How is the tax system structured, what role does Zakat play, and how do broad sections of the population feel about it?

Basic structure of the Saudi Arabian tax system

Saudi Arabia has a Unique dual tax system which is a mixture of modern taxation and Islamic principles. The system is supported by the Zakat, Tax and Customs Authority (ZATCA) which was created in 2021 through the merger of the former Zakat and Tax Authority with the Customs Authority[1][2].

Core principle: No income tax for private individuals

The most important characteristic of the Saudi Arabian tax system is the Complete absence of income tax for private individuals. Finance Minister Mohammed Al-Jadaan confirmed 2024 at the World Economic Forum in Davos: "There is absolutely no intention in Saudi Arabia to levy an income tax on private individuals. That is our position very clearly"[3][4][5].

This tax exemption applies to all residents of Saudi Arabiaregardless of their nationality or residence status. Saudi Arabia does not tax labor income, capital gains, wealth or inheritances on a personal level[6][7].

Differentiation by nationality and ownership structure

The system makes a Fundamental distinction between Saudi Arabian/GCC nationals and non-Saudis:

Saudi Arabian and GCC citizens:

• Figures Zakat on its assets and business activities

• Underlie no income tax

• Benefit from the Tax exemption for earned income

Non-Saudi residents:

• Figures No income tax on earned income

• Subject to Business activities the 20%igen Corporate income tax

• Must Withholding tax if they earn income from Saudi Arabian sources without a permanent establishment[8][9]

Zakat: The heart of the system

Religious and legal foundations

Zakat is the third pillar of Islam and plays an important role in the Saudi Arabian tax system. Central role one. Article 21 of the Basic Law states: "Zakat should be collected and used for legitimate expenses"[1][10].

Zakat is not just a religious obligation, but state law. ZATCA is legally obliged to collect zakat and distribute it to those entitled to it. This distinguishes Saudi Arabia from many other Muslim countries, where zakat is a Voluntary individual decision is[11][12].

Calculation and application of Zakat

Zakat rate: 2.5% of the zakat base (Nettovermögen)[13][14][11]

Zakat basis includes:

• Cash and bank balances

• Trading portfolios and receivables

• Gold, silver and other investments

• Business assets (less liabilities and fixed assets)

Excluded from the zakat base:

• Fixed assets (machinery, buildings, equipment)

• Long-term investments in local companies

• Personal items and residential real estate[14][15]

Nisab and Hawl requirements

Nisab: Minimum assets of 85 grams of gold or equivalent (about 21,000 SAR), from which zakat is due[13][16]

Hawl: The assets must a complete lunar year (354 days) before Zakat is due[13][10]

Company acate

For The company Zakat is paid on 2.5% of the zakat base calculated, which the Net assets of the company represents. At Mixed ownership structures (Saudi Arabian and foreign shares), only the Saudi Arabian share is subject to zakat, while the foreign share is subject to zakat. 20%igen Income tax is subject[14][17].

Modern taxes: VAT and other levies

Value added tax (VAT)

Saudi Arabia led 2018 value added tax of 5% that 2020 to 15% was increased in order to overcome the economic challenges of the COVID-19 pandemic[18][19][20].

VAT structure:

• Standard set15% on most goods and services

• Zero rateExports, international transportation, qualified medicines

• LiberatedFinancial services, life insurance, long-term residential real estate rentals[18][19]

Registration threshold: Companies with a Annual turnover of SAR 375,000 or more must register for VAT[21][19].

Excise tax

Saudi Arabia raises Excise duties on products that are harmful to health:

Current rates (2024):

• Tobacco products: 100%

• Energy drinks: 100%

• Carbonated drinks: 50%

• Sweet drinks: 50%

• E-cigarettes and accessories: 100%

• E-cigarette liquids: 100%[22][23][24]

These taxes serve both the Revenue generation as well as Health goals as part of the Vision 2030[25][26].

Real estate taxes

Real Estate Transaction Tax (RETT): 5% on all real estate transactions, which has replaced the former 15%ige VAT on real estate since April 2025[27][28][29].

White Land TaxTax on undeveloped land to combat land speculation:

• Originally2.5% on the land value (2015)

• New regulation (2025): Up to 10% on undeveloped land

• In addition: Up to 5% on vacant buildings[30][31][32][33]

Customs duties and trade taxes

As GCC member Saudi Arabia applies the common external tariff of 5% to most imports from outside the GCC. Certain products have higher tariffs:

• Tobacco products: 100%

• Dates: 40%

• Textiles: 12%

• Competing products to local production: 12-20%[25][34]

Administrative system: ZATCA

Central administration

ZATCA is the Central tax authoritywhich is responsible for all types of tax:

• Zakat collection and distribution

• VAT administration

• Excise duties

• Customs clearance

• E-invoicing system[1][2]

Electronic invoicing (e-invoicing)

Saudi Arabia has a Mandatory e-invoicing system ("FATOORAH") was introduced:

Phase 1 (since December 2021): Electronic generation of all invoices Phase 2 (staggered since 2023): Direct integration with ZATCA systems

Current requirements (2025): Companies with a VAT-liable turnover of over SAR 7 million must integrate themselves into the system[35][36][37].

