This flexibility is one of the main advantages for foreign investors since they can freely move their funds without serious regulatory barriers.
Individuals must complete a declaration form for cross-border currency or negotiable instruments exceeding SR60,000 ($16,000) and submit it to Customs authorities. This is one of several safeguards in the Kingdom designed to combat money laundering and terrorism financing while ensuring compliance with international financial standards and regulations.
In addition to the general currency declaration requirements, businesses operating in Saudi Arabia must adhere to applicable foreign exchange regulations. The Saudi riyal is pegged to the US dollar, with SAMA monitoring the exchange rate. All foreign exchange transactions are conducted through licensed financial institutions, and businesses must notify SAMA if there is a significant deviation from the established exchange rate. These currency restrictions are designed to ensure financial system stability while facilitating a free flow of capital. By adhering to these regulations, businesses can minimise legal risks and contribute to overall economic stability in the Kingdom.
Tax Administration
ZATCA, formerly known as the General Authority of Zakat and Tax, is the primary agency responsible for overseeing the collection of taxes and zakat in Saudi Arabia. ZATCA’s role includes the enforcement of tax laws, the collection of taxes and zakat, and the implementation of Customs duties. The authority is central to the government’s efforts to modernise the tax system in line with global standards.
ZATCA has introduced several reforms aimed at improving the efficiency of tax administration. Key initiatives include the digitalisation of tax processes, the implementation of e-invoicing and the introduction of more stringent compliance measures. These reforms highlight the country’s commitment to enhancing the ease of doing business – especially for foreign investors – by streamlining tax registration and reducing the administrative burden on taxpayers.
ZATCA collaborates with international organisations to ensure that Saudi Arabia’s tax practices are aligned with global standards, particularly in areas such as transfer pricing and tax avoidance. These efforts are part of a broader strategy to make the tax system more transparent, efficient and attractive to investors.
Corporate Income Tax
The Kingdom’s corporate income tax (CIT) applies to non-Saudi businesses and foreign investors. The CIT rate is set at 20% on the taxable income of non-Saudi-owned entities. Companies that are wholly owned by Saudi or GCC nationals, or those operating in specific sectors like oil and gas, are subject to zakat instead of CIT.
Taxable income for CIT is calculated by deducting allowable expenses from gross income. Allowable expenses include costs directly related to generating income – such as salaries, rent and depreciation – while fines, penalties and non-business-related expenditures are not deductible. Companies are required to file their CIT returns annually, and submit them within 120 days of the end of the financial year. Any tax due must be paid by the same deadline. Late filing or payment of tax can result in penalties, including fines and interest on the outstanding tax amount.
ZATCA has implemented various measures to ensure compliance with CIT regulations, including regular audits and disseminating guidance on tax issues. Companies must maintain accurate records of their financial transactions and provide supporting documentation for deductions claimed in their CIT returns. Failure to comply with CIT obligations can lead to significant penalties, including fines, interest and possible legal action.
The CIT regime in Saudi Arabia is designed to attract foreign investment while ensuring that non-Saudi businesses contribute fairly to the Kingdom’s economy. By offering competitive tax rates and a legal framework, Saudi Arabia has positioned itself as an attractive destination for international businesses looking to establish a presence in the Middle East.
Zakat
As one of the five pillars of Islam, zakat is a mandatory form of almsgiving for Muslims. In Saudi Arabia, zakat is a legal obligation for businesses owned by Saudi or GCC nationals. The zakat rate is set at 2.5% of the zakat base, which is calculated by deducting liabilities from the zakat payer’s net assets.
Zakat is calculated on assets held for more than a year that have the potential to generate income, such as cash, inventory and receivables. Calculating zakat can be complex, particularly for businesses with diverse asset portfolios, so it is important for companies to ensure accurate calculation of their zakat liability.
Unlike CIT, which is profit-based, zakat is based on asset value. Even without profit, a business may still be liable for zakat. Payments are made annually, with returns filed to ZATCA by the same deadline as CIT. Forthcoming zakat and CIT reforms are likely to affect how businesses calculate and report these obligations.
In addition to being a religious obligation, zakat plays a key role in corporate social responsibility in the Kingdom. Many businesses view zakat as an opportunity to contribute to community welfare and support charitable causes. ZATCA also encourages businesses to make voluntary additional zakat payments, which can be directed towards specific social initiatives.
The collection and distribution of zakat is overseen by ZATCA, ensuring that the funds are allocated for the benefit of those in need within the community. Additionally, ZATCA provides guidance to businesses on how to calculate and pay zakat, and conducts audits to ensure compliance with the relevant regulations.
