What is Capital Gains Tax?

Capital Gains Tax is a tax levied on the profit from the sale of an asset such as stocks, real estate, or business assets. It is calculated by subtracting the original purchase cost from the selling price. In Saudi Arabia, the capital gains tax system varies depending on the investor’s status, whether they are a resident or non-resident.

How is Capital Gains Tax applied in Saudi Arabia?

The tax system in Saudi Arabia is considered investor-friendly compared to many countries. What distinguishes the Kingdom is that it does not impose income tax on individuals, so the profits from the sale of personal assets by individuals (such as selling a car or a personal home) are not subject to tax.

However, there are certain cases where capital gains tax applies or are treated as ordinary income:

1. Profits from selling shares in the financial market (Tadawul)

Residents: Profits from selling shares listed on Tadawul by resident entities are generally exempt from capital gains tax. As for Saudi and Gulf individual shareholders, they are subject to Zakat at a rate of 2.5% instead of income tax.

Non-residents: Non-resident investors who sell their shares in Saudi companies are subject to a 20% capital gains tax on the realized profit.

2. Profits from selling real estate and commercial assets

When selling a property or an asset used for commercial activity, the resulting profit is considered ordinary income and is taxed according to the taxpayer’s status. If the investor reinvests the proceeds in a new capital asset within 12 months, the tax payment can be deferred.

3. Restructuring within a single group of companies

The transfer of shares or assets between companies within the same group (provided there is full direct or indirect ownership) is not considered a realization of capital gains, and no tax is incurred. The assets must remain within the group for two years from the date of transfer to benefit from the exemption.

How to calculate capital gains tax?

The tax is calculated as follows:

  • Selling price: The highest of three values: contract value, market value, or the book value of the asset.
  • Cost of the asset: Original purchase price plus any associated acquisition costs (fees, taxes, improvements).
  • Capital gain: Selling price – cost of the asset.
  • Tax due: 20% of the gain for non-residents, or 2.5% Zakat for Saudi and Gulf residents.

Filing and payment procedures

When selling an asset, the selling party must report the capital gain to the Zakat, Tax and Customs Authority (ZATCA). Any tax due must be paid within 60 days of the sale date. The tax is typically finalized when the company’s articles of association are amended and documented, but the authority may use the date of the sale and purchase agreement if it results in a higher tax.

Comparison with other countries

The capital gains tax system in Saudi Arabia is considered more flexible compared to many countries. The UAE does not impose capital gains tax on individuals. Kuwait imposes a 15% corporate income tax. Egypt imposes a 10% tax on stock market profits. Saudi Arabia stands out with extensive exemptions for individuals and residents.

Frequently Asked Questions

Q: Do Saudi individuals pay capital gains tax?
A: No, Saudi Arabia does not impose income tax on individuals. Profits from the sale of personal assets by individuals are not subject to tax. However, commercial establishments are subject to the Zakat system at a rate of 2.5%.

Q: Is selling shares on Tadawul subject to tax?
A: If you are a resident investor, profits from Tadawul shares are generally exempt. Non-resident investors, however, are subject to a 20% tax on the gain.

Q: What is the capital gains tax rate for non-residents?
A: 20% on the realized profit from selling shares in Saudi companies.

Q: Is selling a personal residential property subject to tax?

Q: No, the sale of personal property by individuals is not subject to capital gains tax, as Saudi Arabia does not impose income tax on individuals.

Q: What is the deadline for paying the due tax?
A: Payment must be made within 60 days from the date of sale.

Q: Can the tax on gains from the sale of commercial assets be deferred?
A: Yes, if the proceeds are reinvested in a new capital asset within 12 months.

Source: Zakat, Tax and Customs Authority (zatca.gov.sa)