ZATCA Compliance in 2026: What Foreign Investors Need to Know Before Forming a Company in Saudi Arabia

Saudi Arabia’s economic landscape, driven by Vision 2030, presents significant opportunities for foreign direct investment (FDI). However, navigating the Kingdom’s evolving tax and regulatory environment, particularly with the Zakat, Tax and Customs Authority (ZATCA), is paramount for successful market entry and sustainable operations. 

In 2026, ZATCA compliance is more critical than ever, characterized by digital transformation, stricter enforcement, and expanded regulations. Foreign investors must understand the nuances of Corporate Income Tax (CIT), Zakat, Withholding Tax (WHT), and the mandatory e-invoicing system (FATOORA) to mitigate risks and capitalize on opportunities. Non-compliance can lead to substantial penalties, operational disruptions, and reputational damage. This article provides a comprehensive guide for foreign investors, multinational corporations, and international SMEs, offering clarity on the regulatory framework and a strategic roadmap for compliance.

Understanding ZATCA in 2026

ZATCA, the Zakat, Tax and Customs Authority, is the primary governmental body responsible for overseeing tax and customs regulations in Saudi Arabia. Established in 2021 through the merger of the General Authority of Zakat and Tax (GAZT) and the General Authority of Customs, ZATCA plays a pivotal role in the Kingdom’s fiscal policy and economic diversification efforts under Saudi Vision 2030. The authority’s mandate extends to ensuring tax compliance, combating tax evasion, and facilitating trade through modernized customs procedures.

The evolution from GAZT to ZATCA signifies a strategic move towards a more integrated and efficient regulatory framework. This consolidation has streamlined tax administration and enhanced enforcement capabilities, particularly through digital initiatives. In 2026, ZATCA continues to drive digital transformation, modernizing compliance processes and increasing transparency. This includes the full implementation of the e-invoicing system (FATOORA) and the adoption of advanced data analytics for audit and enforcement, making robust tax governance frameworks essential for all businesses operating in the Kingdom.

Tax Registration Requirements for Foreign-Owned Companies

Foreign investors establishing a presence in Saudi Arabia must adhere to specific tax registration timelines and requirements. The process is intricately linked with obtaining a Ministry of Investment Saudi Arabia (MISA) license and Commercial Registration (CR).

When Foreign Investors Must Register: Generally, foreign entities are required to register with ZATCA once they commence taxable activities or establish a Permanent Establishment (PE) in Saudi Arabia. This includes obtaining a MISA license, which is a prerequisite for foreign investment, and subsequently registering the entity with the Ministry of Commerce to obtain a Commercial Registration (CR). The CR number is then used for ZATCA registration.

MISA Licensing Interplay: The MISA license dictates the scope of foreign investment activities and is a foundational step. Once the MISA license is secured and the company is legally established with a CR, ZATCA registration becomes mandatory for various tax types, including Corporate Income Tax (CIT) and Value Added Tax (VAT).

ZATCA Registration Timelines: It is crucial to initiate ZATCA registration promptly after obtaining the CR. Delays can lead to penalties. While specific timelines can vary, it is advisable to complete all tax registrations within 30 days of the CR issuance to ensure compliance from the outset.

VAT Registration Thresholds:

• Mandatory Registration: Businesses with annual taxable supplies exceeding SAR 375,000 are mandatorily required to register for VAT.
• Voluntary Registration: Companies with annual taxable supplies between SAR 187,500 and SAR 375,000 may voluntarily register for VAT. Voluntary registration can be beneficial for businesses that incur significant input VAT, allowing them to reclaim it.

Branch vs. Subsidiary Tax Treatment: The choice between establishing a branch or a subsidiary impacts tax treatment. A branch of a foreign company is typically treated as an extension of the parent company and is subject to CIT on its Saudi-source income. A subsidiary, being a separate legal entity, is also subject to CIT. However, the distinction can be significant for Zakat purposes in mixed-ownership structures and for the application of Double Taxation Agreements (DTAs).

Practical Examples:

• Scenario 1 (Mandatory VAT): A foreign-owned consulting firm establishes a subsidiary in Riyadh and projects annual service revenue of SAR 500,000. This firm must mandatorily register for VAT due to exceeding the SAR 375,000 threshold.
• Scenario 2 (Voluntary VAT): A new foreign-owned tech startup anticipates SAR 200,000 in annual sales but expects high initial costs with significant input VAT. This company can opt for voluntary VAT registration to reclaim input VAT, improving cash flow.

