A non-Saudi individual has two separate income streams in Saudi Arabia: a salaried job as an employee of a Saudi company, and a side consultancy practice run under his own personally licensed sole establishment, invoicing outside clients directly. Under the Saudi Income Tax Law, how are these two income streams generally taxed?
- Both are exempt from tax, because Saudi Arabia has no personal income tax on natural persons of any kind
- Both are subject to income tax at 20%, because any income earned by a non-Saudi individual physically working within Saudi Arabia falls within the scope of the Income Tax Law regardless of its source
- The salaried employment income is taxed at graduated individual rates, while the consultancy income is exempt because it is earned personally by a natural person rather than by a registered company
- The salaried employment income is not subject to income tax, since Saudi Arabia does not tax wages and salaries, while the net profit of the consultancy practice is subject to income tax under the same mechanism applied to a company, because it is business or professional income earned by a non-Saudi
Why D? And why not the others?
Correct answer: D. The salaried employment income is not subject to income tax, since Saudi Arabia does not tax wages and salaries, while the net profit of the consultancy practice is subject to income tax under the same mechanism applied to a company, because it is business or professional income earned by a non-Saudi
Saudi Arabia has no personal income tax on wages or salaries, so the employment income is untaxed regardless of the employee's nationality, but a non-Saudi individual's business or professional income, such as net profit from a personally licensed consultancy practice, is taxed through the same mechanism applied to a company, at the corporate rate, because it is business income earned by a non-Saudi rather than employment income. The option exempting both streams is wrong because it ignores that business and professional income earned by a non-Saudi individual is squarely within the scope of the Income Tax Law even though wages are not. The option taxing both streams at 20% is wrong because it treats mere physical presence and non-Saudi nationality as sufficient to tax employment income, when the actual trigger is the type of income, business profit versus wages, not the individual's location or nationality alone. The option describing graduated individual tax rates on salary and an exemption for the consultancy income reverses the correct treatment entirely: Saudi Arabia has no graduated personal rate schedule at all, and it is the consultancy profit, not the salary, that is taxed.
Source: Saudi Income Tax Law (Royal Decree No. M/1 of 1425H), Article 2 (persons and income subject to tax)