Simple Tax Guide for Americans in Saudi Arabia
Many of the countries in the Gulf have been, and continue to be, chosen destinations for expatriates worldwide. This is due in no small part to the favorable taxes in the region. Still, it is important that expats understand the tax filing requirements under US law - even in the absence of a requirement to file taxes with Saudi Arabia.
US Expat Taxes - Saudi Arabia
US citizens, as well as permanent residents, are required to file expatriate tax returns with the federal government every year regardless of where they reside. Along with the typical tax return for income, many people are also required to submit a return disclosing assets which are held in bank accounts in foreign countries by using FinCEN Form 114 (FBAR).
The United States is among only a few governments who tax international income earned by their citizens, as well as permanent residents, residing overseas. There are, however, some provisions that help protect from possible double taxation. These include:
- The Foreign Earned Income Exclusion. This exclusion allows one to exclude USD 104,100 (this amount is for 2018 taxes) in earned income derived from foreign sources.
- A tax credit allowing tax on remaining income to be reduced based on the taxes paid to foreign governments.
- An exclusion on foreign housing that allows additional exclusions from their income for some amounts paid to cover household expenses due to living abroad.
Preparing a quality tax return following proper tax planning should allow one to use these, as well as other strategies, in minimizing or possibly eliminating tax liability. Note that in most cases the filing of a tax return is required, even if taxes are not owed.
Income Tax in Saudi Arabia
Anyone who wants to avoid taxes on their income from employment often looks to Saudi Arabia. As is the case with many Gulf nations, Saudi Arabia does not tax business income. In addition, there aren’t taxes on income from investments for individuals - capital gains taxes are levied on businesses instead. There have been some recent news reports stating that the Saudi Arabian government is thinking about taxing income of foreign residents, since they desire to increase non-oil income.
Who Does Saudi Arabia Consider a Resident?
Saudi Arabia is one of the few countries that grants residency using resident permits. The length of your stay, or your reasons for being in the country, are irrelevant - they consider you a resident if you possess the permit (Iqama). Resident permits can be applied for at any of the Saudi embassies.
When Are Saudi Arabian Taxes Due?
Because there is not an income tax or a capital gains tax on individuals, the Department of Zakat and Income Tax doesn’t require the filing of tax returns from individuals. Therefore, there is not a due date or tax year.
Saudi Arabian Social Security
Saudi Arabia does have a system for social security, which applies to the private sector as well as some public workers. The self employed, those working abroad, and those who do not qualify for mandatory coverage have a voluntary option for coverage. Saudi social security is funded with a pension that taxes 9% of earnings (gross). The self-employed pay 18%. Depending on the particular situation, it is possible that you could have a choice between United States Social Security, the social security system in Saudi Arabia, or both.
Does Saudi Arabia Tax Foreign Income?
No income is taxed by Saudi Arabia, so the source of income does not matter.
The US does not have a treaty for taxes with Saudi Arabia. Since the level of Saudi taxes is so low, most expats will not see any issue with the lack of a treaty. The problem may arise, however, if one is subject to business taxes in both the US and in Saudi Arabia.
Saudi Arabian Taxes
Saudi Arabia does not impose gift, wealth, or capital gains taxes. Starting from 1st Jan 2018, the standard VAT rate for Saudi Arabia is 5%, with a nil VAT rate for some goods.
The following supplies are deemed zero-rated, and therefore eligible for reclaiming VAT suffered:
- Exports of goods or services outside the Council Territory backed by evidence of the movement of the goods/services
- Supplies within customs duty suspension zones
- Exports of services include where the customer is not resident within the a Council Territory and/or the consumption does not take place within the Territory
- International transport services of goods or passengers
- Medical equipment and medicines
- Investment precious metals
Still, Saudi Arabian taxes remain among the lowest on the planet.
How Should You Prepare Paperwork for your US Taxes?
We wrote the following article that explains how you should prepare to file US tax returns from Saudi Arabia: