Saudi Arabia: Income Exempt from Income Tax in Saudi Arabia

In accordance with the provisions of the Income Tax Law issued by Royal Decree No. (M/1) dated 15 Muharram 1425 AH and its amendments (“Regulations”), income tax is a direct tax imposed on the shares of non-Saudi partners in corporate entities, on non-Saudi residents who engage in commercial activities within the Kingdom, on non-residents who earn income from engaging in commercial activities in the Kingdom, as well as on individuals working in the field of natural gas investment and those working in the field of oil and hydrocarbon production.

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Individuals subject to income tax in the Kingdom

According to Article 2 of the Regulations, the following are subject to tax: resident capital companies for shares owned directly or indirectly by non-Saudis, as well as shares owned directly or indirectly by individuals working in the production of oil and hydrocarbon materials. 

Capital companies are joint-stock companies and limited liability companies. The shares in these companies are subject to tax if they are owned directly or indirectly by non-Saudis, as well as the shares owned by Saudis or non-Saudis.

The non-Saudi resident individual who engages in activities in the Kingdom.

The non-resident person who conducts activities in the Kingdom through a permanent establishment.

The non-resident person who has taxable income from sources in the Kingdom without having an establishment.

Any person, even if not a resident, is subject to tax as long as they receive a certain income from a source in the Kingdom and do not have a permanent establishment within the Kingdom.

The person who works in the field of natural gas investment

The person who works in the field of oil and hydrocarbon production.

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Income exempt from income tax in the Kingdom

Tax exemption is one of the most prominent advantages enjoyed by income tax payers in the Kingdom, according to the exemptions mentioned in Article 10 of the system. These exemptions aim to encourage investment and trading in the Saudi financial market, so the taxpayer is exempt from income tax if they achieve any of the following incomes:

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1. Capital gains realised from the disposal of securities

The term "capital gains" refers to the profits realised from the disposal of certain assets of the establishment, such as properties or securities, or the disposal of shares by the partners. However, the exception mentioned in the system only applies to the capital gains that fulfilled the following conditions:

Realised from the disposal of securities: traded in the Saudi financial market or traded in a foreign financial market if they are also traded in the Saudi financial market. The investments that were disposed of should not have been listed before the effective date of the Income Tax Law, which came into effect on 13 Jumada al-Thani 1425 AH, corresponding to July 30, 2004 AD.

This exemption applies regardless of the method of disposal and the manner of execution, whether by sale or trading, as long as the disposal process has been carried out in accordance with the Saudi financial market system and its regulations—if the security is traded in the Kingdom—or from a financial security in a foreign financial market and also traded in the Saudi market.

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2. The gain resulting from the disposal of properties not related to the activity's assets.

Any gain realised from the disposal of any property owned by the taxpayer is exempt from income tax under one condition: that the property is not part of the assets of the activity of the taxpayer. If the property is part of the essential assets necessary for the taxpayer's main activity, the gain is not exempt from tax.

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3. Cash or in-kind distributions due from the investments of the capital company in other resident or non-resident companies.

Companies, when achieving profits, sometimes distribute those profits to their shareholders based on a decision from the board of directors. These distributions—whether in kind or cash—are exempt from income tax under the Regulations if they result from an investment by a resident company in other resident or non-resident companies, and the latter company has distributed profits to its shareholders. To achieve this tax exemption, two conditions must be met:

A. The contribution percentage of the resident capital company (the exempt taxpayer) in the capital of the invested company should not be less than ten percent (10%).  

B. The minimum ownership period of the company's contribution percentage mentioned is one year or more. 

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Reference/ Citation
Zakat, Tax and Customs Authority