The Thick of It

Legal & Accounting

Saudi Arabia has implemented a number of laws and procedures to ensure that establishing or operating a business in the Kingdom is as easy as possible. Here, Rupert Agius-Pease of KPMG in Saudi Arabia discusses accounting and legal facts every investor should know.

The Kingdom of Saudi Arabia was established in 1932 by its founder King Abdulaziz bin Abdulrahman Al-Saud. The country’s economy then depended on farming and trade that included the export of dates. The pilgrims that visited the Holy Mosques in Mecca and Medina generated other sources of trade. The discovery of oil in 1938 transformed the country entirely, and today Saudi Arabia is one of the fastest developing countries in the world.

The production of oil in the Kingdom dates back about 80 years when the Standard Oil Company of California was granted drilling rights in 1933. Large quantities of oil were discovered and soon after the Arabian American Oil Company, today known as Aramco, was established. By the mid-1970s, Aramco became one of the top oil producing companies in the world, making the oil industry in Saudi Arabia the catalyst for the government to invest a significant amount of funds in the infrastructure, such as roads, airports, schools, and hospitals


Saudi Arabia’s GDP is approximately $727 billion. This wealth is largely due to the Kingdom’s vast oil reserves. At 250 billion barrels, it accounts for approximately a quarter of the world’s crude oil reserves. This, together with a young population of 29 million, makes the Kingdom an attractive market for foreign investors.

Today, Aramco is one of the most prosperous and successful companies in the world. Generating more than $1 billion in revenues every day, the company is valued at approximately $10 trillion. In addition to being the world’s largest oil producer, Saudi Arabia is investing significant funds in three new refineries to add to its existing nine refineries. These refineries will be amongst the most technologically advanced in the world, and will have a combined output of 8 million bpd, which will be principally targeted for export.

The Saudi government has embarked on a number of initiatives to improve the infrastructure of the country. Approximately $100 billion is being invested in railways that have been planned or have already started, including the North-South line, an East-West route from Riyadh to Jeddah and the metro systems in Riyadh and Jeddah.

In addition to transport, the Saudi Government is investing $21.3 billion in redeveloping the Grand Mosque in Mecca. This project also includes housing projects for pilgrims in Mecca and Medina.

The development of the Economic Cities will definitely play an important role to spread the population around the country and to diversify the economy. Of particular note is the King Abdullah Economic City, situated approximately 100km north of Jeddah, with an ambitious investment of $90 billion.

Healthcare and education are imperative in sustaining the well-being and development of the population. A healthcare improvement program has been instituted, which should see an investment of approximately $100 billion over a five-year period. Included in this program is the construction of 140 new hospitals.

With respect to education, the Government plans to build approximately 500 new schools, upgrade another 2,000 school buildings and plans to open 15 colleges, which is an investment of $54.4 billion.

The GCC construction market is currently valued at $1.5 trillion, of which $629 billion is in Saudi Arabia. The construction industry remains a driving force in Saudi’s economy with approximately $442 billion of projects currently in the design, bidding, or construction phase.


While there are no personal income taxes in Saudi Arabia, there is an income tax regime that applies to businesses to the extent these are owned by non-GCC nationals, either directly or through a chain of ownership. Businesses owned by GCC nationals, whether wholly or partly-owned, are subject to Zakat, which is a religious levy.

The corporate tax regime in Saudi Arabia is quite comprehensive and covers all types of business activities, including capital gains. Moreover, Saudi Arabia has a withholding tax regime that applies on payments made to non-residents.

While Saudi Arabia is a signatory to 30 bilateral tax treaties and the tax treaty network keeps growing, treaty benefits cannot be availed on a unilateral basis. The Department of Zakat and Income Tax (DZIT), the tax authority in the Kingdom, has laid out a procedure that needs to be followed in order to claim relief pursuant to bilateral tax treaties.

The DZIT has been ramping up its assessment and auditing functions. In the recent past, a number of assessing officers were seconded to tax authorities in the advanced economies to acquire the up-to-date necessary experience. The DZIT is in the process of drafting formal transfer pricing regulations. We expect that these guideline will be issued in the near future. The Saudi tax law has always contained anti-avoidance rules and the DZIT assessing officers have been using those provisions in scrutinising transactions between related parties. It is likely that the issuance of the formal regulations and the global implementation of the Organisation for Economic Co-Operation and Development’s (OECD) initiatives with the Base Erosion and Profit Shifting (BEPS) program, especially with respect to country-by-country reporting, will embolden the assessing officers in challenging transactions between related parties.

In summary, entities that are owned by non-GCC nationals, whether directly or indirectly, are subject to corporate income tax. The corporate income tax rate is 20% and is applied on income from all sources, including capital gains. Apart from the oil and gas business, other tax rates or separate tax regimes do not exist for any commercial activity. An entity’s income from all sources is consolidated into one pool and taxed at 20%.

