Saudi Arabia’s Upcoming 2024 Tax Reforms: The Proposals

Foreign investors should take note of sweeping changes to Saudi Arabia’s tax laws  

Riyadh has proposed new income tax and procedures laws to take effect during 2024 and 2025, with these available for public feedback until December 25. These are part of national tax reforms to modernise its tax system, increase transparency, and encourage foreign investment.

These proposed reforms are intended to be made through amendments to the Kingdom’s Income Tax Law. Last month, Saudi Arabia’s Zakat, Tax and Customs Authority (ZATCA) released draft laws seeking public input on changes that aim to overhaul the tax code in line with its Vision 2030 economic agenda.

The proposed law represents a significant reform, aiming to modernise the tax system in line with global best practices. 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

The draft introduces specific provisions for determining tax residency, detailing criteria for transferring residency into and out of the kingdom. It mandates tax residents and entities with taxable activities in the kingdom to adhere to stringent filing requirements. The compliance burden is expected to rise considerably under the new framework.

Taxable Income Sources and Exemptions

Income derived from sources within Saudi Arabia forms the crux of taxable income under the proposed law. While exemptions remain for certain capital gains and employment income, the scope has been refined. Importantly, there are no new categories of tax payers.

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 and non-GCC persons;
• 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 Saudi Arabia;
• A non-resident who has income from a source in Saudi Arabia;
• A natural person who carries out activities in Saudi Arabia 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 Saudi Arabia and to provide a more detailed and comprehensive income tax legislation.

Under the draft law, specific provisions are introduced to determine tax residency and filing requirements.

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, such as profits from selling shares of a Saudi firm you own, or shares sold in 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 also proposed. Payments for services might be taxed at 10% at source. But 20% may apply if the recipient is in a country with preferential tax system.

Withholding Tax

Withholding Tax (WHT) rates may change for various payment types to residents and jurisdictions with preferential regimes. New WHT clauses and adjusted rates, like services payments to non-residents, could be subject to a 10% levy.

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% WHT.

Ultra High Net Worth Individuals

The draft law suggests changes to withholding tax rates, with different rates depending on the payment type and recipient’s jurisdiction.

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 10-20% for jurisdictions with preferential tax regimes.

Additions like real estate taxes and non-recoverable VAT could now be 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 100-300% of the due tax or Zakat.

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 general opinion 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.

In terms of compliance and penalties, the statute of limitations for tax assessments is reduced, and penalties for non-compliance, particularly tax evasion, are significantly increased. In terms of compliance and penalties, the statute of limitations for tax assessments is reduced, and penalties for non-compliance, particularly tax evasion, are significantly increased

Transforming Saudi Arabia’s Fiscal Environment

These changes are pivotal for Saudi Arabia’s economic trajectory, particularly in fostering foreign investment and domestic growth, both cornerstones of the Saudi Vision 2030.

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, tax lawyers are advising 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.

Public feedback is invited through December 25 to help shape the final laws, and concerns or clarifications should be directed to ZATCA what practical challenges provisions may pose and recommend solutions.

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

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Dezan Shira & Associates assist foreign investors into Asia and have a partner firm in Saudi Arabia. For an introduction, please email us at dubai@dezshira.com  and also refer to our Middle East guide below.

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