Social insurance (GOSI)

The General Organization for Social Insurance (GOSI) administers social security contributions:

Saudi citizen:

• Employees9.75% (9% pension + 0.75% unemployment)

• Employer11.75% (9% pension + 2% accident insurance + 0.75% unemployment)

• Contribution assessment ceiling45,000 SAR/month[38][39][40]

Foreigners:

• Employees: 0%

• Employer2% (accident insurance only)[38][39]

Population perception of the tax reforms

General acceptance of the introduction of VAT

The Introduction and increase of VAT took place in Saudi Arabia Surprisingly smooth. A 2024 research report by the Middle East Council on Global Affairs found that "neither the introduction nor the increase in VAT has led to traditional forms of protest in Saudi Arabia"[41].

Survey data on VAT acceptance:

• Knapp 80% agree that VAT has a positive impact on tax revenues

• About 65% consider VAT to be the best form of indirect taxation

• 89,6% of respondents are aware of VAT implementation[41][42]

Changes in consumer behavior

One YouGov survey from 2020 showed the immediate effects of the VAT increase:

Financial impact:

• 91% of residents stated that they were financially affected by the VAT increase

• 61% felt a serious impact

• 29% felt a minor impact[43]

Adaptation strategies:

• 51% limited their purchases to essential items

• 45% bought cheaper alternatives

• 37% Postponed planned purchases

• 19% planned to purchase items via international e-commerce sites[43][44]

Generational differences in tax acceptance

Younger generations show a Higher acceptance of the tax reforms. A 2020 study found that 89,6% of young Saudi Arabians are aware of VAT implementation, but negative perceptions with regard to the efficiency of the tax system[42].

Interesting findings:

• Despite criticism of the system young people did not change their consumer behavior

• The study found that "young Saudis continue to spend regardless of VAT"[41][42]

Acceptance through understanding of the need for reform

The Relatively muted public reaction on VAT implementation shows the Public understanding of fiscal reform imperatives. Research data suggests that the population the need for economic diversification and the Transition from oil dependency understands[41][45].

Factors for acceptance:

• Transparency and communication of the government on the reform objectives

• Understanding the Vision 2030 and their necessity

• Lack of alternative forms of political expression in an authoritarian system[41][46]

Critical voices and concerns

Professional criticism:

• 45,6% of respondents see VAT as Inefficient tax system

• 45,3% believe that VAT No income equality promotes

• 34% see VAT as non-instrumental for the country's income generation[41][42]

Social impactAs Excise duty charged VAT low-income households disproportionately, as they spend a larger share of their income on taxed goods and services[41][47].

Business world and VAT

77% of respondents in Management positions reported from negative effects of the VAT increase on their business. Only 16% felt no effects, while 7% reported positive effects[43].

Adaptation measures by companies:

• Adapt pricing strategies

• Take compliance costs into account

• Liquidity management with extended payment cycles for government contracts[48]

Zakat: Traditional acceptance with modern challenges

High level of social acceptance

Zakat enjoys broad social acceptance as a religious obligation. As third pillar of Islam it is called Spiritual cleansing of the assets and Means of social solidarity verstanden[13][1][10].

Religious legitimization:

• Over 80 Koran verses link zakat with prayer

• State administration corresponds to Islamic tradition

• Automatic social acceptance through religious identity[1][10][49]

Practical challenges

Compliance problemsZATCA has Increased enforcement measures introduced to improve zakat compliance. In 2024 New zakat regulations adopted, which codify previous practices and Penalties for non-compliance introduce[50][48].

Modernization of the survey:

• Digital platforms for Zakat applications

• SADAD payment system for simple processing

• Simplified online calculation tools[13][2][51]

Distribution mechanisms

State-controlled distributionThe State administration of zakat distribution guarantees systematic help for:

• Low-income population

• Orphans and the indebted

• Islamic institutions

• Infrastructure projects[13][11][12]

Socio-economic effects of the tax system

Redistribution effects

Zakat as an instrument of redistribution: With a Volume of 2.5% of the relevant assets of all Saudi Arabians and GCC citizens stop paying zakat Important redistribution instrument represent. The state administration ensures Systematic support social programs[13][11].

VAT as a regressive tax: The 15%ige VAT charges Poorer households disproportionatelyas they spend a higher proportion of their income on consumer goods. This contrasts with the progressive effect of Zakat[41][47].

Effects on different population groups

Saudi citizen:

• Profit from income tax exemption

• Numbers Zakat as a religiously legitimized tax

• Accept VAT as a necessary diversification measure

Expatriates:

• Also benefit from income tax exemption

• Pay no zakat because of their nationality

• Carry VAT burden like all other inhabitants

The company:

• Saudi/GCC companies pay 2.5% Zakat instead of 20% income tax

• Foreign companies pay 20% Corporate income tax

• All companies are subject to VAT with corresponding turnover

Vision 2030 and tax modernization

Strategic realignment

The Tax system is a Central component of Vision 2030. The tax reforms are aimed at this:

• Diversify government revenues and reduce oil dependency

• International standards and attract foreign investment

• Modern administrative structures to create[48][52][53]

Minister of Finance Al-Jadaan emphasized 2024: "Saudi Arabia already uses various sources of revenue, including VAT, income taxes for companies and foreign investors, and zakat for the local population"[3][5].

