SAUDI ARABIA Trends and Developments Contributed by: Zain Satardien, Chadi Hourani and Hayel Hourani, Hourani & Partners
the resulting profits and losses will not be included in taxable income, provided that the assets and liabilities involved are valued at their book values prior to the merger. Participation exemption Dividends, capital gains, and liquidation distributions from a resident’s direct investment in resident or non-resident entities may be exempt from corporate income tax, provided that the taxpayer holds at least a 10% stake for a continuous 365-day period before the year of distribution. The draft Income Tax Law also outlines specific scenarios where this exemption does not apply. Sale of shares in Saudi company A non-resident company may be exempt from income tax on gains from the direct or indirect disposal of shares, stocks, units, or partnership interests in a Saudi-based company, on condition that the sale is to another company within the Kingdom that belongs to the same group. Resident natural persons The draft Income Tax Law stipulates specific condi - tions under which a natural person who is resident in Saudi Arabia but does not hold Saudi Arabian nation - ality is considered a resident for tax purposes, such as staying in Saudi Arabia for a certain number of days within a tax year. Where the natural person is resident in the country and is involved in a commercial activ - ity, income derived from the activity will be subject to 20% income tax. This includes, but is not limited to: • revenue from activities performed in or outside Saudi Arabia; • earnings from movable or immovable property; • profits from owning, trading, and disposing of shares or units in legal entities, including dividends and other distributions; and • income from activities conducted by a PE located outside the Kingdom.
Non-Saudi residents The tax base for non-Saudi residents includes income from activities within the Kingdom, minus deductible expenses. There are specific provisions for calculating the tax base for those involved in oil and hydrocar - bons production. Employment income The draft Income Tax Law also reaffirms that income from employment does not fall under the taxable cat - egory for non-Saudi resident individuals. This con - cept has already been an interpretation of the existing Income Tax Law, but has now been made clearer by the draft revision. WHT rates and categories The draft Income Tax Law suggests various WHT rates for different categories, such as services, dividends, and rental payments, and introduces specific rates for transactions with “preferential tax regimes”. Payments involving debt claims, dividends, rent, services, and royalties to a resident person or PE in a “preferential tax regime” are subject to a 20% WHT. Limitations to interest on loans Loan charges will be deductible to the extent of 30% of the adjusted earnings, as per BEPS. Alongside substantive tax reforms, ZATCA has expanded digital-compliance expectations through mandatory e-invoicing (FATOORA), real-time report - ing requirements, and data-driven audit tools. Foreign investors may anticipate additional scrutiny given the additional data capabilities of ZATCA. Robust tax-governance frameworks and contemporaneous documentation are becoming increasingly essential in navigating ZATCA audits. Overall, Saudi Arabia’s regulatory architecture is con - verging rapidly with international standards, driven by codification, digitalisation, modernised investment rules, strengthened governance, and enhanced tax transparency. These developments collectively posi - tion the Kingdom as one of the most rapid business jurisdictions in the region, offering significant opportu - nities for foreign investors entering the market in 2026.
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