Tax Exemption in Saudi Arabia: Concept, Regulations, and Analysis of Hail

Tax exemption is considered one of the fundamental pillars of financial policy in countries, and this is clearly applicable to the Kingdom of Saudi Arabia. Tax exemption is defined as a regulatory or legal procedure issued by the competent authorities, allowing certain categories or sectors to avoid paying part or all of the tax for a specified or permanent period, according to controls and specifications stipulated in the regulations. In Saudi Arabia, the tax system includes several types of taxes: income tax (imposed on foreign companies or owned by foreigners), zakat (on national companies), and value-added tax (VAT), in addition to customs duties and other fees.

The goal of tax exemption in Saudi Arabia is to achieve several strategic objectives, the most prominent of which are: stimulating local and foreign investment, supporting priority sectors such as technology, renewable energy, and manufacturing industries, encouraging startups and small and medium-sized enterprises, and alleviating burdens on vital sectors such as health and education. It is also used as a flexible tool to support special economic zones, such as NEOM City or Red Sea projects, where these areas grant full or partial tax exemptions to attract capital.

Practically, tax exemption leads to an increase in the net profits of benefiting companies, enhancing their investment attractiveness and contributing to improving stock performance in the Saudi financial market. Additionally, it helps create a more competitive environment and stimulates innovation and economic diversification, especially amid the major transformations the Kingdom is witnessing under Vision 2030. At the individual level, exemptions may include reducing the tax burden on essential products or services, positively reflecting on the standard of living.

It is worth noting that the application of tax exemptions is subject to strict controls, and they are reviewed periodically to ensure that developmental goals are achieved without harming the state's public revenues. Reports from the Capital Market Authority and the Zakat, Tax and Customs Authority are reliable sources for understanding the details of the application of exemptions and their effects on the Saudi market.

The tax framework in the Kingdom of Saudi Arabia is characterized by being organized and clear, and it is subject to periodic updates that reflect the economic and political objectives of the country. Until 2025, Saudi Arabia has maintained a balanced tax system, applying a 20% income tax on the net profits of foreign companies and companies with foreign ownership, while Saudi and Gulf companies are subject to zakat at a rate of 2.5% on certain assets and not on profits. This duality in the tax system aims to support the competitiveness of Saudi companies while maintaining the flow of foreign investments.

The value-added tax (VAT) also represented a significant turning point in the Saudi tax system. After increasing it from 5% to 15% in July 2020, the rate has remained at this level until 2025, helping the state diversify its revenue sources away from traditional reliance on oil. No significant changes have occurred in the main tax rates in the 2025 budget, providing important legislative stability for companies and investors.

Additionally, Saudi Arabia does not impose individual income tax on salaries or capital gains from the sale and purchase of listed stocks in the financial market (Tadawul), which is considered a regional competitive advantage to attract local and foreign capital. Conversely, some real estate transactions are subject to a 5% real estate transaction tax, with special exemptions for first-time home purchases for citizens.

The development of the Saudi tax system is characterized by flexibility, as the government responds to global market changes and economic development needs by updating legislation and launching initiatives such as temporary exemptions from fines, simplifying tax registration procedures, and encouraging voluntary compliance. This approach has reflected in a significant increase in the state's non-oil tax revenues in recent years.

It is noted that regulatory authorities, including the Zakat, Tax and Customs Authority and the Ministry of Finance, closely monitor the application of regulations and regularly issue reports and guidelines that help companies and individuals accurately understand their tax rights and obligations, enhancing transparency and reducing legislative risks.

The types of tax exemptions in the Kingdom of Saudi Arabia are diverse, encompassing a wide range of financial policies that support economic and social development. First, there are exemptions related to corporate income tax, where the government grants full or partial exemptions to new companies or strategic projects, especially in special economic zones or smart cities like NEOM and the Red Sea. This exemption may extend for many years, reaching up to 10-20 years, and includes either a complete exemption from tax or a gradual reduction depending on the type and size of the investment.

Second, zakat, as a financial obligation imposed on national companies at a rate of 2.5% on certain financial items, may sometimes have facilitation in the way zakat is calculated or allow for the deduction of certain expenses, especially if profits are directed to community projects. Third, the value-added tax, which is 15% on most goods and services, but the state exempts vital sectors such as education, health, pharmaceuticals, domestic transport, and exports to alleviate the burden on individuals and companies operating in these fields.

Customs exemptions represent another type, where the government exempts certain raw materials and industrial equipment from customs duties, especially those used in new industrial or technological projects. There are also tax exemptions for individuals, where citizens do not pay income tax on salaries or personal income, with special privileges granted when purchasing the first home through exemptions on real estate transaction tax.

Additionally, exemptions linked to international agreements allow foreign companies and investors to benefit from double taxation avoidance agreements that enable them to obtain exemptions or reductions in taxes due on profits distributed or realized in the Kingdom. These exemptions aim to make the business environment in Saudi Arabia more attractive to global investors and support the country's plans to transform into a regional economic hub.

All these exemptions are subject to close monitoring by the competent authorities and are regularly updated to ensure their alignment with economic changes, with a constant focus on achieving a balance between encouraging growth and achieving tax fairness.

Tax exemptions in Saudi Arabia target multiple categories of companies and institutions within a comprehensive strategy to support economic development, localize industries, and attract foreign investments. At the forefront of these categories are startups and medium-sized companies, especially those operating in national priority sectors such as technology, renewable energy, mining, and manufacturing industries. These companies are granted partial or full tax exemptions on profits for specified periods to facilitate their launch and reduce operating costs during the early growth stages.

Foreign companies also benefit significantly from exemptions, especially when investing in special economic zones or new cities like NEOM. These areas grant long-term tax exemptions, including income tax and customs duties, to attract foreign capital and transfer modern technologies to the local market. Multinational companies operating in strategic sectors find these exemptions a strong incentive to relocate part of their operations to Saudi Arabia, contributing to job creation and skill localization.

Vital sectors such as health, education, agriculture, and public transport also enjoy exemptions on value-added tax or government fees to reduce the costs of essential services and stimulate investment in infrastructure projects. For example, hospitals and private educational institutions are exempt from value-added tax on certain activities, contributing to increased competitiveness and quality of services provided to citizens and residents.

Additionally, individual citizens benefit from tax exemptions, as they are not subject to income tax on salaries and receive exemptions when purchasing their first home, along with many essential products being exempt from value-added tax. These facilities aim to enhance purchasing power and improve the standard of living.

Finally, companies that enter into agreements with government entities to implement national or strategically significant projects may receive tax exemptions or reductions, as part of clear contracts that define conditions and obligations, enhancing the private sector's participation in achieving national development goals. All these measures are subject to close monitoring to ensure the expected economic and social returns are achieved.

Tax exemptions play a pivotal role in enhancing the economic performance of the Saudi financial market, as they indirectly affect company valuations, profit margins, and the attractiveness of stocks to local and foreign investors. When a company receives a tax exemption, its financial obligation to the state decreases, increasing its net profits after tax and improving financial indicators such as the price-to-earnings ratio (P/E Ratio) and earnings per share (EPS). This improvement typically reflects on the stock's valuation in the market and attracts the attention of investors seeking companies with high profitability and stable distributions.

At the sector level, tax exemptions are considered a strategic tool to support industries that the Kingdom seeks to localize or develop, such as technology, renewable energy, and manufacturing industries. In the cement sector, for example, exemptions can help reduce production costs, giving companies a competitive advantage in facing price fluctuations or pressures resulting from oversupply. However, these exemptions are often not granted to all companies in the sector collectively but are allocated based on clear criteria such as investment size, economic impact, or excellence in innovation.

From an investment perspective, the absence of capital gains tax on trading listed stocks in the Saudi financial market (Tadawul) is an important advantage for individual investors, as it allows them to achieve gains from selling stocks without direct tax deductions. Additionally, the stability of tax rates and clarity of legislation enhance investor confidence and reduce the risks of sudden legislative changes.

It is worth noting that tax exemptions are also used as a tool to support liquidity in the market, especially during economic crises or when launching major investment projects. For example, the government may grant temporary tax exemptions or facilities to companies to enhance their ability to overcome recession periods or stimulate employment.

In conclusion, the importance of exemptions lies in their ability to achieve a balance between stimulating economic growth and increasing public revenues, while it is essential to monitor their effectiveness and periodically evaluate their impact to ensure that developmental goals are achieved without negatively affecting tax fairness or the sustainability of public finances.

The cement sector is considered one of the vital pillars of the Saudi economy, playing a key role in supporting infrastructure projects, housing, and urban development, especially under the strategies of Vision 2030 that focus on urban expansion and comprehensive development. The sector includes several large and medium-sized companies, distributed geographically to cover local and regional demand. Among these companies, Hail Cement Company (symbol 3001 in Tadawul) has emerged as a medium-sized company serving the Hail region and the north, competing with companies such as Saudi Cement, Yamama, Southern, and Eastern.