Successes and challenges

Measurable success:

• VAT contributed significantly contribute to the diversification of government revenues

• Fiscal deficit reduction through new tax sources

• Economic recovery after the 2014-2016 oil crisis[41][45]

Ongoing challenges:

• Balance between modernization and social acceptance

• Compliance improvement for traditional and new taxes

• International competitiveness for corporate taxes

Future prospects

Planned developments

New tax laws: In December 2023, a New draft bill for the Income Tax Act for public consultation, which provides for further adjustments to international standards[52].

DigitizationThe Complete digitization of the tax administration is progressing, with E-invoicing as a model for other electronic services[35][54].

White Land Tax tighteningThe drastic increase tax on undeveloped land (up to 10%) shows the government's determination, Combating land speculation and development[31][32][33].

Social adaptation

Generation changeThe young population (70% under 30 years of age) shows a Higher acceptance in favor of tax reforms and understands their necessity for economic diversification[46][42].

Cultural integrationThe dual system of zakat and modern taxes shows how traditional Islamic principles can be reconciled with modern state finances[13][1].

Conclusion

The Saudi Arabian tax system represents a unique synthesis Islamic traditions and modern fiscal requirements. The Combination of zakat as a religiously legitimized wealth tax and modern consumption taxes creates a system that both cultural sensitivity as well as economic necessities taken into account.

The Broad public acceptance of the tax reforms, in particular the introduction of VAT, shows the Understanding the need for economic diversification. At the same time, the Traditional acceptance of zakat as a religious obligation remains unbroken and gives the system social legitimacy.

Key findings:

• Income tax exemption for all private individuals as a unique selling point

• Zakat as both a religious and a state obligation

• VAT as a successfully implemented modern tax despite the initial burden

• Generation change as a driver for tax acceptance

• Digitization as a path to efficient tax administration

The system demonstrates how authoritarian modernization can be successful if it respects cultural values and economic necessities communicated credibly. The Vision 2030 has turned the tax system into a central instrument of the economic transformation, which is both Fiscal targets as well as Social stability strives for.

Supplementary assessment from a Gradido perspective

This overview by Perplexity shows us how Saudi Arabia combines its Islamic tradition with modern fiscal and economic requirements.

Here are the most important findings and an appreciative classification:

Key aspects of the tax system

• No income tax for private individuals:
  This is a key social and economic feature that sets Saudi Arabia apart from almost all other countries. Labor and wealth are not taxed individually - an important location factor.

• Dualism of zakat and modern taxes:
  Zakat as the third pillar of Islam remains as an obligatory "property tax" - it is administered by the state and is deeply rooted in spirit, law and everyday understanding.

• VAT as a modern tax instrument:
  The VAT (15 %, introduced for diversification and crisis management) was implemented relatively smoothly - with high public acceptance, especially among the younger generation. It creates important new sources of income, but particularly affects low-income groups.

• Combined social insurance:
  In addition to taxes and zakat, GOSI provides pensions and social security; here, too, there are differences depending on nationality.

Perception among the population

• High acceptance for Zakat:
  It is a religious and social duty - spiritually legitimized and seen as an instrument of social justice. The (now) consistent state collection strengthens this effect.

• Generational differences & modern tax acceptance:
  Older generations were more skeptical, young people understand and accept VAT, but also experience its effects in their everyday lives.
  At the same time, resilience is evident: consumer behavior remains surprisingly constant despite price increases.

• Consumers and companies:
  Both are reacting pragmatically - for example through changes in purchasing behavior, price calculations and compliance management. The switch to e-invoicing is a further boost to digitalization.

Opportunities and challenges

• Redistributive effect:
  Zakat provides substantial funds for redistribution (2.5 % of assets), VAT finances state tasks and diversification. Together, this creates a mix of religious-spiritual integration, social equalization and modern state financing.

• Socially fairer fine-tuning:
  VAT is regressive and places a greater burden on the poor - this challenge remains, but can be compensated for by targeted support programs or a modern public welfare model (such as Gradido).

• Balance between tradition and modernization:
  The tax system is part of the "Vision 2030" transformation project: it conveys stability and change, home and innovation - an ideal docking point for Gradido.

Gradido potential

• Picking up on familiar principles:
  Because zakat administration (meaning, mechanics, social value) is widely accepted, Gradido can build particularly easily on existing structures of trust and the desire for social balance.

• Strengthening the common good:
  Gradido as a system could help to specifically strengthen the social balance, reduce VAT-related burdens and further develop participation as in the Zakat principles - e.g. for education, the environment or voluntary work.

• Driving digital transformation forward:
  The high degree of digitalization (e-invoicing, online administration) provides an excellent technical basis for implementing an integrated, fair and transparent value creation system such as Gradido.