ZATCA proposes new income tax legislations

Amidst the recent amendments and proposed changes on the current tax and zakat regulations in the KSA, the Zakat, Tax and Customs Authority (ZATCA) published, on 25 October 2023, the draft versions of two new tax legislations, i.e., the draft New Income Tax Law (ITL) (see link here) and the draft Zakat and Tax Procedures Law (see link here), for public consultation open until 25 December 2023. This is in line with ZATCA’s interest in keeping at pace with the comparative tax legislative developments not only in the GCC region but also in the international arena.

The proposed new ITL (see draft document here) aims to reorganize the current income tax system, which was issued and implemented in 1425 AH (2004 G). This is the Kingdom’s response to the recent trends and developments in the international tax landscape to align with the best international tax practices. This initiative will boost the Kingdom’s economy as it helps in promoting and attracting investments and enhancing compliance and transparency.

Based on the draft document for public consultation, the following are the most prominent and/or salient features of the proposed new ITL which will be implemented in the KSA once the law is approved and comes into force:

  • Expansion of the tax residency rules for both legal and natural persons
  • Inclusion of a threshold for the period of performance of in-Kingdom services (i.e., more than 30 days within any 12-month period) for a PE to be created in the KSA.
  • New rules on participation exemption for dividends, capital gains and liquidation distributions received from domestic and foreign companies subject to conditions
  • Changing the tax treatment of partnerships
  • Introduction of tax relief in case of mergers, acquisitions, and demergers subject to conditions
  • Proposed alternative methods of tax calculation for micro-enterprise taxpayers
  • Clarification on the taxation of non-Saudi persons residing and carrying-out activities in the Kingdom
  • Transparent treatment of investment funds consistent with the zakat treatment
  • Inclusion of new provisions relating to the following:
  • Transfer of residence to and from the Kingdom
  • Reinvestment reserve
  • Hybrid mismatches of financial instruments between jurisdictions whereby deductions and exemptions would not apply to financial instruments that have different tax treatments in other jurisdictions than in the Kingdom.
  • Introduction of tax incentives for green investments.
  • Revamped withholding tax (WHT) regime, whereby the following rules are proposed:
  • WHT rates apply on certain payments to nonresidents, as follows: [a] 5% for dividends and rental payments; [b] 10% for services; and [c] 15% for royalties
  • Introduction of the ‘preferential tax regime’ concept in relation to WHT
  • Enumeration of payments not subject to WHT
  • The statute of limitations for tax assessments is reduced to three (3) years as a general rule, with exceptions. 

The ZATCA has also published a draft Zakat and Tax Procedures Law (see link here), which essentially consolidates all the procedural and administrative provisions from various tax and zakat legislations. It covers registration, deregistration, record keeping, confidentiality, rulings, and communication between ZATCA and tax/zakat payers.