Saudi Arabia begins ‘significant’ income tax reform - Nov'23

Saudi Arabia is proposing major reforms to its income tax laws through amendments to the ‘Income Tax Law’. Late last month, the kingdom’s Zakat, Tax and Customs Authority (ZATCA) released draft laws seeking public input on chnages that aim to overhaul the tax code in line with its Vision 2030 economic agenda.

Key changes under consideration include more stringent residency rules, expanded tax bases, and alignment with international standards on issues like transfer pricing and preferential tax regimes.

Tax residency and filings

The draft introduces specific provisions for determining tax residency, detailing criteria for transferring residency into and out of the kingdom.

Income sources and exemptions

“Income derived from sources within Saudi Arabia forms the crux of taxable income under the proposed law,” Maha Abualfaraj of Legal Advisors Abdulaziz Alajlan & Partners in association with Baker & McKenzie.

While exemptions remain for certain capital gains and employment income, the scope has been refined. Importantly, there are “no new categories of tax payers,” she added.

Under the draft income tax law (DITL), persons currently subject to corporate income tax (CIT) in Saudi Arabia include:

• Shares in resident companies owned by non-Saudi persons (and non-GCC person);
• Persons who carry out activities in the field of natural gas investment, oil and hydrocarbons production, or both;
• Non-residents who have a permanent establishment in KSA;
• A non-resident who has income from a source in KSA; and
• A natural person who carries out activities in KSA in a continuous and independent manner; and
• Owners of shares in entities that carry out oil and hydrocarbons production (except publicly listed entities)

“The DITL is not a new law and does not aim to tax persons or income not already taxable. The purpose of the new ITL is to enhance the current income tax regime in KSA and to provide a more detailed and comprehensive income tax legislation,” Abualfaraj said.

The draft income tax law proposes that all income sourced in Saudi Arabia will be subject to corporate income tax regardless of monetary threshold. Taxable income is widely defined as income from properties, shares in Saudi companies, services performed in Saudi Arabia, and income generated by a non-resident’s Saudi permanent establishment.

However, some income will still be exempt, like profits from selling shares of a Saudi firm you own at least 10 percent of over a year or shares of publicly traded companies. Any expenses to make taxable income can be deducted, such as real estate transfer fees and VAT taxes paid but not refunded. The law wants to encourage green investments and support research and development work.

New withholding tax rates are proposed too. Payments for services might be taxed at 10 percent at source. But 20 percent may apply if the recipient is in a country with preferential tax system.

Withholding tax changes

Withholding tax rates may change for various payment types to residents and jurisdictions with preferential regimes.

Abboud notes new WHT clauses and adjusted rates, like services payments to non-residents, being subject to 10 percent WHT.

Exemptions are proposed on dividends by listed firms to foreign shareholders. The amendments also govern treatment of loan fees to related parties under a 5 percent WHT.

Deductions and incentives

Deductible expenses have been expanded under the proposed reforms.

Deductible expenses include those incurred to earn income as well as additions like domestic real estate transaction tax and non-recoverable VAT payments.

The draft aims to incentivise green investments and enhance Research and Development (R&D) deduction provisions. It also introduces new withholding tax rates for services of 10 percent and 20 percent for jurisdictions with preferential tax regimes.

Abualfaraj highlighted additions like real estate taxes and non-recoverable VAT as now claimable against taxable profits.

Compliance and penalties

The statute of limitations for tax assessments is reduced from five to three years, with extensions possible.

“Penalties for non-compliance have been significantly increased, especially for tax evasion, where fines can range from 100 percent to 300 percent of the due tax or Zakat,” said Abboud.

Late payments or filings would attract higher fines to promote accountability.

However, provisions on the filing and payment of tax are not available yet, but Abualfaraj expects them to be similar to the current rules which involve filing of tax return and payment to be within 120 days from the end of the tax year.

Transforming Saudi Arabia’s fiscal environment

“These changes are pivotal for Saudi Arabia’s economic trajectory, particularly in fostering foreign investment and domestic growth – cornerstones of Vision 2030,” observed Abboud.

The kingdom aims to reinforce tax compliance through transparency requirements like mandatory e-invoicing integration with ZATCA.

In terms of what this would mean for businesses, both lawyers advised stakeholders to thoroughly analyse impacts and reach out to advisors for strategic guidance.

“Taxpayers, both businesses and individuals, should closely review these changes to understand their effect on compliance and tax planning,” recommended Abboud.

Public feedback is invited through December 25 to help shape the final laws.

Indicate to ZATCA what practical challenges provisions may pose and recommend solutions, said Abualfaraj.

The drafts define a new normal, so early preparation will smooth future transition. According to Abboud, it is important taxpayers follow and contribute to this process of reforming Saudi’s fiscal framework for long-term competitiveness.

Watch a video on this article: KSA New Income Tax Reforms - Nov'23