European investors approaching Saudi Arabia for the first time usually ask what the corporate tax rate is. The question has no single answer, because the Kingdom does not operate one levy on companies. It operates two, in parallel, on the same balance sheet, and which one applies to which slice of the profit depends on who the shareholders are.
That design is unfamiliar to anyone whose experience is European, and it produces a specific class of error. Joint venture agreements get drafted with tax provisions that assume a single charge. Financial models get built with one effective rate. Distribution mechanics get agreed without anyone establishing which partner bears which levy. None of these are difficult problems if they are identified at the outset. All of them are expensive if they are identified after the shareholders have signed.
Two levies, allocated by shareholder
As the Zakat, Tax and Customs Authority summarises the scope of the Implementing Regulations of the Income Tax Law, resident capital companies are subject to income tax in respect of the shares of non-Saudi partners, whether those partners are resident or non-resident, natural or legal persons. On the other side, article 3 of the Implementing Regulations for Zakat Collection of 1445 H brings within zakat, among others, the share held by a Saudi partner or shareholder in a resident company and a resident Saudi person carrying on an activity under a licence in the Kingdom. For these purposes article 1 of the same regulations defines a Saudi as a holder of Saudi nationality or a national of another Gulf Cooperation Council state accorded the same treatment as Saudi nationals.
In the ordinary case the allocation follows ownership rather than election. A company owned entirely by non-Saudi shareholders is an income tax payer. A company owned entirely by Saudi and other Gulf nationals is a zakat payer. A company with both, which is the ordinary shape of a joint venture, is both, in the proportions its shareholder register produces. Special rules displace that picture in some cases, among them listed companies, where article 3 of the zakat regulations places shares held by non-Saudi shareholders other than founders on the zakat side, and oil and hydrocarbon production, where article 1 of the Implementing Regulations of the Income Tax Law, in their official Arabic text, brings shares held by persons working in that production within income tax, subject to its own exception for listed companies.
The consequence worth naming early is that a European investor’s arrival usually changes the Saudi tax position of the vehicle it invests in. Acquiring a stake in an existing Saudi company from Saudi or Gulf shareholders converts part of what was a zakat base into an income tax base. That is not a hidden cost, but it is a cost, and it belongs in the price rather than in the first year’s accounts.
Income tax on the foreign share
Under article 7 of the Income Tax Law issued by Royal Decree No. M/1 of 1425 H, the rate is twenty per cent of the tax base for a resident capital company, a resident non-Saudi individual carrying on an activity, and a non-resident carrying on an activity in the Kingdom through a permanent establishment. Companies producing oil and hydrocarbons are taxed under a separate and considerably heavier schedule in the same article. Natural gas investment is also treated separately: article 6 computes its tax base independently of the taxpayer’s other activities, although the rate set for it in article 7 is likewise twenty per cent.
Twenty per cent is not a low rate by regional standards, and it is close enough to European rates that Saudi Arabia should not be approached as a low tax jurisdiction. What distinguishes the Saudi position is not the rate but the base and the administration around it, both of which are less forgiving than the rate suggests.
Article 60 of the law requires the income tax return to be submitted within one hundred and twenty days of the end of the taxable year. The authority’s guideline for regional headquarters, in its May 2026 version, states in its section on the tax procedures applicable to regional headquarters that, for all types of taxes, statements, returns and any accompanying annexures must be submitted to it in Arabic, and article 58 of the law requires taxpayers, other than non-residents without a permanent establishment, to keep their books and accounting records in Arabic. That is a practical constraint on groups intending to run Saudi compliance from a European finance function using European working papers.
Zakat on the Saudi and Gulf share
Article 15 of the zakat regulations levies zakat at two and a half per cent of the zakat base for the Hijri year. Where the payer’s fiscal year differs from the Hijri year, zakat is calculated on the actual number of days, by dividing two and a half per cent by the number of days in the Hijri year and multiplying by the number of days in the payer’s fiscal year. A Gregorian financial year therefore attracts a slightly higher effective percentage than the headline figure, because it has more days than the Hijri year.
