Saudi Tax Guide for Foreign Companies: Zakat, Corporate Income Tax, VAT & Transfer Pricing.

Saudi Arabia's tax system has undergone significant modernisation under Vision 2030, with the Zakat, Tax and Customs Authority (ZATCA) — formerly GAZT — implementing new compliance frameworks, digital filing requirements, and transfer pricing regulations that substantially impact foreign companies.

The dual-track system — Zakat for Saudi and GCC nationals, Corporate Income Tax for foreign shareholders — creates structural complexity for joint ventures and mixed-ownership entities. Combined with 15% VAT, withholding tax obligations, and the new transfer pricing regime, foreign companies must plan their Saudi tax position carefully from the point of market entry.

**Corporate Income Tax (CIT)**

Foreign-owned entities and permanent establishments in Saudi Arabia are subject to CIT at a flat rate of 20% on taxable income. This applies to the foreign shareholder's share of income in Saudi joint ventures and mixed entities, branches and permanent establishments of foreign companies, and income from Saudi sources earned by non-resident entities.

Taxable income is computed on an accrual basis, starting from accounting profit and adjusting for non-deductible expenses, exempt income, and timing differences. Key deductions include ordinary and necessary business expenses, depreciation on fixed assets (straight-line method), provisions for doubtful debts (up to specified limits), and prior-year losses (carried forward for unlimited periods, subject to continuity of ownership rules).

Non-deductible expenses include penalties and fines, personal expenses of shareholders, excessive management fees (above arm's length), and provisions for future or contingent liabilities.

**Zakat**

Saudi and GCC nationals (and entities wholly owned by Saudi/GCC nationals) are subject to Zakat rather than CIT. Zakat is levied at 2.5% of the Zakat base — calculated as equity plus long-term liabilities minus fixed assets and long-term investments, with adjustments.

For mixed-ownership entities (Saudi and foreign shareholders), Zakat applies to the Saudi/GCC shareholders' portion and CIT applies to the foreign shareholders' portion. This dual calculation requires careful allocation of income and expenses.

**Value Added Tax (VAT)**

Saudi Arabia implemented VAT in January 2018 at 5%, increasing to 15% in July 2020. VAT is administered by ZATCA and applies to most goods and services supplied in Saudi Arabia.

Standard rate supplies (15%) cover most commercial transactions. Zero-rated supplies include exports of goods and services, international transportation, and supplies of qualifying precious metals. Exempt supplies include financial services (interest and margin-based products), residential property (first sale), and certain health and education services.

Registration is mandatory for businesses with annual taxable supplies exceeding SAR 375,000 and voluntary for businesses exceeding SAR 187,500.

VAT returns are filed monthly (for businesses with annual supplies over SAR 40 million) or quarterly (for all others). ZATCA has implemented fully electronic filing and payment.

**Withholding Tax (WHT)**

Payments to non-resident entities are subject to withholding tax at the following rates: management fees 20%, royalties 15%, rent 5%, technical and consulting services 5%, dividends 5%, interest 5%, insurance and reinsurance premiums 5%, and other services 15%.

WHT applies to the gross payment amount and must be withheld by the Saudi payer and remitted to ZATCA within the first 10 days of the month following payment. Saudi Arabia's double tax treaties (with approximately 60 countries, including France, UK, and several EU member states) may reduce or eliminate WHT on certain payment types.

**Transfer Pricing**

Saudi Arabia adopted OECD-aligned Transfer Pricing Regulations in 2019 (effective for fiscal years starting 1 January 2019). The regulations require arm's length pricing for all related-party transactions.

Compliance requirements include transfer pricing documentation (Master File and Local File) for entities with revenues exceeding SAR 6 million and related-party transactions exceeding specified thresholds, Country-by-Country Reporting (CbCR) for multinational groups with consolidated revenues exceeding SAR 3.2 billion, and disclosure of related-party transactions in the annual CIT/Zakat return.

Accepted transfer pricing methods follow OECD guidance: Comparable Uncontrolled Price (CUP), Resale Price Method, Cost Plus Method, Transactional Net Margin Method (TNMM), and Profit Split Method.

ZATCA has been actively auditing transfer pricing compliance and has successfully challenged intercompany pricing in several cases — particularly management fees, intercompany loans, and intellectual property royalties.

**Tax Planning Considerations for Foreign Companies**

Entity structure significantly impacts tax efficiency. Branch operations are subject to CIT on Saudi-source income only, while subsidiaries are taxed on worldwide income with foreign tax credits. Joint ventures with Saudi partners create dual Zakat/CIT calculations.

Double tax treaty planning can reduce WHT on repatriation of profits. France-Saudi DTA, for example, reduces dividend WHT to 5% and eliminates WHT on certain service payments.

Regional Headquarters Programme tax implications — companies relocating their regional headquarters to Riyadh under the RHQ programme should model the CIT, WHT, and VAT impacts of centralising functions in Saudi Arabia.

GSDA Legal Consultants' tax practice advises on Saudi tax planning — including entity structuring, transfer pricing, WHT optimisation, and ZATCA audit defence.