Tax guide for Americans in Saudi Arabia

Understanding tax obligations is crucial for US expats in Saudi Arabia, a country known for its tax-friendly stance with no personal income tax on earned income.

Nevertheless, US citizens and residents must report their worldwide income to the IRS. This guide covers key aspects such as Saudi residency criteria, local taxation types, the lack of a US-Saudi tax treaty, and essential tax forms for US expats.

Who can be considered a resident of Saudi Arabia?

There are two main conditions under which an individual may be considered a resident for tax purposes:

• Individuals who have a permanent place of residence in Saudi Arabia and who reside in the country for a total of at least 30 days during the tax year are considered residents.
• Individuals who reside in Saudi Arabia for not less than 183 days during the tax year, regardless of having a permanent residence in the country, are also considered residents.

Types of taxation in Saudi Arabia for individuals

1. Saudi Arabia does not levy personal income tax on the earned income of its residents or non-residents. This policy applies to all individuals regardless of nationality.
2. Muslim residents may be subject to zakat, an Islamic levy that is considered a religious obligation rather than a tax. Zakat is calculated at 2.5% of assets above a minimum amount held for one lunar year.
3. Non-residents earning income from sources within Saudi Arabia may be subject to withholding tax on certain types of income, including rents, royalties, management fees, and technical service fees.

Corporate taxes in Saudi Arabia

Saudi Arabia VAT tax

In 2018, Saudi Arabia introduced a value-added tax (VAT) as part of its economic diversification and tax reform strategy. From July 1, 2020, VAT is levied at a standard rate of 15%.

The tax applies to most goods and services, with some exceptions and zero-rated supplies, including exports, international transportation, and certain medical goods and services.

Businesses will be required to register for VAT if their annual taxable supplies exceed the registration threshold.

Customs duties

Customs duties in Saudi Arabia are levied on imported goods, with rates varying depending on the type of goods.

The Customs Tariff outlines the duties applicable to different categories of goods, with some goods qualifying for exemptions or reduced rates under certain conditions, such as goods imported for use in strategic projects.

The valuation of goods for customs purposes includes cost, insurance, and freight (CIF) to the port of entry in Saudi Arabia.

Payroll taxes

While there is no personal income tax in Saudi Arabia, employers are subject to payroll taxes in the form of social security contributions.

These contributions apply to Saudi nationals working in the private sector and are split between the employer and the employee. The total contribution rate is 22%, of which 10% is paid by the employee and 12% by the employer.

This includes contributions to the General Organization for Social Insurance (GOSI) for pension and unemployment insurance.

Non-Saudi employees are subject to a different system, primarily covering occupational hazards, to which the employer contributes 2% of the employee's salary.

Real estate transaction tax

RETT in Saudi Arabia is a tax levied on the sale and transfer of real estate within the Kingdom. Introduced as a measure to stimulate the real estate market and make homeownership more accessible, RETT represents a significant shift in the taxation of real estate transactions.

RETT is levied at a rate of 5% of the sale value of the property. This tax is payable by the seller and applies to all types of real estate transactions, including residential, commercial, and land sales. The introduction of the RETT replaced the previous deed transfer tax and provides a more streamlined approach to taxing real estate transactions.

The implementation of RETT aims to increase transparency, reduce the cost of acquiring property for buyers, and encourage investment in the real estate sector. It is part of Saudi Arabia's broader economic reforms under its Vision 2030 program, which aims to diversify the economy and reduce dependence on oil revenues.

Does Saudi Arabia tax foreign income?

Saudi Arabia stands out in the international community for its tax policies, particularly concerning the taxation of foreign income. In keeping with its efforts to attract foreign investment and expatriates, Saudi Arabia does not tax individuals on their foreign income.

This policy means that residents and expatriates living in Saudi Arabia are not required to pay taxes to the Saudi government on income earned outside the Kingdom.

When are Saudi Arabian taxes due?

The fiscal year in Saudi Arabia follows the Gregorian calendar and runs from January 1 to December 31.

For entities subject to taxation in Saudi Arabia, including those paying corporate income tax and those subject to Zakat, tax returns must be filed and any taxes due must be paid within 120 days of the end of the fiscal year.

For individuals, there is no annual filing requirement as there is no personal income tax on earned income.

Tax treaty between the US and Saudi Arabia

Currently, there are no tax treaties between the United States and Saudi Arabia.

Most popular tax forms for US expats

US expats are subject to special filing requirements and often need to complete additional forms when filing their US tax returns. Some of the most commonly required tax forms for US expats include:

1. Form 1040: The standard form used by US taxpayers to file their annual income tax returns. US expats must report their worldwide income on Form 1040, regardless of where they live.
2. Form 2555 (Foreign Earned Income Exclusion): This form is used by US expats to claim the Foreign Earned Income Exclusion (FEIE), which allows them to exclude a certain amount of their foreign-earned income from US taxation. The FEIE can significantly reduce an expatriate's US tax liability.
3. Form 1116 (Foreign Tax Credit): For US expats who pay income taxes to a foreign country, Form 1116 allows them to claim a credit for foreign taxes paid, potentially reducing their US tax liability.
4. FinCEN Form 114 (FBAR): US persons with financial interests in, or signature authority over, foreign financial accounts that exceed certain thresholds must file the Report of Foreign Bank and Financial Accounts (FBAR). This form is filed separately from the tax return and is submitted electronically to the Financial Crimes Enforcement Network (FinCEN).
5. Form 8938, Statement of specified foreign financial assets: This form is required for US taxpayers with specified foreign financial assets that exceed certain thresholds. Form 8938 is filed as part of the tax return and helps the IRS identify taxpayers with significant foreign assets.