Tax Planning for SMEs in Saudi Arabia: Insights from Wafeq Webinar

Tax planning is no longer just about avoiding penalties, it’s a strategic tool that can fuel growth, especially for SMEs in Saudi Arabia. With ZATCA’s evolving regulations and the introduction of e-invoicing, staying ahead requires more than just standard compliance. In this article, we dive into key insights from the recent Wafeq webinar, uncovering practical tips and strategies to help you optimize your tax planning, maximize deductions, and avoid common pitfalls.

Guest Bio

Salman Khalid is the business head and Co-Founder of Finance Fix. With over 19 years of experience in finance and accounting, specializing in building and optimizing financial departments to drive business success. As the leader of Finance Fix, He guides a team of expert accountants in helping startups and struggling businesses gain financial clarity and make data-driven decisions for sustainable growth. Additionally, as the Business Head of Greenrite Company in Saudi Arabia, He focuses on delivering customized manpower and talent outsourcing solutions to enhance operational efficiency and support business expansion.

Watch the complete webinar recording on our YouTube channel:

Main Topics Covered in the Webinar

Topic 1: Importance of Tax Planning for Saudi SMEs

How does effective tax planning influence a company’s cash flow and long-term growth? Additionally, how does it align with Saudi Vision 2030’s goals?

A: Of course, effective tax planning plays an extremely crucial role in optimizing a company's financial health and aligning especially with Vision 2030, which wants companies to be self-sufficient, tax efficient, and be compliant, which will help the country's economy in turn to have an efficient market to work with.

• Proper tax planning will assure a business is not paying or overpaying taxes, avoiding penalties.
• It allows the company to optimize not only the tax structure, but also they would have the opportunity to reinvest the savings into expansion, innovation, and workforce development.
• It helps businesses qualify for incentives and exemptions that promote growth.

B: While aligning with 2030, compliance will gain credibility, making businesses attractive to the investors and government tenders. Companies that are well-compliant and have no history with ZATCA for penalties are preferred on the government standard, as tax revenues will contribute to national infrastructure public services and development goals. Therefore, delivery services and products outside of KSA will be in high demand for the government. Saudi Arabia wants to promote made-in-Saudi products, which is added to Vision 2030.

Can you elaborate on ZATCA’s stance regarding legal tax optimization versus illegal tax evasion? What are some common mistakes businesses should avoid to stay compliant?

1. Legal Tax Optimization:

• Requires a proper tax structure and compliance with regulations.
• Businesses should purchase from VAT-registered suppliers or obtain proper bills to claim VAT deductions and qualify for Zakat/corporate tax deductions.
• Cash purchases or purchases without valid bills are not deductible for VAT, Zakat, or corporate tax purposes, even with payment proofs like vouchers.
• Certain expenses, such as gifts and marketing costs, are non-deductible and should not be included in tax claims.

2. Illegal Tax Evasion:

• Includes underreporting sales, liabilities, or transactions.
• Use fake bills, which is increasingly difficult with the introduction of e-invoicing.
• Such practices are strictly penalized by ZATCA.

B: Common Mistakes Businesses Should avoid to stay compliant

• Invoice Management: Avoid modifying or tampering with the sequence of e-invoices.
• Ensure complete and accurate details on credit notes and debit notes.
• Underreporting: Do not underreport revenue or sales transactions.
• Customer Advances: Include all customer advances in VAT returns.
• Issue invoices for advance payments received, as they are subject to VAT.
• Record-Keeping: Maintain proper documentation for all transactions to avoid penalties during audits.

What are the potential penalties for non-compliance with tax regulations in Saudi Arabia? How significant are the financial and reputational risks, especially with ZATCA’s increased enforcement focus for 2025?

A: In 2025, ZATCA was very strict with tax evasion and underreported taxes. So ZATCA has put strict penalties, especially، if an entity is found to have incorrect declarations they would be they would be charged with:

• A penalty of 25% to 50% Depending on the case, if a company has committed fraud, it should pay a complete VAT amount plus a 50% penalty.
• An additional penalty of 5% on each month on the delay in the payments.

