Definition of Small and Medium Enterprises in Saudi Arabia

In Saudi Arabia, small and medium enterprises are defined as businesses that employ 249 employees or fewer and have annual revenues of less than SAR 200 million.

Main Taxes Applied to Small and Medium Enterprises

1. Value Added Tax (VAT)

Rate and Application

Value Added Tax in Saudi Arabia is 15% and applies to most goods and services.

Mandatory Registration Threshold

Businesses with annual taxable sales exceeding SAR 375,000 are required to register for VAT.

Voluntary Registration

Businesses with annual taxable sales exceeding SAR 187,500 but less than SAR 375,000 may register voluntarily.

Return Filing Deadlines

• Large Companies: (over SAR 40 million annual revenue) - Monthly returns
• Small and Medium Enterprises: Quarterly returns

E-invoicing

Phase 2 of e-invoicing began on January 1, 2023, affecting businesses based on their revenue size. It now applies to businesses with revenues exceeding SAR 7 million.

2. Corporate Income Tax

Rate

Corporate income tax in the Kingdom is 20% and applies to companies owned by non-Saudis or non-GCC nationals.

Mixed Ownership Companies

In companies with mixed ownership:

• Saudi/GCC share: Subject to Zakat
• Foreign share: Subject to income tax at 20%

3. Zakat

Rate and Application

Zakat is calculated at 2.5% of the Zakat base (net Zakatable assets) and applies to:

• Companies owned by Saudis
• Companies owned by GCC nationals
• Saudi/GCC share in mixed ownership companies

Zakat Base

The Zakat base includes cash, receivables, inventory, and other liquid assets, but excludes long-term assets such as real estate and equipment.

Filing Deadlines

Zakat returns must be filed no later than 120 days from the end of the fiscal year.

4. Real Estate Transfer Tax

Real estate transfer tax at 5% applies to real estate ownership transfer transactions.

5. Withholding Tax

Withholding tax applies to income generated from non-resident entities' activities within the Kingdom, with rates ranging between 5% and 20%.

Tax Incentives for Small and Medium Enterprises

1. Fine Cancellation Initiative

The Kingdom recently announced the extension of the "Cancellation of Fines and Exemption of Financial Penalties Initiative" until July 2025, covering various taxes including withholding, income, excise, and real estate transfer taxes.

2. Monsha'at Support

The Small and Medium Enterprises General Authority "Monsha'at" provides a diverse range of services to ease the burden on SMEs, including:

• Incubators and co-working spaces
• Government fee refunds
• Credit programs
• Pre-qualification service "Jadeer"
• SME support centers

3. Regional Headquarters Initiative

The Kingdom announced the Regional Headquarters Initiative, an ambitious plan to attract multinational companies by offering a 30-year exemption from corporate income tax.

Tax Compliance Requirements

1. Registration with Zakat, Tax and Customs Authority (ZATCA)

All companies are required to:

• Obtain a Tax Identification Number (TIN)
• Register for appropriate tax services
• Submit returns within specified deadlines

2. Record Keeping

Companies are required to:

• Maintain accurate financial records
• Document all transactions
• Keep invoices and supporting documents

3. E-invoicing

All VAT-registered businesses are required to issue electronic invoices according to ZATCA requirements.

Penalties and Non-Compliance Fines

Value Added Tax

In case of late filing of returns and payments, ZATCA imposes a tax penalty of 50% of the tax shortage value.

Late Payment

• VAT: 1% penalty of tax value for every 30 days of delay
• Income Tax: Fines and interest on overdue amounts

Tips for Small and Medium Enterprises

1. Early Tax Planning

• Start planning for tax obligations from the beginning of the fiscal year
• Maintain regular and accurate financial records

2. Leverage Technology

• Use accounting software compatible with ZATCA requirements
• Ensure compliance with e-invoicing requirements

3. Seek Expert Advice

• Consult qualified accountants and tax advisors
• Stay updated with changes in tax laws

4. Utilize Government Services

• Register with Monsha'at services to access support and incentives
• Use ZATCA's electronic services

Available Electronic Services

ZATCA Portal

• VAT registration
• Tax return filing
• Tax payments through SADAD system
• Tax number verification

Monsha'at Services

• Pre-qualification service "Jadeer"
• "Mazaya" supporting services for companies
• Acceleration programs and incubators

Future Developments

New Income Tax Law

ZATCA is working on a comprehensive reform of the income tax and Zakat framework, which mainly includes introducing a revised Income Tax Law, aiming to foster a more business-friendly environment that attracts foreign direct investment.

E-invoicing Expansion

ZATCA continues to implement e-invoicing on more companies gradually, requiring SMEs to prepare for compliance.

Conclusion

The tax system in Saudi Arabia provides a clear and flexible framework for small and medium enterprises, with significant tax incentives and government support through Monsha'at and ZATCA. Success in tax compliance requires a deep understanding of requirements and leveraging available services and incentives.

Through proper planning, expert consultation, and technology utilization, small and medium enterprises can achieve efficient tax compliance and focus on their growth and development within the framework of Vision 2030.

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For the latest information and guidance, it is recommended to visit the official websites of ZATCA (zatca.gov.sa) and Monsha'at (monshaat.gov.sa).