Saudi Arabia is initiating major changes to its income tax regulations by proposing amendments to the ‘Income Tax Law.’ In the previous month, the kingdom’s Zakat, Tax, and Customs Authority (ZATCA) released draft laws, inviting public feedback until December 25 on modifications intended to revamp the tax code in alignment with its Vision 2030 economic agenda.
A Closer Look
A detailed review of the draft ITL highlights ZATCA’s aim to modernize and adhere to global tax standards, strengthening it against perceived tax abuses. While the draft introduces numerous changes, our observations primarily center on international and cross-border tax aspects. These observations are not exhaustive, and the published draft may undergo further modifications during the ongoing Public Consultation.
Saudi-Origin Income Provisions
In the draft Income Tax Law (ITL), the proposal designates income from indirect share transfers and remotely provided services as Saudi-origin income. This marks a departure from current legislation, indicating a move toward formalizing taxation on capital gains and expanding the tax base to include foreign service providers.
Evolving Permanent Establishment Rules
The draft introduces a novel Services PE concept for non-resident companies conducting services in Saudi Arabia for over 30 days within a twelve-month period. Despite ZATCA’s efforts in defining PE positions, the draft acknowledges limitations on taxing rights under existing Double Tax Treaties (DTTs).
Comprehensive Tax Reforms
The draft ITL presents a comprehensive set of tax reforms, including anti-avoidance measures, a participation exemption regime, limitations on interest deductibility, a reinvestment reserve, anti-hybrid rules, and changes to withholding tax rates. These proposals reflect Saudi Arabia’s commitment to modernizing its tax regime and aligning with international standards. International businesses and investors are urged to assess the potential impact on their operations, considering the evolving nature of the framework and possible adjustments after the public consultation.