What Is Income Tax in Saudi Arabia? A Complete Guide for Investors and Franchise Owners

In Saudi Arabia’s rapidly evolving business landscape, the income tax system has become one of the most important topics of concern for local businesses and international investors—especially those operating under franchise models. As the economy grows and digital transformation accelerates, understanding taxation is no longer optional—it’s essential for compliance and financial sustainability.

⚖️ What Is Income Tax in Saudi Arabia?

Income tax is a direct tax imposed on the net profits of entities conducting taxable business in the Kingdom. It applies to:

  • Resident companies owned by non-Saudis
  • Branches of foreign companies operating in Saudi Arabia
  • Non-Saudi individuals engaged in business
  • Companies in certain sectors like oil and gas

Are Saudi Citizens Subject to Income Tax?

No. Saudi nationals are not subject to income tax on their salaries or personal earnings. Instead, companies owned entirely by Saudis are subject to zakat, calculated at a rate of 2.5% on zakatable assets.

🏢 Income Tax and Franchising in Saudi Arabia

What Is a Franchise?

A franchise is a legal arrangement in which the franchisor grants the franchisee the right to use its trademark and business system in exchange for fees or a share of the profits.

How Are Franchise Activities Taxed?

  • If the franchisor is a foreign entity, income generated from the franchise in Saudi Arabia is subject to 20% income tax.
  • If the franchisee is a Saudi-owned company, zakat applies. If foreign-owned, income tax applies.

🧾 How Is Income Tax Calculated in Saudi Arabia?

The tax is calculated on the net annual profit after deducting allowable expenses. The standard rates are:

  • 20% on general business profits
  • 85% for companies in oil and gas sectors
  • 5% withholding tax on certain payments to non-residents (e.g., royalties, franchise fees)

Example:

If a foreign-owned business in Saudi Arabia earns a net profit of SAR 1,000,000:

1,000,000 × 20% = SAR 200,000 in income tax

📝 How to Register for Income Tax

Entities subject to income tax must register with the Zakat, Tax and Customs Authority (ZATCA) within 60 days of commencing business.

Registration Steps:

  1. Visit the ZATCA online portal
  2. Create an account for the entity
  3. Fill out the income tax registration form
  4. Receive your tax certificate

📅 When to File Tax Returns

Tax returns must be submitted annually, no later than 120 days after the end of the fiscal year.

🧩 Difference Between Income Tax and Zakat

Item Income Tax Zakat
Who is subject? Non-Saudis and foreign companies Saudi individuals and wholly-owned companies
Rate 20% or more depending on activity 2.5% of zakatable assets
Basis of calculation Net profit Capital and asset growth

🚨 Penalties for Non-Compliance

  • 1% monthly fine on unpaid taxes
  • SAR 500 daily penalty for delayed return filing
  • Possible suspension from government transactions

💼 Do Franchise Owners Have Tax Exemptions or Benefits?

  • Double tax treaties to avoid dual taxation
  • Deductibility of operational expenses
  • Exemptions for activities in special economic zones (if applicable)

🌍 Income Tax and Foreign Investors

Foreign investors must comply transparently with the Saudi income tax law. This includes:

  • Submitting audited financial statements
  • Disclosing franchise agreements
  • Reporting all income earned within the Kingdom

🧠 Tips to Avoid Tax Risk

  • Hire a licensed tax advisor
  • Stay updated with ZATCA announcements
  • Maintain organized accounting records
  • Ensure franchise operations comply with Saudi law

🏁 Conclusion: Why Should Franchise Owners Understand Income Tax?

Whether you're running a restaurant under a global franchise brand or launching a service-based franchise, understanding Saudi Arabia’s income tax system helps you:

  • Avoid costly penalties
  • Resolve legal issues
  • Ensure smooth business continuity

In short, understanding income tax is the first step toward growing your business responsibly and sustainably in Saudi Arabia’s dynamic economic environment


https://zatca.gov.sa/ar/HelpCenter/guidelines/Pages/IncomeTax.aspx