Background

The General Authority for Zakat and Tax (GAZT) issued Circular No. 6768/16/1438 dated 5/3/1438H (corresponding to 4 December 2016) which changes the way Saudi listed companies are currently accounting for their zakat and tax liability.

According to the Circular, listed companies on Tadawul will now have to file their zakat and tax declarations based on the actual shareholders portfolio at year-end and pay on the shareholdings of Saudi/GCC shareholders and tax on their foreign shareholders percentage. Prior to the issuing of this Circular, listed companies were subject only to zakat except for listed companies where there is a founding foreign shareholder for which tax should be settled.

Discussion

Companies, which are wholly owned by Saudi/GCC nationals, are subject to Zakat at a rate of 2.5% instead of income tax. Companies owned by Saudi and non-Saudi (and non-GCC) nationals pay tax on the portion of income attributable to non-Saudis (and non-GCC) and Zakat on the portion of income attributable to Saudi/GCC nationals. Residents from countries belonging to the Gulf Cooperating Council (Bahrain, Kuwait,
Oman, Qatar, and the United Arab Emirates) and companies from these countries doing business in Saudi Arabia are generally subject to Zakat and not income tax.

Based on the above, the key element for determining if the company is subject to zakat or tax is the nationality of shareholders.

In case of listed companies where the shareholders may change several times during the year, including the change of ownership between GCC and non-GCC shareholders, it was not possible to identify the mix of shareholders (GCC and non-GCC) in order to accurately calculate the zakat base for GCC shareholders and the adjusted taxable profits for non-GCC shareholders.

Therefore, prior to the Circular, the GAZT ignored the shareholding mix of listed companies and subjected listed companies to zakat, except for listed companies where the founding foreign shareholder can be identified.

The key highlights of the new Circular can be summarized as follows:   

• The Capital Market Authority (CMA) issued rules regulating investments by “Qualified Foreign Investors in Tadawul”. The rules require that Tadawul publish on its website statistical data that reflects the percentages owned by foreign investors, including their residency status.   
• The information pertaining to the foreign shareholders as well as Saudi and GCC shareholders can be accessed by listed companies through “Tadawulaty” system which provides details of the portfolio of all shareholders including nationality, type, address, residency status (resident/nonresident).
• Listed companies must now submit declarations based on the actual ownership percentages at the company’s year-end and attach a statement with the declaration detailing the ownership percentages by Saudis, non-Saudis and GCC shareholders.     
• Listed companies are now required to calculate and submit tax advance payments if the requirements under Saudi tax law are met (i.e. tax liability of SR 2m or more).

The circular will apply to tax year which ends after the issuance of this Circular. With respect to declarations already submitted based on ownership percentages reflected in the Articles of Association, the tax years would be assessed based on the information, which were available at that time. 

KPMG Views

The circular could have significant impact on how listed companies will be taxed going forward. The following issues should be considered:

• Listed companies may no longer be able to rely on Ministerial Resolution 1005 to consolidate fully owned subsidiaries. Accordingly, subsidiaries may be required to file separate zakat and tax declarations which could result in a higher zakat and tax cost at the group level in addition to the increasing administrative and compliance costs.    
• Listed companies will now be subject to the provisions of income tax law, which were not applicable as zakat payers. Certain tax provisions limit the deductibility of expenses such as interest, repairs and maintenance, etc.
• Listed companies may need to update their GAZT registration system (ERAD) annually to reflect the correct shareholding percentages between GCC and non-GCC shareholders.
• The availability of details regarding the residency status of shareholders through Tadawulaty system will put pressure on listed companies to comply with the withholding tax regulations and deduct/remit withholding tax on dividends paid to nonresident shareholders. 
• Listed companies will now be required to calculate a tax provision to account for its non-GCC shareholders. The calculation of tax provision for interim reporting may be challenging since tax is determined based on ownership at year-end.

The circular clearly changes the way listed companies will be subject to tax and zakat going forward and may result in additional costs to the listed companies such as the tax liability on the no-GCC shareholders and the additional cost of compliance. Companies should start preparing in advance for the impact of the additional costs and compliance requirements. 

For additional details with respect to this Alert, please contact the following: