Saudi Arabia

Corporate - Income determination

Last reviewed - 27 June 2020

Inventory valuation

The weighted average-cost method is used for valuing inventory under Saudi tax law.

Capital gains

Capital gains are subject to income tax or Zakat, as appropriate, at the normal income tax or Zakat rate. However, capital gains realised from the disposal of shares in Saudi stock companies listed in the Saudi market are tax exempt, subject to certain conditions.

Dividend income

Dividend income that is received by a resident party is subject to income tax at the normal income tax rate. However, dividends paid to a non-resident party are subject to WHT at 5%.

Interest income

Interest income is subject to income tax at the normal income tax rate. However, interest paid to a non-resident party is subject to WHT at 5%.

Royalty income

Royalty income is subject to tax at the normal income tax rate. However, royalties paid to a non-resident party are subject to WHT at 15%.

Royalty is defined as per article one of the Saudi income tax law as follows:

“Payments received for use of or the right to use intellectual rights, including, but not limited to, copyright, patents, designs, industrial secrets, trademarks and trade names, know-how, trade secrets, business, goodwill, and payments received against the use of information related to industrial, commercial, or scientific expertise, or against granting the right to exploit natural and mineral resources.”

Imports and supply contracts

Saudi tax law provides that no profit will be considered to arise from a contract for the supply of goods to Saudi Arabia, provided delivery of the goods is either free on board (FOB) or cost, insurance, and freight (CIF) to a Saudi port. However, should the contract provide for the delivery and/or installation of materials at a point inside Saudi Arabia, the supplier may be considered to be carrying on business within Saudi Arabia, and, as a consequence, the contract may be subject to Saudi income taxation as follows:

  • If the material cost was identified in the supply contract separately from the cost of work performed in Saudi Arabia, then, in the absence of a PE, a WHT on the work that will be performed in Saudi Arabia may be assessed, based on the type of services. However, if the contract qualifies the supplier to have a PE in Saudi Arabia, then income tax will be applied according to the Saudi tax regulations as for a normal taxpayer.
  • If the supply contract indicates a total cost without segregation in the value of supply and the value of the other activities in Saudi Arabia, then the work performed in Saudi Arabia will be assigned a value equal to 10% of the contract value for each type of activity.

Foreign income

The gross income derived by a capital company resident in Saudi Arabia from its operations and of its branches inside and outside Saudi Arabia is subject to tax in Saudi Arabia. However, in order to avoid double taxation on the same income, the following exceptions and clarifications are to be considered:

  • With respect to the income realised from investments in other resident capital companies and foreign capital companies (foreign dividends applicable from 1 January 2018) and in order to avoid double taxation, such income is to be excluded from being subject to tax under the following conditions:
    • The percentage of ownership in the company invested in is not less than 10%.
    • The period of ownership of shares is not less than one year.

Previously (up to 31 December 2017), foreign dividends were taxable unless a DTT provided relief.

There are no restrictions on repatriation of profits, fees, capital, salaries, or other monies.