The law also defines residency criteria, introduces a Service Permanent Establishment, and imposes penalties on non-compliant Zakat payers. It addresses BEPS standards, hybrid mismatches, and adopts a Principal Purpose Test. The law also clarifies terms, treats Partnerships as non-transparent, and extends the statute of limitations for audits and refunds to five years. The effective date is expected in Q2 2024, impacting GCC-held businesses, and potentially aligning with Pillar 2 rules on Global Minimum Tax.

1. Profit Shifting and Tax Avoidance (Preferential Regimes)

The proposed tax law introduces measures to address profit shifting and tax avoidance. It establishes a preferential tax regime with special provisions for transactions between related parties involving jurisdictions with tax rates below 15% or lacking certain agreements. Preferential Tax Regimes are defined by criteria such as income tax below 15%, lack of information exchange agreements, and granting tax benefits without requiring economic activities. A joint decision by ZATCA Board and the Ministry of Foreign Affairs will create a blacklist, most probably affecting the UAE, Bahrain, Qatar, and Kuwait as those countries impose no or low-income tax rates. Withholding tax rates for such preferential regimes are set at 20%.

2. Transfer Pricing

The proposed new Income Tax Law introduces significant changes to Transfer Pricing (TP) rules. It focuses on applying the arm’s length principle to related party transactions, aligning with existing TP Bylaws. Entities engaged in cross-border related party transactions must assess whether their counterparts operate in such regimes. Additionally, changes in Withholding Tax rates emphasize the need for entities to reassess TP policies.

 3. Withholding Tax

All residents, regardless of taxpayer status, and every Permanent Establishment (PE) in the Kingdom are required to withhold taxes from payments made to Non-Resident Persons. The withholding tax rates are as follows:

– 5% on dividends, rental payments, and income from debt claims between related companies. Profit transfers from a PE to any other Related Person in another jurisdiction are considered dividends.

– 10% on payments for services (excluding employment-related compensation).

– 15% on royalties, including intellectual property rights.

– 20% on payments to a Resident Person or PE situated in a jurisdiction with a preferential tax regime

4. Other Provisions

The proposed tax legislation includes provisions on taxable income (with income derived from employment still being exempt), expanding the definition and treatment of partnerships (non-transparent tax treatment), clarifying terms, and considering entities like endowments and investment funds as legal persons. It outlines limits on deductible cash expenses, including real estate transaction tax and non-recoverable input VAT. Certain capital gains and participation income are exempt under specified conditions. The interpretation of undefined terms involves references to accounting standards, by-laws, international agreements, tax laws, and regulations. Criteria for establishing a Permanent Establishment (PE) for non-residents are detailed, and the source of income is specified for various activities. Special provisions exclude gains or losses from merger and demerger transactions from taxable income under specific conditions. Tax credits and incentives, including a credit for foreign tax paid abroad and incentives for green investments, are introduced.