Doing business guide: Understanding Saudi Arabia’s tax ... · PDF fileour comments with...

Doing business guideUnderstanding Saudi Arabia’s tax position

03

Doing business guide | Understanding Saudi Arabia’s tax position

Contents

04Saudi Arabia

06Market overview

08Industries of opportunity

10Entering the market

A country located in the Arabian Peninsula,the Kingdom of Saudi Arabia (KSA, SaudiArabia or The Kingdom) is the largest oil-producing country in the world.

Throughout this guide, we have providedour comments with respect to KSA, unlessnoted otherwise.

Government type Monarchy

Population (2016) 28.1 million

GDP (2016) US $1,731 trillion

GDP growth (2016) 1.2%

Inflation (2016) 4.4%

Industrial productiongrowth rate (2016E)

0.6%

Labor force (2016E) 12.02 million

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

Source: The Economist Intelligence unit, World Bank, Central Intelligence Agency FactBook

04


Saudi Arabia

Saudi Arabia is an oil-based economy with thelargest proven crude oilreserves in the world.

5


05

06


• Saudi Arabia is an oil-based economywith the largest proven crude oil reservesin the world. According to OPEC, SaudiArabia is also the largest exporter ofpetroleum and possesses around 18percent of the world’s total provenpetroleum reserves.

• The Saudi Arabian economy reportedstrong growth until 2014, primarily due tohigh oil prices, strong private sectoractivity, increased government spendingand the implementation of severaldomestic reform initiatives. Since 2014,lower oil prices have put pressure on theeconomy and Saudi Arabia has sought todiversify its revenue base to protect itselffrom oil price fluctuations.

• The non-oil sectors, especiallyconstruction, real estate, healthcare and education, still offer businessopportunities although most businessesare currently more conservative in theirplans compared to the past.

• Saudi Arabia holds membership ofseveral councils and internationalorganizations, such as: - United Nations (UN)- World Trade Organization (WTO) - Organization of Petroleum Exporting

Countries (OPEC)- Gulf Cooperation Council (GCC)- Arab League- Organization of Islamic Cooperation

(OIC)- G20

Source: OPEC website, Factiva, Saudi Arabiagovernment website -http://www.saudi.gov.sa/wps/portal/saudi/home

Government• Saudi Arabia is a monarchy based on

Islam. The government is headed by theKing, who is also the commander in chiefof the military. On January 23, 2015, KingSalman Bin Abdul-Aziz Al Saud wasdeclared as the King and SupremeLeader of the country following the deathof the late King Abdullah Bin Abdul-Aziz Al Saud.

• The King governs with the help of theCouncil of Ministers, also called theCabinet. There are 22 governmentministries that are part of the cabinet.Each ministry specializes in a differentpart of the government, such as foreignaffairs, education and finance.

• The King is also advised by a legislativebody called the Consultative Council(Majlis Al-Shura). The Council proposesnew laws and amends existing ones. Itconsists of 150 members who areappointed by the King for four-year termsthat can be renewed.

• The country is divided into 13 provinces,with a governor and deputy governor ineach one. Each province has its owncouncil that advises the governor anddeals with the development of theprovince.

• As Saudi Arabia is an Islamic state, itsjudicial system is based on Islamic law(Sharia’). The King acts as the final courtof appeal and can issue pardons. Thereare also courts in the Kingdom. The

Government

Government type Monarchy

Chief of State King Salman Bin Abdul-Aziz Al Saud

Head of Government King Salman Bin Abdul-Aziz Al Saud

Legal system Islamic (Sharia’) legal system with some elements of Egyptian, French, andcustomary law; note - several secular codes have been introduced;commercial disputes are handled by special committees.

Administrative divisions 13 provinces (mintaqat, singular - mintaqah); Al Bahah, Al Hudud ashShamaliyah (Northern Border), Al Jawf, Al Madinah (Medina), Al Qasim, ArRiyad (Riyadh), Ash Sharqiyah (Eastern), 'Asir, Ha'il, Jazan, Makkah (Mecca),Najran, Tabuk.

Source: Central Intelligence Agency Factbook, the Economist Intelligence Unit

Market overview

The non-oil sectors,especially construction,real estate, healthcareand education, still offerbusiness opportunitiesalthough mostbusinesses are currentlymore conservative intheir plans compared tothe past.

07


largest are the Sharia’ courts, which hearmost cases in the Saudi legal system.

• In recent years, conscious efforts havebeen made by the government to reducebureaucracy at all levels and transformgovernment departments by introducingonline services and increasingautomation in several ministries.

• King Salman chairs the Saudi SupremeEconomic Council, which is in charge ofoverseeing the formulation of economicpolicy and encouraging foreigninvestment.

Source: About Saudi Arabia – Government.http://www.saudiembassy.net/about/country-information/government/

Economy – overview• The economy of Saudi Arabia is primarily

dependent on revenues from the oil andgas sector. Rising oil prices in the lastdecade (until 2014) fueled the Kingdom’sgrowth and resulted in the lowering ofgovernment debt and an increase offiscal surpluses. However, post summer2014, the economy is under the impactof declining oil prices.

• In order to reduce its reliance on the oiland gas sector, the government aims todiversify its economy by continuouslyutilizing the revenues from the oil and gassector to support the growth of non-oilsectors, such as infrastructure,construction, education, tourism andmanufacturing.

• Saudi Arabia is also working on improvingthe business climate and increasingaccess to finance, especially for small andmedium enterprises.

• The construction of “economic cities” iscentral to development plans. Thegovernment has launched projects toestablish new cities at different locationsacross the country. These cities areplanned as hubs for petrochemicals,mining and logistics industries as well asfor a knowledge-based economy.

Vision 2030The Council of Ministers has approvedVision 2030, and the salient features are as follows:• To raise the non-profit sector’s

contribution to GDP from less than 1% to 5%

• To increase household savings from 6%to 10% of total household income

• To raise ranking on the E-GovernmentSurvey Index from the current position of 36 to be among the top 5 nations

• To raise ranking in the GovernmentEffectiveness Index, from 80 to 20

• To increase non-oil government revenuefrom SR163 billion to SR1 trillion

• To raise the share of non-oil exports in non-oil GDP from 16% to 50%

• To raise global ranking in the LogisticsPerformance Index from 49 to 25 andensure the Kingdom is a regional leader

• To increase the private sector'scontribution from 40% to 65% of GDP

• To increase foreign direct investmentfrom 3.8% to the international level of5.7% of GDP

• To rise from the current position of 25 to the top 10 countries on the GlobalCompetitiveness Index

• To increase the Public Investment Fund’sassets, from SR600 billion to over SR7trillion

• To increase the localization of oil and gas sectors from 40% to 75%

• To move from the current position as the 19th largest economy in the world intothe top 15

• To increase women’s participation in the workforce from 22% to 30%

• To increase SME contribution to GDPfrom 20% to 35%

• To lower the rate of unemployment from 11.6% to 7%

• To have three Saudi cities be recognizedin the top-ranked 100 cities in the world

Saudi Arabia is working on improving thebusiness climate and increasing accessto finance, especially for small andmedium enterprises.

• Real estate, hospitality and constructionare the key industries in terms ofopportunities in Saudi Arabia. A growingpopulation, increasing urbanization,inflow of religious tourism, ease of doingbusiness, and a focus on economicdiversification have all paved the way forincreased investment potential in thecountry.

• The government plans to constructmultiple schools and hospitals in theKingdom in the next 5 years. Moreover,the government is also focusing ondeveloping economic cities, industrialhubs and healthcare facilitates that offerinvestment and business opportunities.

Doing business in Saudi ArabiaThe official language is Arabic, therefore all documents are first required to betranslated into Arabic by an officialtranslator and thereafter submitted to therelevant government authority.

