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For doing business in Saudi Arabia, it is important to know about local tax regulations so that all your operations are smooth and you are compliant. Withholding Tax in Saudi Arabia is one of the key taxes businesses and individuals must understand. If you’re a local company paying foreign entities or are an international service provider receiving income, you need to know how withholding tax works in Saudi Arabia to avoid any compliance issue. In this blog, we will guide you through everything you need to know about withholding tax in Saudi Arabia; from its purpose, the rates and how it is applied.
In Saudi Arabia, withholding tax is deducted by the source of a payment to a non-resident (an individual, business or other type of entity) whether it’s a resident or not. The tax is levied on payments for services, royalties, interest and other types of income generated in the Kingdom. The way in which this tax rate is applied depends on the type of payment and is an important part for businesses to get right.
Besides paying the withholding tax, businesses must also comply with zatca approved E-invoicing in Saudi Arabia and zatca approved E-invoicing in Riyadh. In this article, we will take you through scope, how to calculate withholding tax in Saudi Arabia, and how to report and pay withholding tax in KSA.
Withholding Tax (WHT) is a tax imposed on income derived by non-resident entities for services provided in the Kingdom of Saudi Arabia. Saudi Arabia is a destination based taxation system, which means that income earned within the country is taxed whether the recipient is a resident or a non-resident. That means that if a foreign business or individual renders services in Saudi Arabia, the income from such services will be subject to withholding tax.
Withholding tax in Saudi Arabia applies to payments made to non-residents, regardless of whether the payer is a governmental, non-governmental or semi-governmental entity. The tax is deducted at the source by the entity making the payment and remitted directly by them to the Saudi tax authorities (ZATCA). The amount that a service or payment is taxed depends on the type of service or payment being made, and is meant to ensure that income created in the Kingdom is taxed appropriately, before being paid to another person.
WHT applies to non-resident entities deriving income from Saudi Arabia. Here’s a detailed explanation:
1. Non-Residents
Nonresident entities, such as individuals and corporations, earning income from Saudi sources are subject to withholding tax in Saudi Arabia. They are non-residents and do not have a permanent establishment (PE) in the Kingdom. The tax is levied on their Saudi based income, so that foreign entities are taxed on profits earned in Saudi Arabia even if they do not have a physical presence in the country.
2. Income from Activities in Saudi Arabia
Income earned for activities performed within Saudi Arabia is subject to withholding tax. This includes income from immovable property, for example, rent or proceeds from the sale of property owned by a company, income from the disposal of shares in such a company, and income from other immovable property. Furthermore, WHT has been applied to leasing of movable property within the Kingdom used in an activity.
3. Disbursements
Payments for services rendered wholly or partially in Saudi Arabia are also subject to withholding tax. It includes professional services provided by non-resident entities such as consulting or technical services. Whether the service is completed within the Kingdom or not, the payments will be subject to the applicable WHT rate.
4. Permanent Establishments (PE)
Income arising from the activities of a permanent establishment (PE) of a non-resident entity in Saudi Arabia is not subject to withholding tax, if the PE is located in Saudi Arabia. Thus, income earned from fixed place of business or operations in Saudi Arabia where the entity conducted business has WHT exempted and paid under the corporate income tax rules instead.
1. Identify the Withholding Person
The entity or individual in Saudi Arabia that makes a payment to a non-resident is the withholding person. It may be a government body, a private company or an organization. They have a legal obligation to deduct withholding tax from the payments they make to non-resident service providers.
2. Calculate the Withholding Tax
The tax is withheld at the rate applicable to the type of service and at the amount of payment made to the non-resident. No deductions for expenses are made in this case. The calculated tax amount should be based on the Saudi tax regulations rate.
3. Deduct the Tax at Source
The withholding person is required after calculating the withholding tax, to deduct on his payment to the person he has no right, tax amount that corresponds to the withholding tax. The tax is withheld at the source and paid to the foreign service provider, before being paid to the Saudi tax authorities.
4. Remit the Withheld Tax
The payment that was withheld must be paid to the Zakat, Tax and Customs Authority (ZATCA) within ten days after the end of the month in which the payment was made. It ensures that the Saudi government gets the tax revenue at hand and also keeps the governance of the tax regime.