Until mid-2024, Hail Cement was listed on the Saudi financial market, but it faced fluctuations in its stock price due to low trading volume compared to larger companies and volatility in profitability indicators. The stock price ranged in the tens of riyals, with an estimated market value of hundreds of millions of Saudi riyals. The price-to-earnings ratio (P/E Ratio) was in a moderate range of approximately 8 to 12, reflecting relatively stable profits without exceptional growth. The company's cash distributions were volatile, as it distributed limited profits in some years while retaining earnings in other years to cover slight losses or finance expansions.

In terms of competition, Hail Cement faced challenges in controlling costs and increasing operational efficiency, especially with oversupply in the local market and price declines in certain periods. It also did not benefit from exceptional tax exemptions announced but was subject to the zakat system like other Saudi-owned companies. In June 2024, the Saudi financial market announced the suspension of trading in Hail Cement's stock and its final delisting on June 12, 2024, ending its presence in the financial market and halting updates to its public financial data.

The case of Hail Cement illustrates the importance of tax policies and legislative stability in supporting medium-sized companies and highlights the need for activating additional incentive tools to mitigate competitive challenges, especially in sectors facing structural pressures like cement.

Financial indicators are essential tools relied upon by analysts and investors to assess the performance of listed companies, and this is particularly important when studying the case of Hail Cement Company before its delisting in mid-2024. According to available market data at that time, the stock price of Hail Cement fluctuated between approximately 15 and 25 riyals in the months leading up to the suspension, reflecting fluctuations in demand and liquidity amid low trading volume compared to larger companies in the sector such as Saudi Cement or Yamama.

The company's market value was estimated at hundreds of millions of Saudi riyals, based on the number of issued shares and the stock price, placing the company in the medium-sized category within the cement sector. Regarding the price-to-earnings ratio (P/E Ratio), it ranged between 8 and 12 in recent years, indicating relative stability in profits without exceptional growth or sharp declines. This indicator shows that the company was generating sufficient profits to maintain its investment attractiveness, despite the absence of regular and high dividend distributions.

Hail Cement's cash distribution policy was characterized by irregularity, as the company distributed limited cash dividends in some years while preferring to retain earnings in other years to cover losses or finance small expansions. This fluctuation in distributions reflected on the stock's attractiveness to investors seeking stable returns.

Tax-wise, Hail Cement was subject to the zakat system at a rate of 2.5% on certain assets, provided that the foreign ownership percentage did not exceed the allowable limit, as it was not subject to corporate income tax. The company did not announce benefiting from any exceptional tax exemptions before its delisting.

It is worth noting that the company's delisting in June 2024 halted updates to its financial data in the Saudi financial market, and the available indicators became a reference only for the pre-delisting period, making future performance analysis linked to any potential regulatory changes or restructuring.

The Saudi cement sector represents one of the largest and most competitive industrial sectors, playing a vital role in supporting infrastructure and housing projects. The sector includes several major companies such as Saudi Cement (symbol 3000), Yamama Cement (symbol 3002), Southern Cement (symbol 3030), and Eastern Cement (symbol 2010), along with medium and small companies like Hail Cement. These companies are geographically distributed to serve the needs of different regions, enhancing competition for market shares.

In recent years, the sector has faced challenges related to oversupply due to increased production capacity compared to actual demand, along with price fluctuations resulting from government project cycles and a slowdown in some real estate sectors. This reality has forced companies to improve operational efficiency, reduce costs, and manage production lines flexibly. Larger companies often enjoy higher profit margins due to economies of scale, while medium and small companies face greater competitive pressures and require additional support such as tax exemptions or customs facilities.

Tax policies play an indirect role in supporting or challenging companies, as stability in zakat and income tax rates gives companies the ability to plan long-term financial strategies without tax surprises. Conversely, any tax exemptions or customs reductions on raw materials or equipment can enhance companies' competitiveness and improve profit margins. Although no announced tax exemptions specifically pertain to the cement sector until 2025, some companies may benefit from government support initiatives or special facilities for expansion projects.

In terms of distributions, larger companies in the sector typically provide more stable cash distributions, while distributions among medium companies like Hail Cement are characterized by volatility. Existing challenges necessitate that companies innovate in cost management and expand into export markets, especially as the Kingdom aims to export production surpluses to neighboring Gulf countries.

Overall, the role of tax policies remains a crucial factor in the sector's sustainability and achieving attractive returns for investors, with the importance of continuous monitoring of legislative developments and any future incentive initiatives.

