SAUDI ENTITIES’ COMPLIANCE WITH ZAKAT, VALUE-ADDED TAX, AND CORPORATE TAX LAWS

This article has been researched and written by the Tax Consultant Team at Creation Business Consultants. AI has not been used in generating this article.

Saudi companies must comply with the laws of the General Authority of Zakat and Income Tax and Customs. Failure to comply with these laws can result in significant fines, especially with the authority’s intensified ongoing audits.
In Saudi Arabia, compliance with the authority’s laws is a critical responsibility to avoid the risk of operational failure, especially for companies with weak organizational structures. In this article we break it down understanding Saudi Arabian tax laws and how your business must comply.

UNDERSTANDING THE SAUDI TAX SYSTEM (ZAKAT, CORPORATE TAX, AND VALUE-ADDED TAX):

Understanding Saudi tax laws is crucial for companies seeking to thrive in Saudi Arabia, especially given the Kingdom’s economic diversification. The Saudi tax system is the foundation of the Kingdom’s financial structure and is administered by the Zakat, Tax, and Customs Authority.

THE IMPACT OF OWNERSHIP STRUCTURE: GCC CITIZENS VS. FOREIGN OWNERSHIP

Since Zakat is imposed at a rate of only 2.5% on GCC-owned companies, ownership structure is one of the most important factors in building any Saudi institution. Deductions, such as long-term liabilities, can reduce the Zakat base for companies with significant assets.

As of 2025, Saudi Arabia has more than 50 double taxation treaties that foreign investors may use to lower withholding tax (WHT) on royalties, management fees, technical fees, or dividends. This can reduce rates from 5–15% to as low as 0%. A company may be subject to Zakat only if it is structured through a GCC national.

THE IMPACT OF TAXES BY LEGAL FORM AND LICENSING

The impact of taxes varies depending on the legal form and licensing of Saudi companies. The choice of legal structure for a company in Saudi Arabia significantly affects its tax treatment. See below a snapshot of the main differences in tax treatment depending on the legal structure:

1. LLCs: Provide flexibility and limited liability, together with the previously mentioned ownership-based taxation. They are well-suited for service-oriented firms where earnings can be managed to limit corporate income tax (CIT) risk.
2. Public Joint-Stock Companies: Certain sectors such as public listings or banking, these companies are subject to stricter laws in Saudi Arabia but have access to capital markets. Branches of foreign companies are considered permanent establishments, subject to a 20% corporate tax and exempt from Zakat since they are not owned by GCC nationals. Therefore, branches are less suitable for tax reduction strategies but help quick market entry.
3. Regional Business Headquarters: An ideal choice for global companies establishing their entities in Saudi Arabia as business centres. They qualify for a zero-rated (0%) income tax exemption on qualifying income and a zero-rated (0%) withholding tax on amounts paid from the headquarters to non-residents.

THE IMPORTANCE OF CORPORATE RESTRUCTURING TO REDUCE WITHHOLDING TAX ON RELATED-PARTY TRANSACTIONS

The intercompany structure is essential for managing withholding tax (WHT). Dividends (5%), royalties (15%), and management fees (20%) are subject to WHT when paid to non-residents. To optimize tax efficiency, structuring fees can sometimes be treated as compensation, which may be exempt from WHT if they represent only costs.

For transfer pricing purposes on related-party transactions, WHT regulations mandatory for all Zakat and corporate income taxpayers require that management fees, common for shared services, must be independent of the other party. According to WHT guidelines issued by the Federal Authority of Zakat and Income Tax (ZATCA), aligned with the Organisation for Economic Co-operation and Development (OECD):

• Transactions exceeding SAR 6 million must include documentation such as master and local files.
• Routine services, such as a profit margin of 5–10%, can be justified using the cost-plus method.

It is very important to choose the appropriate transfer pricing method, as selecting an inappropriate method can lead to violations or unnecessary additional costs.

TAKE AWAY – TAX AUDIT READINESS

Recurring tax audits conducted by ZATCA highlight the need for constant tax audit preparedness, which has become even more critical in 2025 due to the introduction of e-invoicing requirements in Saudi Arabia.

To successfully complete on-site audits, companies must maintain records for five years, including transfer pricing documentation for relevant transactions and Zakat/Income Tax calculations. Periodic checks are part of tax compliance, which includes filing quarterly VAT returns and annual Zakat/Income Tax returns within four months of the end of the company’s fiscal year.

For compliance, you can rely on us to assist. We can help you restructure your company before it’s too late, submit all company tax reports, and ensure you remain fully prepared for any tax audit.

For more information regarding how Creation Business Consultants can assist with Tax Services in Saudi Arabia, contact us today:

Email: [email protected] | UAE: +971 4 878 6240 | Saudi Arabia: +966 54 995 267