KSA: Capital gains, dividend income and other income tax amendments

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Oct 12, 2017

In brief

A​ ​number​ ​of​ ​significant​ ​amendments​ ​to​ ​the​ ​Saudi​ ​Arabian​ ​(KSA)​ ​Income​ ​Tax​ ​law​ ​(‘Law’)​ ​have​ ​been issued​ ​through​ ​a​ ​Royal​ ​Decree.​ ​The​ ​amendments​ ​appear​ ​intended​ ​to​ ​support​ ​the​ ​objectives​ ​of​ ​Vision 2030​ ​or​ ​achieve​ ​alignment​ ​between​ ​the​ ​Saudi​ ​tax​ ​authority​ ​practice​ ​and​ ​international​ ​practice.

Two​ ​notable​ ​changes​ ​include​ ​the​ ​exemption​ ​from​ ​income​ ​tax​ ​for​ ​KSA​ ​resident​ ​recipients​ ​of​ ​dividends from​ ​KSA​ ​resident​ ​or​ ​certain​ ​KSA​ ​non-resident​ ​companies;​ ​and​ ​the​ ​potential​ ​removal​ ​of​ ​capital​ ​gains on​ ​the​ ​intra-group​ ​transfers​ ​of​ ​assets​ ​(including​ ​shares)​ ​in​ ​c​ertain​ ​circumstances.

In detail

Royal decree M/131 amends certain articles of the Law

The​ ​Royal​ ​Decree​ ​No.​ ​(M​ ​/ 131)​ ​dated​ ​29/12/1438H​ ​(20 September​ ​2017)​ ​has amended​ ​certain​ ​articles​ ​of the​ ​Law.

The​ ​key​ ​amendments​ ​are​ ​as follows:

Article 2: Persons subject to taxation

Persons​ ​subject​ ​to​ ​taxation also​ ​include​ ​a​ ​resident​ ​‘capital company’​ ​ ​(includes​ ​a​ ​joint stock​ ​company​ ​and​ ​limited liability​ ​companies)​ ​with respect​ ​to​ ​shares​ ​owned either​ ​directly​ ​or​ ​indirectly​ ​by persons​ ​operating​ ​in​ ​oil​ ​and hydrocarbon​ ​production.

This​ ​amendment​ ​appears​ ​to mean​ ​that​ ​any​ ​subsidiaries​ ​or joint​ ​ventures​ ​of​ ​companies operating​ ​in​ ​oil​ ​and hydrocarbons​ ​should​ ​be subject​ ​to​ ​income​ ​tax. Previously,​ ​such subsidiaries/joint​ ​ventures would​ ​only​ ​be​ ​Zakat​ ​payers​ ​to the​ ​extent​ ​owned​ ​by​ ​GCC shareholders.

Article 6: Tax base

The​ ​Decree​ ​confirms​ ​that​ ​the tax​ ​base​ ​of​ ​a​ ​capital​ ​company (includes​ ​a​ ​joint​ ​stock company​ ​and​ ​limited​ ​liability companies​)​ ​is​ ​determined independently​ ​from​ ​its shareholders,​ ​partners​ ​or​ ​its subsidiaries,​ ​irrespective​ ​of whether​ ​the​ ​accounts​ ​of​ ​the capital​ ​company​ ​are consolidated​ ​or​ ​not.​ ​This merely​ ​reinforces​ ​current practice​ ​that​​ t​ axpayers should​ ​continue​ ​to​ ​file​ ​on​ ​a standalone​ ​basis.

Article 7: Tax rate for oil and hydrocarbon companies

Whilst​ ​the​ ​tax​ ​rate​ ​for​ ​for​ ​oil and​ ​hydrocarbon​ ​companies used​ ​to​ ​be​ ​fixed​ ​at​ ​85%, progressive​ ​tax​ ​rates​ ​are being​ ​introduced​ ​based​ ​on​ ​the company’s​ ​capital​ ​assets​ ​as follows:

Total capital investment of company Tax rates
More than SAR 375b
50% of the taxpayer net profit
SAR 300b to SAR 375b
65% of the taxpayer net profit
SAR 225b to SAR 300b
75% of the taxpayer net profit
Not more than SAR 225b
85% of the taxpayer net profit

​“Total​ ​capital​ ​investment”​ ​is the​ ​aggregate​ ​accumulated value​ ​of​ ​fixed​ ​assets (including​ ​prospecting​ ​and exploration​ ​costs​ ​of​ ​oil​ ​and hydrocarbons​ ​and​ ​their development),​ ​before deducting​ ​depreciation/ amortization.

