Tax Exemption Period for New Companies in Saudi Arabia

There is no general, fixed tax exemption period for all new companies in Saudi Arabia simply because they are newly established. Zakat and tax treatment depend on the company's ownership, type of activity, volume of supplies, location of operations, and incentives for which the business may qualify. Therefore, the belief that every new company automatically receives an exemption for one, two, or five years is inaccurate.

For example, a company may become subject to Zakat or income tax as soon as their provisions apply to it, while mandatory VAT registration depends on the volume of taxable supplies rather than the age of the business.

The Zakat, Tax and Customs Authority explains that businesses whose annual taxable supplies reach or exceed SAR 375,000 fall within the mandatory VAT registration threshold.

For this reason, at Aamal Raqamiah, we recommend that a new company start organizing its invoices, expenses, sales, and accounting records from day one, rather than waiting until the tax return deadline and then attempting to compile the data retrospectively.

You can learn how to organize these operations through an integrated accounting system, which connects sales, purchases, inventory, accounts, and reports within a single system.

Are New Companies Exempt from Taxes in Saudi Arabia?

There is no blanket exemption that applies to all new companies because they are newly established.

To determine a company's obligations correctly, we must first identify the type of obligation being discussed, as the term “tax” may refer to more than one system.

The main obligations that businesses may face include:

• Zakat.
• Income tax.
• Value-added tax.
• Withholding tax where applicable.
• Other obligations related to the type of activity or transaction.

The Zakat, Tax and Customs Authority explains that a commercial activity subject to Zakat is registered for Zakat services after the business is registered with the Ministry of Commerce and its registration with the Authority is completed; this means that incorporating a company does not, in itself, grant it a general Zakat grace period lasting several years.

What Is the Difference Between Tax Exemption and Being Below the Registration Threshold?

This is one of the most important points a new company needs to understand.

A small business may begin operating without yet being required to register for VAT because its volume of supplies has not reached the mandatory registration threshold.

However, this does not mean it has received a tax exemption for a specific period.

For example:

A company was established in January, and its taxable supplies were below the mandatory registration threshold.

The correct question is not:

How many years of exemption has it received?

But rather:

Have its actual or expected supplies reached the threshold that requires registration?

ZATCA explains that the mandatory VAT registration threshold is SAR 375,000, while registration is voluntary in certain cases when taxable supplies or expenses exceed SAR 187,500 without reaching the mandatory threshold.

You can refer to the guide to VAT in Saudi Arabia for a broader understanding of registration and calculation.

Is There a VAT Exemption Period for New Companies?

There is no general period, such as one or two years, during which every new company is automatically exempt from VAT.

The determining factors here are the registration threshold and the nature of the supplies.

After registration, the standard VAT rate of 15% applies to supplies subject to the standard rate, while some supplies may be zero-rated or exempt under the provisions of the law.

Revenue must therefore be monitored continuously, particularly in startups whose sales may grow rapidly during their first year.

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Is a New Saudi Company Subject to Zakat?

If the business falls within the categories subject to Zakat, being newly established does not grant it a general exemption for several years.

ZATCA explains that every activity intended to generate earnings from capital or work and falling within the scope of Zakat provisions is subject to registration. A unique identification number is created after the business is registered with the Ministry of Commerce and its registration with the Authority is completed.

For this reason, clear records must be maintained from the outset, including:

• Capital.
• Assets.
• Sales.
• Purchases.
• Expenses.
• Customers and suppliers.
• Bank balances.
• Liabilities.
• Accounting entries.

Waiting until the end of the period and then attempting to reconstruct this data from bank statements and invoices makes the review more difficult.

What About Foreign-Owned Companies?

Among the cases covered by the law, Saudi income tax provisions apply to resident capital companies with respect to the shares of non-Saudi partners, as well as other cases specified by the law, such as certain activities of non-residents.

The standard income tax rate on the tax base in ordinary cases subject to the standard rate is 20%, with special rules and rates for certain activities and circumstances.

Therefore, establishing a new company with foreign participation does not automatically mean several years of income tax exemption. Instead, the ownership structure, activity, and incentives applicable to the company must be identified.

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Do Some Companies Receive Tax Incentives for a Specific Period?

Yes, and here it is necessary to distinguish between a general exemption for new companies and a specific investment incentive with defined conditions.

An important example is Saudi Arabia's special economic zones, where incentive packages are available to eligible companies and vary according to the zone, activity, and requirements.

Among its competitive incentives, the Economic Cities and Special Zones Authority offers a corporate income tax rate of 5%, alongside other incentives related to withholding tax, VAT, and customs duties, subject to the applicable conditions.

Official introductory materials for some special economic zones also explain that the reduced corporate income tax rate may be 5% for up to 20 years for eligible companies.

This is a good example of the difference:

An ordinary new company = does not automatically receive a 20-year exemption.

An eligible company within a special economic zone = may benefit from specific incentives under the regulations and conditions.

The incentive itself must therefore be examined before the company's financial plan is built around it.

