Saudi Arabia: Regulations to implement tax benefits in special economic zone
Saudi Arabia: Regulations to implement tax benefits
Regulations have been issued to implement an initial special economic zone in Saudi Arabia—the integrated logistic bonded zone (ILBZ).
The ILBZ was announced in October 2018, as part of a goal to make Riyadh one of the 10 largest city economies in the world and is in line with efforts to make Saudi Arabia a globally competitive transportation and logistics hub for the movement of goods and services. The ILBZ is located adjacent to the King Khalid International Airport in Riyadh and will, among other things, provide direct and indirect tax benefits and exemptions to Saudi companies and foreign investors.
A company (or branch of a company) that is licensed to conduct activities in the ILBZ—an established entity—will be eligible for tax benefits and exemptions in relation to the following activities:
- Maintenance, repair, processing, modification, development, assembly, and storage of goods
- Sorting, packing, repacking, trading in, distributing, dealing with, and using goods in any form (including simple manufacturing operations)
- Import, export, and re-export
- Value-added services, logistics services, and after sales services
- Recycle waste and e-waste
The General Authority of Zakat and Tax (GAZT) will issue additional guidance to clarify the conditions and the procedures to be followed by established entities to benefit from the ILBZ tax benefits and exemptions.
Duration of tax benefits and exemptions
The tax benefits and exemptions are applicable from the date the established entity obtains its trading license to conduct activities in the ILBZ and will end on the earlier of:
- 50 years from the day the license is obtained, or
- The date when the established entity ceases its activity in the ILBZ
Tax benefits and exemptions
The tax benefits and exemptions that are available to established entities include:
- Income tax at a zero percent (0%) rate for income derived from the prescribed activities
- Permanent establishments of non-resident entities conducting activities related to goods in Saudi Arabia are disregarded, provided the non-resident has no physical presence in Saudi Arabia
- An exemption from withholding tax for the following payments related the prescribed activities:
- Loan charges
- Royalties paid to related persons
- Payments for services (including technical services) to related persons
- Suspended customs duty for goods imported into or transported within the ILBZ (no customs duty is applicable until goods enter the Saudi mainland for domestic consumption) and
- No value added tax (VAT) on supplies or transactions occurring with respect to goods in the ILBZ (such supplies would be outside the scope of VAT because the supplies occur under customs duty suspension)
The tax bylaws refer to a special VAT refund scheme that will be introduced to allow ILBZ entities to recover input VAT incurred on services acquired from VAT-registered suppliers in Saudi Arabia. The GAZT is expected to issue additional detailed guidance on the application of these tax benefits and exemptions.
The regulations do not address the Zakat. Accordingly, it is expected that the introduction of the ILBZ will not affect the application of the Zakat.
There are “anti-avoidance” rules to deny tax benefits and exemptions to an established entity if that entity or a “related person” of that entity conducts prescribed activities outside ILBZ (“mainland”) but then ceases or substantially reduces these prescribed activities and moves the prescribed activities to be:
- Conducted from the ILBZ by that established entity
- Conducted from the ILBZ by one or more related persons that are also established entities, or
- Conducted from the ILBZ by any other established entity as part of an arrangement to move activities from the mainland to the ILBZ for the purpose of obtaining a tax benefit or an exemption
Accordingly, it appears that established companies that already are conducting prescribed activities in the mainland may benefit from the ILBZ tax benefits and exemptions for prescribed activities carried out in the ILBZ as long as their mainland prescribed activities do not cease or reduce substantially.
The GAZT may also deny tax benefits and exemptions to established entities if they facilitate payments to non-residents on behalf of a “person” (i.e., a natural person, corporate person or the government) not eligible for the tax benefits and exemptions.
An established entity remains subject to the Saudi Arabian income tax law and by-laws as well as the following compliance obligations:
- Submission of an annual confirmation to GAZT that the entity complies with the ILBZ requirements
- Preparation and maintenance of books and records for each year, which separately disclose information relating to prescribed activities and non-prescribed activities (if applicable)
Employment relationships between individuals and established entities are governed by special employment regulations that include the following measures:
- Sponsorship for Saudi work and residency through the ILBZ for non-Gulf Cooperation Council (GCC) country national employees
- Employees of established entities not allowed to work outside the ILBZ without obtaining an express approval
- Equal opportunities to both Saudi and non-Saudi nationals
- Salary may be paid in any currency and into a domestic of foreign bank account
For more information, contact KPMG’s Global Head of International Tax:
Rodney Lawrence | +1 (312) 665 5137 | firstname.lastname@example.org
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