The summary of procedures is as follows:• Obtain the investment license from the

Saudi Arabian General InvestmentAuthority (SAGIA)

• Open a bank account with a local bank inKSA for depositing the initial capital

• Obtain a commercial registration (CR)from the Ministry of Commerce andIndustry (MOCI)

• Register with the Chamber of Commerce

• Register with the Customs department

• Obtain a municipality license

• Register with the Ministry of Labor

• Register with the General Organizationfor Social Insurance (GOSI)

• Register with the General Authority of Zakat and Tax (GAZT)

08


Industries of opportunity

Real estate, hospitalityand construction are thekey industries in terms ofopportunities in SaudiArabia.

The non-resident who intends to set up abranch or an LLC in KSA is required toobtain the investment license from SaudiArabian General Investment Authority(SAGIA) before starting the aboveprocedures. Given that all the requireddocuments should be translated intoArabic language for filing with theauthorities, it may take approximately 3 to4 months to obtain the CommercialRegistration (CR) from the Ministry ofCommerce and Industry

09


Number Procedure Minimum time tocomplete

Associated cost

01 Reserve the company name and submitArticles of Association

5 days on average No charge

02 Notarize the Articles of Association with the Notary Public

1 days No charge

03 Pay company registration fees Less than one day (online procedure)

SR1,200 for commercialregistration + SR2,000 afee to become member ofChamber of Commerce +SR 500 e-magazinepublication fee

04 Open an ‘under-formation’ bank account 1 day No charge

05 Obtain a business location license from the Municipality

4 days SR 1,000

06 Register with the Ministry of Labor 1 day No charge

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

SR500

08 Make a company seal 1 day SR50

09 Register with the General Organization for Social Insurance (GOSI)

1 day No charge

10 Register with the General Authority of Zakat and Tax (GAZT)

3 days No charge

Procedures for starting a business in Saudi Arabia

Source: Doing Business report Saudi Arabia, World Bank Group

10


Doing business in Saudi ArabiaForeign investment incentives and restrictionsIn April 2000, the Supreme EconomicCouncil enacted the Foreign InvestmentAct (FIA), which is a broad framework withinwhich non-Saudis are permitted to investin the Kingdom in minority, majority or100%-foreign-owned ventures. In February2001, Saudi Arabia’s Supreme EconomicCouncil approved a “negative list” ofeconomic sectors barred to majority-foreign-owned firms, thus clarifying theissue of where in the economy foreignersmay invest. The list was published assecondary legislation to the FIA and wasearmarked for annual revision. It is also, inthe words of the government, to beinterpreted “flexibly”. By default, thosesectors not included on the list should beregarded as legally open to majority-foreign-owned companies.

In August 2002, a new, shorter listconsisting of 15 areas of the economyrestricted from foreign investmentreplaced the original negative list of 22areas. The present negative list includes oilexploration, drilling and production; realestate brokerage; and land and airtransport. Foreign investment is nowofficially permitted in insurance, powertransmission and distribution, educationand pipelines.

The FIA aims to provide equal treatmentfor non-Saudi firms, stating in Article 5 ofthe Implementing Regulations for theForeign Investment Law that a foreign

venture “shall enjoy all the benefits,incentives and guarantees enjoyed by a national project”. The FIA includesguarantees on the free repatriation ofprofits and capital, and it provides a clause that foreign-owned assets may be expropriated only in exceptionalcircumstances, in return for fullcompensation. It offers the right to buyproperty and allows ventures to sponsortheir own employees (previously denied to100%-foreign-owned ventures).

The FIA established SAGIA, an entity withsole responsibility for approving foreign-investment projects. This includes amandate to regulate the investmentsmade by foreign entities to ensureconsistency with national interests. SAGIAalso has responsibility for developing

more detailed legislation to flesh out the framework established by the FIA.However, SAGIA’s primary goal is tofacilitate and encourage investment (bothlocal and foreign) wherever possible.

SAGIA’s Investors Service Center (ISC)(https://www.sagia.gov.sa/en/) serves as aone-stop shop to facilitate the investmentprocess for foreign companies, minimizingthe number of bureaucratic steps requiredbefore investment can take place. The ISCcomprises of three divisions, each focusedon particular steps in the investmentprocess:• The Investors Service Unit - ensures that

initial approval forms are completed andthat documentation is handled properly.

• The License Follow-up Unit - rechecksinvestment applications, notifies theinvestor of any omissions, collects theappropriate application fees and thenregisters the new venture.

• The Government Relations Unit - helpsinvestors to establish contacts with othergovernment agencies to eliminateobstacles hindering the licensing of aproject. Nine ministries are representedat the ISC.

The government has courted foreigncompanies willing to invest in thepetrochemicals business (which is notincluded on the negative list), especiallyaround the industrial cities of Jubail andYanbu. The substantial incentives it hasmade available have already attracted a

Entering the market

In April 2000, theSupreme EconomicCouncil enacted theForeign Investment Act(FIA), which is a broadframework within whichnon-Saudis are permittedto invest in the Kingdomin minority, majority or100%-foreign-ownedventures.

11


number of firms to the sector. However,the foreign investors that have been mostsuccessful in petrochemicals have typicallybeen those seeking joint ventures withSaudi Arabian Basic Industries Corporation(SABIC), the majority-state-ownedindustrial giant. The government haslooked most favorably on joint ventures

with Saudi partners in other sectors aswell. Prior to the passage of the FIA,operations that were 100%-foreign-ownedcould not gain access to the same taxtreatment, funding and other incentivesavailable to joint ventures. Fully foreign-owned companies still remain theexception rather than the norm.

There is a series of laborregulations that requireforeign companiesoperating in the Kingdomto employ and train Saudi nationals.

There is a series of labor regulations thatrequire foreign companies operating in theKingdom to employ and train Saudinationals. All investment schemes mustshow that they meet requirements onemploying and training Saudi nationals.After the commencement of the project,depending upon the nature of its work, anentity should, on a continuing basis,maintain its Saudization ratio; a failure todo so may lead to problems withauthorities in renewals. Labor-intensiveprojects receive preferential treatmentsince the government seeks to combatrising local unemployment. Priority is givento high-technology projects which offersignificant skills transfer. Theserequirements have been in place for sometime but are being enforced withincreasing rigor, and the licensing processoffers officials a good opportunity toensure that standards are being met.

100% foreign ownership is now allowed intrading activity on a case-by-case basis.

Tax incentivesThe government has granted 10-year taxconcessions to six underdevelopedprovinces in the Kingdom, with theintention of attracting more investment on the start of any project. Investors will begranted a tax credit against the annual taxpayable in respect of certain costs incurredon Saudi employees.

The tax credits will be offered in thefollowing regions:• Ha’il• Jazan• Najran• Al-Baha• Al-Jouf• Northern Territory

Financial incentives• The ability to carry forward tax losses on

balance sheets indefinitely (subject tochange of ownership and performingsame activity rules).

• Foreign investors have access togenerous regional and internationalfinancial programs, including:

- Arab Fund for Economic and SocialDevelopment (AFESD) - participates infinancing economic and socialdevelopment projects in Arab countries.

- Arab Monetary Fund - promotes thedevelopment of Arab financial marketsand trade among member states;advises member states on investment of resources.

- Arab Trade Financing Program -provides medium and long-term loansto individuals and organizations forprivate and commercial trade.

- Inter-Arab Investment GuaranteeCorporation - provides insurancecoverage for inter-Arab investments andexport credits against commercial andnon-commercial risks.

- Islamic Development Bank (IDB) -participates in equity capital and grantsloans for productive projects andenterprises. It accepts deposits tomobilize financial resources throughSharia’-compatible avenues.

Exchange controlsThere are no significant restrictions on the inward or outward movement of fundsby companies. Transfer operations areincreasingly sophisticated and rapid,although occasional constraints onworking hours or working days may causea delay of one or two days in implementingorders.

Although there are no restrictions, theSaudi Arabian Monetary Authority (SAMA –the central bank) closely monitors foreignexchange transactions to deterspeculation, fraud and money-laundering.

Banks must report the export of riyal banknotes to SAMA and gain approval prior tothe participation of foreign banks in riyal-denominated syndicated loans or foreign-currency syndicated transactions arrangedfor non-residents. SAMA has shownconsiderable flexibility in its approach tosuch arrangements, however, and has co-operated speedily with the vast majority oftransactions.

12


The government hasgranted 10-year taxconcessions to sixunderdevelopedprovinces in theKingdom, with theintention of attractingmore investment on thestart of any project.

13


Number License Type Minimum acceptable capital (SR) Minimum Saudiparticipation (%)

01 Service * -

02 Industrial 1,000,000 -

03 Commercial ** 26,666,667. Foreign capital shareholding not less than SR20,000,000 and partnership not more than 75%.

25

04 Agricultural 25,000,000 -

05 Communications - 40

06 Communications value added

- 30

07 Insurance 100,000,000 40

08 Reinsurance 200,000,000 40

09 Real estate financing 200,000,000 40

10 Real estate development The value of each project is not less than30,000,000 (covering land and construction); theland and building will be outside the perimeter ofthe two Holy Mosques

-

11 Management ofconstruction projects, detailedengineering design and EPC contracts

- 25

Source: https://www.sagia.gov.sa/en/InvestorServices/InvestmentServicesGuide/Documents/GENERALRULES.pdf

Types of licenses, minimum capital requirements and percentage of Saudipartnership

* It remains generally SR500,000 for foreign-owned companies. There is no express requirement for a specificminimum capital requirement for Saudi-owned companies.

** Trading activity - per the decision No. 377 dated 13 June, 2016 (the "CM Decision"), the Saudi ArabianCouncil of Ministers approved criteria for the licensing of foreign companies desiring to engage in retailand wholesale trading in Saudi Arabia through local corporate entities that they fully own. Previously,foreign investment in the trading sector was limited to 75%. According to the CM Decision:

1. Licensing applicants must have a presence in at least three different regional or international markets.2. The cash capital of the entity to be established locally must not be less than SR30 million.3. Licensing applicants must commit to invest at least SR200 million within five years from having obtained

a foreign investment license from the SAGIA. The cash capital may be counted within such an amount.4. Licensing applicants must commit to realize the Saudization proportions imposed by the Ministry of Labor

and Social Development and must formulate a durable plan to place Saudi nationals in managerialpositons within the first five years.

5. Licensing applicants must commit to train at least 30% of their Saudi Arabian personnel each year.6. Licensing applicants must commit to fulfil at least one of the following objectives: (a) to manufacture locally

at least 30% of all locally-distributed products, (b) to direct at least 5% of all sales revenues towards localresearch and development programs, and/or (c) to establish a local logistical and distribution center and to offer after-sale services. An exemption may be obtained in respect of this requirement for licensingapplicants that commit to invest more than SR300 million within five years from having obtained a foreigninvestment license.

The CM Decision authorizes SAGIA’s Management Board to grant exemptions, provided that exemptions aregranted pursuant to clear, general, and unbiased criteria.

The CM Decision also requires SAGIA to assess the effectiveness of the above requirements, within thecoming five years, and to propose any recommendations.

It is worthwhile to note that recently a foreign investor received a trading license allowing 100% ownership.

The Saudi ArabianMonetary Authority(SAMA – the central bank)closely monitors foreignexchange transactions todeter speculation, fraudand money-laundering.

Choice of business entity and setting up a companyPrincipal business entitiesLimited liability company (LCC) , joint stock company ( JSC) and branch of a foreign entity.

14


Specialized activities which require approval by other government agencies

Number Government agency Issue of license Activity requiring approval

01 Ministry of Health After approval • Management and operation of a hospital and all healthcare services except those included in the negative list

02 Ministry of Petroleum andMineral Resources

After approval • Mineral exploration licenses (services)• Mineral exploitation and production

licenses (industrial)

03 General Authority of Civil Aviation (GACIA)

After approval • Cargo air transport• Airline companies• Aircraft maintenance training centers• Aviation training centers

04 Ministry of Education After approval • Management and operation of elementary, intermediary and high secondaryschools for teaching in Arabic or any other language (the activity is currentlysuspended by the decision of the Council of Ministers)

• Management and operation of institutes, colleges or universities for teaching and issuance of graduation certificates in Arabic or any other language

05 Capital Market Authority (CMA)

After approval • Financial activities, such as financial advice, custody or safekeeping and underwriting, etc.

06 Saudi Arabian Monetary Agency (SAMA)

After approval • Insurance, finance, leasing, banking, etc.

07 Ministry of Interior (MOI) After approval • Manufacture of civil explosives (deleted from the negative list)

08 Ministry of Defense or any military agency or government institution

After approval • Temporary licenses for the performance of time-limited contracts

09 Higher Economic Council After approval • For derogation of any of the activities of the negative list

10 Saudi Food & Drug Authority (SFDA) Before approval(restricted activity)

• Manufacture of human and animal drugs• Manufacture of cosmetics • Scientific and technical offices

11 General Organization for TechnicalEducation & Vocational Training

Before approval(restricted activity)

• Management of higher institutes

12 Ministry of Transport Before approval(restricted activity)

• Maritime transport (shipping) intermediaries• Management and operation of vessel fleets flying the Saudi flag or foreign flags• Service centers on the highways

13 Saudi Standards, Metrology and QualityOrganization (SASO) & Ministry of Trade and Industry


• Quality assurance laboratories

14 Ministry of Agriculture Before approval(restricted activity)

• Poultry• Livestock breading• Fish and shrimp farming

15 Supreme Commission for Tourism andAntiquities (SCTA)


• Travel and tourism agencies, except for ticket issuance by GACIA• Management and operation of hotels

15


New Saudi Company Law• The Saudi Arabian MOCI introduced a

new Company Law, effectiveMay 2, 2016.Some of the key changes compared tothe old Company Law are as follows:-The ability for a LLC to be formed by oneshareholder rather than a minimum oftwo as required previously

- Reducing the minimum share capital forJSCs (SR500,000 instead of SR2,000,000)

- Reducing the minimum number ofshareholders in JSCs to become twoshareholders instead of the previousminimum requirement of fiveshareholders

- Enforcing the need for an auditcommittee to monitor the company'sbusiness

- Prohibition on the role of the chairmanof the board and any other executiverole in a company being combined

- Dictating the “accumulated voting”methodology in electing the board ofdirectors (i.e. each shareholder hasvoting rights equivalent to the numberof shares it holds, which can be used forone nominee, or divided betweennominees, without any duplication ofvotes. This system tends to favorminority shareholders)

- Shareholders in an LLC can no longerbe held personally liable for acompany's debts if losses exceed 50%of the company's capital. Instead thecompany is dissolved by operation oflaw unless the shareholders resolveotherwise

- The MOCI is responsible for supervisingand regulating matters relating to alltypes of companies under the newregulation, except for “listed companies”as these will be the specialty of theCapital Market Authority (CMA)

- Special treatment for family companiesand a legal framework specifically forholding companies

- Introduction of provisions relating to theissuance of debt instruments and sukukfinancing by “listed companies” in accordance with the regulations ofthe capital markets

- Allowing companies to mortgage theirshares and the shareholders of listedcompanies to participate in annualgeneral meetings and vote on thedecisions via modern technology (i.e. no need for physical presence)

- Requirement for companies to valuetheir in-kind share capital contributionby a certified valuer

- Reduction from 50% to 30% of thestatutory reserve which needs to be put aside each year by the company

• Following are the different types ofbusiness structure provided under theregulations for companies:- Branches of foreign company -

commonly used for foreign investors- LLC - commonly used for foreign

investors- JSC- Limited partnership- Joint ventures- General partnership

• The procedure for setting up a branch ofa foreign company or LLC normally takesthree to six months.

