JEDDAH, 16 August 2004 — Saudi Arabia yesterday issued an executive bylaw to the new income tax. The bylaw cuts the rate of taxation on foreign investors from 45 to 20 percent. The law, which came into effect on July 30, was imposed on foreign companies and individuals doing business in the Kingdom.
The Council of Ministers approved the new law in January this year. The new law replaced the existing 48-year-old income tax law. Companies established with capital from non-Saudi shareholders, non-Saudi residents doing business in the Kingdom and individuals who do not live in the Kingdom but do business here through a permanent firm are all liable to the new tax.
The executive bylaw, carried by the official SPA news agency, stipulates that the law applies to foreign shareholders in local companies, regardless of whether they reside in the Kingdom or not. Saudis who live abroad but conduct business and generate income in the Kingdom are also subject to the new law.
“The rules of the (new) law apply to the shares of non-Saudis, whether persons or corporations, and Saudis who are conducting business in the Kingdom,” it said.
“If Saudis have companies registered abroad and conduct business in the Kingdom, they will be subject to income tax because their companies are foreign,” Saudi economist Ihsan Buhulaiga said.
“The basic rule states that Saudi nationals pay zakat (an Islamic charitable contribution), and foreigners pay income tax,” added Buhulaiga, who is also a member of the Shoura Council.
Saudis pay zakat which works out at 2.5 percent of the total net worth of a company’s equity and not only turnover, according to Buhulaiga. “It is a net worth-based tax which affects the capital of a company and its returned earnings during a financial year,” he said.
A Saudi company is subject to zakat even when it is not making profit, he added. There is no tax discrimination against foreign businesses in the Kingdom, Buhulaiga added, explaining that “the rules of zakat are very strict and Saudi companies cannot evade them at all.”
The new law stipulates a maximum 85 percent tax on oil and hydrocarbon production, a field almost totally off-limits to foreign investors. Companies producing natural gas are subject to a 30-percent tax on profits made in the first four years of operations, according to Al-Eqtisadiah business daily. This will increase to 67.95 percent and 85 percent in the fifth and sixth years respectively.
The law applies to non-Saudis involved in commercial, professional or handicraft businesses or any similar activity, using money or property with the aim of making profit though it spares foreigners’ personal salaries. The activities to be taxed include commercial, industrial, agricultural, service, banking, insurance and investment, transportation, rental properties, agencies and brokerage.
“They do not include bank accounts or trading in the shares of companies registered on the Kingdom’s stock market by a foreign resident,” the law said. “A person will be considered a resident of the Kingdom in the tax year if he has a permanent residence in the country and stays in the Kingdom for not less than a total of 30 days,” the law said.
The law will apply to the revenue from operations of a company and its branches in the Kingdom and abroad and revenues from sales of products manufactured in the Kingdom. “Contracts for import of products to the Kingdom will not be considered among commercial activities taking part in the Kingdom,” it said.
The tax will be calculated after deducting essential expenditures but companies should produce documents to prove them. Certain expenses such as salaries paid to owners or partners or fines paid to Saudi authorities will not be deductible. Individuals and companies who fail to register with the revenue department will be fined SR1,000 and SR10,000 respectively.
— Additional input from agencies
