SAUDI ARABIA Trends and Developments Contributed by: Zain Satardien, Chadi Hourani and Hayel Hourani, Hourani & Partners
Principals should carefully consider these arrange - ments to adequately cover their rights, as disputes under Saudi Arabian law often favour the commercial agent. Saudi Arabia’s New Tax Law Amendments Saudi Arabia’s Zakat, Tax, and Customs Authority is in the process of comprehensively reforming its income tax and zakat framework, which mainly entails the introduction of a revised Income Tax Law, aiming to replace the existing law, and a unified Zakat and Tax Procedures Law. The aim is to foster a more business- friendly environment that attracts FDI, while ensuring The proposed draft Income Tax Law introduces chang - es in partnership tax treatment, investment funds, and micro-enterprise taxpayers. It also includes detailed provisions for transfer pricing and introduces the con - cept of a “preferential tax regime”, which applies to international jurisdictions imposing an income tax rate under 15%. Force of attraction principle compliance with international standards. Key highlights of the proposed reforms Comprehensive tax law amendments The force of attraction principle is based on the con - cept that when a company has a permanent estab - lishment (PE) in a foreign country, it becomes liable to pay taxes on the income generated from its opera - tions in that country. This principle is being updated so that it applies when a non-resident taxpayer with a PE in Saudi Arabia conducts similar activities to its PE. However, this rule can be waived if the non-resident taxpayer can demonstrate valid economic or com - mercial reasons for not conducting these activities through its Saudi PE. PE The concept of a PE has undergone revisions to speci - fy instances that may establish a PE for a non-resident entity in Saudi Arabia. These instances include the presence of a management site, offices, facilities func - tioning as sales outlets, and the provision of services within Saudi Arabia directly by a non-resident entity or via its employees, associates, contractors, or other appointed individuals, particularly if these services extend over 30 days or more in any 12-month period.
“Preferential tax regimes” The draft Income Tax Law introduces the notion of “preferential tax regimes”, defining these as systems that offer tax or related benefits exceeding those avail - able under Saudi Arabia’s own laws. Characteristics of a “preferential tax regime” include: • an income tax rate below 15%; • absence of an information exchange agreement with Saudi Arabia; and • provision of tax advantages to entities without the necessity for actual economic activity or lacking substantial commercial presence. Anti-avoidance The draft Income Tax Law also focuses on anti-avoid - ance, stipulating that transactions involving entities in “preferential tax regimes” will be subject to distinct tax treatments. This includes the rules on the deductibility of expenses, depreciation methods, withholding tax (WHT) rates, and transfer pricing regulations. Transfer pricing Additionally, the draft Income Tax Law further speci - fies that expenses not adhering to the arm’s length principle, when paid to related entities or PEs in these “preferential tax regimes”, will not be recognised for tax purposes. “Hybrid instruments” The concept of “hybrid instruments” is now defined in the draft Income Tax law, and these instruments will not qualify for tax deductions or exemptions if their tax treatment differs in the jurisdiction of the counterparty, especially if the appropriate tax is not applied in that jurisdiction. Additionally, tax deductions in Saudi Arabia may not apply to payments made to a non-resident entity if that entity is not recognised as a legal entity in its home jurisdiction, does not hold a similar status under the tax laws of its home country, or where payments are not subject to taxation in the entity’s home country. Mergers and restructuring The proposed draft Income Tax Law stipulates that in the event of a merger or demerger, where equity, or assets and liabilities of a legal entity are transferred,
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