The more consequential difference is the base. Zakat is not a charge on profit. Under articles 21 to 26 of the zakat regulations the base is built from the balance sheet: equity and its equivalents, certain liabilities, and the difference between the adjusted and the book result are added, and the assets listed in article 26 are deducted. Article 27 then sets a minimum base that operates by reference to the adjusted net profit, and article 28 a maximum. The detailed composition of the base for a particular company is a computation under those regulations and not something that can be inferred from the income statement.
Two implications follow. A zakat payer with a poor trading year can still carry a substantial zakat liability, because article 27 provides that a positive base without an adjusted net profit is still assessed on that base. And a capital-intensive company can produce a zakat figure that bears little relation to what its income statement would suggest. A European partner reading a Saudi joint venture’s accounts should not treat the zakat line as a small percentage of profit, and should ask for the computation rather than the total.
A further point of timing is easy to overlook. Because the zakat year is measured against the Hijri calendar while the company’s books are almost always kept on a Gregorian year, the apportionment applies every year rather than as a one-off adjustment on transition.
The mixed company
In a company with both Saudi and foreign shareholders, both computations are prepared and each applies to the corresponding proportion of the base. The authority’s guidance refers accordingly to tax, zakat or mixed returns, and the company files for both levies.
This creates a governance question that shareholder agreements frequently miss. The two levies fall on different bases, follow different rules and can move in opposite directions in the same year. If the agreement provides simply that taxes are borne by the company before distribution, the effect is that each shareholder partly funds the other’s levy, and in a bad year that cross-subsidy can be significant.
The alternative approach, which allocates each levy to the shareholder group whose ownership generates it and adjusts distributions accordingly, requires more drafting but reflects the statutory design. It is worth settling before signature. Renegotiating it after a year in which the zakat base and the tax base diverged sharply is a conversation between partners who each believe the other is being subsidized.
Withholding tax, and the rate set by what is paid
Article 68 of the Income Tax Law requires a resident, and a permanent establishment in the Kingdom, paying an amount from a source in the Kingdom to a non-resident to withhold tax at rates fixed by category, and where the payer is a natural person the article applies those withholding conditions to payments relating to that person’s activity. The current table sits in article 63 of the Implementing Regulations, last amended by Ministerial Resolution No. 25 of 8 Muharram 1445 H, and the authority reproduces it in its January 2025 tax circular on withholding under double taxation agreements. Management fees are withheld at twenty per cent. Royalties are withheld at fifteen per cent. Technical or consultancy services, international telephone services, rent, air tickets, air or sea freight, dividends, returns on loans, and insurance or reinsurance premiums are withheld at five per cent, subject to the definitions and exclusions in article 63, which among other things take dividends distributed by companies operating in natural gas, oil or hydrocarbon investment outside withholding. Any other payments are withheld at fifteen per cent.
Management fees are defined by reference to management service contracts such as hotel management and ship management. Technical and consultancy services are defined broadly, covering technical, technological and scientific services of any kind, including studies and research, surveys of a scientific, geological or industrial nature, consultancy, supervisory and engineering services of any kind, and the plans relating to them.
The pattern is deliberate. Payments that look like a return on capital are taxed lightly at five per cent. Payments for the use of intellectual property, or that look like the extraction of profit through a management charge, are taxed at fifteen or twenty. Under those domestic rates, a European parent that intends to recover its investment through royalties and management fees rather than through dividends will find that route withheld at considerably higher rates than the dividend it was designed to avoid. Where a treaty applies, the comparison has to be made again under the treaty, as the section on treaty relief below explains.
The related party premium, and its removal
For years the table carried a direct penalty on intragroup services. The earlier consolidation of the regulations, current to Ministerial Resolution No. 2568 of 1440 H and still served on the authority’s English pages, applied fifteen per cent to technical, consultancy and international telephone services paid to a head office or a related company, against five per cent for the same services paid to anyone else. The current article 63 no longer draws that distinction, and the authority’s 2025 circular shows a single rate of five per cent for technical and consulting services whether the provider is a related party or not.