Corporate Income Tax (CIT) for Foreign Investors

Foreign investors in Saudi Arabia are primarily subject to Corporate Income Tax (CIT) on their Saudi-source income. Understanding the applicable rates, obligations, and related regulations is vital for effective tax planning.

Applicable Tax Rates: The standard Corporate Income Tax (CIT) rate for foreign-owned companies and foreign shareholders in mixed-ownership entities is a flat 20% on net adjusted profits. This rate applies to wholly foreign-owned companies, foreign partners in joint ventures, and non-resident companies with a Permanent Establishment (PE) in Saudi Arabia. Certain industries, such as oil and gas extraction, are subject to higher tax rates, ranging from 50% to 80%. However, these higher rates generally do not apply to general foreign investors in other sectors.

Withholding Tax (WHT) Obligations: Withholding Tax (WHT) is levied on payments made by a resident entity in Saudi Arabia to a non-resident entity for services rendered or income generated from a Saudi source. The WHT rates vary depending on the type of service or income:

• Dividends: 5%
• Royalties: 15%
• Management Fees: 20%
• Technical and Consultancy Services: 5%
• Interest, Rent, and other services: Rates typically range from 5% to 15%.

It is crucial for foreign investors to correctly identify the nature of payments to non-residents and apply the appropriate WHT rate. WHT must be paid to ZATCA within the first ten days of the month following the month in which the payment was made or became due.

Permanent Establishment (PE) Risk: A Permanent Establishment (PE) is a fixed place of business through which the business of an enterprise is wholly or partly carried on. In Saudi Arabia, a PE can be triggered by a physical presence (e.g., a branch, office, workshop, construction site lasting more than six months), a dependent agent habitually concluding contracts, or the provision of services for a certain duration. The establishment of a PE subjects the foreign entity to Saudi CIT on the profits attributable to that PE. ZATCA is expected to increase its monitoring of PE risks in 2026, making it essential for foreign companies to assess their activities carefully to avoid unintended PE creation.

Double Taxation Agreements (DTAs): Saudi Arabia has an extensive network of Double Taxation Agreements (DTAs) with various countries. These agreements aim to prevent double taxation of income and can reduce or eliminate WHT on certain payments, such as dividends, interest, and royalties. Foreign investors should leverage these DTAs to optimize their tax position, provided they meet the specific conditions outlined in the relevant agreement.

Transfer Pricing Regulations: Saudi Arabia’s transfer pricing (TP) regulations are largely aligned with the OECD Transfer Pricing Guidelines. ZATCA released the third edition of its TP Guidelines in June 2024, expanding compliance requirements to include all Zakat payers as of January 1, 2024. Multinational enterprises operating in Saudi Arabia are required to prepare and maintain comprehensive TP documentation, including a Master File, Local File, and Country-by-Country Report (CbCR), to demonstrate that intercompany transactions are conducted at arm’s length. Non-compliance with TP regulations can result in significant penalties.

Thin Capitalization Rules: Saudi tax regulations include thin capitalization rules that limit the deductibility of interest expenses on loans from related parties. These rules aim to prevent excessive debt financing from related parties to reduce taxable income. Foreign investors should be aware of these limitations when structuring their financing arrangements.

Filing Deadlines and Payment Timelines: Corporate income tax returns must be filed with ZATCA within 120 days from the end of the company’s fiscal year. The tax due must be paid either before or at the time of filing the return. Extensions for filing may be granted under specific circumstances, but it is generally advisable to adhere to the statutory deadlines to avoid penalties.

VAT Compliance in 2026

Value Added Tax (VAT) is a critical component of Saudi Arabia’s tax system, impacting most businesses. In 2026, VAT compliance, particularly with the ongoing rollout of e-invoicing, demands meticulous attention from foreign investors.

Standard VAT Rate: The standard VAT rate in Saudi Arabia remains at 15%. This rate applies to most goods and services supplied within the Kingdom, with certain exceptions for zero-rated and exempt supplies.

Zero-rated and Exempt Supplies:

• Zero-rated supplies include exports of goods and services, international transport, and certain medicines and medical equipment. Businesses making zero-rated supplies can still reclaim input VAT.
• Exempt supplies include financial services, residential real estate rentals, and certain government services. Businesses making exempt supplies cannot reclaim input VAT related to these supplies.

VAT Registration Thresholds: As previously mentioned, mandatory VAT registration is required for businesses with annual taxable supplies exceeding SAR 375,000, while voluntary registration is available for those with supplies between SAR 187,500 and SAR 375,000. It is crucial for foreign investors to continuously monitor their turnover to ensure timely registration.

