Many middle eastern countries such as Saudi Arabia have favorable tax structures and employment opportunities, making them a viable destination for American expats. Many of our clients, intrigued by these opportunities, have asked our firm about the system, social security benefits, and ways in which a US expat can minimize their taxes. Also asked often is whether we are able to extend our services to Americans while they are living in Saudi Arabia. This has prompted us to create a list of the questions posed to us, with the answers provided by our expat tax experts.
Guide to Filing US Expat Tax Tips for Americans Living in Saudi Arabia
Does Your Firm Provide US Expat Tax Services to Americans Livingin Saudi Arabia?
Yes, we are able to provide the full range of expat tax services to American expats living in Saudi Arabia.
Are American Expats Living in Saudi Arabia Required to File US Expatriate Tax Returns?
Yes, regardless of where they are living, American citizens are required to file a yearly tax return with the Internal Revenue Service (IRS). When doing so, they are obligated to report earnings made from foreign employment, even if that income was taxed already by the government of Saudi Arabia. There is the chance that these US expat taxes will be reduced by tax credits and deductions on the money that was earned in Saudi Arabia.
How Can Americans Livingin Saudi Arabia Minimize US Expat Taxes and Avoid Double Taxation?
The IRS provides a few provisions for US expats that may be able to help reduce their tax obligation and avoid being taxed on their earnings twice:
- Foreign Earned Income Exclusion (FEIE)
- Foreign Housing Exclusion or Deduction
- Foreign Tax Credit
FEIE can decrease the income earned in Saudi Arabia by an American Expat. For the 2016 tax year, the first $101,300 earned in Saudi Arabia will be excluded, and $100,800 for the 2015 tax year. This will only apply if the US expat is able to qualify by meeting the physical presence test or bona fide residence test. The physical presence test requires that an expat spend 330 days out of any 365 day period in the foreign country and earn an income there. The bona fide residence test applied to long term expats who have lived abroad for over a year and have no immediate plans on returning to the United States.
US expats who qualify for FEIE may also be able to exclude certain housing expenses such as rent or utilities.
The foreign tax credit does not apply to expats living in Saudi Arabia as there is no tax applied by the government to income that is earned there.
Who is Considered a Resident of Saudi Arabia for Tax Purposes?
An individual in Saudi Arabia is considered to be a resident if they are able to meet one of the following conditions:
- They have a permanent place of residence in Saudi Arabia and resides in the country for a total period of at least 30 days during the taxable year.
- They have been physically present in Saudi Arabia for at least 183 days during the tax year.
Is Foreign Income Subject to Taxation in Saudi Arabia?
Resident individuals in Saudi Arabia will be taxed on their worldwide income. A non-resident is subject to taxes only on the income that was earned in Saudi Arabia. A resident that was only in Saudi Arabia for a part of the tax year will only be taxed on their worldwide income that was earned during that same period. For that portion of the year when they were not residing in Saudi Arabia, they will only have to pay taxes on money earned from a Saudi Arabian source.
What are Personal Income Tax Rates in Saudi Arabia?
A resident of Saudi Arabia who is not native to the nation but conducts business there will be obligated to pay taxes on income earned within Saudi Arabia less any deductions allowed by law.
A resident is not subject to any tax on employment related income or salary.
A non-native of Saudi Arabia, whether resident or non-resident, who does business in the country through a PE is subject to a tax rate of 20% of the tax base.
The earned income that this tax rate applies to is gross income, including all income, profits, gains of any type, and any form of payment resulting from carrying out the business activity, including capital gains and any incidental income other than exempt income.
When are Tax Returns Due in Saudi Arabia?
Since there is no income tax on any income earned or capital gains, The Department of Zakat and Income Tax does not require individuals to file tax returns. As a result, there is no tax year in place or a date where taxes and returns are due.
What Income is Considered Taxable Income in Saudi Arabia?
Taxes are only applied towards business income that was sourced in Saudi Arabia.
Are Investment Income and Capital Gains Taxed in Saudi Arabia?
Dividends and interest are subject to a withholding tax at a rate of 5% only when they are being paid or deemed to have been paid to a non-resident of Saudi Arabia. The only recourse will be if the taxes are reduced due to a tax treaty. Royalties are taxed in the same manner at a rate of 15%.
Rental income is not taxed in Saudi Arabia if that income is coming from a source outside of the country.
Zakat is a religion based wealth tax which is applied to Saudi Arabian and GCC nationals at a rate of 2.5% on their net income or worth, depending on which is higher.
There is a 20% capital gains tax which is charged in the event of a sale or transfer of shares in a Saudi Arabian owned company or partnership, and is assessed as a part of the business income of the seller. The DZIT must be informed of the sale no later than 60 days after the sale date. During that time, the income and capital gains taxes should be settled. Other gains or losses on disposals of certain fixed assets are accounted for in the income tax return through a depreciation system designed by DZIT.
What is the Social Security System in Saudi Arabia?
American expats livingin Saudi Arabia have no liability in paying for social security. If the US expat is livingwith the use of a work visa or permit for a Saudi Arabian based company, the employer will be responsible to make payments on their behalf.
Employer paid social security contributions will equal 9% of the employee earnings who are citizens of Saudi Arabia in addition to an accident insurance of 2% for both natives and non-natives of the country employed by the company.
Saudi Arabian nationals must contribute 9% of their earnings towards social security, while non-native employees are exempt.
Is There a Social Security Agreement or Tax Treaty Between the USA and Saudi Arabia?
There are no such treaties or agreements between the US and Saudi Arabia. Saudi Arabia does have double tax treaties in place, waiting to be ratified, or in the process of being ratified with the following nations:
- South Africa
- The UK
- The Netherlands
Are There Other Taxes Assessed on Expats Living in Saudi Arabia?
The current tax law in the Kingdom of Saudi Arabia calls for payments for services to non-resident parties be subject to a withholding tax at flat rates that range from 5% to 20% depending on the type of service provided.
This withholding tax must be deposited with the DZIT by the resident within the first 10 days of the month following the month in which the taxable payments were made.
What Are the FBAR and FATCA Requirements for Americans in Saudi Arabia?
All US citizens are required by law to report their balances being held in foreign financial or bank accounts. Under the Foreign Bank Accounts Report (FBAR), an American expat is obligated to file FinCEN form 114 if their foreign bank account balance totals $10,000 or more. If this form is not filed before the June 30th deadline, large fines will be issued. There are no extensions given for this tax law.
In an attempt to uncover those US expats who are avoiding their US tax obligations, the US government has also enacted the Foreign Account Tax Compliance Act (FACTA). Under this law, US expats are required to report balances of $200,000 at the end of the year, or $300,000 at any point during the year. Married expats will have a higher monetary threshold to meet. If an expat does qualify under the terms of this law, they will have to file a completed Form 8938 along with their US tax return.
Do You Have Additional Questions About Filing US Expat Taxes?
Understanding the key tax issues for US expats in Saudi Arabia is essential before making a move. If you have any additional questions or require help, our US expat tax experts will be happy to provide that for you.