Does Not Making a Profit Mean the Company Is Tax-Exempt?

Not necessarily.

There is a difference between:

• Having no profits subject to income tax in a particular period.
• Not reaching the VAT registration threshold.
• Having an accounting loss.
• Having a statutory exemption.
• Having an investment incentive.

For example, a company may be in its first year and have made no profit, but this does not automatically mean it is not required to register, submit certain returns, or maintain records if the laws applicable to it require these actions.

This is a very important point for startups:

Having no tax due does not always mean having no accounting or filing obligations.

When Should a New Company Start Organizing Its Accounts?

From the first financial transaction.

Do not wait until you reach the VAT threshold or the return deadline.

The following should be recorded from the outset:

Capital → Purchases → Expenses → Sales → Customers → Suppliers → Bank and Cash → Tax When Applicable → Reports

This makes the transition to registration or the preparation of returns easier.

At Aamal Raqamiah, we particularly advise new companies against starting operations with scattered Excel files and then switching to a system after hundreds of invoices have accumulated, as cleaning and migrating the data later becomes more complicated.

An integrated accounting software solution can be used to manage accounts, sales, purchases, customers, suppliers, and inventory within an interconnected cycle.

What Happens If Sales Reach the VAT Registration Threshold?

As the company approaches the registration threshold, it should not discover this months after exceeding it.

Suppose a new company was generating:

• First quarter: SAR 70,000.
• Second quarter: SAR 90,000.
• Third quarter: SAR 110,000.

Here, total supplies and expected supplies for the upcoming period must be monitored in accordance with the registration rules, rather than considering only the total for a financial year that has already ended.

ZATCA explains that mandatory registration considers taxable supplies during the preceding twelve months or those expected during the following twelve months, in accordance with the applicable provisions.

After registration, correctly managing invoices, tax, sales, and purchases becomes even more important.

You can refer to the guide to tax invoices in Saudi Arabia to learn about the information that must be considered when issuing invoices.

How Can a New Company Prepare for Tax Obligations?

We recommend these steps from the start of operations:

1. Identify the nature of the company's ownership.
2. Determine whether it is subject to Zakat, income tax, or both, depending on its structure.
3. Monitor supplies subject to VAT monthly.
4. Keep all sales and purchase invoices.
5. Record expenses as they occur.
6. Separate the business bank account from personal expenses.
7. Review customer and supplier accounts.
8. Use a clear chart of accounts.
9. Generate monthly reports.
10. Review obligations with a Zakat and tax specialist when the situation requires interpretation of the law.

Having an accounting system from the outset makes this data available instead of having to compile it again at each deadline.

Common Mistakes About Exemptions for New Companies

Mistakes we recommend avoiding include:

• Believing that the first year is automatically exempt.
• Confusing non-registration for VAT with exemption from all taxes.
• Waiting until reaching SAR 375,000 before starting to record accounts at all.
• Believing that a loss means there are no obligations.
• Ignoring the effect of partners' ownership on Zakat and tax treatment.
• Applying special economic zone incentives to any new company.
• Collecting VAT before meeting the statutory registration requirements.
• Keeping invoices and expenses without a clear system.

Frequently Asked Questions About the Tax Exemption Period for New Companies

How Long Is the Tax Exemption Period for New Companies in Saudi Arabia?

There is no uniform general period granted to all new companies. The position is determined by the type of tax, the company's ownership, volume of supplies, activity, and applicable incentives.

Is a Company's First Year Tax-Exempt?

There is no general rule exempting every new company from taxes simply because it is in its first year.

Is a Business with Sales Below SAR 375,000 Exempt from Tax?

The amount of SAR 375,000 relates to the mandatory registration threshold for value-added tax and does not mean the business is exempt from all other Zakat and tax obligations.

Are New Foreign Companies Exempt from Income Tax?

Not generally. Income tax applies to the cases specified by the law, including the shares of non-Saudi partners in resident capital companies.

Are There Exemptions Lasting 20 Years?

Some eligible companies in special economic zones may benefit from a corporate income tax rate reduced to 5% for up to 20 years under specific incentive packages and conditions. This is not a general exemption for every new company.

Conclusion

The direct answer regarding the tax exemption period for new companies in Saudi Arabia is:

There is no general, fixed tax exemption period automatically granted to every new company after incorporation.

Instead, the company's position must be determined regarding:

Zakat → Income Tax → Value-Added Tax → Any Special Investment Incentives

For VAT specifically, mandatory registration is linked to the volume of taxable supplies, with a mandatory registration threshold of SAR 375,000, rather than the number of years since the company was established.

For this reason, at Aamal Raqamiah, we recommend that businesses start organizing their accounts from day one, even if they have not yet reached the VAT registration threshold. DigitalPro for Accounting and Point of Sale provides tools for managing sales, purchases, expenses, customers, suppliers, inventory, and reports, helping the company build an organized financial record from the start of its operations.

You can also explore Aamal Raqamiah's solutions or request a trial and try the system with your company's operations from the beginning of its establishment.