E-invoicing (FATOORA) Phase 1 & Phase 2 Compliance: Saudi Arabia’s e-invoicing system, FATOORA, is a cornerstone of ZATCA’s digital transformation efforts. Phase 1 (Generation Phase) mandated the generation of electronic invoices with specific technical requirements. Phase 2 (Integration Phase), which began rolling out in waves from January 1, 2023, requires the integration of taxpayer’s systems with ZATCA’s platform.

• Phase 1 Requirements: Businesses must issue electronic invoices in a structured digital format, including mandatory fields such as seller name, VAT registration number, invoice timestamp, VAT total, total amount with VAT, unique invoice identifier (UUID), and a QR code for simplified invoices. Digital signatures, tamper-proof generation, and cryptographic stamping are also required.
• Phase 2 Integration: This phase mandates real-time communication with ZATCA’s Fatoora system via APIs. Key requirements include invoice clearance for Business-to-Business (B2B) transactions and reporting for Business-to-Consumer (B2C) transactions. Digital signing using Public Key Infrastructure (PKI), generation of invoices in XML or PDF/A-3 with embedded XML, and inclusion of ZATCA-generated cryptographic stamps and QR codes are essential.

Integration Requirements: Foreign investors must ensure their Enterprise Resource Planning (ERP), Point of Sale (POS), or billing software is capable of real-time communication with ZATCA’s Fatoora system. This involves API integration, testing in a sandbox environment, and obtaining platform readiness approval from ZATCA. The system must be able to securely transmit invoice data and handle ZATCA’s validation responses (approved, rejected, or correction requests).

Penalties for Non-compliance: Non-compliance with VAT regulations, including e-invoicing requirements, can lead to significant penalties. These include fines for late registration, late filing of VAT returns, underreporting of VAT, and technical non-compliance with FATOORA specifications. ZATCA is increasing its audit activities, and digital audit triggers are becoming more sophisticated, making adherence to all VAT rules critical.

Cross-border Transactions and Reverse Charge Mechanism: For cross-border transactions, foreign investors need to understand the application of VAT, particularly the reverse charge mechanism. When a non-resident supplies services to a VAT-registered business in Saudi Arabia, the recipient business is generally required to account for the VAT under the reverse charge mechanism. This shifts the responsibility for reporting and paying VAT from the non-resident supplier to the resident recipient.

Real-world Scenarios:

• Import/Export Businesses: A foreign-owned trading company importing goods into Saudi Arabia will pay VAT at customs. When selling these goods domestically, it must charge 15% VAT to its customers. For exports, the supplies are zero-rated, allowing the company to reclaim input VAT.
• Service Providers: A foreign-owned IT consulting firm providing services to Saudi clients must charge 15% VAT if it is VAT-registered. If it receives services from a non-resident provider, it may need to apply the reverse charge mechanism.

E-Invoicing (FATOORA) – Mandatory Digital Compliance

Saudi Arabia’s e-invoicing system, FATOORA, represents a significant leap towards mandatory digital compliance. For foreign investors, particularly those entering the market in 2026, a deep understanding of Phase 2 integration requirements is paramount.

Phase 2 Integration Requirements: Phase 2 of FATOORA, the Integration Phase, mandates that taxpayers’ systems directly integrate with ZATCA’s platform. This involves a shift from merely generating e-invoices to transmitting them electronically to ZATCA for validation and clearance. Key aspects include:

• API Integration with ZATCA Systems: Businesses must establish a secure API connection between their invoicing systems (ERP, POS, accounting software) and ZATCA’s Fatoora portal. This enables real-time or near real-time exchange of invoice data.
• Cryptographic Stamping: Each e-invoice must be cryptographically stamped by the taxpayer’s system before submission to ZATCA. This involves using digital certificates and Public Key Infrastructure (PKI) to ensure the authenticity and integrity of the invoice data.
• Clearance vs. Reporting Model: Saudi Arabia employs a clearance model for B2B (Business-to-Business) tax invoices and a reporting model for B2C (Business-to-Consumer) simplified tax invoices. Under the clearance model, B2B invoices must be submitted to ZATCA for validation and approval before being issued to the customer. For B2C invoices, a reporting model applies, where invoices are reported to ZATCA within 24 hours of issuance.
• ERP Readiness for Foreign Companies: Foreign companies must ensure their ERP systems are configured to meet FATOORA’s technical specifications. This includes generating invoices in the required XML or PDF/A-3 format with embedded XML, handling QR codes, and managing the cryptographic stamping process. Many foreign companies may need to upgrade or adapt their existing ERP solutions or implement ZATCA-compliant third-party software.

