What is Income Tax in KSA and How Is It Applied?

Have you heard about income tax in KSA? You may have heard about it, but you did not know its details and how to apply it. If you are looking for accurate information, you are in the right place. We will explain what it is and how to apply it to individuals and companies.

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The concept of income tax in KSA

In Saudi Arabia, income tax is an essential part of the tax system. This tax helps support economic and social development and plays an important role in the Kingdom’s economic diversification strategy.

Income tax is imposed on the income collected by natural and legal persons in Saudi Arabia. This tax aims to provide money to support national development and contributes to increasing revenues for the state.

The Importance of Imposing Saudi Income Tax

Income tax helps manage the national economy, helps achieve a balance between government revenues and expenditures, and contributes to financing strategic projects and public services.

Targeted groups of the Saudi income tax system

Income tax targets local and foreign companies and non-resident investors, there are some categories that are subject to special tax systems, this tax is applied fairly to all taxpayers in accordance with the laws.

Ultimately, income tax is an important financial tool that helps increase government revenues and stimulate economic growth.

Historical development of the Saudi income tax system

The Saudi income tax system has witnessed major developments over the years, major changes and reforms have been made to this system. These stages are important for understanding the current tax system in Saudi Arabia.

The first tax system in Saudi Arabia was issued in 1950 AD, and was aimed at foreign companies. After that, the system underwent many updates, the most prominent of which was in 2004 AD.

The tax was first imposed during the reign of King Faisal in 1370 AH, and then re-implemented during the reign of King Fahd in 1425 AH.

The tax witnessed fundamental amendments in 2018 to include foreign investments and non-Saudi individuals, instead of applying it directly to the income of citizens. This contributed to the diversification of government revenue sources. The system seeks to achieve the Kingdom’s 2030 goals.

The Saudi income tax system is still evolving, aims to keep pace with economic and social changes, and seeks to achieve sustainable development goals.

Categories subject to income tax in Saudi Arabia

It applies to several categories, including personal, local and foreign companies and non-resident investors. There are also legal exceptions to this tax.

 

Personal Income Tax

Income tax is applied to every natural or legal person who practices an activity in the Kingdom. Therefore, once the establishment is registered with the Ministry of Commerce, a unique number (TIN) is created for the establishment, and immediately after its creation, the taxpayer must enter the Authority’s electronic portal to complete the initial registration, and immediately after the completion of the process, the taxpayer will be registered proactively in the income tax services.

 

Income Tax in Saudi Arabia for Residents

A 20% income tax is applied to all individuals and companies residing in Saudi Arabia, with the exception of Saudis and citizens of the Gulf Cooperation Council countries, while individuals and companies in the gas sector are subject to a 30% tax.

Income Tax on Local and Foreign Companies in KSA

Local and foreign companies in Saudi Arabia are subject to income tax, this category includes companies with Saudi ownership, joint ventures, and Saudi branches of foreign companies, corporate income tax in Saudi Arabia is an important source of income, and is subject to 20%.

Non-resident investors

Foreign investors who are not residents in Saudi Arabia are subject to income tax, this includes individuals and foreign companies that have investment interests in Saudi Arabia.

Legal exceptions

• Government bodies and institutions
• Diplomatic and consular organizations
• Whole government-owned companies
• Authorized charitable and humanitarian organizations

Income tax rates in KSA

Vary between companies and individuals, Saudi Arabia applies a proportional income tax system, this system aims to achieve tax justice and increase government revenues.

For companies, most local and foreign companies in Saudi Arabia are subject to a 20% income tax on profits. Non-resident investors are subject to a 5% income tax on their total income from the Kingdom.

As for individuals residing in KSA, they are subject to income tax at a rate ranging from 2.5% to 20% on taxable income, depending on the approved income brackets.

This system is considered an important pillar in achieving the goals of the Kingdom’s Vision 2030, contributing to diversifying sources of government income and enhancing financial transparency and accountability.

How to calculate income tax?

Taxable income includes all financial gains, this includes salaries, profits and other income.

