Tax Implications of Doing Business in Saudi Arabia

VAT (15%) and reverse charge: Supplies to Saudi taxable persons may fall under the reverse-charge mechanism for VAT purposes, whereby the Saudi recipient accounts for VAT on services received from a non-resident supplier.

Zakat vs. corporate income tax in mixed ownership: In Saudi/GCC vs. non-Saudi mixed ownership structures, the Saudi/GCC share is generally subject to 2.5% zakat on the zakat base, while the non-Saudi share is subject to 20% corporate income tax.

When no Saudi tax liability arises: If you do not create a PE, do not derive Saudi-source income, employ staff locally, or register

Under Saudi Arabian law, foreign companies may be required to register for Value Added Tax (VAT) if they make taxable supplies in the Kingdom or are otherwise considered to be carrying out an economic activity within Saudi Arabia as determined by the Zakat, Tax and Customs Authority (ZATCA). ZATCA requires VAT registration for any entity—resident or non-resident—that meets the statutory criteria for taxable supplies.

Foreign entities without a Permanent Establishment (PE) may still fall under VAT obligations if their supplies are taxable in Saudi Arabia, even in the absence of income tax exposure.

3. E-Commerce and Non-Resident Sellers

Foreign companies trading with Saudi customers—including online sellers—may have VAT obligations if:

ZATCA maintains comprehensive VAT compliance requirements for cross-border e-commerce transactions. Non-resident suppliers are responsible for ensuring VAT is applied correctly under Saudi law.

Where a foreign business imports goods into Saudi Arabia, import VAT and applicable customs duties must be declared and paid at the point of entry. Importation procedures fall under ZATCA’s customs division, which enforces declaration obligations for importers and their logistics partners.

No Equivalent to the EU OSS Regime

Employer onboarding & core registrations. If a foreign company employs staff who work in Saudi Arabia, it must complete the employer registrations and comply with payroll and labor rules administered by

the Ministry of Human Resources and Social Development (MHRSD), the General Organization for Social Insurance (GOSI), and the Wage Protection System (WPS) via the Mudad platform. This includes registering as an employer with GOSI, enrolling employees, and reporting and funding monthly social insurance contributions; and onboarding to WPS/Mudad to evidence timely salary payments.

GOSI (social insurance) obligations. All employers must register eligible staff with GOSI. For Saudi nationals, employers and employees contribute to pensions and social insurance (including SANED unemployment) based on covered wages up to prescribed caps; for non-Saudi (expatriate) employees, employers typically contribute only the occupational hazards insurance (commonly 2%) while no pension deductions are taken from the expatriate’s pay. Late registration, under-reporting, or missed payments can lead to penalties.

Wage Protection System (WPS) via MHRSD/Mudad. Private-sector employers must process payroll through banks and upload wage files monthly to MHRSD (commonly via Mudad) to demonstrate that salaries are paid on time and in full; non-compliance can trigger fines and labor-office restrictions. WPS applies to

Saudi and expatriate employees alike and is a central control in KSA payroll compliance.

No wage (personal income) tax on employees. Saudi Arabia does not impose personal income tax on employment income, so salaries— whether for Saudi nationals or expatriates—are not subject to wage tax withholding. Consequently, benefits-in-kind (e.g., company car, housing, stock options) do not generally create Saudi wage tax exposure, though they may have implications under employment law, contract terms, or social insurance if included in contributory pay definitions.

Health insurance is mandatory for expatriate staff. Employers must arrange private health insurance compliant with the Council of Health Insurance (CHI) rules for non-Saudi employees (and commonly dependents); the policy is digitally linked to the employee’s residency (Iqama) and is required for visa issuance/renewal. As of late 2025, temporary work visas also require pre-issuance health

insurance from a CHI-approved insurer.

Saudization (Nitaqat) considerations even for limited hiring. Hiring employees locally may subject the employer to Saudization/Nitaqat metrics administered by MHRSD, which classify entities and can affect work-permit processing and access to services. Even with a lean footprint, companies should monitor applicable Saudization targets for their sector/size to avoid operational constraints.

Expat levies & special cases. Employers should assess expatriate levy rules and any sector-specific exemptions when budgeting labor costs. Notably, the Cabinet cancelled the expatriate worker levy for licensed industrial facilities effective late 2025, reflecting policy support for the industrial sector; other sectors remain subject to prevailing fee frameworks unless separately

exempted.

5. Permanent Establishment

Under Saudi Arabian Income Tax Law, a foreign enterprise may be considered to have

a Permanent Establishment (PE) in the Kingdom if it engages in activities that constitute a fixed place of business or conducts business through a dependent agent acting on its behalf. ZATCA defines taxable activity broadly, covering all forms of commercial, industrial, service-based, or professional operations carried out in Saudi Arabia

A PE is typically created when a foreign business maintains a place of management, branch, office, factory, workshop, or any fixed site used to conduct business in Saudi Arabia, including construction sites that meet statutory duration thresholds. A PE also arises when a person in the Kingdom habitually concludes contracts or plays the principal role in negotiating

contracts on behalf of the foreign enterprise.