Compliance Risks for New Entrants in 2026: New foreign entrants in 2026 face unique compliance risks related to FATOORA. These include:

• Underestimation of Integration Complexity: The technical integration with ZATCA’s APIs can be complex and time-consuming, requiring specialized IT expertise.
• Lack of Awareness of Wave Deadlines: Phase 2 is rolled out in waves, with specific deadlines for different taxpayer groups based on their annual taxable revenue. New entrants must identify their applicable wave and ensure timely integration.
• Technical Non-compliance: Errors in XML schema, missing cryptographic stamps, or incorrect QR code formatting can lead to invoice rejections and penalties.
• Data Security Concerns: Ensuring secure transmission and storage of sensitive invoice data is critical to avoid breaches and comply with data protection regulations.

Zakat vs. Corporate Tax: Key Differences

Saudi Arabia operates a dual tax system, distinguishing between Zakat and Corporate Income Tax (CIT). Foreign investors, especially those in mixed-ownership structures, must understand these differences.

When Zakat Applies: Zakat is an Islamic religious levy applicable to Saudi nationals, GCC citizens, and companies wholly owned by them. It is calculated at a rate of 2.5% on the Zakat base, which typically includes owner’s equity, working capital, retained earnings, and certain balance sheet items. Zakat is not a tax on income but rather on wealth and assets.

Mixed Ownership Structures: In companies with mixed ownership (i.e., both Saudi/GCC and foreign shareholders), both Zakat and CIT apply proportionally. The company’s profits are allocated based on the ownership percentages. The Saudi/GCC share of the profits is subject to Zakat, while the foreign share is subject to CIT.

Treatment of GCC Shareholders: GCC (Gulf Cooperation Council) shareholders are treated similarly to Saudi nationals for Zakat purposes. Their share of the company’s profits is subject to Zakat, not CIT.

Allocation Rules Between Saudi and Foreign Ownership: For mixed-ownership entities, the taxable base is effectively split. For example, if a company is 60% Saudi-owned and 40% foreign-owned, 60% of the Zakat base will be subject to Zakat, and 40% of the net adjusted profits will be subject to CIT. This requires careful accounting and segregation of financial data to ensure accurate calculation and reporting for both Zakat and CIT obligations.

Common Compliance Mistakes by Foreign Investors

Foreign investors often encounter specific pitfalls when navigating Saudi Arabia’s tax and regulatory landscape. Awareness of these common mistakes can help new entrants avoid costly errors.

Practical Pitfalls:

• Delayed VAT Registration: Failing to register for VAT within the stipulated timelines after exceeding the mandatory threshold can result in penalties and retroactive tax liabilities.
• Improper WHT Handling: Incorrectly applying WHT rates, failing to withhold tax, or late remittance of WHT to ZATCA are frequent issues. This often stems from a misunderstanding of payment classifications and DTA benefits.
• Transfer Pricing Documentation Failures: Multinational groups often underestimate the complexity and stringent requirements for TP documentation in Saudi Arabia. Lack of a Master File, Local File, or CbCR, or inadequate arm’s length analysis, can lead to significant adjustments and penalties during audits.
• Misclassification of Permanent Establishment: Foreign companies sometimes inadvertently create a PE through their activities (e.g., prolonged service provision, dependent agents) without recognizing the tax implications. This can lead to unexpected CIT liabilities.
• E-invoicing Technical Non-compliance: Errors in the technical aspects of FATOORA integration, such as incorrect XML formats, missing cryptographic stamps, or failure to integrate with ZATCA’s APIs, can result in invoice rejections and fines.
• Late Filings and Penalties: Missing deadlines for tax returns (CIT, VAT, WHT) and payments is a common mistake, leading to late filing penalties (up to 25% of tax due) and late payment penalties (1% for every 30 days of delay).

Penalties and Enforcement in 2026

ZATCA maintains a strict enforcement regime, and penalties for non-compliance are substantial. In 2026, with enhanced digital capabilities, audit activities are expected to intensify.

Administrative Penalties: ZATCA imposes various administrative penalties for tax infractions. These can range from fines for procedural errors to significant financial penalties for substantive non-compliance. For instance, late filing of tax returns can incur penalties of 5% to 25% of the tax due.

VAT Non-compliance Fines: Fines related to VAT non-compliance include penalties for late VAT registration, failure to issue valid tax invoices, incorrect VAT calculations, and late payment of VAT. The penalty for late payment of VAT is 1% for every 30 days of delay.

E-invoicing Penalties: Non-compliance with FATOORA e-invoicing requirements, such as failure to integrate systems, issuing non-compliant e-invoices, or tampering with e-invoicing systems, can lead to specific penalties. These fines are designed to ensure the integrity and widespread adoption of the digital invoicing system.

Tax Evasion Consequences: Tax evasion carries severe consequences, including substantial fines, imprisonment, and reputational damage. ZATCA is equipped with advanced tools to detect and prosecute cases of deliberate tax evasion.

Increased Audit Activity: ZATCA is continuously enhancing its audit capabilities, leveraging data analytics and digital tools. Foreign investors should anticipate increased scrutiny and be prepared for comprehensive tax audits. Robust record-keeping and transparent financial reporting are essential.

Digital Audit Triggers: With the full implementation of FATOORA and other digital initiatives, ZATCA’s systems can automatically flag discrepancies or non-compliance issues, acting as digital audit triggers. This means that errors or omissions can be detected more rapidly, leading to quicker enforcement actions.

Step-by-Step Compliance Roadmap for Foreign Investors

Establishing a clear compliance roadmap is crucial for foreign investors to navigate the Saudi tax landscape effectively.

Structured Checklist:

1. Pre-incorporation Planning:

• Conduct a thorough tax due diligence to understand the implications of the chosen legal structure (branch vs. subsidiary) and ownership (wholly foreign vs. mixed).
• Assess potential PE risks based on planned activities.
• Evaluate the applicability of DTAs to optimize WHT and other tax liabilities.
• Develop a robust transfer pricing policy if part of a multinational group.

2. Post-CR Tax Registration:

• Immediately after obtaining the Commercial Registration (CR), register with ZATCA for Corporate Income Tax (CIT) and, if applicable, Zakat.
• Ensure all necessary documents are prepared and submitted accurately.

3. VAT Readiness:

• Monitor projected annual taxable supplies to determine mandatory or voluntary VAT registration requirements.
• Register for VAT promptly once the threshold is met or if voluntary registration is strategically beneficial.
• Ensure accounting systems are configured to handle VAT calculations, input VAT recovery, and output VAT collection.

4. ERP Configuration & FATOORA Integration:

• Assess existing ERP/POS systems for FATOORA Phase 2 compliance.
• Engage with ZATCA-compliant solution providers for API integration.
• Configure systems for cryptographic stamping, QR code generation, and XML/PDF/A-3 invoice formats.
• Conduct thorough testing in ZATCA’s sandbox environment.
• Obtain ZATCA platform readiness approval and activate production APIs.

5. Ongoing Reporting Calendar:

• Establish a comprehensive tax compliance calendar, detailing deadlines for CIT, Zakat, VAT, and WHT filings and payments.
• Implement internal controls and processes to ensure timely data collection and submission.

6. Annual Compliance Cycle:

• Prepare and file annual CIT/Zakat returns within 120 days of the fiscal year-end.
• Submit audited financial statements as required.
• Update and submit transfer pricing documentation annually.
• Conduct regular internal tax reviews to identify and rectify any compliance gaps.

Strategic Planning Considerations

Beyond mere compliance, foreign investors should engage in strategic tax planning to optimize their operations in Saudi Arabia.

Tax Structuring Optimization: Careful consideration of the legal and ownership structure (e.g., branch, limited liability company, joint venture) can significantly impact tax liabilities. Analyzing the tax implications of each structure in the context of the investor’s home country tax regime and Saudi DTAs is crucial.

Holding Company Structures: Utilizing holding company structures, particularly in jurisdictions with favorable tax treaties with Saudi Arabia, can offer benefits such as reduced WHT on dividends and capital gains. However, these structures must have genuine economic substance to be recognized for tax purposes.

Transfer Pricing Planning: Proactive transfer pricing planning, including the development of robust TP policies and documentation, can mitigate risks of ZATCA adjustments and penalties. This involves ensuring that all intercompany transactions (e.g., goods, services, intangibles, financing) are priced at arm’s length.

Use of DTAs: Leveraging Saudi Arabia’s network of Double Taxation Agreements (DTAs) can reduce the tax burden on cross-border income streams. Investors should understand the specific provisions of the DTA between Saudi Arabia and their home country, particularly regarding WHT rates and PE definitions.

Substance Requirements: With increasing global focus on anti-base erosion and profit shifting (BEPS) measures, ZATCA is likely to scrutinize the economic substance of entities operating in Saudi Arabia. Companies must demonstrate genuine business activities, adequate resources, and local management to support their tax positions.