While Saudi Arabia has a growing network of bilateral tax treaties, it is important to note that tax treaties with any of the GCC countries have not been signed. It is also important to note that a self-assessment regime does not apply, which makes all returns filed subject to a tax audit process.

Entities that are owned by GCC nationals, whether directly or through a chain of a GCC-based ownership structure, are subject to Zakat, which is a religious levy, as mentioned above. All business entities are required to annually obtain a tax/zakat clearance certificate from the DZIT. The certificate confirms that the entity’s tax/zakat affairs are up-to-date and in order. Non-availability of the clearance certificate can potentially restrict the business activities of the entity.


Saudi Arabia is an Islamic state and sharia is the foundation of all laws. Foreign investors can open a Saudi branch of their foreign parent company. A branch is a common business structure for foreign companies operating in the Kingdom. The branch would require a foreign investment license from the Saudi Arabian General Investment Authority (SAGIA). The branch will be treated as an essential part of the entity it represents. There are instances where a business activity would require the foreign investor to incorporate a company in Saudi Arabia, for example, in the securities business.

Foreign wholly owned Saudi companies are permitted pursuant to the Saudi Foreign Investment Law. The limited liability company (LLC) is generally considered to be the most practical corporate form available to foreign companies pursuant to the Saudi Arabian Companies Law. These are usually referred to as limited liability partnerships and should not be confused with other partnerships. LLCs cannot offer shares to the public and are generally not permitted to operate in commercial banking or insurance. LLCs must not have less than two or more than 50 shareholders and the liability of each shareholder is generally limited to the capital contribution of the shareholder. Furthermore, shares of LLCs are of equal value and must each be fully paid-up in cash or kind.

It is important to note that article 180 of the companies law stipulates that if an LLC incurs losses that amount to 50% or more of its share capital, then the shareholders must resolve to either liquidate the company or, in the instance of continuing operations, the shareholders will become responsible for its debts.

The joint-stock company (JSC) form of incorporation is also available. A JSC can offer its shares to the public and can raise public debt. Unlike an LLC, a JSC allows foreign investors to limit their liability to their equity contribution.


The Foreign Accounts Tax

Compliance Act

The Foreign Accounts Tax Compliance Act (FATCA) was introduced by the US government and is aimed at ensuring that information on the citizens of the US offshore investments is provided to the Internal Revenue Service (IRS).

To achieve its goals, the IRS entered into agreements with non-US financial institutions around the world, directly or via Inter-governmental Agreements (IGAs). Pursuant to these agreements, financial institutions will report to the IRS, on an annual basis, information about bank accounts held by their clients who are US citizens.

Financial institutions have already started the process of becoming FATCA compliant and have implemented various measures to identify clients who are US citizens. For example, individuals are now required to sign, under penalties for perjury, a self-certification form that states that the individual is not a US citizen.

It is expected that FATCA will impact more than 200,000 US citizens in Saudi Arabia. Pursuant to US tax law, US citizens and permanent residents, otherwise known as “green card” holders, are required to file individual income tax returns in the US and report their worldwide income even if not physically present or resident in the US. Individuals who were born in the US, holding US passports or green cards, will be seriously affected by FATCA legislation and may have to comply with the US tax filing and reporting requirements.

Once Saudi banks start reporting information about their US citizen clients, the concern is that the IRS will begin to contact individuals identified in the FATCA disclosures who have not previously filed US tax returns. Furthermore, US citizens living in Saudi Arabia traveling to the United States with their US passports may be stopped by the US immigration authorities and questioned as to why they have not filed their US tax returns.

Individuals who are considering renouncing their US citizenship or relinquishing their green cards may be subject to the expatriation rules and may still be subject to US tax filing obligations even after giving up their US passport or green card. Legal and tax advise must be sought before considering this option.

In an effort to encourage US citizens to come forward and voluntarily disclose their offshore income, the IRS introduced a tax amnesty program referred to as the Offshore Voluntary Disclosure Program (OVDP). The main objective of the program is to bring US taxpayers with previously undisclosed foreign financial accounts, or interest in foreign financial entities, into compliance with US tax law and regulations.

Under the OVDP criminal prosecution may be avoided if taxpayers voluntarily come into compliance with their obligations, including paying any tax due for up to eight prior years plus substantial civil penalties.

The IRS also introduced a supplementary programme to the OVDP. The so-called Streamlined Procedures are available for low-risk compliance taxpayers which the IRS will not assess penalties or pursue follow-up actions against voluntary disclosures if the taxpayers file income tax returns and Reports of Foreign Bank and Financial Accounts, FBAR — Fin-CEN Form 114, for a specific number of years.