Saudi Arabia provides a number of incentives for industrial investment in the country and to promote employment in certain areas. The following outlines the main incentives:
Saudi Arabia's industrial investment incentives apply to investments in industrial establishments that produce finished or semi-finished goods, or prepare or package goods. The primary incentives, subject to approval, include:
- Interest free financing from the Saudi Industrial Development Fund (SIDF) for up to 50% of the project (subject to a fixed fee);
- Customs duties exemption on imported machinery, equipment, raw materials, and spare parts if they are for industrial use provided such imports are not available locally; and
- Low-cost rent for sites in Saudi Arabia's 24 industrial cities, 4 economic cities, and in Jubail and Yanbu.
In addition to the above incentives for industrial investment, Saudi Arabia provides additional incentive in the form of tax credits when investing in the following areas:
- Al-Jouf; and
- Northern territory.
The additional tax relief is provided for a period of 10 years beginning the year the project starts, and includes:
- A tax credit equal to 50% of annual training expenditure for Saudi nationals;
- A tax credit equal to 50% of the annual salary paid to Saudi nationals; and
- A tax credit equal to 15% of the amount of foreign-invested capital.
Any excess training and salary credit per year may not be carried forward, although the capital tax credit can be carried forward until fully used or till the end of the 10-year period.
The criteria for eligibility are as follows:
- The project must be licensed by the Saudi Arabian General Investment Authority;
- Must have at least SAR 1 million in paid in capital;
- Accounts must be audited by an authorized Saudi Arabian auditor;
- At least 5 Saudi nationals must be employed in a technical or senior administrative positions for at least 1 year; and
- If the project is a branch of a company or entity established outside the 6 prescribe areas, it must have its own separate capital, keep separate books, and submit a separate tax return.
The incentives available to companies establishing operations at the ILBZ include:
- A tax holiday period of up to 50 years during which:
- profit taxes on income from prescribed activities are levied at the rate of 0%;
- no withholding tax shall apply on specified payments (see below) to non-residents;
- assets located in the zone shall not be deemed to constitute a permanent establishment in Saudi Arabia for the non-resident investor; and
- goods located in the zone shall be deemed to be in bonded customs warehouse and, therefore, eligible for the suspension of VAT.
- 100% suspension of customs and import restrictions;
- No restrictions on capital repatriation; and
- No restrictions on foreign ownership (i.e., 100% foreign ownership is allowed).
The tax holiday period starts on the date the entity is granted a trading license in the zone and continues for 50 years or until such date that the entity ceased for any reason to be an “established entity” in the zone, whichever earlier. The benefits may be denied or rescinded if activities carried out in the zone entail the termination or reduction, by the entity or related parties, of similar activities previously carried out outside the zone.
The exemption from withholding tax applies to the following types of payments made to non-residents:
- Interest on indebtedness;
- Royalties provided the recipient is a related person and is the beneficial owner of the royalties received; and
- Technical and other service fees provided the recipient is a related person and is the beneficial owner of the service fees received.
For the purposes of the withholding tax exemption, the term “related person” is interpreted in line with the same definition as under the general Saudi transfer pricing rules (see Sec. 13.4.1.). The withholding tax exemption is limited to distributions or payments made in relation to the prescribed activities. It is denied in case of abuse, or where the payment is sourced from related parties carrying out in Saudi Arabia (but outside the ILBZ) activities which are similar to ILBZ prescribed activities.
The tax treatment of income from non-prescribed activities or payments relating to such activities remains covered by the Saudi general tax rules.
The main sectors that benefit from the ILBZ incentives include consumer products, computer parts, pharmaceuticals, nutritional and medical supplies, aerospace spare parts, and luxury goods, jewelry, and precious metals.
Note that according to the GACA Tax Rules, the zone forms an integral part of the Saudi territory and falls within the scope of all international agreements concluded by Saudi Arabia, including tax treaties. Therefore, entities established in the zone would qualify for the benefits of Saudi tax treaties, to the extent meeting the residence test or other limitations under the relevant treaty.
Saudi Arabia launched three new special economic zones on 13 April 2023, viz King Abdullah Economic City Special Economic Zone (KAEC SEZ), the Ras Al-Khair SEZ, and the Jazan SEZ.
The incentives provided to companies established in each of the zones include:
- 5% corporate income tax for up to 20 years;
- 0% withholding tax permanently for repatriation of profits from SEZ into foreign countries;
- 0% customs duties deferral for goods inside the SEZ;
- 0% VAT for all intra-SEZ goods exchanged within the zone and between zones;
- Flexible and supportive regulations around foreign talent during the first 5 years; and
- Expat levy ensuring fees exemption for employees and their families in the zones.
The incentives apply to companies operating in specified sectors of focus for each SEZ, which are as follows:
Further, a Cloud Computing SEZ is launched wherein companies established in the cloud computing zone are provided special tax treatment in line with OECD principle that avoids double taxation and accommodates the cloud service provider (CSP) operating model.
Effective 1 June 2015, the Saudi government introduced rules to enable Qualified Financial Investors (QFI) to invest in the Saudi Stock Market, which was previously open to only domestic investment.
The general conditions to register as a QFI include that the applicant must:
- Be a financial institution with a legal personality which falls within one of the following types:
- Brokerage or securities firms;
- Fund managers; or
- Insurance companies;
- Be licensed or otherwise subject to regulatory oversight by a regulatory authority and incorporated in a jurisdiction that applies regulatory and monitoring standards equivalent to those of the Saudi Capital Market Authority or acceptable to it;
- Have at least SAR 18.75 billion (~USD 5 billion) or equivalent amount in assets under management, although this amount may be reduced to as low as SAR 11.25 billion (~USD 3 billion); and
- Have carried out securities-related activities and investments for at least 5 years.
The investment limitations include:
- A foreign investor, together with its affiliates, may not own more than 5% of the shares of any one listed company;
- No more than 20% of the shares of a listed company may be owned by foreign investors; and
- The aggregate foreign ownership of all listed companies is limited to 10% of the total Stock Market value, including any interests under swaps.
Capital gains from the disposal of shares on the Stock Market are generally tax-exempt, and dividends are subject to 5% withholding tax.