B: When it comes to the reputation risks:

• In the later stage, if a company is listed in ZATCA's books as a company that makes tax evasion, its reputation will be damaged, and the government would consider them tenders.
• Once a company is found guilty of negligence or fraud, it will perform other tax violations, which will lead to other strict consequences and, in the worst cases, closure of business as well.

C: The ZATCA enforcement Focus in 2025

With the arrival of e-invoicing, ZATCA has been overseeing all the sales and purchases, so there will be increased audits during 2025. With all the waves they have announced, companies around a million Riyal will be inserted, which means all kinds of VAT inputs and outputs that ZATCA will cross-check.

The strong invoicing system implemented by ZATCA will enable them to conduct thorough compliance checks on clients. With the introduction of phase two, all possibilities of tax evasion or underreporting will be effectively eliminated. Therefore, it is advisable to use a reliable accounting application that is fully integrated with ZATCA and ensures the generation of compliant invoices.

Topic 2: Deductions & Incentives Under KSA Regulations

What key tax deductions can businesses in Saudi Arabia leverage, including operational expenses and sector-specific exemptions?

A: Regarding corporate tax, businesses in Saudi Arabia can leverage several key deductions allowed by ZATCA. These deductions are primarily linked to operational costs and are designed to support business growth and efficiency. Below are the main categories of deductible expenses:

• Salaries, benefits, office rent, and utilities.
• The cost of digital transformation, marketing, advertisement training development, and a few miscellaneous expenses are directly tied to business operations.

Under the audit, ZATCA would allow such directions and will charge Zakat or corporate tax on such things as:

• Office rent without contracts. Since it's already integrated, ZATCA would be strictly checking on that.
• Labor Expenses In the latest phase, if any discrepancies are identified during compliance checks, they will eliminate such practices and impose additional taxes on them. Similarly, this approach will apply to other costs, such as labor expenses, that companies incur.

How do depreciation rules and incentives for green investments impact financial planning?

Green Investments is a very recent law that ZATCA has pushed recently and is still under discussion. What ZATCA has done initially is that they have proposed to eliminate the declining depreciation method and pushed to use just the straight line method. This is also under consideration.

In such cases, the depreciation rules will be adjusted, particularly for businesses investing in solar panels, EV charging stations, and energy-efficient equipment. At the same time, ZATCA will provide tax compensation for those adopting green investments and sustainable practices.

What upcoming ZATCA updates in 2025 should businesses prepare for, particularly regarding deductions for employee training, R&D, and ESG initiatives?

For small and medium businesses, there are few compensation ZATCA would be allowing on the Tax compensations on:

1. depreciation and renewable energy.
2. Salaries, especially the people employees who are under training.
3. Research and development expenditures.

Topic 3: Strategies to Reduce Tax Liabilities

How can businesses strategically reduce their tax liabilities through VAT group structuring?

1. Restructure to be a group of companies They would have an edge over what companies were performing those separately because:

• Transactions within the group are tax-free, which simplifies the compliance-related issues and reduces the number of VAT returns. If a company operates four different branches or CRs (Commercial Registrations) across multiple locations, it can file a single VAT return, streamline compliance monitoring, and optimize cash flow, as managing one consolidated VAT return simplifies planning and reporting.

2. Setting up a holding company will basically:

• Optimize the tax liability by managing profits and losses across subsidiaries. For example, if a company is making profits and has a startup that works under the same company, the losses of one entity can be written off for the other.
• Improve the cash flow recognize their current accounts (ACs) and consider all the deferred revenue to be pushed to the period they occurred, and similarly to be done with the expenses and all the things which are related to investing into Capital activities to put it in progress or capitalize them to have correct tax returns.

What are the key record-keeping requirements for tax compliance, including e-invoicing and retention policies?

Almost 80% of the companies have been integrated or have been sent or informed by ZATCA, so the key requirements by ZATCA are to:

• Integrate the entity's system with ZATCA.
• keep five-year records of data.

Why is collaborating with certified tax advisors essential, and how can they assist businesses in maintaining compliance with ZATCA regulations?

