Although the idea of withholding tax in Saudi Arabia might be unfamiliar to you, chances are excellent that you have already dealt with it. It is an amount of money that usually comes out from employees’ paychecks, as the name suggests. Making sure you have the appropriate amount of withholding is crucial. Therefore, hiring accounting services in the KSA is essential to maintain compliance.
In this article, we will be talking about how withholding tax Saudi Arabia works. According to the laws and guidelines regarding tax, it is essential to pay these taxes. So, learning how to pay withholding tax in Saudi Arabia is vital. Let’s see more!
What is Withholding Tax in Saudi Arabia
Some people wonder, what withholding tax is in Saudi Arabia when establishing a local entity.
Withholding tax Saudi Arabia is a type of tax that the government imposes on the income of an individual or legal entity. In Saudi Arabia, withholding tax (“WHT”) is defined as a specified proportion of income received by an entity that does not reside in Saudi Arabia that provides services inside KSA and generates money.
Non-resident entities that receive income from Saudi Arabia- All establishments, no matter their industry, are subject to Withholding Tax. According to the Revenue Tax Law Implementing Regulations (“ITL”), Withholding Tax shall be levied on the complete amount given to the non-resident firm. This, regardless of expenses used to generate the revenue.
Understanding Withholding Tax Basics
Tax withholding allows the government to keep its pay-as-you-earn income tax structure in place. This entails taxing people at the point of income generation rather than attempting to collect revenue taxes after earnings are in place.
Under Saudi Arabian law and tax laws, all clients have to pay withholding tax (WHT) on all ‘out of kingdom’ foreign payments to non-Saudi residents or registered companies directly to the General Authority of Zakat and Tax (GAZT).
GAZT is a government institution with headquarters in Riyadh and working with the Ministry of Finance. The goal is to charge non-resident entities who earn revenue in the Kingdom. So, who pays withholding tax in Saudi Arabia? WHT will be obtained from consultant/contractor compensation. This is in compliance with KSA legislation and tax regulations.
How to Pay Withholding Tax in Saudi Arabia: Step-by-Step Guide
Now that you know what is withholding tax in Saudi Arabia, it is time to learn how to pay it.
- Firstly, companies must impose a tax percentage on their income. Depending on the kind of service and if the person receiving it is a related party, the rates range from 5% to 20%.
- The client must directly pay the General Authority of Zakat and Tax (GAZT) the applicable amount of WHT after declaring it.
- After paying, the client must send in monthly WHT filings to GAZT within 10 days of the payment’s due date.
Most companies decide to hire business services in Saudi Arabia to handle these tax payments and other processes.
Who Pays Withholding Tax in Saudi Arabia: Withholding Tax Rates and Applicability
Withholding taxes in Saudi Arabia are applied to the majority of workers. The responsibility for submitting it to the government rests with the hiring company.
An overseas entity that does not have a Permanent Establishment (“PE”) in KSA is liable for withholding tax per Article 63 of the ITL. This, at the following rates, except when the rate is lowered by a tax treaty:
- Dividends – 5%
- Loan fees and interest – 5%
- Royalties – 15%
- Management fees – 20%
- Rent, technical consultancy, airline ticket revenue, air and ocean freight, foreign telecommunications providers, and insurance premiums – 5%
- Other services being carried out in the KSA – 15%
Withholding Tax Exemptions and Deductions
By assigning taxing authority to only one nation, or by establishing a waiver or credit system, double taxation on international trade is hoping to be avoided. Additionally, it offers tax assistance by lowering the withholding tax rates on various international transactions.
Rules against double taxation could relieve withholding taxes that are owed. You should seek professional advice from a tax expert if you have concerns regarding if double taxation exemption may apply.
WHT depends on whether or not the corresponding expenses are deductible for taxes or Zakat reasons. Zakat is a compulsory donation that comes from Islamic religious law.
Saudi Arabia is a member of a number of tax treaties, including one with the UAE. Beginning on January 1, 2020, KSA and the UAE entered into a Double Tax Treaty (“DTT”). The following is a list of the DTT’s main characteristics in brief:
- Service fees are exempt from withholding tax as long as they don’t result in the formation of PE in the Kingdom of Saudi Arabia.
- Interest payments are exempt from withholding taxes.
- 10% withholding tax at a reduced rate on royalties.
- Dividends on dividends have a 5% withholding tax.