16 Ministry of Culture and Information


• Advertising agencies• Printing presses• Photography • TV & radio studios• Foreign media offices & their representatives

17 National Program for Exhibitions andConferences


• Organization and management of exhibitions and conferences

18 Ministry of Municipalities and Rural Affairs (MOMRA)


• Service centers on the highways

Source: https://www.sagia.gov.sa/en/InvestorServices/InvestmentServicesGuide/Documents/GENERALRULES.pdfNote: Construction can be done by a contracting company which can be established without the need for any “special” license.

Accounting principles/financialstatements• Saudi Organization for Certified Public

Accountants (SOCPA) standards are beingfollowed. If an issue is not covered bySOCPA standards, International FinancialReporting Standards (IFRS) are followed(and are used by banks). However, SaudiArabia is transitioning to IFRS. Listedcompanies (other than banks andinsurance companies) are required to

adopt IFRS as of December 31, 2017, withJanuary 1, 2016 being the transition datefor IFRS convergence (the beginning ofthe earliest comparative year); otherentities are required to adopt IFRS as ofDecember 31, 2018, with January 1, 2017being the transition date for IFRSconvergence.

• The audited financial statements arerequired to be uploaded within four

months from the end of the financial yearon the MOCI’s web portal.

Taxation in Saudi ArabiaOverview• Like most other states in the GCC, Saudi

Arabia levies corporate income tax on thenon-resident's share in a residentcorporation; the share of Saudi and GCCnationals is subject only to a religious levycalled Zakat, which is levied on net equity.If a company is a joint venture between aSaudi/GCC shareholder and a foreignshareholder, the portion of taxableincome attributable to the foreign party is subject to income tax and the Saudiparty’s share of net equity is subject to Zakat.

• Corporate tax rates for foreigncompanies vary widely among GCCstates. The Saudi cabinet approved a new tax law on 12 January 2004. Theexecutive by-laws covering the newcorporate tax law were published inAugust 2004. The tax regulations providethe income tax flat rate of 20%, effectivefor accounting years commencing on orafter 30 July 2004. Investments in certainstrategic resources are still taxed athigher rates: 30% for gas and at ratesranging from 50% to 85% depending onthe capital investments for taxpayersengaged in the production of oil andhydrocarbons materials. The taxstructure offers some benefits tocompanies choosing to invest in LLCs orJSCs in Saudi Arabia. Such companies arefree to establish branches throughoutthe kingdom and only need to file onecombined return, provided they arebranches of only one legal entity. TheGAZT often scrutinizes the reportedexpenses and charges of a branch.

16


Branch of foreign company

LLC JSC

Minimumcapitalrequirement

Normally SR500,000 (but can be lower or higher depending upon the nature of activity).

SR500,000. SR500,000 or SR5,000,000 (in case of single shareholder).

Minimumshareholder

Not applicable. One shareholder.

If the number of shareholdersexceeds 50, the company hasto be converted into a JSCwithin a year. If the company is not converted into a JSC, the LLC will be dissolved byoperation of law with certainconditions.

Two shareholders.

Single shareholder is allowed with a minimumcapital of SR5,000,000 andcertain other conditions.

Losses exceed 50% of capital

In case of a foreign branch,the HO’s liability may not be restricted to the extent of the branch's capital.

If losses exceed 50% of capital, the shareholders must meet within 90 days and decide whether todissolve or continue thebusiness.

If losses exceed 50% of capital, the shareholders willnot be held personally liablefor company debts.Shareholders must meet within 90 days and decidewhether to dissolve orcontinue the business andpublish their decision. Thecompany will be deemed todissolve by operation of law if no decision is made.

If losses exceed 50% of capital, the shareholders willnot be held personally liablefor company debts.Shareholders, once aware,must meet within 45 days inan extraordinary generalmeeting and decide whetherto dissolve or increase sharecapital. If the increase in sharecapital is not materialized, thecompany will be deemed todissolve by operation of law.

Maintenanceof statutoryreserve

Transfer 10% of net profit to statutory reserve until it reaches 30% of sharecapital.

Transfer 10% of net profit to statutory reserve until itreaches 30% of share capital.

Transfer 10% of net profit to statutory reserve until itreaches 30% of share capital.

Key differences between foreign branch, LLC and JSC

The general tax burden of a Saudientity owned by foreign companies• The share of taxable profit owned by the

non-Saudi/non-GCC shareholder will besubject to 20% corporate income tax inaddition to 5% withholding tax (WHT)applicable on the distribution ofdividends to the non-resident (includingnon-resident GCC) shareholders.However, the Saudi/GCC shareholder will be subject to Zakat, a fixed-rate tax of 2.5% levied on the higher of taxableincome or what is sometimes referred to as the “balance sheet” basis. A simplecalculation of the balance sheet basisincludes the Saudi shareholder’s share ofequity plus long-term liabilities less fixedassets.

17


Saudi Arabia levies corporate incometax on non-resident share in a residentcorporation; the share of Saudi and GCCnationals are subject only to a religiouslevy called Zakat.

• As per the local regulations, theaccounting treatment for Zakat andincome tax in joint venture companies isunique. The balance of the retainedearnings at the year-end cannotnecessarily be apportioned to theshareholders in proportion to theirshareholding. This is due to the provisionof Zakat and income tax. Zakat is chargedto the Saudi shareholder’s share ofretained earnings, and income tax ischarged to the foreign shareholder’sshare of retained earnings, unless thepartners formally decide otherwise.

Summary of the Saudi Arabian incometax law 2004The Saudi tax regulations came into effectfrom 30 July 2004, which has introducedcertain new concepts and/or modifiedexisting practices. The taxation system inthe past was much less codified and asignificant portion of the tax system hadevolved over a number of years throughvarious practices. However, the law is stillsubject to significant interpretation. Thefinal treatment of any particular section ofthe law will ultimately be dependent uponthe practices developed by the GAZT andhow the particular appeals play out in thecourts.

The GAZT will always lift the veil ofincorporation to determine the nationalityof the shareholders. They will go up thechain of ownership to the last level.

In addition to corporate income tax andZakat, WHT is levied on payment to non-residents from an “in-kingdom source”.WHT, on the other hand, ranges from 5%to 20%, depending on the nature ofpayment, place of performing services andrelationship with the non-resident.

Residence• The 2004 tax law also introduced the

concept of residency for individuals andcorporations, which is of particularimportance in assessing liability to WHT.

• A natural person is considered resident ifhe has a permanent residence (defined)and is available in the Kingdom for aperiod that in total is not less than 30consecutive/non-consecutive days in atax year. Additionally, a natural person isconsidered resident if he resides in theKingdom for a period not less than 183consecutive/non-consecutive days in atax year, even if he does not have apermanent residence.

• For a company, residency in a tax year isconsidered if the company is establishedin accordance with the companies’regulations or is headquartered in theKingdom.

Related partyThe tax law has introduced the concept ofrelated party. Thus, for companies,ownership or control of 50% or more bythe same persons or related persons shallbe considered to be companies under onecommon control.

Source of incomeThere are extensive rules; however, insummary, income is considered to berealized in the Kingdom if it arises from anactivity occurring in the Kingdom; if it isdividends or management fees and amanager’s fee paid by a resident company;amounts paid by a resident for servicesrendered in the Kingdom either fully orpartly; or an amount paid by a residentcompany to its head office or a relatedcompany for services rendered, etc. (thedetailed list is included in the tax law).

18


The Saudi tax regulations came intoeffect from July 30, 2004, which hasintroduced certain new concepts and/ormodified existing practices. The taxationsystem in the past was much lesscodified and a significant portion of thetax system had evolved over a numberof years through various practices.

19


Income derived by a non-resident party from acontract for supply ofgoods from abroad is notconsidered as a Saudi-source income unless itincludes associated workin Saudi Arabia.

Supply of goodsThere is no WHT on payments made tonon-residents for the import of goods.

Income derived by a non-resident partyfrom a contract for supply of goods fromabroad is not considered as a Saudi-source income (i.e. not subject to tax inSaudi Arabia) unless it includes associatedwork in Saudi Arabia, such astransportation, installation, training orother similar work. In such a case, only

associated work is considered to bederived from an activity performed inSaudi Arabia and is liable to tax.