Recently, ZATCA has been rolling out frequent updates, introducing new measures that offer some flexibility while also imposing stricter penalties for non-compliance.

Working with an advisor helps companies to:

• Stay compliant and stay informed about the best practices for compliance that leading companies in the market are implementing.
• Avoid the risk of penalties and plan because allocating all the expenses during that period is vital.
• Advise what incentive and legal optimization possible.
• Train and keep the new high staff compliant with the ZATCA laws always.

Topic 4: ZATCA’s Extended Tax Amnesty Program (2025)

Who is eligible for ZATCA’s 2025 Tax Amnesty Program, and what benefits does it offer to SMEs with unpaid taxes?

A: This Tax Amnesty Program was designed for the companies who:

• Haven't paid the VAT or withholding tax.
• Or they had penalties on late registration.

B: So, companies have two relaxations from ZATCA:

• Full exemptions from fines for late registration, late payment, or late filing. All the penalties will be removed, and they'll pay just the actual amount of tax.
• They can convert the tax amount into the installment.

What are the risks of ignoring the amnesty program, and how can businesses apply to ensure compliance and avoid penalties?

A: In case of non-payment of Zakat or penalties related to taxes -since ZATCA's integrated with all ministries- would result in:

• Close company activities at Qiwa and Mudad. Therefore, it would lead to suspended activities on its CR.
• Closure of the bank account would be a vital hit to a company.

B: Businesses should comply with the amnesty program and try at least to convert the tax payment to an installment, which will help them to get rid of all those penalties and have an easy way to push the payments.

Topic 5: Digital Tools for Compliance & Efficiency

How can ZATCA-approved e-invoicing solutions, like Wafeq, help businesses automate VAT compliance and streamline tax filings?

coming of the E compliant Solutions like Wafeq and the integration with ZATCA. Wafeq has first put a proper check over the companies issuing all the invoices:

• An approved electronic system by ZATCA and cloud-based application.
• Help companies to maintain their revenues, collections, and accounts at the same time they would.
• the Right control over the Tax filing, helping the Finance team and the management to file numbers and VAT returns correctly.
• Generate RS for direct submission to ZATCA and customize the solution further with other solutions or an expense module you have.
• Check financial statements correctly with the revenues you have filed in corporate tax and VAT, and vice versa.
• Real-time reporting that reduces the discrepancy percentage and improves compliance and insurance.

What role do digital tools play in real-time tax reporting and cash flow management to prevent discrepancies and liquidity issues?

Having an electronic or cloud-based accounting application or an ERP is vital, especially when you work in a country like Saudi Arabia, where ZATCA has been very supportive and very strict at the same time. So, having a good accounting application like Wafeq can help you:

• Manage your accounting records and help predict the company's cash flows.
• Make projections and anticipate upcoming tax obligations.
• Allocate funds.
• Monitor the liquidity, track cash flow in and out flows, and prevent shortages.
• Make the financial decision through dashboards and insights, which a business owner needs to make the decision linked to the company growth.
• Give insights into the business as it integrates with your accounting software.
• Integrate with other applications related to finance and HR payroll like Qiwa and Mudad.
• Manage your business from anywhere altogether, and if you're expanding your business to different locations.

Topic 6: Avoiding Common ZATCA Audit Triggers

What are the most common mistakes that trigger ZATCA audits, and how can businesses avoid them?

A: This will trigger a ZATCA audit if:

1. Have not payable VAT collectable from ZATCA. Going with the refund option will send an automated response from ZATCA, and they'll send you an audit.

2. Claiming deducting high amount of bonuses

• Claiming large amounts under bonuses, allowances, commissions, or miscellaneous expenses can trigger a ZATCA audit.
• Salary Mismatch Between GOSI and ZATCA Records: A discrepancy between salaries registered in GOSI and those reported in ZATCA returns or corporate tax filings can raise red flags.
• Invoicing Sequence Mismatch: This is the mismatch of invoicing sequence number.
• Incorrect VAT Categorization and Claims: on ineligible expenses as claiming VAT on a luxurious item that is not approved.
• Claim deductions on which is a luxurious item having a car which is not registered under your business.
• Delayed VAT Filings or Payments will trigger an audit from ZATCA.

