Rules for Subjection to Taxation

Note: “GCC “ stands for Cooperation Council for the Arab States of the Gulf. The member states are Saudi Arabia, Bahrain, Kuwait, Qatar, Oman and the United Arab Emirates.

Question 1: What is the determining criteria for subjection  of GCC nationals or GCC companies who exercise activities in the Kingdom to taxation or zakat ?

Answer: The determining criteria for subjection of GCC nationals or GCC companies to taxation or zakat is residence. A GCC national or company resident of the Kingdom who exercises activities in the Kingdom is subject to zakat. A GCC national or company non-resident of the Kingdom who derives income from a permanent establishment or a source in the Kingdom is subject to tax.

Question 2: When is a natural or corporate person considered resident for the purpose of the Income Tax Law?

Answer: Article 3 (a) of the Income Tax Law has stipulated that a natural person is considered resident in the Kingdom if he meets any of the two following conditions:

-         He has a permanent place of residence (abode) in the Kingdom and resides (is present) in the Kingdom for a total period of not less than thirty (30) days in the taxable year.

-         He resides (is present) in the Kingdom for a period of not less than one hundred eighty three (183) days in the taxable year.

Paragraph (b) of the same Article has stipulated that a company is considered resident in the Kingdom during the taxable year if it meets any of the following conditions: 

-         It is formed in accordance with the Saudi Companies Law.

-         Its head office (management control) is located in the Kingdom.

Article 3 (3) of the Implementing Regulations has stated that nationality (citizenship) is not considered to determine place of residence of a person. A natural or corporate person, notwithstanding its nationality, is not resident in the Kingdom unless the residency provisions of the Law and of its Implementing  Regulations are met.

Question 3: Does a GCC national who is resident in the Kingdom and a partner in a resident capital company receive the same treatment as Saudis as to being subject to Zakat only and not being  subject to withholding tax on dividends?

Answer: Yes, a GCC national who is resident in the Kingdom and a partner in a resident capital company receives the same treatment as Saudis as to being subject to Zakat only and not being  subject to withholding tax on dividends.  A GCC natural person’s share in a resident capital company is subject to Zakat, and dividends paid to him by that company is not subject to withholding tax.

Question 4: Is a GCC non-resident natural person who is a partner in a resident capital company subject to tax or zakat, and is he also subject to withholding tax on dividends?

Answer: The share of  a GCC non-resident natural person in a resident capital company is subject to zakat. Dividends paid to him, being non-resident,  by the resident capital company is subject to withholding tax.

Question 5: Is a GCC  person who is resident in a Gulf State other than Saudi Arabia  considered resident in the Kingdom for tax and zakat purposes?

Answer: Article 3 of the Income Tax Law has defined the tax residency to be residency in the Kingdom of Saudi Arabia. Therefore, a GCC person who is resident in his country (a Gulf State other than Saudi Arabia) is not considered resident in the Kingdom for tax purposes. Furthermore, a Saudi person, natural or corporate, who does not meet the residency conditions as stated in the mentioned Article is not considered resident in the Kingdom and his activity income derived from a source in the Kingdom is subject to tax and not zakat.

Question 6: Is the share of a Gulf company (a company registered in one of the Gulf states other than Saudi Arabia) , fully owned by GCC nationals, in a resident capital company subject to tax or zakat? Are dividends paid by the resident company to the GCC company subject to withholding tax?

Answer: The share of a GCC company, fully owned by GCC nationals, in a resident capital company is subject to zakat . Dividends paid by the resident company to the GCC company, fully owned by GCC nationals, being non-resident,  are subject to withholding tax?

Question 7: Is a non-resident company’s share  in a Saudi resident joint capital company considered a permanent establishment of that non-resident company in the Kingdom?

Answer: A non-resident company’s share  in a Saudi resident joint capital company is not considered a permanent establishment of  that company in the Kingdom.

Question: Are investment funds considered separate taxpayers?

Answer: Article (1) of the Income Tax Law has considered investment funds to be capital companies. Therefore, investment funds are considered separate taxpayers and should comply with all tax statutory obligations of resident capital companies, such as registration with the Department and filing annual returns. All tax rules applicable to capital companies are applicable to investment funds. Some important rules are those of Article (2) of the Income Tax Law that stipulate tax on non-Saudi shares in resident capital companies, and of Article (8) that have defined taxable Income to be  the gross income including all revenues, profits and gains of any type and of any form of payment resulting from carrying out an activity, including capital profits and any incidental revenues.

Question 9: Is a non-Saudi resident natural person subject to tax on income from deposits in accounts held in local banks?

Answer: A non-Saudi resident natural person is not considered to have an activity in the Kingdom if his sole source of income in the Kingdom, other than employment income (wages and salaries), is from deposits at bank accounts or from trading in shares of companies listed in the Kingdom’s Stock Market. Under Article (2) of the Implementing Regulations, such act is not considered a taxable activity in the Kingdom. However, if that person exercises professional, commercial or trade activity in the Kingdom, his income from bank accounts held in local banks is taxable with other incomes and he should report it in the annual return required to be filed with the Department and should pay tax accordingly.