Economic Presence Expectations: Beyond physical presence, ZATCA may consider the economic presence of a foreign entity when determining taxability. This aligns with international trends towards taxing digital economies and ensuring that profits are taxed where economic activities generating them occur.

Outlook for 2026 and Beyond

The Saudi tax and regulatory landscape is dynamic, with continuous reforms driven by Vision 2030 and global tax trends. Foreign investors should anticipate further developments.

Expected Regulatory Tightening: ZATCA is expected to continue strengthening its regulatory framework and enforcement mechanisms. This includes more sophisticated data analytics, increased audit frequency, and stricter penalties for non-compliance.

Digital Compliance Expansion: The digital transformation of tax administration, exemplified by FATOORA, is likely to expand. Future initiatives may include further automation of tax processes, real-time data sharing, and the introduction of new digital compliance requirements.

Alignment with OECD Standards: Saudi Arabia is committed to aligning its tax policies with international best practices, particularly those promoted by the OECD (Organisation for Economic Co-operation and Development). This includes adherence to BEPS initiatives, which will continue to shape TP regulations and international tax rules.

Potential Future Tax Reforms: While the current CIT and VAT rates are stable, the long-term outlook may include further tax reforms to diversify government revenue and enhance the investment environment. Foreign investors should stay abreast of any proposed changes through reliable tax advisory channels.

Conclusion

Navigating ZATCA compliance in 2026 is a critical undertaking for foreign investors seeking to capitalize on the immense opportunities in Saudi Arabia. A proactive and informed approach to Corporate Income Tax, Zakat, Withholding Tax, VAT, and particularly the mandatory e-invoicing system (FATOORA), is essential. By understanding the regulatory framework, anticipating enforcement trends, and implementing a robust compliance roadmap, foreign investors can mitigate risks, ensure operational continuity, and contribute to the Kingdom’s economic growth.

Professional Advisory Disclaimer

This article provides general information and is not intended as tax or legal advice. The tax laws and regulations in Saudi Arabia are complex and subject to change. Foreign investors are strongly advised to consult with qualified tax and legal professionals specializing in Saudi Arabian tax law before making any investment decisions or commencing operations in the Kingdom. This information should not be used as a substitute for professional advice tailored to specific circumstances.

Call to Action

Ensure your entry into the Saudi market is compliant and strategically optimized. Contact a professional tax advisory firm today to discuss your specific needs and develop a tailored compliance strategy for Saudi Arabia.

Learn More

ZATCA. (2026). VAT – Value Added Tax. Retrieved from https://zatca.gov.sa/en/RulesRegulations/VAT/Pages/default.aspx

ExpandWay. (2026). Saudi Corporate Tax Foreign: Full 2026 Guide for Investors. Retrieved from https://expandway.sa/saudi-corporate-tax-for-foreign-companies-2026/

ExpandWay. (2026). ZATCA E-Invoice Integration: 2026 Guide. Retrieved from https://expandway.sa/zatca-e-invoice-system-approval-integration-guide/

PwC. (2026). Saudi Arabia – Corporate – Withholding taxes. Retrieved from https://taxsummaries.pwc.com/saudi-arabia/corporate/withholding-taxes

Deloitte. (2024). ZATCA releases updated third edition of TP Guidelines. Retrieved from https://www.deloitte.com/middle-east/en/services/tax/perspectives/zatca-releases-updated-third-edition-of-tp-guidelines.html

For cross-border transactions where a non-resident provides services to a Saudi resident, the reverse charge mechanism applies. This means the Saudi resident is responsible for accounting for the VAT on the imported service. Foreign investors must have a clear understanding of this mechanism to ensure correct VAT treatment of their international transactions.

Real-world Scenarios:

• Import/Export Business: A foreign-owned company importing goods into Saudi Arabia must account for import VAT. If the company is VAT-registered, it can typically reclaim this VAT. When exporting goods, the supply is zero-rated, allowing the company to reclaim input VAT related to the export.
• Service Provider: A foreign IT consultancy providing services to a Saudi client from outside the Kingdom would not charge Saudi VAT. Instead, the Saudi client would be responsible for accounting for VAT under the reverse charge mechanism.

E-Invoicing (FATOORA) – Mandatory Digital Compliance

Phase 2 of the FATOORA e-invoicing system represents a significant leap in digital compliance for businesses in Saudi Arabia. Foreign investors entering the market in 2026 must be prepared for its stringent technical and operational requirements.

