Saudi Arabia has announced a lower tax rate for its state energy giant Saudi Aramco on Monday as the company prepares for a 5 per cent listing late next year.

A royal order was issued to cut the tax rate for Saudi Aramco, the kingdom’s main revenue earner, from 85 per cent to 50 per cent.

The tax rate is a key component in determining the valuation and dividend policy for state owned Saudi Aramco, which officials have said is worth $2tn.

Even if it is valued at half this level it would still be the largest ever flotation.

Amin Nasser, Saudi Aramco’s chief executive, said in a statement: “The new tax rate will bring Saudi Aramco in line with international benchmarks.”

Investors and energy sector analysts have said Saudi Aramco’s high tax and royalty payments to the state are one factor that could reduce its valuation.

But with a 5 per cent listing, the kingdom will remain Saudi Aramco’s largest shareholder and in turn would get paid a dividend.

“Any tax revenue reductions applicable to hydrocarbon producers operating in the Kingdom are replaced by stable dividend payments by Government-owned companies, and other sources of revenue including profits resulting from investments,” said Mohammed Al-Jadaan, minister of finance, in a statement.

The IPO forms the centrepiece of a plan to overhaul Saudi Arabia’s economy and diversify away from oil, the precious resource it has been reliant on for decades.

Saudi Aramco earlier this year had recommended the government approve a tax rate of 50 per cent.

Aramco is not just an oil and gas producer, it also works as an effective arm of the state building schools, hospitals and sports stadiums.

Since announcing plans for a listing in early 2016 Saudi Aramco has engaged in a vast untangling of its finances, portioning off those revenues it earns from its core business versus those projects it conducts for the government.

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