5. File the Withholding Tax Return
The withholding person is then required to file a monthly return with ZATCA, which includes the non-resident beneficiary, the type of payment, the amount paid and the tax withheld. Partnerships must also submit an annual return within 60 days of the fiscal year end, and all others must submit an annual return within 120 days of the fiscal year end to ensure full compliance.
1. Secures Tax Revenue
Withholding tax in Saudi Arabia ensures the Kingdom gets its tax revenue up front. It minimizes the risk of non-payment by non-resident entities that otherwise may not remit their taxes. Saudi Arabia deducts the tax at the source so that the tax is paid before income is transferred out of the country.
2. Simplifies Tax Administration
Simplification of withholding tax in Saudi Arabia makes the process of overall tax administration easier for government and taxpayers. The payer is responsible for remitting taxes, which means it’s easier to collect, report and track taxes. It also lightens the administrative burden on non-resident entities reducing the administrative burden on all the parties involved in tax compliance.
Calculating WHT involves:
1. Identifying the Applicable Rate
The first step is to find out the correct withholding tax rate depending on the kind of income. If you’d like, you can look at the tax tables or ask a tax professional.
2. Determining the Gross Payment Amount
Then, determine the total payment to the non-resident entity. It’s this amount before any deductions, and it’s used to calculate how much withholding tax you owe.
3. The Rate x Gross Amount
Thirdly, multiply the gross payment by the amount of the requested withholding tax. This will give you exactly how much tax it should withhold from the payment and remit to ZATCA.
1. Withholding Tax Deduction
If it is a payment to a non-resident, the withholding person must deduct the applicable tax from the payment to the non-resident depending on the type of payment and the rates.
2. Payment to ZATCA
The withheld tax must be paid to ZATCA within 10 days of making the payment to the non-resident service provider.
3. Monthly Filing
Within ten days after the end of each month, a monthly return showing the payments and taxes withheld must be submitted to ZATCA.
4. Annual Filing
Partnerships must file an annual return of the total withheld taxes within 120 days of the fiscal year end (60 days for partnerships).
5. Record Keeping
Payment and tax withheld records must be maintained for ten years by the withholding person.
6. Compliance Documentation
Thorough records and ready to be audited or ZATCA inquiries must be made to comply with all withholding tax regulations.
7. Issuing Certificates
The withholding person shall provide certificates to non-residents on request to confirm the tax deductions and payments made to ZATCA.
To prevent this, Saudi Arabia has entered into Double Taxation Treaties (DTTs) with many countries. For example, most of these treaties will allow a reduction or elimination of the withholding tax rates (WHT) if the taxpayer is a resident of a country of a pledged treaty in case of the nature of of income and certain provisions of each treaty. If it were not for the proper compliance and to make full use of these benefits, a taxation professional is to be consulted in these cases of DTTs and claiming the relevant reductions.
Non-compliance with withholding tax regulations in Saudi Arabia can lead to:
1. Monthly Penalty
If tax is not paid on time, the penalty is 1% of unpaid tax for each 30-day delay beyond the due date. The penalty accumulates over time, and the total liability for non-compliance increases.
2. Additional Penalty
If the Zakat, Tax and Customs Authority (ZATCA) suspects tax evasion, an additional tax of 25 per cent over unpaid tax may be imposed. It is a penalty to make sure that you are filing your taxes properly.
For both businesses and individuals who are transacting in Saudi Arabia, it’s important to understand withholding tax in Saudi Arabia. Besides paying the withholding tax, businesses must also comply with zatca approved E-invoicing in Saudi Arabia and zatca approved E-invoicing in Riyadh. Withholding tax system ensures that tax obligation is fulfilled in quick time by deduction of tax at the source. You can make sure to comply smoothly and avoid penalties by becoming familiar with the rates, process and responsibilities.
If you are a resident entity paying to non-residents or a foreign entity getting income in Saudi Arabia, you have to be aware of the rules and deadlines related to withholding tax in Saudi Arabia. Tax professionals can be consulted to bypass complicated sets of circumstances and make the best use of possible treaty benefits, so all tax requirements are paid in accordance with a tax professional.
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