Transfer Pricing
Saudi Arabia’s transfer pricing regulations are closely aligned with the guidelines agreed upon by OECD member countries, the latest updates of which were released in June 2024. These rules are designed to prevent multinational companies from eroding the tax base and shifting profit to lowtax jurisdictions through intercompany transactions.
Companies are required to maintain comprehensive documentation of their transfer pricing practices, which includes both a master file and a local file. These documents must demonstrate that the company’s transfer pricing policies adhere to the Arm’s Length Principle, indicating that the prices applied in these transactions should align with those typically charged between unrelated entities.
Businesses must provide transfer pricing documentation to ZATCA upon request. In addition, enterprises are obligated to file an annual disclosure form alongside their CIT or zakat returns. Failure to comply with these rules can lead to severe penalties, which may encompass adjustments to taxable income as well as fines.
The introduction of transfer pricing regulations reflects Saudi Arabia’s commitment to combatting tax avoidance and ensuring multinational companies pay their fair share of taxes. These regulations also align the Kingdom’s tax practices with international standards, enhancing the transparency and predictability of the tax system for foreign investors.
VAT
Saudi Arabia introduced VAT on January 1, 2018, as part of a broader effort to diversify the Kingdom’s revenue sources. The standard VAT rate was initially set at 5% but was increased to 15% on July 1, 2020, to offset the economic impact of the Covid-19 pandemic and bolster public finances.
VAT applies to most goods and services supplied in the Kingdom, with some exceptions. Certain goods and services are either exempt or zero-rated, including specific financial services, services provided to nonGCC residents, residential real estate and international transport. Businesses with annual revenue exceeding a designated threshold are required to register for VAT and comply with the associated obligations.
The VAT registration process is straightforward: businesses apply through ZATCA’s online portal. Once registered, they must submit VAT returns regularly – monthly or quarterly, depending on annual revenue. VAT returns are due within 30 days of the end of reporting period, along with any payments owed.
Non-compliance with VAT obligations can result in significant penalties. For example, failing to register for VAT when required can lead to fines of up to SR10,000 ($2670), while the late filing of VAT returns or the late payment of VAT can result in penalties ranging from 5% to 25% of the tax due. ZATCA also has the authority to conduct audits to ensure compliance with VAT laws, and businesses found to be non-compliant may face additional fines or other enforcement actions.
The implementation of VAT in Saudi Arabia has had a notable impact on businesses, particularly in terms of pricing, accounting and cash flow management. Businesses need to establish strong systems for managing VAT compliance, which include accurate record-keeping, the timely submission of returns and proper invoicing practices. Despite the challenges, VAT has emerged as a crucial source of revenue for the Saudi government, contributing to funding public services and infrastructure projects.
E-Invoicing
Saudi Arabia has taken a considerable step towards digital transformation with the introduction of e-invoicing – known locally as Fatoorah – by ZATCA. E-invoicing became mandatory on December 4, 2021, with the commencement of the first phase of the programme. This requirement applies to all taxable entities, including resident taxpayers, businesses and third parties issuing tax invoices on behalf of residents.
The main objectives of e-invoicing are to enhance transparency, combat tax evasion and improve the efficiency of VAT collection. The system requires generating, transmitting and storing electronic invoices in compliance with ZATCA standards. The rollout of e-invoicing occurs in two phases. In the first phase – known as the generation phase – businesses were required to generate and store electronic invoices, along with credit and debit notes, in a compliant format. This phase concluded in December 2022.
The second phase began in January 2023 and is being implemented in waves. In this stage, taxpayers with 2021 revenue of SR3bn ($800m) must integrate their systems with ZATCA to enable real-time reporting and e-invoice validation. To comply with e-invoicing requirements, businesses must upgrade their accounting and billing systems to ensure they can generate e-invoices that meet ZATCA’s prescribed technical requirements.
There are numerous benefits of e-invoicing, including reduced administrative costs, improved accuracy in tax reporting and faster processing of refunds. Additionally, e-invoicing helps businesses streamline their operations by reducing paperwork, minimising errors and enhancing data security. However, the transition to e-invoicing has also posed several challenges for businesses, particularly smaller enterprises, which may need to invest in new technologies and train their staff to comply with the updated requirements.
Outlook
Saudi Arabia’s tax and zakat systems are integral to the Kingdom’s economic framework, reflecting a blend of modern tax practices and Islamic principles. Ongoing reforms and modernisation efforts, driven by Vision 2030, are transforming the tax landscape, making it more transparent, efficient and aligned with international standards. For businesses operating in Saudi Arabia, understanding of and compliance with the tax and zakat regulations are crucial for maintaining successful and sustainable operations. From VAT and e-invoicing to CIT, zakat and transfer pricing, each element of the tax system presents its own set of challenges and opportunities. These can significantly affect a company’s growth, profitability, and ability to adapt in an increasingly dynamic and competitive market.
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