Saudi Arabia’s corporate income tax framework differentiates significantly between hydrocarbon income and non-hydrocarbon income. This dual structure ensures that companies engaged in oil and gas exploration, production, and refining pay higher rates compared to those operating in non-oil sectors. Understanding these rates is critical for corporate taxpayers to remain compliant with ZATCA regulations and optimize tax planning.
🏭 What is Hydrocarbon Income?
Hydrocarbon income refers to earnings generated from activities related to the exploration, extraction, production, and sale of oil, natural gas, and their derivatives. In Saudi Arabia, companies involved in these activities—particularly foreign-owned entities—are subject to higher corporate tax rates, ranging from 50% to 85%, depending on their production levels.
- Exploration and Production: Income from crude oil, natural gas, and related activities.
- Refining Operations: Processing hydrocarbons for domestic or export use.
- Petrochemical Activities: In cases where they are integrated with oil production.
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📊 Hydrocarbon Income Tax Rates
The Hydrocarbon Income Tax Law imposes progressive rates based on the company’s average daily production:
| Average Daily Production (Barrels of Oil Equivalent) | Applicable Tax Rate |
|---|---|
| Up to 50,000 barrels | 50% |
| 50,001 – 100,000 barrels | 65% |
| 100,001 – 150,000 barrels | 75% |
| Over 150,000 barrels | 85% |
These high rates reflect the strategic importance of hydrocarbons to Saudi Arabia’s economy and the value of its natural resources.
🏢 Non-Hydrocarbon Income
Non-hydrocarbon income refers to revenue generated from other sectors, such as manufacturing, services, technology, retail, and financial operations. Corporate income from these sources is generally taxed at a flat rate of 20% for non-Saudi investors.
- Income from non-oil manufacturing plants.
- Profits from IT, consulting, or financial services.
- Retail and wholesale trade profits.
Zakat also applies to Saudi/GCC-owned companies at a standard rate of 2.5% on the zakat base, instead of corporate income tax.
⚖️ Compliance Requirements
Corporate taxpayers must ensure accurate segregation of hydrocarbon and non-hydrocarbon income in their tax filings. Key compliance steps include:
- Maintaining separate accounts for each income type.
- Submitting returns via the ZATCA e-portal within statutory deadlines.
- Preparing supporting documentation, including production reports for hydrocarbon income.
Non-compliance can lead to penalties, including fines and back taxes.
📌 Tax Planning Considerations
Companies can reduce their effective tax burden by:
- Leveraging double tax treaties to lower withholding taxes on cross-border transactions.
- Optimizing input VAT recovery to offset operational costs.
- Reinvesting profits in non-hydrocarbon sectors where possible.
🏁 Conclusion
The contrast between hydrocarbon and non-hydrocarbon corporate tax rates in Saudi Arabia underscores the government’s approach to resource-based taxation. For corporate taxpayers, understanding these differences is essential for accurate tax reporting, compliance, and strategic business planning in one of the world’s most important energy markets.