In case of delivery of goods from abroadwith "in-Kingdom associated work", wherevalue is not separately specified in thecontract for the "in-Kingdom associatedwork", income for each associated workshall be estimated at 10% of the totalgross value of the contract for taxpurposes.

Tax losses Carry forward is allowed indefinitely. The maximum limit allowed to bededucted in each year must notexceed 25% of the annual taxableprofit.

Capital companies will be allowed tocarry forward losses, irrespective ofwhether there has been a change inownership or control, provided theycontinue to perform the sameactivity.

Currencytranslation

No consideration is given tounrealized currency translation gainsor losses arising from revaluation fortax purposes.

20


Tax rate 20% applicable to all, except 30% forexploitation of natural gas and ranges50% to 85% for production of oil andhydrocarbons materials depending oncapital investment.

Levied on • The resident corporation – on theshare of the non-Saudishareholders.

• The resident, natural, non-Saudiperson who conducts activities inthe Kingdom

• The non-resident person whoconducts activities in the kingdom through a permanent enterprise

• The non-resident person that hasother taxable income from in-Kingdom source without havingpermanent establishment

Incomeexempt from tax

• Capital gains realized from thedisposal of financial instrumentstraded in the Kingdom’s stockexchange acquired afterimplementation of the new tax lawand gains resulting from the disposalof assets that are not part of theactivity

• Capital gains realized from thedisposal of securities traded on astock exchange outside the Kingdomprovided the securities also aretraded on the Saudi stock exchange(Tadawul), irrespective whether thedisposal occurred through a stockexchange or through any othermeans.

• Cash or in-kind dividends receivedfrom investments made by a Saudiresident capital company in a Saudiresident or non-resident companyprovided the dividend recipient ownsat least 10% of the investeecompany and for a period of at leastone year.

Allowableexpenses

Ordinary expenses necessary for the realization of taxable income.Expenses such as bad debt write-offs,interest deduction, depreciationexpense repairs and maintenance,etc. are subject to certain rules.

Thincapitali-zation

There are no specific thincapitalization rules. However, there isa rule limiting the deductibility ofinterest expense to the lesser of thefollowing:• The actual interest expense; or• Interest income, plus 50% of taxable

income (excluding interest income and interest expense).

Income tax

Estimatedtaxes (deemedprofit tax)

The GAZT may assess the tax foractivities associated with worldwideexpenses on an estimated basis,when local expenses for practicingsuch activities are mixed withworldwide expenses and it is difficultto separate these expenses relatedto activity in the Kingdom accuratelyand hence it is impossible to submitactual accounts for the local activity.

The minimum deemed profit rates on various activities range from 80%(for management fees) to 10% (forconstruction work contracts).

Taxableyear

In general, the tax year is the state’sfiscal year.

A different year can be used in thefollowing circumstances:• If it is approved by the GAZT prior

to the effective date of law.• If it is a Gregorian year.• If the tax payer is a member of a

group of companies or a branch of a foreign company that uses adifferent financial year.

Taxes onexploitation of naturalgas

Separate rules.

Registration Each taxpayer must register hisactivity prior to the end of his first taxyear, otherwise a penalty may beimposed ranging from SR1,000 toSR10,000, depending upon theclassification of the taxpayer.

It is now mandatory for all taxpayersto be registered on the GAZT onlineportal and all filings with the GAZTare required to be made through theonline system.

Books andrecords

All taxpayers (except non-residentswho do not have a permanent establishment in the Kingdom) arerequired to keep the necessarybooks in the Kingdom in the Arabiclanguage. They must at least includethe following:• Daily journal• General ledger• Inventory book

For computerized records, thecomputer should be located in theKingdom.

For taxpayers operating through apermanent establishment that has acentral computer system abroad, thelocal terminal must be in theKingdom to generate all statements,transactions, etc.

Assessmentand appealprocedures

Detailed guidelines have been laidout in the tax regulations. Followingare the two appellate committees:• Settlement Committee of Tax for

Conflict and Dispute• Higher Committee of Tax for

Conflict and Dispute

Acceleratedtax payment

Accelerated tax payment procedureshave been introduced based on aformula. If the prior year’s tax liabilityis SR2 million or more, the taxpayer is required to settle accelerated taxpayments in 3 equal installments.

Non-submittaland delaypenalties

Penalties for non-submittal of the taxreturn by the due date are the higherof 1% of the total revenues up to amaximum of SR 20,000, or they rangefrom 5% of the unsettled tax for adelay not exceeding 30 days to 25%of the unsettled tax if the delayexceeds 365 days.

Penalties for delay in settlementamount to 1% of the unsettled taxfor each 30 days of delay. Thisincludes the delay in the WHT andaccelerated tax payments.

A financial penalty amounting to 25%will be imposed on the taxdifferences resulting from submittingincorrect information or fraud.

21


WHTThe non-resident, on any amount received from any sources in the Kingdom, shall besubject to WHT deductible from the gross amount according to the following rates:

Nature of payment WHT rate (%)

Management fee 20

Royalties, payments against technical or consultancy services, or services for international telephone calls paid to the head office or any other related entities

15

Dividends distributed 5

Rent, return on loans (interest) & insurance (including related parties) 5

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

Statutory compliance deadlinesA 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)

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

Filing of annual WHT return 120 days from year-end

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

Filing of accelerated tax payment To pay advance income tax in 3 equal instalments calculated at 25% of immediately preceding year’s tax liability (SR2 millionor 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

The non-resident, on anyamount received fromany sources in theKingdom, shall be subjectto WHT deductible fromthe gross amount per theprescribed WHT rates.

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

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

22


Capital gains• Capital gains tax is assessed at 20% on

the disposal of shares by the foreignshareholder in a resident company.Capital gains on the disposal of sharestraded on the Saudi stock exchange(Tadawul) are tax exempt if the shareswere acquired after 30 July 2004. Capitalgains realized from the disposal ofsecurities traded on a stock exchangeoutside the Kingdom will be exempt fromtax, provided the securities also aretraded on Tadawul, irrespective whetherthe disposal occurred through a stockexchange or through any other means.

• No gain or loss will be computed ontransfers of assets between groupcompanies, provided:

- The companies are wholly owned(directly or indirectly) within the group;and

- The assets are owned within the groupfor two years from the date of transfer.

Transfer pricingSaudi tax law does not contain anydetailed transfer pricing regulations orguidelines. However, related partytransactions and the applicability of thearm’s length principle are covered under

Capital gains on thedisposal of shares tradedon the Saudi stockexchange (Tadawul) aretax exempt if the shareswere acquired after July30, 2004.

23


certain general anti-avoidance provisions,and the GAZT may challenge anytransaction as follows:• Disregard a transaction that has no

economic effect;

• Reclassify a transaction whose form does not reflect its substance;

• Reallocate income and expensesbetween related parties or parties under common control to reflect theincome that would have resulted from a transaction between independent and unrelated parties; and

• Estimate the appropriate tax base and impose penalties.

The GAZT is presently working on transferpricing legislation and as a first step toprovide legal cover in article 10 (11) of thetax by-laws, which was amended in April2014. We expect the transfer pricing rulesto be in line with OECD principles and tobe announced in due course.

Foreign income and tax treatiesSaudi Arabia has signed treaties withFrance, China, India, Pakistan, Malaysia,Austria, Italy, Ireland, Greece, Japan, Korea,Poland, Bangladesh, Vietnam, Ukraine,Netherlands, Russia, Singapore, SouthAfrica, Spain, Turkey, United Kingdom,Uzbekistan, Belarus, Syria, Romania, CzechRepublic, Tunisia, Malta, Azerbaijan,Hungary, Kazakhstan, Luxembourg,Tajikistan, Algeria, Ethiopia, Macedonia,Portugal, Sweden, Venezuela, KyrgystanTurkmenistan and Egypt.

