Saudi Arabia on Monday dropped the tax rate on its oil industry, marking a significant move to lay the groundwork for a highly anticipated initial public offering of its state-owned energy company, Saudi Aramco.

Under changes announced by a royal decree, Saudi Arabian Oil Co., or Aramco, said its tax rate would fall to 50% from 85%, bringing the company "in line with international benchmarks." The decree didn't address the 20% royalty Aramco pays the kingdom.

The tax change addresses a potential concern for would-be Aramco investors and represents a step in a flurry of changes at the company as the Saudis prepare to list up to 5% of its national crown jewel. The company has already hired independent auditors to examine its crude-oil reserves and a raft of bankers, press relations consultants and advisers to help make the listing happen.

The Aramco IPO is expected to be among the largest ever and the proceeds are supposed to be directed toward a Saudi national transformation effort known as Vision 2030, meant to diversify its economy.

Generating more revenue from non-oil sources is key to the success of Riyadh's economic vision. Saudi Arabia depends on oil revenue for 62% of government revenue, down from 73% in 2015.

The government estimated non-oil revenues totaled 199 billion Saudi riyals last year--still significantly short of the 530 billion-riyal target ($141.3 billion) it set for non-oil income by 2020.

For decades, oil income allowed the ruling monarchy to spend lavishly on benefits for its citizens, who don't pay tax. The slump in crude prices that began in 2014 has forced the kingdom to cut back on capital expenditure and to reduce subsidies on water, fuel and electricity.

Saudi finance minister Mohammed Al-Jadaan said the tax change would support the kingdom as it becomes a "global investment powerhouse."

"This move carries strategic benefits for Saudi Arabia, its citizens and future generations," Mr. Jadaan said in a news release.

He said the tax change wouldn't affect the kingdom's ability to deliver services to its citizens. In a news release, he said the taxes lost would be replaced by other sources of revenues, including "stable dividend payments by government-owned companies" and "profits resulting from investments."

Write to Summer Said at summer.said@wsj.com and Margherita Stancati at margherita.stancati@wsj.com