SAUDI INVESTMENT GUIDE
Setting up business in the Kingdom of Saudi Arabia
BY KPMG Saudi Arabia
Saudi Arabia is one of the most admirable Gulf countries when it comes to fiscal, labour and business freedom. Its free market economy has transformed the kingdom into a regional and global economic power. The growth of the private sector has become unstoppable as Saudi Arabia is opening its doors fully to the vast horizon of opportunities offered by foreign investments.
Setting up business
The Foreign Investment Act allows foreign companies to invest in alleconomic activities other than thoselisted on the so-called “negative list”.Broadly, the Foreign Investment Act also allows foreign companies to own100% of local companies with the exception of certain activities like tradethat require minimum 25% local shareholding. A Saudi sponsor or localpartner is no longer required for most business activities.
The Saudi Arabian General Investment Authority (SAGIA) is responsible fordealing with all matters relating to investment regulations, includingissuing licenses to foreign investors.
Commonly used business entities
The main company types are Limited Liability Companies (LLC), Joint StockCompanies (JSC), general partnerships and limited partnerships. Foreignersgenerally conduct business through either a LLC or a branch office of a foreigncompany.
Main legal formalities for the formation of a company or registration of a branch
The establishment of a Branch or LLC (which has foreign ownership) requires a license from the Saudi Arabian General Investment Authority (SAGIA). In addition, a Branch or LLC requires a Commercial Registration Number from the Ministry of Commerce & Industry (MOCI). There are certain restrictions related to minimum amount of share capital, number of shareholders and business sectors which need to be observed when there is foreign participation.
Saudi Riyals is the currency of exchange. There are no foreign currencyrestrictions.
Regulatory requirements for financial services
Financial service companies are generally governed, licensed and regulated by the Saudi Arabian Monetary Agency (SAMA). The Capital Market Authority (CMA) regulates and monitors the activities of entities broadly carrying on capital market activities.
Accounting/finance for companies and Saudi branches of foreign companies
Annual financial statements must be prepared under the accounting standards issued by the Saudi Organization for Certified Public Accountants (SOCPA), except for banks and insurance companies which are allowed to prepare their financial statements under International Financial ReportingStandards (IFRS).
Foreign companies subject to income tax in Saudi Arabia are required to submit tax returns based on audited financial statements.
Book year/accounting currency
Generally, the taxable year for taxpayers of all activities is the state’s fiscalyear (i.e. January to December). However, a taxpayer may use a differentfiscal year after obtaining approval from the Department of Zakat and Income Tax (DZIT). The taxpayer’s first fiscalperiod will start from the date of its commercial registration or license and can be for less or more than 12 months (generally up to 18 months) if the company’s Articles of Association provide for a long first fiscalperiod. A Branch’s first fiscal period, under no circumstances, can exceed 12months.
Companies must maintain a book of accounts in Saudi Riyal and in the Arabiclanguage.Gross revenue and taxable profits must be calculated in Saudi Riyal. Wherethe calculation of income involves an amount in foreign currency, the amountis converted at the exchange rate published by SAMA on the date of the transaction.
Approval is not required from the DZIT for setting up a business. However, an application for registration with DZIT should be submitted before the end of the first fiscal year. Failure to register is subject to a penalty ranging from SR 1,000 to SR 10,000.
Advance tax rulings/ Advance Pricing Agreements (APA)
There is no formal tax advance ruling system. Obtaining rulings onprinciple issue is possible in certain circumstances.
Income tax compliance
Saudi Arabia has a system which includes corporate income tax, withholding tax and Zakat. Corporate income tax is assessed on the share of the profits of the foreign partner in the local company or the non-resident who conducts business in Saudi Arabia through a permanent establishment. The corporate tax rate is generally 20%, apart from activities related to natural gas investment and oil and hydrocarbon production, where the tax ranges from30% to 85%. Zakat is a religious levy on Saudi and Gulf Cooperation Council (GCC) nationals and Saudi companies that are wholly owned by Saudi or GCCnationals. The Zakat rate is 2.5% of the higher of the adjusted taxable profitsor the Zakat base which in general comprises equity, loans and provisionsreduced by deductible investments and fixed assets.A tax payer is required to submit his Tax/Zakat return to the DZIT within 120days from the end of the taxable period of the incorporated body.
The Saudi Arabian tax law provides for actual withholding tax at differentrates on payments made to non-resident parties by a resident or a PE of a non-resident from a source of income in the Kingdom of Saudi Arabia.Accordingly, any payment for services provided by a non-resident enterprise from a source or deemed source in the Kingdom is subject towithholding tax. Services are defined to mean anything done for considerationother than the purchase and sale of goods and other property. In accordancewith the provisions of the tax law and by-law, the amount of withholding tax iscalculated at the following rates:
Calculation of Withholding Tax
A person withholding tax under the tax law is required to pay to the DZIT theamount withheld during the first 10 days of the month following the monthof payment to the non-resident. Furthermore, the person withholding tax is required to file with the DZIT an annual withholding tax report within 120 days from the end of his financial year. This form will be a consolidation of all the monthly withholding tax forms filed by the person during the financial year.
Indirect tax compliance
Saudi Arabia does not impose any sales tax or Value Added Taxes (VAT), however customs duty is payable on importation of certain goods andproducts into Saudi Arabia.According to the Foreign Investment Act (2000), companies licensed for industrial projects in the Kingdom are afforded the same benefits as national industries based on “The National Industries Law” and are able toqualify for certain exemptions. The National Industries Law provides thatindustrial projects in Saudi Arabia may import machinery, tools, equipmentand spare parts free from customs duties. Semi-manufactured materials,raw materials, and packaging materials may also be imported duty-free byindustrial projects but only to the extent that such materials are not availablein Saudi Arabia.Furthermore, equipment and spare parts may qualify for exemption fromcustoms duties if they are purchased from GCC states (Kuwait, UAE,Qatar, Oman or Bahrain) and if certain requirements are met. The Uniform GCC customs union provides for a customs duty rate of 5% for most products, and a rate of 12 to 20% for certain products in order to protect national interest.
Currently, social insurance contributions, commonly known as GOSI, are levied on salaries at the following rates:
Other tax compliance
Generally, tax liability is due with the filing of the tax return. However, certain taxpayers may be required to remit advance tax payments if 25% of previous year’s tax liability less taxes withheld at source is more than SR 500,000. In such case, the taxpayer must remit three advance payments on or before the last day of the sixth, ninths and twelfth month of the tax year. Failure to file tax return or pay due amount in time, results in a fine amounting to the greater of:
− 1% of the gross revenue to a maximum penalty of SR 20,000, or
− According to the following rates:
a. 5% of the underpayment of tax if the delay is for up to 30 days after the due date;
b. 10% of the underpayment of tax if the delay is more than 30 and no more than 90 days after the due date;
c. 20% of the underpayment of tax if the delay is more than 90 and no more than 365 days after the due date;
d. 25% of the underpayment of tax if the delay is more than 365 days after the due date.
In addition to the penalties mentioned above, 1% of underpayment of tax foreach 30 days of the delay shall be added in the following cases:
− Delay in payment of tax payable per the return.
− Delay in payment of tax payable per the DZIT assessment.
Director’s liability to tax
Saudi Arabia does not impose personal income taxes on wages and salaries.From a corporate tax point of view, salaries and wages paid to a Director who is also a shareholder of the company will not be deductible for tax purposes.
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