The GAZT in recent years has issuedinternal guidance recommending astronger position on service permanentestablishments (PEs). The guidance statesthat if a non-resident provides services inKSA for a period exceeding the agreedservices PE duration under an applicabletax treaty (i.e. 183 days in a 12-monthperiod), the non-resident will be deemedto have a PE in KSA, regardless of whetherthe services were physically rendered inKSA. Consequently, a foreign serviceprovider rendering services in KSA formore than 183 days may create a PE evenif it does not have any personnel oremployees actually in KSA.

ZakatZakat is payable by Saudi (and GCCnational) shareholders in their share of theZakat base in a company. The rate is 2.5%and is calculated on the higher of theSaudi’s share in the adjusted net incomeor his share on the “balance sheet” basis.

The new Zakat regulations effective from1.6.1438H (February 28, 2017) replace allprevious resolutions, circulars andinstructions relating to Zakat collectionfrom the date of this resolution. TheGAZT’s current practices are more or lesscompiled in the regulations.

Turnover and other indirect taxes and stamp dutiesPresently there are no sales orconsumption taxes or stamp duties inSaudi Arabia, but the country intends tointroduce value added tax (VAT) fromJanuary 1, 2018.

VATThe six member states of the GCC allintend to introduce VAT, at a rate of 5%,from January 1, 2018 onwards. This is tobe governed by a Framework Agreement atthe GCC level which applies to all GCCmember states, and local VAT laws andregulations in each country.

The GCC Framework has been published,and GAZT issued the final VAT law on July28, 2017. Some of the main features are asfollows:• VAT is applicable at the rate at 5% from

January 1, 2018 on all supplies of goodsand services in Saudi Arabia, and allimports of goods into Saudi Arabia fromoutside of the GCC – subject to limitedexceptions.

• The GCC’s Framework Agreement setsome mandatory areas for zero-rating inall six member states (such as exports ofgoods and services outside the GCC,medicines and investment metals).Individual countries are however able toelect whether exemptions or zero-ratesapply in some other sectors. Theregulations published by GAZT reflectthat Saudi Arabia has chosen a broad taxbase and VAT is to be applied to almostall supplies of goods or services, subjectto limited exceptions. The VAT treatmentof different type of supplies (signaled bythe draft regulations and correct at thetime of publication) are as follows:- Financial services – fee-based services

are taxable and margin-based servicesare exempt

- Insurance - all non-life insurance istaxable and life insurance is exempt

- Food items - all taxable - Education - taxable- Health - taxable - Real estate - all real estate is taxable

except residential rental which isexempt

- Local transport - taxable

Zakat is payable by Saudi (and GCCnational) shareholders in their share ofthe Zakat base in a company.

24


• VAT must be charged on supplies madeafter January 1, 2018 and tax invoicesmust be issued for all taxable supplies,showing a range of mandatoryinformation.

• If an invoice is issued or a payment ismade before the implementation orregistration date but the actual supply ofthe goods and services is on or after theimplementation or registration date, theVAT will be considered to be due.

• Any VAT deduction requires thepurchaser to hold a copy of a valid taxinvoice issued by the supplier.

• Deductions of VAT will not be permittedfor entertaining, catering, and purchaseor expenditure on ‘restricted’ motor cars– i.e. those available for any private use.

Registration and VAT administration• The standard VAT registration threshold

is an annual turnover of SR375,000;businesses with an annual turnover lessthan SR1,000,000 are however initiallyexempt from the mandatory registrationrequirement until January 1, 2019, givingthe smallest businesses more time tobecome ready for the new rules.

• Businesses who fail to apply for theregistration within the specified periodwill be fined SR10,000.

• Each business will need to calculate thenet VAT due over monthly or quarterly taxperiods, with electronic submission of the VAT return and the payment duefor that period required by the end ofthe following month.

• VAT reporting can be carried out on a‘cash accounting’ basis for smallbusinesses with turnover of less thanSR5,000,000.

• All businesses with annual turnover lessthan SR40,000,000 may use a quarterlyfiling period, significantly reducing thenumber of VAT returns required per yearand extending the time for makingpayment of VAT.

• A formal VAT assessment may be issuedby GAZT at any time up to five fullcalendar years following any tax period.In certain cases, this can be extended to20 years.

Customs duties• Most of the consumer products are duty

free, e.g., rice, tea, corn, livestock andmeat (fresh or frozen).

• Customs duties at 20% are imposed onsome commodities for the purposes ofprotecting Saudi industries.

• Import duty on other items rangesbetween 5% to 20% ad valorem on thecost, insurance and freight (CIF) value.

• A limited number of items are subject tocustoms duties calculated on the basis ofmetric weight or capacity, rather than advalorem. However, the rates for theseitems are fairly low.

• The government has recently decided toraise the customs duty rates applied to193 products, from 5% to 25%.

• The Ministry of Finance has increasedcustoms duty rates applicable to a widerange of highly consumed products, withalmost 600 harmonized system (HS)codes impacted. The duty increase iseffective from January 2, 2017. The rateincrease is significant, with new rates ofup to 25% payable on the customs value.A full list of impacted HS codes,description (in Arabic) and new duty ratescan be found on the KSA Ministry ofFinance website(https://www.customs.gov.sa/sites/sc/en/SCTariffs).

Customs duty is calculated on the CIFvalue of imports, which is converted toSaudi Riyals at the exchange ratespublished by SAMA applicable on the dateof the declaration. Customs duty is payablein cash or by a certified check drawn on alocal bank.

The documents required for allcommercial shipments to the Kingdom,irrespective of value or mode oftransportation, are:• Commercial invoice

• Certificate of origin

• Bill of lading (or airway bill)

VAT must be charged onsupplies made afterJanuary 1, 2018 and taxinvoices must be issuedfor all taxable supplies,showing a range ofmandatory information.

• Steamship (airlines) company certificate

• Insurance certificate (if goods are insuredby the exporter)

• Packing list

• Evidence of payment to non-residentvendor or bank guarantee

Depending on the nature of goods beingshipped, or upon certain requests fromthe Saudi importer or clauses in acontractual document, specific certificatesmay also be required.

GCC Unified Customs Tariff 2017The 2017 Unified Customs Tariff has beenfinalized by the customs authorities of theGCC for the region. We understand frominformal discussions with the customsauthorities that the updated GCC UnifiedCustoms Tariff has been in force sinceJanuary 1, 2017. An official announcementhas yet to be made, and is expected totake place in due course.

We understand the updated tariff includesamended product descriptions andadditional HS codes. Importers shouldreview their import product portfolio inrelation to the updated tariff and ensurethe new HS codes/product descriptionsare followed. Incorrect classification ofgoods on import may lead to action by thecustoms authorities, even where no dutyrate increase results.

Excise duty In June 2017, Saudi Arabia introducedexcise tax, another GCC harmonizedinitiative with the GCC Framework

Agreement in place, and with domestic laweffective from June 11, 2017. Some of thekey points are listed below:• Excise tax will be chargeable on the

importation or production of excisegoods released for consumption in KSAon or after June 11, 2017.

• The excise tax is, ordinarily, chargeable byreference to the “tax base” of the goodsconcerned. The tax base is the higher ofeither the retail price of the goods or alist price which will be determined andpublished by the authorities.

• The definitions of excise goods are,broadly, soft carbonated drinks (50%rate), energy drinks (100% rate), andtobacco products (100% rate).

• Excise tax registration is required foranyone intending to import, produce or hold (under a suspension arrangement)any excise goods in KSA.

• All those holding excise goods valued inexcess of SR60,000 (whether or nototherwise registered or registrable) arerequired to submit a one-off transitionalreturn and pay excise due within 45 daysof the implementation of the tax. Thismeans many shops and other businesseswill need to pay tax on stocks on hand.

• In addition to any transitional return,excise tax registrants must submitreturns reporting their total excise

liabilities on a bi-monthly basis (i.e. one return every two calendar months).Returns must be submitted together withpayment within 15 days of the end of thetax period.

