Withholding tax in Saudi Arabia (“WHT”) is defined as a specific percentage of income earned by a non-resident entity in Saudi Arabia, providing services within Saudi Arabia and generating sources of income. Non-resident entities deriving Saudi Arabia -sourced income whether they deal with governmental, non-governmental, or semi-governmental establishments are all subject to Withholding Tax. According to the Implementing Regulations of the Income Tax Law (“ITL”), Withholding Tax shall be imposed on the total amount paid to the non-resident entity, notwithstanding expenses incurred to make the income; full allowances/disallowances, as a deduction, of such payment.
The withholding person must keep records proving its compliance with the withholding provisions if they have at least the name and address of their beneficiaries, the type of payment, the amount, and the amount deducted in addition to any supporting documents for at least ten (10) years after payment.
WHAT ARE THE WITHHOLDING TAX RATES IN SAUDI ARABIA?
Under Article 63 of the ITL, a non-resident entity with no Permanent Establishment (“PE”) in Saudi Arabia is subject to Withholding Tax at the following rates, unless the rate is reduced under a tax treaty:
TYPE OF INCOME
Interest and loan fees
Rent, technical and consulting services, income from air tickets, air and maritime freight, international telecommunications services and insurance/reinsurance premiums
Other services (e.g., training, recruitment, bookkeeping, marketing), were part of the services are carried out in KSA
WHAT ARE THE WITHHOLDING TAX PENALTIES IN SAUDI ARABIA?
A penalty of 1% of the unpaid tax for every thirty (30) days of delay from the due date shall be imposed for non-payment of Withholding Tax. An additional penalty of 25% may be levied to the unpaid tax in case Zakat, Tax and Customs Authority (“ZATCA”) suspects tax evasion.
WHEN ARE THE WITHHOLDING TAX DEADLINES?
The withholding person must submit a monthly Withholding Tax return within the first ten (10) days of the month following the month during which payment to the non-resident party was made. As confirmed by ZATCA, the withholding person is the entity residing in KSA and is required to file the Withholding Tax return through its ZATCA portal. An annual Withholding Tax return is also required to be filed within 120 days of the year end, and not later than 60 days of year end for partnerships.
WHAT ARE THE DOUBLE TAX TREATIES WITH SAUDI ARABIA?
The purpose of double tax treaties is to eliminate double taxation on cross-border transactions by granting taxing rights to only one country or providing for an exemption or credit system. It also provides tax relief in the form of reduced rates of withholding tax on some cross-border transactions. Saudi Arabia has an extensive network of double tax treaties:
WHAT IS THE TAX TREATY BETWEEN SAUDI ARABIA & THE UNITED ARAB EMIRATES (UAE)?
Saudi Arabia is a party to several tax treaties with other countries, one of which is with the UAE. The Double Tax Treaty (“DTT”) between Saudi Arabia and the UAE was effective from 1 January 2020. A summary of the key features of the DTT is outlined below:
An exemption from Withholding Tax on service fees provided that such services do not lead to the creation of PE in KSA
No Withholding Tax for interest payments
A reduced Withholding Tax rate of 10% on royalty payments
5% Withholding Tax on dividends on dividends (same as the domestic dividend Withholding Tax rate in Saudi Arabia)
A ‘service PE’ will arise only if services are carried out by an enterprise of a contracting state through employees or other personnel engaged by that enterprise within the borders of the other contracting state for more than 183 days in any 12-month period
UAE Sovereign Wealth Funds operating in KSA qualify for an exemption from withholding taxes and capital gains on the sale of shares in KSA
We have seen in practice that many non-resident service providers are not considering the impact of withholding tax when negotiating their contracts with clients in Saudi Arabia. As a result, they end up suffering a loss of up to 20% due to the financial impact of withholding tax not being priced in into the contract value. The contract should contain a gross-up clause whereby the value agreed with their Saudi Arabia customer is net of withholding tax and the applicable rate is agreed by both parties (subject to commercial considerations).