Arithmetic equations

Income tax calculation is based on mathematical equations, first, we calculate the taxpayer’s total annual income. Then we subtract the deductions and exemptions allowed.

Next, we apply the tax rate to the taxable income, this determines the total amount due.

Admissible deductions

Taxpayers benefit from deductions, these deductions include:

• Deduction of business expenses and operating expenses
• Deduction of approved charitable donations
• Deduction of investments in economic development projects

Tax exemptions

There are also tax exemptions available. These include:

1. Exemption of income generated from economic development activities
2. Exemption of income of foreign investors in certain investment sectors
3. Exemption of income generated from research and development activities

Understanding these equations, deductions and exemptions helps in calculating the tax accurately.

Income Tax Registration Steps

If you are an individual or a company in Saudi Arabia, income tax registration is necessary. Here are the basic steps for your successful registration:

1. Obtain a commercial register or professional license, this document proves your legal identity.
2. Obtain a Tax Identification Number (TIN) from the General Authority of Zakat and Income, this number represents your tax identity.
3. Determine the type of economic activity you practice, this determines the appropriate tax category for you.
4. Gather the required documents such as the commercial register and proof of identity, as well as lease contracts and others.
5. Submit a registration application through the General Authority of Zakat and Income portal, you can do so via the website or mobile application.
6. If you are a foreign company or a non-resident investor, you may need additional procedures.

After completing the tax registration procedures, you will be able to submit your tax returns and pay the amounts due according to the laws.

“Tax registration is the first step towards proper tax compliance, which helps enhance the role of taxes in supporting the national economy.”

How to file an income tax return in KSA?

It is important to know how to file a tax return, this process requires submitting certain documents and observing specific deadlines, we will explore these details in this section.

Required documents

To file a tax return in Saudi Arabia, you need to collect important documents, these documents include:

• Copies of invoices and receipts related to revenues and expenses
• Bank statements
• Copies of contracts and commercial agreements
• Any other documents related to the company’s financial activities

Income Tax Deadlines

There are deadlines for filing a tax return in Saudi Arabia, the last date is the end of April of each year. These deadlines may change based on some cases or updates.

If you do not file the return on time, you may face fines, it is important to plan ahead and ensure that the return is filed on time.

So, if you are required to pay, make sure you know the required documents and deadlines, these steps will help you meet your legal obligations and avoid penalties.

Income Tax Penalties and Fines for Violations

The tax system in Saudi Arabia sets financial penalties and fines for those who violate the rules. Penalties for tax evasion in Saudi Arabia and fines for violating the income tax system aim to ensure compliance with the laws.

Some examples of violations and penalties include:

• Failure to submit a tax return on time: Fines of up to 20,000 Saudi riyals.
• Failure to pay the tax due: Fines of up to 25% of the value of the late tax, in addition to late interest.
• Providing false data or information in the tax return: Fines of up to 50,000 Saudi riyals.
• Obstructing the work of employees of the General Authority of Zakat and Income: Fines of up to 100,000 Saudi riyals.

In cases of tax fraud or serious evasion, penalties may reach imprisonment for up to 5 years. Therefore, it is important for everyone to adhere to the laws to avoid penalties.

Rights and Obligations of Income Taxpayers

In the Kingdom of Saudi Arabia, if you are an income taxpayer, it is important to know your rights and obligations. This section explains what you should do and when.

Legal Rights

As a taxpayer, you have the right to clear information, you can appeal unfair tax decisions Taxpayer Rights in Saudi Arabia, and you can get free advice to help you.

Duties and Responsibilities

On the other hand, you have some duties to do, such as registering in the tax system and submitting returns on time Obligations of Income Taxpayers, you must also pay taxes on time.

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Disclaimer: This publication is for informational purposes only and should not be considered professional or legal advice. While we strive for accuracy, we make no guarantees regarding completeness or applicability. mazeed, its members, employees, and agents do not accept or assume any liability, responsibility, or duty of care for any actions taken or decisions made based on this content. For official tax guidance, please refer to Zakat, Tax and Customs Authority (ZATCA).