December 14, 2023
Saudi Arabia issues drafts of new Income Tax Law and Zakat and Tax Procedures Law for public consultation
On 25 October 2023, the Zakat, Tax and Customs Authority (ZATCA) released the drafts of a (i) new Income Tax Law and (ii) Zakat and Tax Procedures Law (together, the Draft Laws), for public consultation.
The new draft Income Tax Law, intended to replace the current Income Tax Law, is meant to be effective 90 days after its publication in the Official Gazette and will be applicable to tax years starting after its effective date.
Saudi Arabia's current Income Tax Law was issued in 1425H (2004). In line with its Vision 2030, seeking to create a welcoming business environment and facilitating foreign investment, the new Income Tax Law proposed to be issued is in line with international best practices. Furthermore, a new Zakat and Tax Procedures Law will unify tax and zakat procedural protocols for consistency and harmonization.
The deadline for receiving recommendations and comments on the Draft Laws is 25 December 2023.
The Implementing Regulations for the new Income Tax Law will be issued at a later stage.
Highlights of the Draft Laws
New criteria are proposed to be added to the definition of residency for a natural person. For example, a natural person will be considered as resident if he stays in Saudi Arabia for 90 days within a tax year and, in the aggregate, stays at least 270 days within three tax years before the current tax year.
Detailed procedures are proposed for computing income tax on a non-Saudi natural person who conducts any activity (as defined in the draft Income Tax Law) in Saudi Arabia independently and regularly. Income from salaries and similar compensation is specifically excluded from taxable income, subject to certain conditions.
The limited force-of-attraction principle provided in the existing Income Tax Law is proposed to be restricted to cases where no proper justification is provided for the direct business of the head office with Saudi customers.
Gains derived from the indirect sale of shares in a Saudi entity and the performance of services remotely through electronic means are proposed to be considered as Saudi-source income.
An explicit 30 days within a 12-month period threshold has been proposed to create a service permanent establishment (PE) in the Kingdom.
The Draft Laws expand the definition of related persons to be aligned with Saudi Arabia's transfer pricing regulations. The ZATCA expands the existing transfer pricing rules in the new draft Income Tax Law, incorporating detailed rules on corresponding tax adjustments for transfer pricing purposes.
The Draft Laws introduce the concept of a preferential tax regime. Transactions with a resident or PE in a preferential tax regime are subject to specific tax treatments.
Changes are proposed in the computation of capital gains tax. In addition, the following income types are proposed to be tax-exempt income:
Changes are proposed in the computation of income tax for partnerships. Similar to the new draft zakat regulations, the income tax applicable for funds is proposed to be applied on the partners, shareholders and unitholders rather than the fund itself.
Nondeductible expenses are proposed to be expanded to include losses resulting from hedging financial instruments, expenses paid to entities in preferential tax regimes that do not comply with the arm's-length principle and expenses paid in cash in excess of the limit specified in the regulations.
Interest deductibility is now proposed to be restricted to 30% of the taxable profit.
The tax depreciation method is proposed to be changed to the straight-line method.
Gains on disposal of depreciable assets are not taxable if a reinvestment reserve is created to reinvest in another similar depreciable asset, subject to certain conditions.
Hybrid mismatch of financial instruments between jurisdictions is applicable only to financial instruments held by related persons. In this case, if the tax treatment is different in another jurisdiction, the tax deduction or exemption may not be applied in Saudi Arabia.
The Draft Laws introduce specific provisions for (i) tax incentives for green investment and (ii) transfer of business activities "to" and "from" the Kingdom.
The profits and/or losses generated from merger or demerger are proposed to be excluded from taxable income, subject to certain conditions.
The Draft Laws introduce alternative methods of tax calculation for micro-enterprise entities.
Approved carryforward losses can be claimed in the following year up to the amount of taxable profits (previously restricted to a maximum of 25% of the taxable profit).
Taxes paid outside Saudi Arabia can be deducted from tax payable in Saudi Arabia, subject to certain conditions.
The Draft Laws suggest amendments to the withholding tax (WHT) rates on payments made to nonresidents. Below is a high-level summary of the proposed applicable WHT:
Salaries are not subject to WHT if paid to a natural person who is contractually associated, similar to having an employer-employee relationship. Bonus amounts paid to members of board of directors and payments made to transparent entities are not subject to WHT. Issuance of shares to nonresidents, arising from mergers, acquisitions and demergers shall be treated as payment of dividends for WHT purposes.
At the ZATCA's discretion, taxpayers may send and receive notifications to/from the ZATCA in English or another language when necessary.
Requests for refund of overpaid tax/zakat shall be submitted within three years from the end of the calendar year of the date specified for submission of the relevant return.
The Draft Laws propose a self-assessment system for the filing of returns within a stipulated timeline in the correct manner.
The statute of limitations is reduced to three years from the end of the calendar year in which the legally specified period for submission of the return expired.
A largely new structure for computing fines is proposed that would impose higher fines than those currently provided in the existing tax regulations.
Taxpayers and zakat payers should review the Draft Laws and assess the potential compliance implications to their businesses when the Draft Laws are eventually approved and issued.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Professional Services (Professional LLC), Riyadh
Ernst & Young Professional Services (Professional LLC), Jeddah
Ernst & Young Professional Services (Professional LLC), Al Khobar
Ernst & Young LLP (United States), Middle East Tax Desk, New York
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor