Saudi Arabia Proposes Overhaul of Tax and Zakat Regulations

December 21, 20230

Saudi Arabia is on the verge of a substantial tax and zakat regulatory transformation, unveiling drafts of a new Income Tax Law and Zakat and Tax Procedures Law for public consultation. These legislative revisions aim to bring alignment with global tax norms, enhance transparency, and standardize the procedural framework governing tax and zakat regulations. 

The Zakat, Tax and Customs Authority (ZATCA) released drafts of the new Income Tax Law and Zakat and Tax Procedures Law in October 2023, initiating a public consultation period until 25 December 2023. The proposed Income Tax Law, set to supersede the existing legislation, is anticipated to take effect within 90 days of its publication in the Official Gazette, applying to tax years commencing after its enactment. 


Overview of Proposed Reforms 

Aligned with Saudi Arabia’s Vision 2030, aimed at fostering a business-friendly environment and attracting foreign investment, the new Income Tax Law reflects international best practices. Additionally, the Zakat and Tax Procedures Law seeks to harmonize procedural protocols for tax and zakat regulations. 


Key highlights of the proposed reforms encompass a spectrum of modifications: 

  1. Residency Criteria: Redefined to include criteria for natural persons staying in Saudi Arabia for a specific duration within a tax year. 
  2. Income Tax Computation: Detailed procedures for computing income tax on non-Saudi natural persons engaged in defined activities within Saudi Arabia. 
  3. Permanent Establishment: Introduction of a specific threshold for creating a service permanent establishment in the Kingdom. 
  4. Transfer Pricing: Expanded regulations and corresponding tax adjustments, ensuring compliance with transfer pricing norms. 
  5. Tax Exemptions: Introduction of tax exemptions for specific income types and proposed changes in the computation of capital gains tax. 


Zakat Treatment of Related-Party Transactions 

Moreover, the ZATCA issued comprehensive guidelines on related-party transactions for zakat purposes. The guidelines classify these transactions into commercial, indirect financing, and direct financing categories. 


Guidelines on Related-Party Transactions 

The guidelines delineate zakat computation methodologies for various related-party transactions: 

  1. Commercial Transactions: Adjustments mandated if transactions do not adhere to the “arm’s length” principle. 
  2. Indirect Financing: Generally doesn’t require zakat adjustments. 
  3. Direct Financing: Provides clarity on zakat treatment, distinguishing between debt and equity classifications based on transaction nature and terms. 

Additionally, the guidelines specify treatment for credit balances, liabilities, and equity elements arising from related-party transactions, offering detailed scenarios and their zakat implications. 


Implications and Recommendations 

Businesses, taxpayers, and zakat payers are advised to thoroughly review and assess the implications of these proposed reforms. Understanding the impact on compliance and financial strategies is crucial as these reforms, once approved, are poised to reshape the tax and zakat landscape in Saudi Arabia. 


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