Saudi Arabia issues guideline for Special Integrated Logistics Zone

Executive summary

On 10 December 2023, Saudi Arabia’s Zakat, Tax and Customs Authority (ZATCA) published the General Guideline for the Zakat, Tax and Customs Provisions of the Special Integrated Logistics Zone (pdf) (Guideline). The Special Integrated Logistics Zone (SILZ or Zone) was previously known as the Integrated Logistics Bonded Zone or ILBZ.

The Guideline provides the necessary clarifications and guidance for the application of the tax and customs provisions relating to the Zone. It outlines the specific tax and customs rules applicable in the Zone.

Detailed discussion

Background

On 10 October 2018, Saudi Arabia took a key step toward diversifying its economy by setting up a dedicated framework for ILBZ (now SILZ) through Royal Order A/17. This initiative was part of a broader strategy to establish specialized economic zones in strategic locations to promote promising sectors such as ICT, logistics, tourism and financial services.

The Zone stands as the inaugural project within Saudi Arabia's national logistics platform program. To promote the logistics sector and attract businesses to establish in the SILZ, the ZATCA published the Guideline.

Highlights of the Guideline

Activities allowed in the Zone

The Zone aims to attract qualitative investments with added value to the national economy. Existing establishments within the Zone can practice the following activities:

• Maintenance, repair, processing, modification, development, assembly, and storage of goods
• Sorting, packing, repacking, packaging, trading, distribution, handling and use of goods or other goods, including simple manufacturing processes, in any form
• Import, export and re-export
• Value-added services, logistics and after-sales services
• Recycling waste and e-waste

Tax incentives for establishments

i. 0% income tax for 50 years (tax holiday) on income derived from Zone activities: Eligible income from Zone activities is subject to 0% tax for a period of 50 years starting from the date the establishment receives a license for Zone activities. Income not derived from activities allowed in the Zone and income after the income tax holiday period are taxed at the standard corporate tax rate of 20%.

ii. No withholding tax on certain payments to non-residents during the tax holiday period: Certain payments to nonresidents (dividends, loan payments, royalties, technical services, etc.) are not subject to withholding tax.

iii. Suspension of VAT and customs duties on goods related to Zone activities: Goods imported into the Zone are temporarily exempted from customs duties, VAT and certain restrictions, if related to licensed activities. The suspension ends upon entering the local market, with customs duties and VAT applied at that time. Temporary transfers to the mainland for activities such as maintenance keep the suspension status active.

Other matters

Zakat and other taxes: There are no special exemptions for zakat, excise tax and real estate transaction tax.

Transactions with the mainland and anti-tax avoidance provision: Businesses established in the zone are independent from those set up in the mainland. Transactions between any establishment operating within the designated Zone and its affiliated entities in the mainland must be reported as related-party transactions.

Tax/zakat base returns and payments: Businesses operating in the Zone must fulfill their tax obligations by filing returns and paying any owed amounts, including those not covered by incentives or exemptions, as outlined in the Zakat Collection laws and regulations.

Supply of goods from the mainland to the Zone: Goods supplied within the Zone must be in a suspended status for customs duties and VAT. Zero rate applies to supplies from the mainland to the Zone if the supplier is VAT-registered and the goods are related to Zone activities. Goods from the Zone to the mainland are considered as imported goods and are subject to VAT and customs duties upon exit. Temporary exports from the mainland to the Zone are exempted from customs duties if returned in accordance with the conditions and controls stipulated in the Common Customs Law and its Implementing Regulation. Movement of goods from the Zone to another country is considered as export with no VAT payable. Goods moved to other special economic zones under tax suspension are suspended for customs duties and VAT if both zones have such provisions.

VAT deduction: Businesses in the Zone registered for VAT can deduct input tax for taxable supplies, including zero-rated ones. As such, refundable credit balances may occur. Mainland businesses importing from the Zone will pay VAT at exit from the Zone and can deduct input tax incurred upon import. Refund requests can be submitted through the returns filed or as separate requests.

Recordkeeping requirements: Companies should maintain separate books and records for Zone activities from those of the parent company. Businesses should maintain the necessary documents for tax and customs calculations. E-invoicing is mandatory for Zone businesses registered with the ZATCA.

Tax and customs assessments and inspection: Zone businesses are subject to tax and customs assessments and inspections like any other businesses in Saudi Arabia. Businesses that wish to object to the ZATCA's decisions should follow designated procedures. Noncompliance with tax and customs rules may lead to fines, license withdrawal or other penalties.

Implications

Businesses planning to carry out licensed activities in the Zone should review the Guideline to assess their eligibility to avail of the applicable tax breaks and other benefits.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Professional Services (Professional LLC), Riyadh

• Asim Sheikh, Saudi Arabia Tax Market Segment Leader
• Ahmed H Akeel, Business Tax Services
• Amr Farouk, Global Compliance & Reporting
• Atif Khan, Global Compliance & Reporting
• Esraa Albuti, Business Tax Services
• Hosam Abdulkareem, Business Tax Services
• Imran Iqbal, Global Compliance & Reporting
• Mirza Ashraf, Global Compliance & Reporting
• Babar Ali, Business Tax Services
• Wissam Merhej, Business Tax Services
• Carl Suchtelen, Global Compliance & Reporting
• Rula Dajani, Business Tax Services
• Suleiman Mohammed, Global Compliance & Reporting
• Billy Thorne, International Tax and Transaction Services
• Carsten Kuhlmann, International Tax and Transaction Services
• Ricardo M. Cruz, Saudi Arabia ITTS and Transfer Pricing Leader
• Mohammed Bilal Akram, Indirect Tax
• Peter Dylewski, Indirect Tax

Ernst & Young Professional Services (Professional LLC), Jeddah

• Ayman Abu El lzz, Global Compliance & Reporting
• Hussain Asiri, Business Tax Services
• Amro El Fadly, Business Tax Advisory
• Ahmed Mubarak, Business Tax Services
• Dana D. Dandashi, Global Compliance & Reporting
• Khalid Feroze, Business Tax Services
• Asem Habis, Business Tax Services
• Suleman Mulla, International Tax and Transaction Services
• Adrian Smith, Indirect Tax
• Mohsin Rehmani, Indirect Tax

Ernst & Young Professional Services (Professional LLC), Al Khobar

• Sanjeev Fernandez, Saudi Arabia Indirect Tax Leader
• Syed Farhan Zubair, Global Compliance & Reporting
• Ali K. Khamis, Business Tax Services
• Bilal Mian, Global Compliance & Reporting
• Javed Aziz, Global Compliance & Reporting
• Haytham Hassan, Global Compliance & Reporting
• Waqas Khan, Business Tax Services

EY Consulting LLC, Dubai

• Aamer Bhatti, MENA Indirect Tax Leader
• Guy Taylor, MENA Transfer Pricing Leader

Ernst & Young — Middle East, Bahrain

• Miranda Baas, International Tax and Transaction Services
• David J. Macklin, International Tax and Transaction Services
• Patrick Oparah, International Tax and Transaction Services - Transfer Pricing
• Ali Almahroos, Indirect Tax
• Jack Sims, Indirect Tax
• Shane Durran, Indirect Tax

Ernst & Young LLP (United States), Middle East Tax Desk, New York

• Asmaa Ali

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.