A zakat or income tax (a religious wealth tax) is assessed on the taxable income of most business organizations. Since only Saudis and GCC nationals are subject to zakat, foreigners pay an income tax in proportion to their equity interest. Foreign employees are not taxed on their salaries or wages. There is no sales tax. Capital gains fall under the same umbrella as ordinary income. Taxable net income is fairly consistent for all types of business organisations, foreign or resident.
Corporate Income Tax
Corporate income taxes are levied on the profits of foreign shareholders in a mixed company and the net profits of branches of foreign companies. Company tax rates, which are applicable to limited liability and joint stock companies, are taxed between 25% to 45% depending on profit. Petroleum and other hydrocarbon producing companies, however, are subject to a flat tax rate of 85% of net operating income.
Foreign companies entering into joint ventures with Saudi companies that have been recognised as developing projects by the Foreign Capital Investment Committee may receive a five year tax holiday. The exemption only applies to the particular project for which the Foreign Capital Investment Committee approval is granted. Other income may be held to fall outside the exemption, and therefore, be taxable. Manufacturers of agricultural products may be granted a ten year tax exemption.
Deductions and Losses
In general, all necessary business expenses incurred in Saudi Arabia are tax deductible except for specific types of expenses which may not be deductible. Expenses of the later type include doubtful debts, termination benefits and general administrative costs of the head office. Other types of expenses may be deductible only if certain conditions are met (e.g. agency fees). Statutory maximum rates have been set with regard to depreciation.
Saudi law has no provision allowing tax losses to be carried forward or back.
Taxation of Partnerships
A general partnership is taxed in a manner similar to that of a resident company. Non-Saudi and non-GCC individuals and corporate partners, however, are taxed upon their allocated share of profit at the applicable individual corporate tax rates.