Unlocking Growth: Comprehensive Overview of Tax and Customs Incentives in Integrated Logistics Bonded Zone

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The Integrated Logistics Bonded Zone (ILBZ) has emerged as a strategic hub for economic activities, offering a suite of tax and customs incentives to entities engaged in Prescribed Activities  In this write-up, we have discussed the tax and customs incentives for an entity established in ILBZ and the compliance requirements.

Prescribed Activities:

Entities established in the ILBZ may be engaged in the following activities: Maintenance, repair, processing, assembly, storage etc. of goods and after-sales services; Sorting, packaging, re-filling, trading, distribution, handling and use of goods, including simple manufacturing processes; Import, export and re-export; Logistics, valued-added services; and  Recycling of waste and electronic wastes.

Corporate Income Tax Incentives:

ILBZ entities enjoy the following corporate income tax (CIT) benefits: Such entity is considered a tax resident of the Kingdom of Saudi Arabia (KSA). 50-year tax relief period, commencing from the date of licensing for Prescribed Activities, the tax relief period ends on expiry of 50 years or if the entity ceases to be an ILBZ entity.  Income derived from Prescribed Activities is subject to CIT rate of 0% during the tax relief period, any other income of the ILBZ is taxed at normal tax rates.

Withholding Tax Incentives:

ILBZ entities are spared from withholding tax (WHT) on various payments related to Prescribed Activities, including dividends, loan charges, royalties to non-resident related parties, and technical services. However, it is essential to note that this exemption hinges on the direct relevance of these payments to Prescribed Activities.

Customs Duty Incentives:

Goods imported into ILBZ benefit from a customs duty suspension arrangement, translating to a duty-free status until the goods either leave ILBZ or enter the mainland. This facilitates cost- effectiveness in logistics and adds a competitive edge to ILBZ entities involved in import, export, and re-export activities.

Value-Added Tax Advantage:

The Value Added Tax (VAT) incentive within ILBZ focuses on transactions involving goods under a customs duty suspension arrangement. The transportation of goods into or within ILBZ, as well as related supplies or transactions, falls outside the scope of the VAT Law.

Conditions and Anti-Abuse Rules:

To ensure the integrity of the incentive framework, ILBZ has implemented stringent conditions and anti-abuse rules. Entities may be disqualified from these benefits if they engage in Prescribed Activities in the mainland, cease or substantially reduce these activities, and subsequently relocate them to ILBZ for tax advantages. Additionally, the General Authority of Zakat and Tax (GAZT) reserves the right to deny incentives if ILBZ entities facilitate payments to non-residents on behalf of ineligible entities. The enforcement of these rules aims to maintain the credibility and effectiveness of the incentive system.

Tax Compliance Requirements:

ILBZ entities, while enjoying a favorable tax environment, remain subject to domestic tax legislation within the KSA. Compliance obligations include providing annual confirmation of adherence to requirements and maintaining separate accounts for Prescribed and non-Prescribed Activities.

Conclusion:

The 50-year tax relief period, coupled with 0% CIT on Prescribed Activities, positions ILBZ as an attractive destination for long-term investments. The withholding tax exemptions, customs duty suspension, and VAT advantages further enhance the appeal of ILBZ for entities involved in international trade. However, entities must navigate these incentives responsibly, adhering to conditions and compliance requirements to sustain the integrity of the ILBZ ecosystem.

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