The​ ​tax​ ​rate​ ​has​ ​been​ ​banded (effectively​ ​reduced​ ​by​ ​up​ ​to 35%)​ ​to​ ​encourage​ ​foreign investment​ ​in​ ​this​ ​sector.

Article 9: Intragroup transactions for certain assets

Intragroup​ ​transfers​ ​of​ ​cash, shares,​ ​financial​ ​securities and​ ​other​ ​tangible​ ​and intangible​ ​assets​ ​can​ ​now​ ​be done​ ​tax​ ​neutrally.​ ​The​ ​'cost base'​ ​of​ ​the​ ​relevant intragroup​ ​transactions​ ​will be​ ​net​ ​book​ ​value​ ​to​ ​achieve the​ ​no​ ​gain​ ​no​ ​loss​ ​result.

Previously,​ ​there​ ​was​ ​no specific​ ​exemption​ ​for intragroup​ ​transfers​ ​of​ ​assets.

This​ ​amendment​ ​aligns​ ​the Law​ ​with​ ​reorganisation regimes​ ​that​ ​exist​ ​in​ ​many countries​ ​and​ ​concurs​ ​with previous​ ​rulings​ ​from​ ​Appeal Committees​ ​that​ ​share transfers​ ​within​ ​a​ ​KSA​ ​group should​ ​not​ ​be​ ​subject​ ​to​ ​tax.

Article 10: Tax exemptions extended

The​ ​types​ ​of​ ​income​ ​that​ ​are tax-exempt​ ​has​ ​been extended​ ​to​ ​include:

  1. ​Capital​ ​gains​ ​from​ ​the disposal​ ​of​ ​shares​ ​of​ ​a​ ​Saudi listed​ ​company​ ​that​ ​is​ ​listed on​ ​dual​ ​or​ ​multiple​ ​stock exchanges.​ ​In​ ​other​ ​words,​ ​if a​ ​Saudi​ ​company​ ​is​ ​listed​ ​on the​ ​Saudi​ ​Stock​ ​Exchange​ ​and on​ ​a​ ​foreign​ ​stock​ ​exchange (e.g.​ ​NASDAQ),​ ​the exemption​ ​from​ ​Saudi​ ​capital gains​ ​taxation​ ​also​ ​applies​ ​to the​ ​shares​ ​listed​ ​on​ ​the foreign​ ​stock​ ​exchange. Currently,​ ​only​ ​capital​ ​gains realised​ ​from​ ​disposal​ ​of securities​ ​traded​ ​on​ ​the​ ​Saudi Stock​ ​Exchange​ ​are​ ​tax exempt.
  2. Dividend​ ​income​ ​(cash or​ ​in​ ​kind)​ ​received​ ​ ​by​ ​a​ ​KSA resident​ ​company​ ​from​ ​a foreign​ ​or​ ​KSA​ ​resident company,​ ​provided​ ​that:
    1. ​The​ ​ownership​ ​in​ ​the company​ ​is​ ​10%​ ​or​ ​more;​ ​and
    2. ​The​ ​period​ ​of ownership​ ​is​ ​at​ ​least​ ​one​ ​year.

Local​ ​dividend​ ​income​ ​is currently​ ​exempt​ ​under Ministerial​ ​Resolution​ ​3294, but​ ​this​ ​amendment​ ​now exempts​ ​foreign​ ​dividends​ ​as well.

Article 17: Depreciation

The​ ​cost​ ​base​ ​of​ ​assets transferred​ ​or​ ​distributed between​ ​companies​ ​that​ ​are part​ ​of​ ​the​ ​same​ ​“group”​ ​(at this​ ​stage,​ ​companies​ ​that would​ ​fall​ ​under​ ​the​ ​same “group”​ ​has​ ​not​ ​been​ ​defined and​ ​as​ ​such,​ ​we​ ​hope​ ​that clarification​ ​on​ ​this​ ​will​ ​be provided​ ​in​ ​the​ ​amendments to​ ​the​ ​By-laws).​ ​should​ ​set​ ​at the​ ​net​ ​book​ ​value​ ​in​ ​line​ ​with Article​ ​9​ ​above.