Tax exemption directly affects companies' ability to distribute dividends and improve their capital structure, as reducing tax liabilities means increasing the net profits available for distribution among shareholders. In the Saudi context, when a company receives an exemption from income tax, it retains a larger percentage of its profits, enhancing its ability to finance future expansions or increase cash dividends.

For example, if a company pays a 20% income tax on its profits and then receives an exemption, this percentage is directly added to the net profits, allowing the company to increase distributions or reinvest profits in expansion projects. This positively reflects on earnings per share (EPS) and the price-to-earnings ratio (P/E Ratio), increasing the stock's attractiveness to investors seeking stable returns.

As for national companies that are subject only to zakat (2.5% on certain assets), tax exemptions remain relatively limited in impact compared to companies paying higher income tax. However, any reduction in financial obligations, whether through tax or customs exemptions, contributes to improving the company's financial position and provides greater flexibility in managing capital.

In the case of Hail Cement, the company did not benefit from exceptional tax exemptions before its delisting, but was subject to the zakat system like other national companies. This means that its ability to increase cash distributions was primarily linked to its ability to achieve stable operating profits and control costs, rather than as a result of direct tax exemptions.

It is important to note that dividends themselves may be subject to withholding tax for foreign investors (typically 5% under international agreements), while Saudi investors are not subject to any tax on distributions. This structure enhances the attractiveness of the Saudi financial market for local investors and supports the stability of dividends in financially sound companies.

The Saudi government places great emphasis on supporting individual investors and startups by granting them various tax exemptions and financial incentives. Individuals in Saudi Arabia are not subject to income tax on salaries or personal income, which is one of the most important features of the local tax system and grants citizens and residents greater purchasing power. Additionally, capital gains realized from buying and selling listed stocks in the financial market (Tadawul) are not subject to any tax, encouraging investment in securities and providing an attractive investment environment.

Startups and small and medium-sized enterprises (SMEs) benefit from incentive policies that include partial or full tax exemptions on profits for several initial years, along with discounts on government fees and facilitation in company registration. For example, technology or health startups may be granted an exemption from income tax for up to five years, according to clear criteria set by regulatory authorities. Companies operating in special economic zones also benefit from long-term exemptions that include income tax and customs duties, reducing operational costs and enhancing success opportunities in the early stages.

Financial incentives are not limited to tax exemptions only but also include government support programs, facilitated loans, and access to markets. These policies aim to stimulate entrepreneurship, attract foreign investments, and localize modern technologies. The foreign investment law grants foreign investors special tax rights, sometimes including partial exemptions from taxes if invested in strategic projects or those with significant social impact.

All these incentives are subject to periodic review to ensure their effectiveness and achieve the desired goals, with an emphasis on the necessity for startups to comply with disclosure and governance requirements to fully benefit from the exemptions. In this way, tax exemptions contribute to enhancing the entrepreneurial environment and supporting economic transformation in Saudi Arabia.

In 2024 and 2025, the Kingdom of Saudi Arabia witnessed several government initiatives aimed at enhancing tax compliance and providing temporary facilities for companies and individuals. The most prominent of these initiatives was the launch of a campaign by the Zakat, Tax and Customs Authority to encourage companies to voluntarily declare and settle overdue tax debts, granting temporary exemptions from fines and a discount of up to 25% on the amount of tax due if settled before the end of 2024. This step aims to raise the tax compliance rate without imposing additional burdens that hinder economic growth.

Regarding tax policies, the government maintained stability in the main tax rates, especially the value-added tax, which remained at 15% without change in the 2025 budget. This stability provided companies with the ability to plan long-term, especially in sensitive industrial and commercial sectors to tax changes. The government did not announce any exceptional tax exemptions for the cement sector or the companies listed in it during this period, but focused efforts on improving tax collection efficiency and simplifying administrative procedures.

On the other hand, the Kingdom continued to update double taxation avoidance agreements with international partners such as China and India, allowing foreign investors to benefit from exemptions or reductions in taxes due on profits realized within Saudi Arabia. This step enhances the attractiveness of the Saudi market for foreign investments and supports exports, especially in industrial sectors like cement.

It is noteworthy that some major companies in non-cement sectors announced expansions and new projects, benefiting from tax incentives directed at special economic zones or strategic sectors. As for Hail Cement Company, it did not benefit from any announced tax exemptions before its delisting in June 2024.

These developments reflect the government's commitment to improving the business climate and enhancing transparency, with a focus on stimulating local and foreign investment without harming public revenues or tax fairness.

