Saudi Arabia: ZATCA releases drafts of new income tax and tax procedural laws for public consultation

On 25 October 2023, Saudi Arabia’s Zakat, Tax and Customs Authority (ZATCA) issued drafts of a new Income Tax Law and Zakat and Tax Procedures Law for public consultation. The public consultation period for comments on the drafts is open until 25 December 2023.

The draft income tax law replaces the current income tax law, which aims to the best international tax practices in promoting and attracting investments, in addition to enhancing compliance and transparency. On the other hand, the draft zakat and tax procedures law aims to establish a unified procedural system for zakat and tax processes, ensuring consistency, transparency, and voluntary compliance. It also seeks to align with international best practices and stay updated on tax legislative developments. Key proposals for the amendments are outlined below:

  • The draft income tax law broadens the related party definition to align with the transfer pricing regulations of Saudi Arabia.
  • Broadens the existing transfer pricing regulations and integrates comprehensive guidelines for corresponding tax adjustments in the context of transfer pricing.
  • The draft income tax law specifies that tax deductibility for net interest expenses is capped at 30% of the taxable profit.
  • Hybrid mismatch of financial instruments between jurisdictions applies exclusively to financial instruments held by related parties. In such scenarios, if there exists a variance in tax treatment in another jurisdiction, Saudi Arabia may not recognize the eligibility for tax deductions or exemptions.
  • The Permanent Establishment (PE) provisions establish a threshold, requiring a minimum of 30 days of physical presence within a 12-month period for nonresident employees to potentially create a PE in Saudi Arabia.
  • New participation exemption rules exempt taxpayers from taxes on dividends, distributions, and capital gains arising from their involvement in a resident entity.
  • Losses that have been approved for carry-forward can be utilized in the subsequent year, up to the extent of taxable profits.
  • The draft income tax law revises withholding tax rates, maintaining a 5% rate for rent, dividends, and income on debt, while reducing the rate for services to 10%. However, payments to nonresidents for rent, royalties, income from debt, dividends, and services rendered to individuals in jurisdictions with preferential tax regimes now incur a 20% withholding tax.

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