What are the Tax Obligations for Foreign Investors?

What Are the Tax Obligations for Foreign Investors in Saudi Arabia?

Saudi Arabia has emerged as an attractive destination for foreign investors due to its strategic location, economic diversification initiatives, and a growing focus on innovation. However, for anyone looking to tap into the Saudi market, understanding local tax regulations is essential for ensuring profitability and compliance.

The business law attorney at Khalaf Bandar Law Firm can provide foreign investors with a comprehensive overview of their tax obligations in Saudi Arabia. This includes: 

• Corporate taxes 
• Withholding taxes
• The unique concept of Zakat 

We’ll also highlight how our attorney at Khalaf Bandar Law can help safeguard your business interests in this complex regulatory environment.

Tax Obligations for Foreign Investors

Saudi Arabia imposes distinct tax regulations on non-Saudi and non-GCC (Gulf Cooperation Council) residents conducting business within its borders. Here’s a detailed look at what you need to know as a foreign investor:

Foreign business owners in Saudi Arabia are subject to income tax on their net adjusted profits. The corporate income tax rate is set at 20%, and it applies in the following scenarios:

• Non-Saudi and non-GCC shareholders in resident companies conducting business.
• Non-residents operating through a permanent establishment (PE) in Saudi Arabia.
• Non-residents earning Saudi-source income (e.g., consultants and contractors) without a PE.

Withholding Tax (WHT)

For certain types of income originating in Saudi Arabia, non-resident entities are also required to pay withholding taxes. The rates vary depending on the nature of the services or income:

• 5% on dividends, interest, and royalties.
• 15% on payments for technical services and similar activities.
• 20% on management fees.

These taxes are deducted at the source, and the payer is responsible for remitting the withheld amount to the Saudi Tax Authority. Understanding these rates in advance can help foreign investors accurately predict their tax liabilities and structure contracts effectively.

Understanding Zakat and Income Tax

Saudi Arabia’s tax system also incorporates Zakat, a religious financial assessment rooted in Islamic teachings. Zakat is charged on the net worth of an entity, calculated based on the company’s “Zakat base.” 

For businesses, Zakat is levied at a rate of 2.5%, and it applies to Saudi and GCC individuals and companies. This can include shareholders of resident capital companies. When a business has mixed ownership (Saudi and non-Saudi stakeholders), the tax liability is divided:

• Foreign stakeholders are subject to corporate income tax on profits derived from their shares.
• Saudi stakeholders pay Zakat on their share of the company’s profits.

Who is Subject to Income Tax?

According to Saudi income tax law, the following groups are liable for income tax:

1. Non-resident persons conducting business through a PE in Saudi Arabia.
2. Non-residents receiving Saudi-source income without having a PE (e.g., royalties, consulting fees).
3. Resident non-Saudi individuals engaged in business activities within Saudi Arabia.
4. Entities in the natural gas investment or oil and hydrocarbon production sectors (special tax rates may apply).

Foreign investors should be diligent in determining whether their business meets any of these criteria and prepare to comply accordingly.

Zakat in Action

To better understand how Zakat functions in practice, here’s an example:

• A company owned 70% by foreign investors and 30% by Saudi investors.
• The foreign investors’ profits are taxed at the 20% corporate income tax rate.
• The Saudi investors’ profits are assessed for Zakat at 2.5%.

This dual system requires precision in financial reporting and tax filings to meet compliance standards.

Legal Support for Businesses in Saudi Arabia

Navigating Saudi Arabia’s tax system can be complex, especially for foreign investors unfamiliar with local regulations. That’s where legal experience and knowledge come into play.

Khalaf Bandar Law focuses on helping businesses—both local startups and international enterprises—navigate the legal landscape in Saudi Arabia. Our renown in business law and tax compliance ensures that your company is protected from potential legal pitfalls. Our services include:

• Tax and Zakat advisory: Clear guidance on your financial obligations.
• Compliance support: Ensuring adherence to Saudi tax and corporate laws.
• Contract structuring: Drafting agreements that minimize tax exposure and align with local regulations.
• Permanent establishment (PE) assistance: Advising on PE status and its tax implications.

Our team understands the unique challenges foreign investors face in Saudi Arabia. Whether you’re expanding your business or starting anew, we’ll provide tailored solutions to secure your success in one of the world’s fastest-growing markets. If you’re ready to explore your options, contact Khalaf Bandar Law Firm for a consultation.