How UAE Companies Can Manage Tax in Saudi Arabia for Successful Expansion

As more and more UAE businesses look to expand into Saudi Arabia, understanding the tax implications from a UAE perspective is crucial for strategic planning and compliance. A UAE company can enter the KSA market either by operating as a UAE company, by incorporating a KSA company, or by establishing a foreign branch.

The UAE company should carefully weigh the pros and cons of establishing a company or a branch in KSA to ensure the most efficient expansion, considering not only tax implications but also legal, regulatory, and compliance aspects. Here is an overview of the key considerations for UAE companies expanding their business into KSA by establishing a branch, from the UAE tax perspective.

Understanding the Taxation of Foreign Source Income in KSA

A UAE tax-resident company is subject to corporate tax on its worldwide income, including income derived from both within and outside the UAE. To mitigate and prevent potential double taxation of foreign source income, the UAE Corporate Tax Law exempts foreign source income via the Foreign Permanent Establishment exemption.

The UAE company can elect in the corporate tax filing to disregard the income and associated expenses of its foreign permanent establishment (e.g., branch) when determining taxable income, if the foreign branch is subject to corporate tax, or a tax of a similar character, at a rate not less than 9% under the applicable tax legislation of the foreign jurisdiction in which it is located. Since the branch in KSA would generally be subject to KSA corporate tax at 20%, this condition is met.

The KSA branch is treated as an independent entity separate from the UAE head office, meaning the net income of the KSA branch is exempt when determining the taxable income of the UAE resident company, i.e., the UAE head office.

Repatriation of Profits from a Saudi Arabia Branch to the UAE

The repatriation of surplus funds from the KSA branch to its head office in the UAE is considered as a receipt of own funds by the UAE company, since the branch and head office are the same legal entity. Hence, the repatriation transaction is not a taxable event from the UAE tax perspective and is ignored for corporate tax purposes.

Transfer Pricing Considerations for UAE Companies in Saudi Arabia

When expanding into Saudi Arabia, UAE companies must navigate transfer pricing regulations. The UAE has implemented transfer pricing rules aligned with OECD guidelines, requiring that intercompany transactions be conducted at arm’s length. The KSA branch is considered a related party of the UAE head office. Therefore, any transactions between the KSA branch and its UAE head office, or other related parties of the UAE head office, must adhere to the arm’s length principle.

Conclusion: Navigating Tax in Saudi Arabia for UAE Companies

Expanding into Saudi Arabia presents promising opportunities for UAE businesses but also introduces new tax considerations. Understanding and managing the implications of transfer pricing, VAT, double taxation agreements, and corporate taxes are essential for a smooth expansion process. Consulting with tax professionals knowledgeable in both UAE and Saudi tax regulations can help navigate these complexities and optimize tax efficiency.

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