Article 20: Contributions to authorized retirement funds

A​ ​capital​ ​company​ ​is​ ​now allowed​ ​to​ ​deduct​ ​its contribution​ ​to​ ​a​ ​retirement fund,​ ​a​ ​social​ ​insurance​ ​fund or​ ​any​ ​other​ ​fund​ ​established for​ ​the​ ​purpose​ ​of​ ​settling employee​ ​end​ ​of​ ​service benefits​ ​or​ ​to​ ​meet​ ​staff medical​ ​expenses,​ ​provided they​ ​meet​ ​certain​ ​conditions.

It​ ​should​ ​be​ ​noted​ ​that​ ​there is​ ​a​ ​notification​ ​requirement to​ ​General​ ​Authority​ ​of​ ​Zakat and​ ​Tax​ ​(GAZT)​ ​in​ ​order​ ​to claim​ ​any​ ​deduction​ ​of​ ​the contribution.

Article 43: Loss carry forward on change of ownership

Capital​ ​companies​ ​are​ ​now allowed​ ​to​ ​carry​ ​forward​ ​tax losses​ ​regardless​ ​of​ ​a​ ​ ​change in​ ​the​ ​ownership​ ​or​ ​control​ ​in the​ ​company​ ​provided​ ​the company​ ​continues​ ​to undertake​ ​the​ ​same​ ​activity. Previously,​ ​a​ ​change​ ​in control​ ​or​ ​ownership​ ​of​ ​50% or​ ​more​ ​would​ ​result​ ​in carried​ ​forward​ ​tax​ ​losses​ ​to be​ ​forfeited.

This​ ​amendment​ ​falls​ ​within the​ ​government’s​ ​objective​ ​ ​to encourage​ ​foreign investment.

The Authority’s right to information

GAZT’s​ ​right​ ​to​ ​obtain information​ ​from​ ​taxpayers now​ ​extends​ ​to​ ​the​ ​provisions
of​ ​international​ ​bilateral/multilateral​ ​agreements.

Effective date

Amendments​ ​to​ ​Articles​ ​2,​ ​7 and​ ​20​ ​are​ ​applicable​ ​from​ ​1 January​ ​2017.

All​ ​other​ ​amendments​ ​are effective​ ​from​ ​the commencement​ ​of​ ​the financial​ ​year​ ​immediately after​ ​the​ ​issuance​ ​of​ ​the​ ​said Royal​ ​Decree​ ​(i.e.​ ​for​ ​most companies​ ​it​ ​will​ ​be​ ​from​ ​1 January​ ​2018).

Amendments​​ to​ ​By-laws which​ ​are​ ​anticipated​ ​to provide​ ​further​ ​details concerning​ ​the​ ​above amendments​ ​are​ ​expected​ ​to be​ ​issued​ ​soon.

The takeaway

Many​ ​of​ ​these​ ​changes​ ​will be​ ​well​ ​received​ ​by taxpayers​ ​and​ ​foreign investors;​ ​specifically​ ​the those​ ​relating​ ​to​ ​intragroup transactions,​ ​ ​extension​ ​of tax​ ​exemptions​ ​and​ ​loss carry​ ​forward​ ​on​ ​change​ ​of ownership.

Contact us

Mohammed Yaghmour

Leader, Zakat and Tax Leader - Saudi Arabia. Clients & Markets, PwC Middle East

Tel: +966 (12) 610 4400

Mohammad Hussein Amawi

Partner, PwC Middle East

Tel: +966 126104400

Soudki Zawaydeh

Partner, PwC Middle East

Tel: +966 11 465 4240

Mohammed Al-Obaidi

Tax Partner, PwC Middle East

Tel: +966 1 465 4240

Mugahid Hussein

Partner in Tax, PwC Middle East

Tel: +966 (0)13 849 6311

Yaseen AbuAlkheer

KSA Tax Partner, PwC Middle East

Tel: +966544250540

Abdulkhamid Muminov

Tax Senior Director, PwC Middle East

Tel: +966 11 211 0400

Fehmi Mounla

Partner, Zakat and Tax, PwC Middle East

Tel: +966 2 610 4400

Fayez Aldebs

Partner in Tax, PwC Middle East

Tel: +966 11 0400

Wael Osman

Tax & Zakat Partner, PwC Middle East

Tel: +966 13 849 6311

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