Phase 2 Integration Requirements: As of 2026, the integration phase of FATOORA is well underway, with most businesses expected to be compliant. The core requirement is the real-time integration of taxpayer systems with ZATCA’s Fatoora platform. This involves:

• API Integration: Establishing a secure and reliable connection between the company’s ERP or billing system and ZATCA’s APIs.
• Cryptographic Stamping: Each invoice must be cryptographically stamped to ensure its integrity and authenticity. This involves the use of digital signatures and a unique hash.
• Clearance vs. Reporting Model:
  • Clearance Model (B2B): For business-to-business transactions, invoices must be submitted to ZATCA for real-time clearance before being sent to the customer. ZATCA validates the invoice and, if approved, returns a cryptographically stamped version.
  • Reporting Model (B2C): For business-to-consumer transactions, invoices are reported to ZATCA within 24 hours of the transaction.

ERP Readiness for Foreign Companies: Foreign companies must ensure their ERP systems are configured to meet FATOORA’s requirements. This may involve significant system upgrades, middleware solutions, or adopting a ZATCA-compliant e-invoicing solution. Key considerations include the ability to generate invoices in the required XML format, handle API communications, and manage cryptographic keys.

Compliance Risks for New Entrants in 2026: New entrants in 2026 face the immediate challenge of ensuring their systems are FATOORA-compliant from day one. The risks of non-compliance are substantial, including penalties, operational disruptions, and the inability to issue valid invoices. It is crucial to factor in the time and resources required for e-invoicing implementation during the market entry planning phase.

Zakat vs. Corporate Tax: Key Differences

Understanding the distinction between Zakat and Corporate Income Tax (CIT) is essential, particularly for companies with mixed Saudi and foreign ownership.

When Zakat Applies: Zakat is a religious levy applicable to the Saudi and GCC (Gulf Cooperation Council) shareholders’ portion of a company’s Zakat base. The Zakat base is calculated based on the company’s net worth, not its profit, and the rate is 2.5%.

Mixed Ownership Structures: In companies with both Saudi/GCC and foreign ownership, the tax liability is apportioned. The foreign partner’s share of the profit is subject to CIT (20%), while the Saudi/GCC partner’s share is subject to Zakat (2.5% of their share of the Zakat base).

Allocation Rules: ZATCA has specific rules for allocating the tax base between Saudi and foreign ownership. These rules can be complex and require careful accounting to ensure accurate calculation of both Zakat and CIT liabilities.

Common Compliance Mistakes by Foreign Investors

Foreign investors, particularly those new to the Saudi market, can fall into several common compliance traps. Awareness of these pitfalls is the first step toward avoiding them.

• Delayed VAT Registration: Failing to register for VAT once the mandatory threshold is reached is a frequent mistake that attracts penalties.
• Improper WHT Handling: Incorrectly identifying services subject to WHT or failing to remit the tax on time can lead to significant financial liabilities.
• Transfer Pricing Documentation Failures: Neglecting to prepare and maintain the required Master File, Local File, and CbCR can result in substantial penalties during a tax audit.
• Misclassification of Permanent Establishment: Underestimating the activities that can trigger a PE can lead to unexpected tax liabilities and compliance obligations.
• E-invoicing Technical Non-compliance: Failing to meet the stringent technical requirements of FATOORA Phase 2 can result in penalties and operational disruptions.
• Late Filings and Penalties: Missing deadlines for tax returns and payments can lead to a cascade of penalties that can quickly escalate.

Penalties and Enforcement in 2026

ZATCA’s enforcement capabilities have been significantly enhanced through digital transformation. In 2026, foreign investors can expect a strict and efficient enforcement regime.

• Administrative Penalties: These apply to a range of non-compliance issues, including late registration, late filing, and incorrect tax calculations.
• VAT Non-compliance Fines: Penalties for VAT non-compliance can be severe, including fines for under-reporting VAT and failure to issue correct tax invoices.
• E-invoicing Penalties: Specific penalties apply to non-compliance with FATOORA regulations, ranging from warnings to substantial fines for repeated offenses.
• Tax Evasion Consequences: Tax evasion is treated as a serious offense, with potential consequences including imprisonment and significant financial penalties.
• Increased Audit Activity: ZATCA is leveraging data analytics to identify high-risk taxpayers and conduct more targeted audits. Digital audit triggers, such as inconsistencies in e-invoicing data, are becoming increasingly common.

Step-by-Step Compliance Roadmap for Foreign Investors

A structured approach to compliance is essential for a smooth market entry and sustainable operations in Saudi Arabia.