• Importers of excise goods that are notentered into an approved warehousingarrangement will be required to payexcise tax upon importation to thecustoms authorities.

Land taxThe Council of Ministers issued the whiteland tax law and its implementationregulations in June 2016 and levied 2.5%‘land tax’ on all undeveloped residentialand residential/commercial plots withinurban boundaries. The land valuation isperformed by the Ministry of Housing andis applicable to individuals and privatesector legal entities.

Personal taxation• Presently, there is no employment tax in

Saudi Arabia.

• In the 2017 federal budget, thegovernment announced its intention tolevy 6% tax on the remittance of salary byexpatriate individuals working in SaudiArabia, however this has not beenintroduced as yet.

Social security, pension• The GOSI (social insurance) is paid for

the employees who are on a residential

25


In June 2017, Saudi Arabia introducedexcise law effective from June 11, 2017.

26


permit (iqama) of a Saudi entity. TheGOSI contributions are computed onbasic salary, housing allowance andcommission payments, if any. Thesecontributions are required to be settledat the following rates:

• The minimum and maximum monthlylevels of contributory wage for Saudiemployees are SR1,500 and SR45,000respectively. For non-Saudi employees,the minimum and maximum levels areSR400 and SR45,000 respectively.

• GOSI is not applicable on individualsvisiting Saudi Arabia on a temporary,business or a visit visa.

• Retirement benefits are payable toinsured Saudi workers at 60 Hijri years(58 Gregorian years). No annuitiescontribution exists for expatriateworkers.

• Capital companies are allowed to deducttheir contribution to a retirement, socialinsurance or any other fund establishedfor the purpose of settling employees’end-of-service benefits or medicalexpenses, provided:

- The allowable deduction does not exceedthe unfunded liabilities relating to thefund that are due at the beginning of the

financial year for which a deduction isbeing claimed; and

- The fund has an independent legalstatus, regardless of whether it isestablished inside or outside SaudiArabia.

Labor relations and workforceVisa and entry requirements• All visitors require visas except for the

following:- Nationals of the GCC countries.- Transit passengers who intend to

continue their journey by the same orfirst connecting aircraft within 18 hours,provided they possess onward or returndocumentation, do not leave the airportand make no further landing in SaudiArabia (except nationals of BurkinaFaso, Mali, Niger and Nigeria whoalways require a transit visa).

- Holders of re-entry permits and landingpermits issued by the Saudi ArabianMinistry of Foreign Affairs.

- Business visitors from countries outsidethe GCC must obtain a visitor’s visa. The visa is contingent on a letter ofinvitation from a Saudi business or anofficial body such as a regional chamberof commerce.

Annuity branch Occupational hazards

Total Employer’s share

Employee’sshare

Employer’sshare

Saudi nationals 22% 10% 10% 2%

Foreign employees(expatriates)

2% - - 2%

A unified system forsalaries and wages basedon experience andqualifications is applied inthe government sector.Salaries in the privatesector are determined by the market but aregenerally higher to reflectthe increased riskassociated with workingin Saudi Arabia.

27


Presently the visa fee has been increasedin all categories. The nationality-widevisitor’s fee is as follows:

Working hoursAs per the Saudi labor law amended in October 2015, an employee or worker inSaudi Arabia should not work more thaneight hours in a single day; if the employerdecides to readjust the working hours dueto any reason then it should not exceedmore than 48 hours in a week. DuringRamadan, working hours for Muslimsshould not exceed six hours in a single dayor 36 hours in a week. Government officesare closed all day Friday and Saturday.Overtime is typically paid at time and ahalf. The labor regulations outlineprovisions for overtime work.

Wages and benefitsA unified system for salaries and wagesbased on experience and qualifications isapplied in the government sector. Salariesin the private sector are determined by themarket but are generally higher to reflectthe increased risk associated with workingin Saudi Arabia.

Other mandatory employee benefits to bepaid by the employer include the following:

• Annual paid vacation of 21 days is dueafter one year of service and up to fiveyears. If the employee is with the same

employer for more than five years, he willbe entitled to 30 days paid annualvacation.

• End of service benefit is due upon theterm or termination of the contract: theemployee will be entitled to half a monthof pay for each of the first five years ofservice, and one month’s pay for eachsubsequent year. If the employee resigns,he will be entitled to (i) one-third of theend of service benefit if he spends aminimum of two years and up to fiveyears in service, (ii) two-thirds of the endof service benefit if he spends five to tenyears in service and (iii) the full end ofservice benefit if he spends more thanten years in service.

• Workers are allowed sick leave with fullpay for the first 30 days and three-quarters pay for the next 60 days.

• There is no compulsory annual bonus,but a bonus is paid by most companies.

A pregnant woman is entitled to onemonth maternity leave before the deliveryand six weeks after the birth. Employersbear the cost of medical check-ups,treatment and birth expenses and may not terminate a female worker duringpregnancy or during her time off after the birth.

Expatriate packages for skilled workersgenerally include provisions for housing,schooling, annual leave tickets, and restand recreation trips. Unskilled workersrequire accommodation and transportpaid to and from the Kingdom.

Wages Protection System The Ministry of Labor launched the WagesProtection System (WPS) from March 1,2014. The aim of this system is for theMinistry of Labor to have a timely andaccurate record of bank account paymentsmade between an employer andemployee. This applies to Saudi citizensand Saudi expatriates in the private sector.

By implementing the above system, notonly is the Ministry of Labor maintainingthe salaries record and ensuring thepayment of salaries to employees in Saudibank accounts, but other revenueauthorities are also monitoring, such as:• GOSI department will ensure that the

salaries (e.g. basic and housing subject toGOSI contribution) reported to the GOSIdepartment also match the employmentcontract.

• GAZT may use this information for taxpurposes and start comparing thesalaries as reported in WPS and asreported in the tax returns, and maydisallow any unreconciled differences.

Nationality Single entry (SR) Multiple entry for 6 months (SR)

Multiple entry for 1 year (SR)

Multiple entry for 2 years (SR)

USA (multiple entry for 5 years)

400 400 400 400

UK 510 510 1,950 1,950

Schengencountries

250 250 250 250

Turkey 225 225 5,000 8,000

Othernationalities

2,000 3,000 5,000 8,000

28


There could also be implications forcompanies using the services of payrollproviders or paying directly to employee’sbank accounts outside KSA.

Termination of employment• Saudi labor regulations permit dismissal

at the employer’s discretion during athree-month probationary period. Anemployer who terminates an employeeafter three months of work should notmeet any regulatory resistance ifprocedures are followed and the cause is legitimate.

• Contracts for specified periods may notbe terminated unless there is cause, andan employee may challenge prematuretermination at the Labor Office. However,an employer should not encounter anydifficulties in non-reviewing employmentof an employee at the end of a contract.An unspecified-term contract may beended with 30 days’ notice for monthlyworkers and with 15 days’ notice forother workers.

• On termination, the employee is entitledto the termination benefit as per thelabor law and a service certificate fromthe employer specifying the period ofservice and the salary.

Employment of foreigners• Saudi Arabia is dependent on foreign

labor. Nevertheless, the number ofSaudis entering the labor force isincreasing every year and the publicsector’s traditional capacity to absorbthem is eroding. Hence the governmentis increasingly determined to hire moreSaudi nationals instead of foreignworkers wherever possible.

• The Ministry of Labor developed adatabase to monitor the length ofexpatriate workers’ work permits andcontracts to ensure that qualified Saudishave the option to apply for the postbefore an expatriate’s permit is renewed.

• The latest Saudization initiative waslaunched under the auspices of theMinistry of Labor (the Nitaqat program).Under the program, Saudi nationalscomprise 30% of the workforce of everySaudi company which employs morethan twenty (20) employees, subject tocertain limited exceptions. Thecompanies are categorized according toa basic color scheme: red, yellow, greenand premium. In summary, companiesclassified as green or premium arefulfilling Ministry of Labor sanctionedSaudization requirements and will receivespecified benefits. On the other hand,those companies classified as red oryellow are non-compliant and will besubject to various sanctions.