International agreements to avoid double taxation play an important role in providing an attractive investment environment for foreign investors in the Kingdom of Saudi Arabia. These agreements aim to avoid imposing two taxes on the same income or profits realized, whether in Saudi Arabia or in the investor's original country. Until 2025, the Kingdom has signed dozens of agreements with major countries such as China, India, the United States, and EU countries to facilitate the flow of capital and provide tax protection for investors.

Under these agreements, foreign companies and investors have the right to benefit from exemptions or reductions in taxes due on profits distributed or realized in Saudi Arabia. For example, the withholding tax rate on dividends for investors covered by the agreements is often set at a maximum of 5%, reducing the tax burden compared to standard rates. The agreements also allow for the deduction of taxes paid in Saudi Arabia from the tax due on the same income in the investor's country, preventing double taxation and increasing investment attractiveness.

These exemptions contribute to enhancing the flow of foreign direct investments, especially in priority national industrial and service sectors. They also support foreign companies operating in Saudi Arabia in reinvesting profits or distributing them to shareholders without incurring double tax costs.

It is important to note that benefiting from these exemptions requires companies to comply with disclosure and transparency standards and provide the necessary documentation to prove eligibility for the agreements. Regulatory authorities closely monitor the implementation of the agreements to ensure full compliance and protect the rights of the public treasury.

For the cement sector, foreign investors in companies like Hail Cement (before its delisting) or other major companies can benefit from these exemptions when distributing profits or restructuring investments, enhancing the competitiveness of the Saudi market in attracting foreign capital.

Despite the similarity of the terms, there are substantial differences between tax exemption and tax reduction in terms of concept, application, and financial impact on companies and individuals. Tax exemption means a complete or partial cancellation of the tax due, so that the concerned entity is not obliged to pay the tax or pays only part of it under specific conditions. Exemptions are usually granted for specified periods or for certain activities as an investment incentive or to support a specific sector. For example, the government may grant a complete exemption from income tax for a new industrial project for ten years or an exemption from value-added tax for some vital services such as healthcare or education.

In contrast, tax reduction or tax deduction means reducing the amount of tax due without completely canceling it, achieved by lowering the tax rate or allowing a deduction of part of expenses or profits before calculating the tax. For example, tax authorities may allow companies to deduct 50% of their profits realized from research and development projects before calculating income tax or reduce the income tax rate from 20% to 10% on certain activities.

In the Saudi context, the difference is clearly evident in applications such as "exemption from income tax" for new companies in special economic zones (complete exemption), versus "reduction of taxes imposed on profits" for certain sectors or projects (partial deduction). Both aim to stimulate investment and reduce financial burdens, but exemption is considered more comprehensive and impactful in the short term, while reduction focuses on supporting the continuity of activity and encouraging gradual expansion.

It is worth noting that granting exemptions or reductions is subject to strict criteria and regulatory controls to ensure that developmental goals are achieved without harming public revenues or creating unfair competition among companies. The impact of these policies is also periodically reviewed to assess their effectiveness and adjust them according to national economic requirements.

Tax policies play a strategic role in determining the trajectory of the Saudi cement sector, whether in terms of competitiveness, profitability levels, or opportunities for expansion and financial sustainability. Until 2025, the Kingdom has maintained relative stability in tax legislation, without imposing any exceptional taxes on the cement sector or granting collective exemptions. This stability has given companies the ability to plan long-term, focusing on improving operational efficiency and addressing market challenges such as oversupply and price fluctuations.

In the future, tax policies may witness new trends based on economic development requirements or changes in the regional labor market. If the government announces new exemptions or tax reductions (such as lowering income tax or customs facilities on equipment), this will contribute to reducing production costs and increasing profit margins for companies, potentially prompting them to expand production capacity or increase cash distributions to shareholders. On the other hand, any tightening in tax collection or the imposition of new environmental fees may increase operational costs and pressure the profitability of companies, especially medium and small ones.

Support initiatives for special economic zones and the expansion of double taxation avoidance agreements remain motivating factors for attracting foreign investments and enhancing the competitiveness of the sector. Additionally, the continued tax incentives for startups and strategic projects will contribute to driving innovation and localizing modern technologies in the industry.

From an investor's perspective, monitoring developments in tax policies will remain a crucial factor in assessing the feasibility of investing in listed cement companies. Exemptions or legislative stability increase investor confidence and stimulate further capital inflows into the sector. It is important to emphasize the need for continuous monitoring of regulatory authority reports and market analyses to ensure understanding of the impact of tax policies on the sector and to evaluate the associated opportunities and risks.