That changes the arithmetic of shared service centres. A European group that centralizes engineering, technical support or professional services and recharges its Saudi subsidiary no longer faces a withholding differential against an independent supplier merely because the provider is a group company.
The stakes on characterization remain. The line between a technical service and a royalty, or between a technical service and a management fee, determines whether the rate is five, fifteen or twenty per cent. Contracts that describe a bundle of services in general terms invite the authority to characterize the whole payment at the highest applicable rate, and that characterization is easier to prevent in the drafting than to reverse in an assessment.
Treaty relief, at source or by refund
The treaty between the Netherlands and Saudi Arabia, in force since 1 December 2010 according to the consolidated text on wetten.overheid.nl and applying under its article 27 to withholding taxes on amounts paid from 1 January 2011, limits Saudi tax on dividends under article 10 to five per cent of the gross amount where the beneficial owner is a company, other than a partnership, holding directly at least ten per cent of the capital of the paying company, and to ten per cent in all other cases. Under article 11, income from debt-claims is limited to five per cent, and under article 12 royalties to seven per cent, in each case where the recipient is the beneficial owner. The treaty has no article dealing specifically with management fees or fees for technical services, so such a fee paid to a Netherlands company, where it is not a royalty within the definition in article 12, falls under article 7, which makes the profits of an enterprise of the Netherlands taxable only in the Netherlands unless the enterprise carries on business in the Kingdom through a permanent establishment situated there, and in that case the profits may be taxed in the Kingdom but only so much of them as is attributable to that permanent establishment. Article 5 treats as a permanent establishment, among other things, the furnishing of services, including consultancy services, through employees or other personnel engaged by the enterprise for that purpose, where activities of that nature continue for the same or a connected project within the Kingdom for a period or periods aggregating more than six months within any twelve-month period. The authority’s 2025 circular reads the business profits article in the same way, and the relief is claimed through the procedures described below. Both Saudi Arabia and the Netherlands list this treaty as a covered agreement in their deposited positions under the multilateral instrument, and neither has reserved its article 7. The principal purpose test in article 7(1) of the multilateral instrument therefore applies: a benefit under the treaty is not granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in it, unless it is established that granting the benefit in those circumstances would be in accordance with the object and purpose of the relevant provisions of the treaty.
The rates matter less than the mechanism, and the mechanism is where European groups are caught. The authority’s 2025 circular describes two routes. Under the benefit at source procedure, the resident payer applies through the authority’s portal for the reduced rate or exemption, uploading a tax residency certificate from the foreign tax authority and a request in the authority’s approved form, both authenticated by the Saudi embassy in the non-resident’s state or by apostille, together with the payer’s undertaking to settle any tax or penalties that become due on the non-resident through false or wrong information, arithmetic error or a misinterpretation of the treaty. A payer that cannot meet those requirements follows the refund procedure: it withholds at the domestic rate, remits the tax, and then applies for a refund with the residency certificate, a letter from the non-resident authorising the payer to receive the refund, and the approved request form, all three authenticated in the same way, together with a copy of the withholding return with evidence of remittance, and a letter from the payer, attested by the Chamber of Commerce, confirming that the amount has not already been refunded, transferred or offset.
The commercial consequences follow from which route the payer takes. Where relief is not obtained at source, a royalty subject to fifteen per cent domestically and seven per cent under the treaty is withheld at fifteen and reclaimed down to seven, with the difference outstanding for as long as the claim takes. The circular also notes a five year limitation period for lodging an application or being audited by the authority, after which the treaty benefits can no longer be claimed, and paragraph IX(1) of the protocol to the treaty requires an application for refund of tax levied at source in excess of articles 10, 11 or 12 to be lodged within five years after the end of the calendar year in which the tax was levied. Any contract that provides for payments to be made net of Saudi tax, or that grosses up the payer’s obligation, needs to say which route the payer will use and who is entitled to the refund when it arrives, because otherwise the party that funded the gross-up and the party that recovers the excess are not the same person.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.