• Saudi employees in the private sectorreceiving salaries of SR1,500 areconsidered as “half-workers” in theircompanies’ Saudization records in theNitaqat system, while Saudis receivingless than that amount are not included atall when calculating their firm’sSaudization percentage. However, thegovernment is considering a minimumwage of SR3,000 for Saudis andspecifying conditions for calculatingSaudization quotas. The companies arerequired to pay SR2,400 per foreignemployee at the time of renewal of theirresidential permit (Iqama) if a company’snumber of foreign workers exceeds thenumber of Saudis.

Saudi employees in theprivate sector receivingsalaries of SR1,500 areconsidered as “half-workers” in theircompanies’ Saudizationrecords in the Nitaqatsystem, while Saudisreceiving less than thatamount are not includedat all when calculatingtheir firm’s Saudizationpercentage.

29


• However, in the recently announced2017 fiscal budget, these amounts havebeen increased. For companies in whichexpats do not exceed the number ofSaudi or GCC employees, the fee will nolonger be waived, but will be charged at adiscounted rate.

• The dependent levy of SR1,200 perannum for each expat dependentresiding in the Kingdom is effect from July2017. This amount would increase toSR2,400 per annum per dependent witheffect from July 2018 and SR3,600 perannum per dependent with effect fromJuly 2019 and SR4,800 per annum perdependent with effect from July 2020.

• To increase the cost of employingexpatriate staff over Saudi nationals, thegovernment has steadily raised thecharge for work permits and otherdocumentation. Work-permit fees(renewable every one to two years, forcertain categories of employment, andpayable by the employer) now stand atSR2,000 in addition to an extra fee ofSR1,000 for any expatriate wanting tochange jobs. Foreign workers must payfor exit and re-entry visa fees, at the rateof SR200 for the first two months andthereafter SR100 for each additionalmonth.

• Expatriate workers need an entry workvisa to work in Saudi Arabia. Theprospective employer applies for thepermit, which is issued by the Saudiembassy in the expatriate worker’s homecountry. This also serves as a residencepermit for one month. To retain the

employee, the employer must apply for aformal work permit before the end of themonth. The formal permit is necessary tore-authorize the residence permit. TheMinistry of Labor issues work permits,but the Ministry of Interior controls entryvisas and residence permits. There arevarious private-sector “enabling” agenciesthat can complete formalities faster thanfirms can themselves.

• In the 2017 federal budget, thegovernment plans to introduce an “expatlevy” only if a company’s expat employeesexceed the number of Saudi employees.

Deloitte in Saudi Arabia – How can you benefit?Deloitte Middle East (DME) is committed toproviding client insight and deliveringthought leadership to help our clients keep abreast of key developments in thetax landscape. Deloitte has more than 90 years of presence in the Middle East,making it the longest standing professionalservices firm in the region. We will outlinesome key areas where we have offered adifferentiated value added service toclients in KSA.

DME launched an International TaxServices Center of Excellence in Dubai in2009. The center offers our clients as wellas investors in the region services whichinclude structuring groups with inboundand outbound investments within theMiddle East and North Africa. The Centerleads some of our largest global taxengagements.

Deloitte’s Middle East practice has beenawarded a Tier One ranking in tax servicesfor five consecutive years by theInternational Tax Review’s World TaxAwards. Top tier rankings are provided tofirms that have “an international networkand leading reputation” which is “reflectedin the size and quality of transactions” inthe relevant jurisdiction.

We would welcome the opportunity todiscuss your needs further and provideyou with a better understanding of theissues discussed in this material. Please do not hesitate to contact one of ourspecialists.

In the 2017 federal budget, thegovernment plans to introduce an“expat levy” only if a company’s expatemployees exceed the number of Saudi employees.

30


We are here to help. Deloitte & Touche Bakr Abulkhair & Co.

Al Khobar ABT BuildingAl KhobarSaudi ArabiaPhone: +966 (0) 13 668 5700 Fax: +966 (0) 13 887 3931

Jeddah Saudi Business CenterMadinah Road JeddahSaudi Arabia Phone: +966 (0) 12 657 2725 Fax: +966 (0) 12 657 2722

Riyadh Prince Turki Bin Abdullah Al-Saud Street, Sulaimania AreaRiyadhSaudi Arabia Phone: +966 (0) 11 282 8400 Fax: +966 (0) 11 282 8428

We welcome the opportunity to discussyour needs further and provide you with a better understanding of the issuesdiscussed in this material. Please do nothesitate to contact one of our specialists.

The ‘Doing business guide’ series issupplemented by the Middle East TaxHandbook, which provides a summary ofbasic tax information in a country-by-country snapshot.

Want to do business in Saudi Arabia?

Nasser AlSaggaPartner, Tax - Al KhobarTel +966 (0) 13 668 [email protected]

Nauman AhmedSenior Director, Tax - KSAMiddle East Tax LeaderTel +966 (0) 13 668 [email protected]

Wissam MerhejSenior Director, Tax -RiyadhTel +966 (0) 11 282 [email protected]

Syed M. NaqviDirector, Tax - JeddahTel +966 (0) 12 657 [email protected]

Farhan FaroukSenior Director, Tax -JeddahTel +966 (0) 12 657 [email protected]

Aamir MajeedDirector, Tax - Al KhobarTel +966 (0) 13 668 [email protected]

Issa AyashDirector, Tax - Al KhobarTel +966 (0) 13 668 [email protected]

31


This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particularcircumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte & Touche (M.E.) wouldbe pleased to advise readers on how to apply the principles set out in this publication to theirspecific circumstances. Deloitte & Touche (M.E.) accepts no duty of care or liability for any lossoccasioned to any person acting or refraining from action as a result of any material in thispublication.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limitedby guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of itsmember firms and their related entities are legally separate and independent entities. DTTL (alsoreferred to as “Deloitte Global”) does not provide services to clients. Please seewww.deloitte.com/about to learn more about our global network of member firms.

Deloitte provides audit, consulting, financial advisory, risk advisory, tax and related services topublic and private clients spanning multiple industries. Deloitte serves four out of five FortuneGlobal 500® companies through a globally connected network of member firms in more than150 countries and territories bringing world-class capabilities, insights, and high-quality service toaddress clients’ most complex business challenges. To learn more about how Deloitte’sapproximately 245,000 professionals make an impact that matters, please connect with us onFacebook, LinkedIn, or Twitter.

Deloitte & Touche (M.E.) is a member firm of Deloitte Touche Tohmatsu Limited (DTTL) and is aleading professional services firm established in the Middle East region with uninterruptedpresence since 1926. DTME’s presence in the Middle East region is established through itsaffiliated independent legal entities which are licensed to operate and to provide services underthe applicable laws and regulations of the relevant country. DTME’s affiliates and related entitiescannot oblige each other and/or DTME, and when providing services, each affiliate and relatedentity engages directly and independently with its own clients and shall only be liable only for itsown acts or omissions and not those of any other affiliate.

Deloitte provides audit, tax, consulting, financial advisory and risk advisory services through 25offices in 14 countries with more than 3,300 partners, directors and staff. It is a Tier 1 Tax advisorin the GCC region since 2010 (according to the International Tax Review World Tax Rankings). Ithas also received numerous awards in the last few years which include best Advisory andConsultancy Firm of the Year 2016 in the CFO Middle East awards, best employer in the MiddleEast, the Middle East Training & Development Excellence Award by the Institute of CharteredAccountants in England and Wales (ICAEW), as well as the best CSR integrated organization.

© 2017 Deloitte & Touche (M.E.). All rights reserved.

Doing business guide: Understanding Saudi Arabia’s tax ... · PDF fileour comments with...

Documents

Transcript of Doing business guide: Understanding Saudi Arabia’s tax ... · PDF fileour comments with...