Saudi PE Triggers and Risk Indicators

Saudi PE rules apply regardless of whether the foreign company registers formally with MISA; the tax liability arises from activity, not registration.

Dependent Agent PE

A foreign company will also be treated as having a PE in the Kingdom if it appoints an agent who

creating a dependent agent PE even in the absence of a formal office.

ZATCA’s Enforcement Approach ZATCA follows a substance-over-form approach. If there is ambiguity about whether a foreign entity has created a PE, ZATCA often presumes one exists, especially when:

If a foreign business is deemed to have a PE, the PE must:

Key Takeaway Foreign companies operating in Saudi Arabia must carefully evaluate whether their activities — especially through local managers, employees, or long-term service projects — create a

PE. Even limited local presence or dependent agent activity may result in ZATCA classifying the foreign entity as having a PE and subjecting it to Saudi corporate taxation. Where an effective DTT exists between Saudi Arabia and the counterparty jurisdiction, double taxation relief may be available on Saudi-source income—typically via exemption or foreign tax credit mechanisms, depending on the treaty text. In practice, DTTs can reduce or eliminate withholding tax (WHT) on certain cross-border payments (e.g., dividends, interest, royalties), but the precise relief depends on the specific treaty article and conditions.

6. Subsidiary Company

Choosing the correct corporate vehicle

Limited Liability Company (LLC)

The LLC is the most commonly chosen legal form for foreign investors due to its operational simplicity, flexibility in structuring, and strong acceptance by regulators, banks, and commercial partners. It requires at least one shareholder and offers limited liability

protection. The LLC does not have a statutory minimum capital requirement, although MISA may impose practical minimum capital depending on the sector (e.g., trading vs. services). LLCs are favored because they are easier to manage compared to joint stock companies, allow 100% foreign ownership in most sectors, and are widely used by multinational subsidiaries in the Kingdom.

Joint Stock Company

A JSC is typically suitable for large enterprises planning to raise capital publicly, issue tradeable shares, or eventually list on the Saudi Stock Exchange (Tadawul). It has higher governance, reporting, and minimum-capital requirements and is generally recommended only for companies planning significant operations, complex ownership structures, or capital-market activity.

While possible, foreign investors seldom use other forms such as simple partnerships or limited partnerships, as they offer less operational flexibility and may introduce complex tax/Zakat implications. Partnerships in Saudi Arabia generally pass profits directly to partners as partnerships do not create hybrid-entity tax advantages; instead, they are assessed under Saudi tax and Zakat rules depending on the nationality/residency of the partners.

7 Legal Setup of a Saudi Subsidiary (e.g., LLC or JSC)

Pre-approval and Licensing (MISA)

Private-sector employers must enroll in Mudad/WPS and report salary payments monthly.

Shelf Companies

Summary

8. Opening a Bank Account

When opening a corporate bank account in the Kingdom of Saudi Arabia, foreign companies should be prepared for a rigorous KYC/AML process, as Saudi banks follow strict compliance requirements set by the Saudi Central Bank (SAMA), the Ministry of Commerce (MoC),

and ZATCA. This process is typically more detailed for entities with foreign ownership, complex structures, or high-risk jurisdictional backgrounds.

8a. Enhanced KYC & AML Requirements

Saudi banks are required to perform robust Know-Your-Customer

(KYC) and Anti-Money-Laundering (AML) checks, which include:

Banks cross-check UBO data with government systems, as all UBO information must match what is declared on MoC and ZATCA registries.

Applicants may face additional compliance requirements, especially when:

Most Saudi banks require that:

This requirement stems from common KYC practice and the need to match bank data with MoC and ZATCA records (including UBO declarations).

Although specific checklists differ by bank, foreign companies should expect to provide:

Banks may require additional documents if the ownership structure includes multiple corporate layers.

Only then can they proceed with opening a bank account. Processing time will vary depending on complexity of the structure and KYC risk level.

8f. No “Shelf Company” Shortcut

Saudi Arabia does not employ shelf companies. Even after the Commercial Registration is issued, the bank cannot bypass its statutory AML and UBO checks, meaning there is no way to “fast-track” the compliance process.

Opening a corporate bank account in Saudi Arabia involves strict SAMA-mandated KYC/AML procedures. Banks verify the company’s CR, MISA license, and UBO data—including cross-checks with MoC and ZATCA. Foreign owners, especially those subject to FATCA or from high-risk jurisdictions, face enhanced due diligence. At least one authorised signatory must usually complete in-person verification. UBO reporting is mandatory and must always match regulatory filings.

9a. Commercial & investment setup (before tax registration)

9b. Municipal (Baladi) trade license & premises evidence

9c. Fiscal registration with ZATCA (tax/Zakat/VAT/WHT)

9d. Evidence of real presence (anti-“letterbox” expectations)s

We specialise in cross-border tax efficiency. We don’t do Accounts, we don’t do Book-keeping, we just do Tax. We like to focus on complex and difficult tax cases.

Let us help you to become more tax efficient, wherever you are.

For more articles like this, why not explore our website and sign up free to the Learning Centre?

Dr Peter Wilson’s LinkedIn