Understanding the Tax System in Saudi Arabia (2025)
Saudi Arabia, the largest economy in the Middle East, has undergone significant reforms in recent years, especially in the realm of taxation. As part of its ambitious Vision 2030 strategy to diversify its economy away from oil dependence, the Kingdom has introduced and revised several tax policies to encourage investment, promote transparency, and increase non-oil revenues.
1. Overview of the Tax System
Saudi Arabia does not impose personal income tax on individuals, whether Saudi nationals or expatriates. Instead, its tax structure primarily targets businesses and foreign entities through mechanisms such as corporate income tax, Zakat, value-added tax (VAT), excise tax, and withholding tax.
Key Tax Types in Saudi Arabia:
| Tax Type | Applicable To | Rate |
|---|---|---|
| Corporate Income Tax | Foreign-owned companies | 20% |
| Zakat | Saudi/GCC-owned companies | 2.5% (on Zakat base) |
| Value-Added Tax (VAT) | Most goods and services | 15% |
| Excise Tax | Harmful goods (e.g., tobacco, energy drinks) | 50%–100% |
| Withholding Tax | Payments to non-residents | 5%–20% |
2. Corporate Income Tax and Zakat
Businesses in Saudi Arabia are subject to either Zakat or corporate income tax, depending on ownership:
Zakat is a religious levy imposed on Saudi and GCC nationals at 2.5% of the Zakat base.
Corporate Income Tax is levied at a flat rate of 20% on the net profits of entities that are wholly or partially foreign-owned.
In cases where ownership is mixed (Saudi and non-Saudi), the tax authority apportions the base accordingly for Zakat and income tax.
3. Value-Added Tax (VAT)
Introduced in 2018, VAT was initially set at 5% but increased to 15% in July 2020 as part of pandemic-related fiscal measures. It applies to most goods and services, with exemptions for specific financial services, education, healthcare, and real estate.
Businesses exceeding the annual turnover threshold of SAR 375,000 are required to register for VAT. Compliance is monitored by the Zakat, Tax and Customs Authority (ZATCA).
4. Excise Tax
Excise tax applies to products considered harmful to public health or the environment. The rates are as follows:
100% on tobacco products and energy drinks
50% on soft drinks and sweetened beverages
This tax is part of a broader health initiative and environmental reform strategy.
5. Withholding Tax
Saudi Arabia imposes withholding tax on certain payments made to non-residents, such as:
Dividends
Royalties
Technical service fees
Interest
The rates vary from 5% to 20%, depending on the nature of the payment and whether a tax treaty exists between Saudi Arabia and the non-resident’s country.
6. Digital Economy and E-Invoicing
In line with global digital transformation trends, Saudi Arabia launched mandatory e-invoicing (FATOORA) in 2021. It involves:
Phase 1: Issuance of e-invoices (December 2021)
Phase 2: Integration with ZATCA’s platform (starting January 2023 in waves)
This reform enhances transparency, prevents tax evasion, and modernizes the Kingdom’s tax infrastructure.
7. Tax Treaties and International Cooperation
Saudi Arabia has signed dozens of double taxation treaties with countries across Europe, Asia, and the Americas, facilitating cross-border trade and investment. These treaties help businesses avoid being taxed twice on the same income.
8. Recent Developments and Reforms
Saudi Arabia continues to evolve its tax system. Notable recent initiatives include:
Expansion of transfer pricing regulations
Increased audits and enforcement by ZATCA
Streamlining of online tax filing and dispute resolution systems
Encouragement of voluntary disclosure programs
These efforts support Saudi Arabia’s goals of improving its investment climate and aligning with global best practices.
Conclusion
Saudi Arabia’s tax regime reflects a careful balance between economic diversification, foreign investment incentives, and fiscal responsibility. For businesses, understanding and complying with the tax system is crucial, especially as regulatory enforcement increases. While individuals are still exempt from income tax, the broader tax landscape is becoming more sophisticated, transparent, and aligned with international standards.