Saudi Arabia has over the past few months revised its income tax regime in an effort to spur foreign investment. These moves are also seen as a step towards accession to the World Trade Organization, a high priority of Crown Prince Abdullah.
Under the new Income Tax Law, adopted by the Council of Ministers on January 12, net income generated by foreign firms in Saudi Arabia will be subject to a flat tax of 20%. The current tax is graduated, with a maximum tax rate of 30% on net income in excess of SR1 million. Saudi companies and individuals do not pay income tax but are instead subject to zakat, an Islamic wealth tax equal to 2.5% of the net worth of the taxpayer. Nationals and companies of the other Gulf Cooperation Council (GCC) countries doing business in Saudi Arabia are treated as Saudis and pay zakat rather than taxes.
The new Income Tax Law has made substantial changes in the withholding tax regime in respect of income generated by foreign companies. Companies in Saudi Arabia will be required to withhold 15% of the gross amount for licences, franchise fees, management fees and royalties paid to foreign companies. Similarly, a 12% withholding tax will be levied against services provided by foreign companies to firms inside Saudi Arabia. The new Income Tax Law will be effective 90 days after publication in the Umm Al Qura (Official Gazette). At press time, the new Income Tax Law had not yet been published.
In October 2003, the Ministry of Finance and National Economy issued several Ministerial Resolutions imposing a withholding tax on reinsurance premiums and a 5% withholding tax on interest paid to offshore lenders; such amounts had previously been exempt from Saudi Arabian taxes. A similar Ministerial Resolution limits the deductibility of tax losses carried forward from a previous year to 25% of net income. Previously, there had been no limit on the use of loss carryforwards.
In August 2003, the Council of Ministers adopted the Natural Gas Investment Tax Regulations applicable to upstream and midstream investment activities in the natural gas sector. Under these regulations, the tax rate applicable to foreign firms on natural gas investments is determined according to the average internal rate of return of the project at rates that vary between 30% and 85%.
By Stephen Matthews and Nabil Issa