Withholding Tax in Saudi Arabia: A Comprehensive Guide

Withholding Tax in Saudi Arabia is a crucial aspect of the country’s tax system, ensuring that taxes on certain payments to non-residents are collected at the source. This tax mechanism, enforced by the Zakat, Tax, and Customs Authority (ZATCA), applies to payments made by Saudi businesses to foreign entities that do not have a permanent establishment in the country. Understanding withholding tax in Saudi Arabia is essential for companies operating in the Kingdom to maintain compliance and avoid penalties.

This guide explores the concept in detail, including Saudi Arabia withholding tax certificate, Saudi Arabia withholding tax exemption, Saudi Arabia withholding tax on services, Saudi Arabia withholding tax refund, and current withholding tax rates in Saudi Arabia.

What is Withholding Tax (WHT) in Saudi Arabia?

Withholding Tax (WHT) in Saudi Arabia is a tax deducted at the source when Saudi-based businesses make payments to non-residents for specific services. The tax is collected on behalf of ZATCA to ensure that foreign entities contributing to the Saudi economy pay their fair share of taxes. Saudi withholding tax applies to various payments, including royalties, management fees, interest, and other professional services.

The key characteristics of withholding tax in KSA include:

• Applicability: WHT applies to payments made to foreign entities without a permanent establishment in Saudi Arabia.
• Obligation: The Saudi company making the payment is responsible for deducting and remitting the tax.
• Rates: Withholding tax rates in Saudi Arabia vary depending on the nature of the payment and applicable tax treaties.

Scope of Withholding Tax in Saudi Arabia

Withholding tax in Saudi Arabia covers various payments made to non-residents. The most common types of payments subject to withholding tax include:

• Technical and consultancy services: Payments for expert advice and professional services.
• Management fees: Charges related to business administration and operational support.
• Royalties: Payments for the use of intellectual property, trademarks, or patents.
• Interest payments: Fees paid on loans or financial instruments.
• Lease payments: These are the Rent for leasing equipment, buildings, or other properties.
• Dividends: Profit distribution payments made to foreign shareholders.
• International telecommunications services: Payments for cross-border telecommunication services.

Saudi Arabia withholding tax on services is a significant component, particularly affecting industries that rely on foreign expertise. Businesses must carefully evaluate their transactions to determine withholding tax applicability.

Examples of Withholding Tax (WHT) in Saudi Arabia

To understand how Saudi withholding tax works, consider the following scenarios:

1. A Saudi-based IT company hires a foreign consultant for software development and pays SAR 150,000. If the applicable WHT rate is 15%, the company must withhold SAR 22,500 and remit it to ZATCA.
2. A local manufacturing firm pays SAR 500,000 in royalties to a foreign licensor. Given the withholding tax rate of 15%, SAR 75,000 is withheld before transferring the remaining amount.
3. A Saudi corporation distributes SAR 200,000 in dividends to a foreign shareholder. With a withholding tax rate of 5%, SAR 10,000 is deducted before the payment is made.

Withholding Tax Process in Saudi Arabia

The process of withholding tax in KSA involves several key steps:

1. Identifying taxable payments: Businesses must determine if a payment to a non-resident is subject to WHT.
2. Determining the withholding tax rate: The applicable rate depends on the nature of the payment and whether a tax treaty applies.
3. Deducting the tax: The payment company withholds the appropriate tax amount.
4. Remitting tax to ZATCA: The withheld tax must be submitted to ZATCA by the specified deadline.
5. Obtaining a Saudi Arabia withholding tax certificate: Companies may request a certificate from ZATCA as proof of tax payment.
6. Filing tax returns: Businesses must submit WHT reports and maintain proper records for compliance.

Purpose of Withholding Tax in KSA

The primary objectives of withholding tax in Saudi Arabia include:

• Ensuring tax compliance among non-residents.
• Preventing tax evasion by collecting taxes at the source.
• Increasing government revenue from cross-border transactions.
• Ensuring that foreign businesses contribute to the Saudi economy.

Withholding Tax Rates in Saudi Arabia

The withholding tax rates in Saudi Arabia vary by type of payment:

• Management fee: 20%
• Royalties: 15%
• Technical and consulting services: 5%-15%
• Dividends: 5%
• Interest payments: 5%
• Lease payments: 5%
• International telecommunications services: 15%

How to Calculate Withholding Tax in KSA?

The formula for calculating withholding tax in Saudi Arabia is: WHT = Payment Amount × Applicable Tax Rate. For example, if a Saudi business pays SAR 300,000 to a foreign consultant at a 10% tax rate, the withheld tax is SAR 300,000 × 10% = SAR 30,000

Responsibilities of the Withholding Person

The entity responsible for withholding tax in Saudi Arabia must:

• Deduct the correct amount before making a payment.
• Submit the withheld tax to ZATCA by the deadline.
• Obtain a Saudi Arabia withholding tax certificate as proof.
• Maintain detailed records for audits.

What Are Double Taxation Treaties (DTTs) in KSA?

Saudi Arabia has Double Taxation Treaties (DTTs) with multiple countries to prevent double taxation. These treaties may reduce withholding tax rates. Businesses should check applicable DTTs before deducting taxes.

Penalty for Non-Compliance with Withholding Tax

Failure to comply with withholding tax regulations results in penalties, including:

• Fines for late payments.
• Additional tax liabilities.
• Legal consequences.

When Are the Withholding Tax Deadlines?

Withholding tax in Saudi Arabia must be paid to ZATCA within the first 10 days of the following month. Late submissions result in fines.

Who Should Pay Withholding Tax in Saudi Arabia?

• Saudi businesses making payments to non-residents.
• Foreign entities providing services in Saudi Arabia.
• International companies earning revenue from Saudi clients.

Current Withholding Tax Rates in KSA

The applicable withholding tax rates in Saudi Arabia depend on the payment type and any tax treaties. Generally, they are:

• 5% on dividends, interest, and lease payments.
• 15% on royalties and technical services.
• 20% on management fees.

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Conclusion

Withholding tax in Saudi Arabia is an essential tax regulation for businesses engaging with non-residents. Understanding Saudi Arabia withholding tax certificates, Saudi Arabia withholding tax exemptions, Saudi Arabia withholding tax refunds, and Saudi Arabia withholding tax on services is crucial to compliance. Companies must calculate and remit withholding tax accurately to avoid penalties. Consulting with tax professionals ensures compliance with ZATCA regulations and reduces tax burdens through applicable exemptions and treaties.

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FAQs

Q1. How can I obtain a WHT exemption certificate?

Apply through ZATCA with required documents proving eligibility for exemption.

Q2. Who is considered a non-resident for WHT purposes?

Any entity or individual earning income from KSA without a permanent establishment.

Q3. What is the penalty for late payment of withholding tax?

1% of the unpaid tax per month of delay.

Q4. Who is responsible for deducting and paying WHT in KSA?

The Saudi entity is making the payment to a non-resident.

Q5. What is the withholding tax rate in Saudi Arabia?

Depending on the service and tax treaties, rates range from 5% to 20%.

Q6. When should withholding tax be paid to ZATCA?

Within the first 10 days of the following month.

Q7. Are there any exemptions from withholding tax?

Yes, based on tax treaties and ZATCA-approved exemptions.