B: Proactive Compliance Measures

• Conduct regular bank reconciliations to ensure accuracy.
• Train your finance team well or hire a professional tax advisor for expert guidance.
• File corporate tax and Zakat returns properly and proactively to avoid penalties.

What proactive steps, such as bank reconciliation and internal audits, can businesses take to ensure tax compliance and minimize audit risks?

To ensure tax compliance and reduce audit risks, businesses in Saudi Arabia can take the following proactive steps: reconciliation and internal audits can business take to ensure comp

1. Bank Reconciliation: Conduct monthly bank reconciliations to ensure accuracy between bank records and bookkeeping entries. Use accounting software like Rema or Wafeq with integrated bank payout features to automate and streamline reconciliation.
2. Internal Audits and Payroll System: Implement a robust payroll system integrated with your accounting software to track employee deductions, working hours, and overtime (especially for contracting, IT, or project-based companies).
3. Maintain electronic records to automate and monitor financial transactions and support claims during corporate tax or Zakat filings.
4. Monthly bank reconciliation: Having a bank integrated with your accounting application is highly required to help businesses reconcile every transaction and categorize easily.
5. Import and Reverse Charge Mechanism For imported goods, report them under Column 9 of the VAT return to apply the reverse charge mechanism (even for zero-rated goods).
6. Timely VAT Submissions and Payments: File VAT returns and make on-time payments to avoid penalties and audit triggers.

Q&A Session from Attendees

How can the business treat the down payment deduction and the retention amount from a progress invoice?

Retention is a term used for construction companies that have construction projects. The retention amount is the amount that is adjusted at the end of the project. For example, if you have a project for a million Riyal and a retention of 10%, once you finish the project, this 100,000 will be part of the project's final payment.

Could sales commissions for the employees be deducted from profit and accordingly from income tax?

Yes, sales commissions for employees can be deducted from profit, which reduces the income tax liability in return. However, the treatment of commissions depends on the regulations set by the Zakat, Tax, and Customs Authority (ZATCA) in Saudi Arabia.

Commissions can be included in the registered salary for the General Organization for Social Insurance (GOSI), but doing so will incur a 2% tax on the GOSI contribution. There are two types of commissions:

• Internal commissions (paid to employees)
• External referral commissions. While minor external referral commissions are generally acceptable, large quantities may face scrutiny.

Commissions should be deductible within a reasonable percentage, such as under 30-40,000 SAR. significant amounts may attract closer examination by ZATCA, and they might require such payments to be allocated from the owner's account or retained earnings instead. Similarly, bonuses are subject to deductions, but only up to a particular limit. If the bonus amount is high, ZATCA may ask for it to be allocated from the owner's account. Smaller amounts should be reclassified as allowances, which might be a more favorable approach.

If a company owner is also the General Manager (GM) and has registered with GOSI, can their salary be deducted from the company's income tax?

No, the salary of an owner who also serves as the General Manager (GM) cannot be deducted from the company's income tax, even if they are registered with GOSI and actively working in the company. Based on experience, ZATCA (Zakat, Tax, and Customs Authority) does not allow owners' salaries to be treated as deductible expenses, regardless of their role or involvement in the business. This applies even if the owner is a working partner, not a "sleeping partner."

Additionally, ZATCA may disallow salaries paid to individuals with the same surname (e.g., family members) as deductible expenses. To stay compliant, it is recommended to avoid classifying owner salaries as expenses and instead explore alternatives like allowances. In some cases, it is advisable to consult with a ZATCA account manager to clarify any uncertainties.

How would overseas purchases, GOSI contributions, and other non-VAT expenses that reduce profit be included in annual Zakat or corporate tax calculations?

Expenses such as overseas purchases, GOSI contributions, employee-related costs (rentals, accommodations, transportation, food), and other overheads can be included in your Zakat or corporate tax calculations as deductible expenses as they reduce your profit. However, since these expenses are not subject to VAT, you cannot claim VAT deductions. These costs should be included in your Zakat or corporate tax filings, and the tax or Zakat will be calculated after accounting for these deductions.