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When it comes to managing your finances in Saudi Arabia, taxes are important, especially when it comes to Capital Gains Tax (CGT). Even if you are a local investor or a business owner, personal income is complicated, or even if you are not, understanding how Capital Gains Tax works is necessary. A country that is also implementing e-invoicing in Saudi Arabia, Saudi Arabia has simplified its tax policies to provide a more efficient system for both individuals and businesses. The benefits of e-invoicing in Riyadh are already clear for those based in Riyadh, as it simplifies tax related processes and makes them more transparent for everyone.
In this blog, we will explain Capital Gains Tax and how it is applied in Saudi Arabia so you are prepared for any transactions that may affect your finances. Many are curious as to how Capital Gains Tax works under Saudi Arabia’s investor friendly tax system, with regards to different types of investments. In addition, we’ll also look at how the new e-invoicing in Saudi Arabia system goes hand in hand with those changes to make tax reporting and compliance as easy as it’s ever been.
Capital gains are gains that are earned from the sale of an asset such as shares, real estate, business assets among others. It is computed by deducting the original cost of acquisition or cost recovery base from the selling price of the concerned asset. Capital Gains Tax (CGT) is the tax that is paid on the profit that has been made from such transactions.
CGT is charged on the disposal of shares in Saudi resident companies, and other business assets such as business-use properties. This tax is charged on both non-residents and residents but at different rates depending on the status of the resident.
Any person who sells shares in Saudi companies is subjected to a tax of 20% on the profits realized. For resident shareholders, the tax rate is either 2.5% Zakat or 20% on the ordinary income depending on the type of the resident shareholder. These rates help in the taxing of capital gains arising from various transactions whether for the residents or non-residents.
The Saudi Arabia’s CGT regime comprises of the following provisions:
1. Capital gains on transfer of shares or securities listed on the Tadawul.
A group of companies operating within Saudi Arabia does not lead to either capital gain or loss from internal organizational adjustments during transactions. The tax exemption extends to direct or indirect movements of shares or securities when made within fully owned group subsidiaries of Saudi Arabian companies. Assets need to stay within group operations during the two-year period starting from their transfer date. The transfer qualifies for CGT exemption when both conditions are fulfilled.
2. Capital gain on transfer of shares or assets between companies within the same group
If the assets or shares are transferred from one company to another within the same group then no capital gain or loss is allowed for the purpose of tax. This provision means that no CGT is chargeable on the transaction and it does not alter the tax position of the companies.
3. Capital gain that a resident shareholder makes when disposing shares in an entity resident in KSA
Any resident shareholders who sell their shares in Saudi-based companies are liable to pay either Zakat at 2.5% of the share’s market value or a 20% tax on the capital gain depending on the source of income of the shareholder. The decision to take either of these rates depends with the tax status of the shareholder as it relates to capital gains tax.
4. The capital gain that arises from the disposal of shares in an entity resident in the Kingdom of Saudi Arabia by a non-resident individual
Any foreign investors who dispose of their shares in Saudi-based companies are liable to be taxed at the rate of 20 per cent CGT. It is a tax levied on the amount received by the vendor and the consideration received for the shares less its cost base. This tax regime is used for taxation of non-resident investors in Saudi Arabian shares and other securities.
5. Capital gain on disposal of property or assets used in business activity
In the case of sales of business assets like property, the gains are usually considered as ordinary income and are taxed depending on the status of the shareholder. If the proceeds are used to purchase other assets that are classified as capital assets within the next 12 months, the gain may be deferred. Zakat for the business is charged at 2.5% or corporate tax at 20% depending on the legal status of the seller.
In Saudi Arabia, CGT is calculated by the difference between the selling price of the asset and the cost of the asset. Here’s how it works:
1. Selling Price Calculation:
In Saudi Arabia, the selling price of an asset is the maximum of three values consisting of contract value, market value, and book value. Contract price is the price that was agreed upon in the course of the sale contract. The market value is the value of the asset at the time of valuation and it is the value that is obtainable in the market. It is the value assigned to the asset by the company according to the company’s balance sheet and the accounting standards.
2. Cost Base Calculation:
The cost base of an asset is the actual cost of the asset or the cost at which the asset was acquired by the business entity. This entails the cost incurred in acquiring the asset and any other related costs incurred in the process like the fees, taxes among others or enhancements made to the asset. Cost base is then used to arrive at the capital gain by deducting it from the selling price in a bid to arrive at the taxable profit.
Capital gains tax is one of the most important taxes that individuals and companies have to pay to the government depending on the profits they make from the sale of an asset or property that has appreciated in value over time or any other capital asset which they hold for investment purposes.
In the case of the sale, the selling party is required to declare the capital gain to the General Authority of Zakat and Tax (GAZT). The payment of the tax is expected within sixty days from the date of sale. The last CGT is usually computed when a firm’s articles of association are altered and notarized, which formalizes the transaction. Nevertheless, GAZT may opt for the date of the Sale and Purchase Agreement (SPA) if this leads to a higher tax amount for the seller. This makes it possible to change the date in situations when the SPA date results in a better taxation treatment.
Saudi Arabia has a relatively moderate policy on CGT that is favorable to investors as compared to what is practiced in many other countries. Here is how the situation in the USA compares to other countries:
1. UAE Capital Gains Tax Regime:
The UAE has been particularly good for its tax climate since it does not apply CGT on the people. This implies that investors can freely sell personal investments including shares or real estate without having to bother about taxes, thus making it a good investment hub.
2. Kuwait Capital Gains Tax Regime:
The gains arising from the sale of assets in Kuwait are classified as business income in the usual sense of the term. These profits are subject to the corporate income tax rate of 15% as mentioned above. Hence, capital gains are subjected to taxation together with other business incomes in Kuwait.
3. Egypt Capital Gains Tax Regime:
It is worthy of note that Egypt levies 10% tax on profits that are generated from the sale of shares in the stock market. However, there is an exception that is bonus shares which are issued to the shareholders of the company in form of dividends, this is a good rule for the investors since they are not taxed under Capital Gains Tax.
4. US Capital Gains Tax Regime:
The United States has more progressive Capital Gains Tax system ranging from 0% and 20% depending on the investor’s income status as well as period the asset was held. It is important to note that the gains arising from holding capital assets for less than a year are charged at higher tax rates than those for holding capital assets for more than a year.
5. UK Capital Gains Tax Regime:
The UK levies Capital Gains Tax on individuals who are either residents in the UK or those who dispose of assets located in the United Kingdom. The tax is progressive based on the amount of income of the taxpayer and the category of property sold but some property such as primary residence is exempted under certain circumstances.
In conclusion, it can be stated that Saudi Arabia’s CGT is relatively beneficial for investors than in other countries within the region. The country has no CGT on most individual capital gains and has a relatively simple tax regime which makes the Kingdom of Saudi Arabia an attractive destination for investors in terms of tax. Also, through e-invoicing in Saudi Arabia, the compliance with tax has been made easy since it has been made easier for the business entities as well as individuals to report on their taxes.
Other countries such as the UAE provide even more friendly environment for the individual investors in terms of taxes; however, the straightforward and transparent CGT system of Saudi Arabia along with its developing financial system is full of opportunities. As a resident or non-resident investor, it is important to know how Capital Gains Tax is charged in order to make sound economic decisions within the Kingdom.
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