- Only an enterprise of the contracting state provides services through workers or other persons engaging with that enterprise for over 183 days in a single year within the limits of the other contractual state would a “service PE” develop.
- Emirati Sovereign Wealth Funds that operate in Saudi Arabia are immune from capital gains taxes and withholding taxes on the sale of Saudi Arabian stock.
Compliance and Reporting Requirements
Payments for services rendered from a permanent establishment (PE), a resident party, or a non-resident party are subject to withholding tax. Depending on the kind of service and if the recipient is a related party, the charges might range from 5% to 20%. Unless the rate decreases by a tax treaty, the national rate for WHT is 15% on royalties given to non-residents, 5% on dividends, and 5% on interest.
It is necessary to declare and pay the appropriate amount of WHT directly to GAZT, as well as complete the WHT monthly tax filings to GAZT, within 10 days of the month’s end at which the payment occurs. A yearly WHT return must be in place at the end of the fiscal year.
Navigating Withholding Tax Implications for Businesses
When it becomes clear that the branch has been providing services and paying amounts to the head office in exchange for the benefits the branch receives in doing its business in the Kingdom, the taxpayer has to provide the withholding tax.
The purpose of the withholding tax is to ensure that payments originate from a local to an overseas party. This, to carry out tasks in the Kingdom that reveal the source of income, even though it is irrelevant to the achievement of profits.
Calculating Withholding Tax in Saudi Arabia: Methods and Formulas
Learn how to calculate withholding tax in Saudi Arabia:
Firstly, choose the appropriate WHT rate according to your connection with the international party and the categorization.
Subtract the appropriate tax rate from the payment, then pay the provider the net sum.
The withholding tax Saudi Arabia formula is:
Net supplier payment = Gross supplier payment – Withholding amount.
It should be noted that WHT is computed based on the total payment to be delivered to the supplier and is subtracted from that amount rather than added to it.
Unveiling Withholding Tax on Services in Saudi Arabia
These are the withholding tax on services in Saudi Arabia:
- Consultants:
Most consultant WHT charges in Saudi Arabia range from 5 to 20% of their pay. These charges range according to the service they offer and are as follows:
- Management Fees: 20%
- Royalty or License Fees: 15%
- Head Office (outside of the KSA): 10%
- Technical or Consulting Service: 5%
- International Telecommunications: 5%
- Rent: 5%
In other words, you must make contributions to the Kingdom. However, it will not get in the way of your ambition to make it big as an advisor in Saudi Arabia. You will not find a better location to establish your consultancy branch, after all.
- Contractor:
Considering that building supplies are exempt from WHT, reducing the tax exposure, it is in the suppliers’ best interest to offer a breakdown of the offer price in the contract, whether conventional or lump sum.
Depending on the type of service and if the beneficiary is a related party, WHT rates range from 0% to 5% as follows:
- Staff (business visas): 5%
- Plant: 5%
- Engineering: 5%
- Maintenance: 5%
- Material supply: 0%
Withholding Tax in Saudi Arabia: FAQs and Practical Insights
- Is there a withholding tax while flying from Saudi Arabia to another country?
The payment will happen in Saudi Arabia. Hence, it is not subject to WHT, if the airline that sells tickets has a KSA organization or presence.
However, payments will go to an organization outside of KSA, for which WHT is relevant, if the airline that sells tickets has no presence in the KSA.
- Do software and applications for IT fall under technical services or royalties?
It will be royalty if the purchaser simply has the right to use the program and has no influence over where it is installed or hosted or how resources are allocated. It will be a technical service if the buyer has significant management control over the program or the freedom to promote or sell the application as they see fit. Instead of falling under Technical services, many SaaS models will end up under Royalties.
- Does withholding tax in Saudi Arabia apply to the Principal component of a loan installment?
Only an interest-only loan payment is subject to WHT. WHT is not present in the central part.
- If income tax was previously deducted from the profit owing to the non-resident, are profits to the non-resident liable to WHT?
Yes. If the beneficiary of the payout is not a resident of KSA, the dividend will be subject to 5% WHT, regardless of whether it is a post-Zakat/Income Tax dividend or not.
- How does withholding tax Saudi Arabia apply if payments happen as a form of reimbursement to corporate headquarters or a related party?
One may use the non-relating party WHT percentage that is appropriate to the specific expense. This, if they can show with certainty that the payment is a reimbursement of a cost.
