Related investment law

1. Jurisdiction

There are two types of taxes in Saudi Arabia

• a. Income Tax
• this tax is levied on income earned by foreign corporate entities and individuals that arises or is deemed to arise in the kingdom of saudi arabia..
• b. Zakat
• this is religious tax on income and property belonging to saudi corporate entities and individuals (nationals of g.c.c. are treated as saudis for this purpose). the rate of zakat is 2.5% of capital employed – not invested in fixed assets, long-term investments and deferred costs – as adjusted by net results of operations for the year.
  
• profits of saudi mixed companies (owned by both saudis & non-saudis) are apportioned. the share which belongs to foreign partner/s is subject to tax and saudi’s share is subject to zakat.

2. Major taxes on corporations

Corporate income tax withholding tax and Zakat:

3. Organisations taxable as corporations

Corporate income taxes are levied on the profits of foreign shareholders in a mixed company and the net profits or branches of foreign companies. Company tax rates, which are applicable to limited liability and joint stock companies, are taxed at rate of 20% depending on profit.

4. Taxable income of resident corporations

On April 30, 2004 new income tax law had been approved and became effective from July 29, 2004.
A summary of certain salient features of the new tax law is as follows:

• foreign partner's (shareholder's) share in a resident capital company.
• a resident non-saudi natural person who does business in the kingdom.
• a non-resident that does business in the kingdom through a permanent establishment.
• a non-resident on other income subject to tax from sources within the kingdom.

• income derived from an activity which occurs in the kingdom.
• income derived from immoveable property located in the kingdom, including gains from the disposal of an interest in such immoveable property and from the disposal of shares or partnership interests in a company the property of which consists directly or indirectly principally of interests in such property.
• income derived from the disposal of shares in a resident capital company or a partnership.
• income derived from the rental of moveable property used in the kingdom.
• income derived from the sale or license of industrial or intellectual property used in the kingdom.
• a dividend, management fee, or director's fee paid by a resident company.
• a payment for services made by a resident company or branch of a non-resident company to the company's head office or to a related company.
• a payment for services made by a resident, if the services are performed in whole or in part in the kingdom.
• income from exploitation of a natural resources in the kingdom.
• income attributable to a permanent establishment of a non-resident located in the kingdom, including income attributable to sale in the kingdom of goods of the same or similar kind as those sold through such a permanent establishment, and income arising from rendering services or performance of other activity in the kingdom of the same or similar nature as activity performed through such a permanent establishment.

• expenses not connected with the earning of income subject to tax.
• payments or benefits to a shareholder, a partner or their relatives which constitute employment income or which do not represent an arm's length payment for property or services.
• entertainment expenses.
• income tax paid in the kingdom or to another state.
• fines and penalties paid or payable to any party in the kingdom (not including those paid for breach of contractual obligation).

• within 120 days of the fiscal year-end. except for personal companies to be submitted within 60 days.
• if a taxpayer’s income exceeds sr 1 million, the tax declaration must be certified as correct by a chartered accountant who is licensed to practice in the kingdom.
• an advance payment on account of tax for the year is payable in three instalments i.e. by the end of 6th, 9th and 12th month. the taxpayer is not required to make advance payment if the amount of each payment due would be less than sr. 5,000,000.
• the taxpayer may file an appeal against the higher appeal committee’s decision with the grievance board.

• depreciation will be computed for each group of fixed assets by applying the prescribed depreciation rate to the remaining value of each group at the fiscal year-end.
• the remaining value for each group at the fiscal year-end is the total remaining value of the asset group at the end of previous fiscal year after deduction of the depreciation charge for the previous year plus 50 percent of the cost of assets added during the current year and the previous year minus 50 percent of the proceeds from assets disposed during the current year and the previous year provided that the balance is not negative.
• assets acquired under bot or boot contracts must be depreciated over the period of contract or the remaining period of contract if acquired or renewed during that period.

• land (non depreciation) – 0%
• fixed buildings - 5%
• movable industrial and agricultural buildings – 10%
• factories, equipment, machinery including motor vehicles and heavy transport vehicles, software (computer software) – 25%
• geological survey, drilling, exploration expenses and other preliminary work to exploit and develop natural resources and their field – 20%
• all other tangible and intangible assets depreciable by nature which are not included in the above groups, such as furniture, aircraft, ships, trains, goodwill – 10%

• the assessment of tax on a foreign partner in a saudi arabian company which sells all or part of the shares in the company and realizes a capital gain is dealt with by letter 17/4682 of the minister of finance and economy, and implementation circular 4126/1 of 1406h.
• tax is chargeable on the capital gain provided that the company in which the foreign partner has a share made profits from its activities in saudi arabia in the year of sale of the shares.
• the taxable gain is computed by taking the average profits of the three years preceding the sale and taking the [proportion of this average profit, which corresponds to the seller;s share in the equity. for this purpose, equity is defined as capital, statutory reserves and retained profit.
• capital gains and losses, whether derived from fixed assets or otherwise, are not accorded any special treatment but are simply included in gross income and taxed at corporate tax rate.