Tax Planning for Saudi Companies Using UAE Entities

In Saudi Arabia, the corporate tax – 20%, whereas in the UAE, it is 9% for mainland companies. Can UAE companies be used for tax planningby Saudi-based businesses?

The answer is Yes—but not by simply billing from a UAE company to a Saudi company. Doing so without proper structure and documentation can lead to major violations and heavy penalties.

Effective and compliant tax planning requires a structured approach. Let’s break it down through key areas:

Key Tax Areas to Consider:

1. Corporate tax in Saudi Arabia.
2. Corporate Tax in UAE.
3. How to structure business for tax planning
4. With holding tax.
5. VAT applicability in UAE and Saudi Arabia.
6. Transfer Pricing and related documents.

Corporate tax in Saudi Arabia:

• Saudi imposes 20% corporate tax on non-GCC shareholder profits.

Corporate tax in UAE:

• UAE has implemented a 9% federal corporate tax on profits above AED 375,000.

How to Structure business for Tax Planning

By deploying a back-office or service function in a UAE mainland company, a Saudi company can outsource and bill for shared services (e.g., IT, admin, design, analytics). But here’s the critical point:

1. You cannot simply inflate the invoice value to shift profits out of Saudi and reduce tax.
2. This is where Transfer Pricing (TP) comes in

Transfer Pricing – The Compliance Backbone

If a Saudi company is related to the UAE entity (e.g., branch or common ownership), all inter-company transactions must follow the Arm’s Length Principle.

• Arm’s Length Price (ALP) means the price must be comparable to third-party market rates, not arbitrarily set.
• Artificially increasing costs in UAE to reduce Saudi profits will attract penalties and audits from the Zakat, Tax and Customs Authority (ZATCA).

Withholding Tax

When a Saudi company makes payments (e.g., management fees or service charges) to a UAE company, withholding tax (WHT) at 15% is typically applied under Saudi domestic tax law.

While the Saudi–UAE Double Taxation Avoidance Agreement (DTAA) does not explicitly mention “management fees,” Saudi Arabia generally applies a 15% WHT on service payments to foreign entities.

However, UAE mainland companies can claim a foreign tax credit under the UAE Corporate Tax Law. The law allows businesses to offset foreign taxes paid (like WHT in Saudi Arabia) against their UAE corporate tax liability — capped at the 9% UAE tax rate.

Example: If a UAE mainland company earns AED 1,000,000 from Saudi and AED 150,000 is withheld as WHT, it can use that AED 150,000 to offset its UAE tax liability (up to a maximum of AED 90,000). Excess WHT cannot be refunded or carried forward.

This makes proper documentation, invoicing, and TP support essential for tax credit eligibility and compliance in both jurisdictions.

Conclusion

Tax planning between Saudi Arabia and the UAE is possible and powerful, but must be done right.

With increasing scrutiny from ZATCA and the implementation of UAE Corporate Tax, the focus is now on transparency, documentation, and compliance. Missteps—like over-invoicing or ignoring TP rules—can lead to audits, penalties, and denial of foreign tax credit claims.

Action Points for Businesses

1. Review your cross-border structure:- Are your UAE and KSA entities properly documented? Are intercompany agreements in place?
2. Get your TP documentation ready:- Ensure you’ve conducted benchmarking studies and prepared your Master/Local Files if thresholds are met.
3. Invoice with correct VAT wording:- Avoid charging VAT incorrectly and ensure proper RCM treatment is stated for KSA clients.
4. Claim foreign tax credits smartly:- Maintain WHT proof and align it with UAE tax returns for proper offsetting.
5. Consult with a tax advisor:- A compliant setup tailored to your business can help avoid costly mistakes.