1. Pre-incorporation Planning:
   • Conduct a thorough tax and legal due diligence.
   • Determine the optimal corporate structure (branch vs. subsidiary).
   • Assess the impact of DTAs.
   • Develop a preliminary transfer pricing strategy.
2. Post-CR Tax Registration:
   • Obtain a MISA license and Commercial Registration (CR).
   • Register with ZATCA for CIT, VAT, and WHT as applicable.
   • Complete all registrations within 30 days of CR issuance.
3. VAT Readiness:
   • Determine VAT registration obligations (mandatory or voluntary).
   • Configure accounting systems to handle VAT correctly.
   • Ensure the ability to distinguish between standard, zero-rated, and exempt supplies.
4. ERP Configuration for E-invoicing:
   • Select and implement a ZATCA-compliant e-invoicing solution.
   • Complete API integration and testing with the Fatoora platform.
   • Obtain platform readiness approval from ZATCA.
5. Ongoing Reporting Calendar:
   • Establish a clear calendar for all tax filing and payment deadlines (VAT, WHT, CIT).
   • Implement internal controls to ensure timely and accurate reporting.
6. Annual Compliance Cycle:
   • Prepare and file the annual CIT return within 120 days of the fiscal year-end.
   • Prepare and maintain annual transfer pricing documentation.
   • Conduct an annual review of the company’s tax position and compliance status.

Strategic Planning Considerations

Beyond basic compliance, strategic tax planning can create significant value for foreign investors.

• Tax Structuring Optimization: Choosing the right legal structure and financing arrangements can optimize the overall tax burden.
• Holding Company Structures: Utilizing holding companies in favorable jurisdictions can offer tax benefits, subject to substance requirements.
• Transfer Pricing Planning: Proactive transfer pricing planning can help manage tax risks and align with the company’s value chain.
• Use of DTAs: Leveraging Saudi Arabia’s DTA network can reduce withholding taxes and prevent double taxation.
• Substance Requirements: It is crucial to ensure that any tax planning structures have sufficient economic substance to withstand scrutiny from ZATCA.

Outlook for 2026 and Beyond

The regulatory landscape in Saudi Arabia is expected to continue evolving. Foreign investors should anticipate:

• Expected Regulatory Tightening: ZATCA is likely to continue refining its regulations and closing loopholes.
• Digital Compliance Expansion: The scope of digital compliance is expected to expand beyond e-invoicing to other areas of tax administration.
• Alignment with OECD Standards: Saudi Arabia will continue to align its tax policies with international best practices, including the OECD’s BEPS 2.0 framework.
• Potential Future Tax Reforms: While the current tax framework is relatively stable, foreign investors should monitor for potential future reforms as the Kingdom continues to diversify its economy.

FAQ Section

1. What is the biggest tax challenge for new foreign investors in Saudi Arabia?

The biggest challenge is often navigating the complexities of the FATOORA e-invoicing system. Ensuring ERP readiness and full compliance from day one is critical and can be a significant undertaking.

2. Can I get a VAT refund if my input VAT exceeds my output VAT?

Yes, VAT-registered businesses can claim a refund from ZATCA for excess input VAT. The process involves submitting a refund claim through the ZATCA portal.

3. How important is transfer pricing for a small foreign-owned subsidiary?

Transfer pricing is important for all foreign-owned subsidiaries, regardless of size, that engage in transactions with related parties. ZATCA requires all such entities to have appropriate TP documentation.

4. Are free zone entities subject to the same tax rules?

Entities in Saudi Arabia’s special economic zones may be subject to different tax incentives, such as reduced CIT rates. However, they are generally still required to comply with VAT and e-invoicing regulations.

5. What is the first step I should take to ensure tax compliance in Saudi Arabia?

The first step is to seek professional tax and legal advice before establishing your business. This will help you choose the right corporate structure and develop a comprehensive compliance strategy.

6. Is it better to establish a branch or a subsidiary in Saudi Arabia?

The choice depends on various factors, including your business objectives, liability considerations, and tax planning strategy. The comparison table above provides a starting point, but a detailed analysis with a professional advisor is recommended.

7. How has the move from GAZT to ZATCA affected taxpayers?

The consolidation has led to a more integrated and efficient tax administration. For taxpayers, this means more streamlined processes but also stricter enforcement and a greater emphasis on digital compliance.

Planning your entry into the Saudi market? Ensure you are fully prepared for the Kingdom’s tax and regulatory landscape. Contact our team of experienced advisors today for a comprehensive consultation on ZATCA compliance and strategic tax planning.