Question 10: Are Saudi joint companies’ subsidiaries registered abroad taxable in the Kingdom on their income if they exercise no activity in the Kingdom? Is a foreign tax credit allowed for these subsidiaries for taxes paid to foreign countries on activities carried therein?

Answer: Under Article 5 (4) of the Implementing Regulations, subsidiaries registered abroad and fully owned by Saudi joint companies  are taxable in the Kingdom on their income even if earned abroad. Income taxes paid to other countries on these subsidiaries’ operations outside the Kingdom are not an allowed deduction unless such taxes are addressed under a treaty on avoidance of double taxation between the Kingdom and these countries.

Question 11: A case: A non-Saudi person with no branch or office in the Kingdom and whose activity is equipment rental, installation and provision of related services and who dispatches staff from abroad to work under the sponsorship of a main contractor to assist operate the equipment in the Kingdom. Is that person (taxpayer) considered to have a permanent establishment in the Kingdom as per the provisions of Article (4) of the Income Tax Law? 

Answer: If a non-Saudi person has no permanent place of  activity or no agent  through which it carries out business, in full or in part, in the Kingdom, nor is it licensed to exercise business activity in the Kingdom,  that non-resident person is considered to have no permanent establishment in the Kingdom and is therefore not required to register  with the Department.  However, payments to this person (taxpayer) from a source in the Kingdom  are subject to withholding tax provisions of Article 68 of the Income Tax Law and of Article 63 of  the Law’s Implementing Regulations.

Question 12: Is a non-resident shipping company’s income from transporting products of oil, hydrocarbons and liquefied gas tax-exempt under the provisions of the new Income Tax Law like the old provisions?

Answer: The new Income Tax Law has no provisions for exempting an income from a source in the Kingdom, such as from transporting  any type of goods , crude or refined oil, other products and hydrocarbons. Under the new Income Tax Law and its Implementing Regulations, non-resident shipping companies are subject to tax on income  from transporting of  passengers or any type of goods from the Kingdom’s ports.

Question 13: Are capital gains from disposal of traded government securities tax-exempt under Article 7 of the Implementing Regulations?

Answer: Article 2 of the Capital Market Law promulgated under Royal Decree number M/30, dated 2/6/1424 H has defined financial papers to include government bonds and securities. Under Article 10 of the Income Tax Law, capital gains from disposal of securities are tax-exempt provided they meet conditions as stated in the Income Tax Law's Implementing Regulations (Article 7) which are as follows:

1. The sale transaction is performed in accordance with the regulations of the Kingdom’s Stock Market.

2. The disposed investment did not exist before the effective date of the Law as stipulated in Article 74 of these Regulations.

Question 14: Are fees paid to members of Boards of Directors subject to Saudi Income Tax whether it is a profit or loss company? How is the taxation done? Are these fees subject to withholding tax?

Answer: Under Article 10 (1) of the Income Tax Law's Implementing Regulations, fees paid to members of Directors who are owners, partners or shareholders are not allowed deductions with except for such fees in cases of stock companies. So, paid fees would be added back to the base (added to profit or charged to loss) as they are considered a distribution of profit not a deduction from profit; these fees in either case ( profit or loss) are subject to withholding tax under Article 5(a/6) of the Income Tax Law at a rate of 5 percent.

Question 15: Are delivery contracts to the Kingdom with other associated work subject to tax under the new Income Tax Law?

Answer: Articles 5 (7) and 16 (6) of the Implementing Regulations  state that a delivery contract to the Kingdom is not considered to be from a source in the Kingdom and only associated work performed in the Kingdom is subject to tax.

Question 16: Is a GCC share in reinsurance premiums paid to reinsurance companies registered in a GCC state ( other than Saudi Arabia)  and owned fully or partially by companies or individuals from the GCC states subject to zakat or tax?

Answer: Article 1 of the Implementing Regulations clearly states that the provisions of the Income Tax Law apply to non-resident persons, natural or corporate, Saudi or non-Saudi, who conduct business in the Kingdom through a permanent establishment located in the Kingdom or who derive income from a source in the Kingdom. Therefore, a GCC share in reinsurance premiums paid to reinsurance companies registered in a GCC state and owned fully or partially by companies or individuals from Gulf States is subject to tax.

Question 17: Are foreign airline, sea or land freight and transportation companies subject to the provisions of Article 34 or Article 68 of the Income Tax Law?

Answer: Foreign airline, sea or land freight and transportation companies that have branches registered in the Kingdom are subject to the provisions of Article 34 of the Income Tax Law.  Foreign airline, sea or land freight and transportation companies that have no permanent establishments in the Kingdom are subject to the provisions of Article 68 of the Income Tax Law, i.e. withholding tax for being non-resident.

Question 18: Shall the text of Article 16 (6) of the Implementing Regulations, stipulating that each work associated with a delivery contract shall be valued at 10 percent of the value of the contract, apply to companies that are assessed presumptively or shall it also apply to similar contracts of resident companies?

Answer: The text of Article 16 (6) of the Implementing Regulations in regard to the value of in-the-Kingdom work associated with delivery contracts from abroad  applies to all companies and contracts that are assessed presumptively. Income of each in-the-Kingdom work associated with such delivery contracts, when the value is not specified in the contract, shall be assessed at 10 percent of the total value of contact.