Withholding tax

1- Forms and types of taxes may vary according to each country’s requirements and vision, and taxation can be regional, source or residency based among others.

Withholding tax (WHT) is a type of indirect tax. Although some mistakenly believe it is new to the Kingdom of Saudi Arabia, this tax has actually existed in a different form in the past and the underlying basis for its imposition remains the same: regional and source-based, as established in the reviewed tax law issued by Royal Decree No. 2/28/17/3321 on 1/21/1370 AH corresponding to 11/2/1950 AD. Non-resident entities were required as per this law to pay a tax. This tax is estimated to be the precursor to the current withholding tax.

Although each country has its own set taxes, they generally align with fundamental tax categories such as income tax, sales tax, and value-added tax (VAT). The tax levied on non-resident entities has evolved in this scope and the tax is currently applied as per the applied regulations (established by Royal Decree No. M/1 on 1/15/1425 AH, and its executive regulations outlined in Ministerial Resolution No. 1535 on 6/25/1425 AH).

2- Withholding tax is imposed on non-resident companies for services provided within the Kingdom.

Article (68) and its subsequent amendments, as well as Article (63) of the updated Executive Regulations, clearly outline the nature of services provided within the Kingdom by non-resident foreign companies. As per these regulations, a withholding tax is enforced, whereby the tax is deducted at the source from the total amount owed to the service provider. Any non-resident individual or entity receiving payments for services rendered from a source within the Kingdom is subject to this withholding tax.

The responsibility for deducting the tax lies on any resident, whether assigned or not, and on the permanent establishment for the non-resident. 

3- The amount of tax withheld is determined by the nature of the services provided. As specified in Article (68) of the tax law, the type of service and the applicable tax rate are outlined as follows:

  • Rent, airline tickets, air or sea freight, and international communications: 5%
  • Royalty or rent, along with any other payments specified by the executive regulations: 15%
  • Management fee: 20%

In accordance with these regulations, the individual or entity responsible for deducting the tax is required to promptly register with the Authority and ensure that the withheld amount is paid within the initial ten days of the month following the payment or transfer to the service provider, the beneficiary.

The withholding individual/entity is also required to submit a comprehensive statement to the Authority at the end of each year, detailing information about the beneficiary. Furthermore, it is important to maintain complete records and entries to substantiate the value of the withheld tax, which must be provided to the Authority using the designated form. A comprehensive and adequate statement of withholding should also be prepared at year-end and submitted along with the tax or zakat return.

It is crucial to note that the person or entities responsible for withholding the tax hold personal liability and are obligated to pay any outstanding tax amount and associated fines in case of failure to withhold or remit the tax, or neglecting to submit a withholding statement.

4- Moreover, the law and its executive regulations explicitly define and outline the scope of services. Management fees encompass payments made for service contracts involving management, such as those related to hotel management carried out by specialized companies like Intercontinental and Sheraton, or ship management, among others.

Royalty or rent pertains to amounts paid in exchange for the utilization of intellectual property rights, including copyrights, patents, trademarks, and trade names like Pepsi and McDonald’s.

The law further specifies other services that can be provided within the Kingdom by non-residents, such as equipment rentals, information checks, travel tickets, air freight, and international communications, all of which are subject to a 5% tax rate.

It is important to highlight that technical and consulting service, (encompassing technical, scientific, research, and survey work, as well as engineering and consulting services), have been subject to considerable debate and discussion. If the service provider is a sister company, main center, or related entity, it is subject to a 15% tax rate. However, if these services are provided by entities other than the main center, they are subject to a 5% tax rate.

It is worth noting that this law remained in effect until Ministerial Resolution No. 25 on 1/8/1445 AH (corresponding to 26/7/2023 AD), was issued and entered into force after published in the Official Gazette on 30/2/1445 AH (corresponding to 15/9/2023 AD). According to this resolution, technical and advisory services are subject to a 5% tax rate, regardless of the service provider. This also includes payments for International flights departing from the Kingdom.

5- Lastly, the law excludes the distribution of profits in oil and gas companies, and liquidation is deemed equivalent to distributed profits. The fact that profits are subject to income tax does not exempt them from being subject to withholding tax. The law and its executive regulations provide further clarification on the following points:

  • The withholding tax is calculated based on the full amount paid to the non-resident, without any deductions for expenses related to generating this income.
  • If a payment or amount is made to a non-resident with a permanent establishment, and this payment is directly connected to the activities performed by the permanent establishment, then it is included in determining the non-resident’s taxable base.
  • If the tax is withheld from an amount that is already included in the taxpayer’s taxable base for the permanent establishment, the withheld tax amount is deducted from the tax owed by the taxpayer for the said base.

6- In general, the entity/individual responsible for withholding tax must complete the monthly form, submit it to ZATCA, and pay the corresponding amount accordingly. Additionally, they must submit an annual withholding form within (120) days from the end of fiscal year. However, for private companies, the annual withholding form must be submitted within (60) days.

Failure to pay the withholding tax within the specified timeframe will result in a fine of 1% for every 30 days of delay, calculated from the tax’s due date. The determination of the reliable due date is a topic of contention.

Furthermore, an additional fine of 25% will be imposed if it is proved that the taxpayer intentionally provided false information and attempted to evade taxes.

In conclusion, every individual or company responsible for withholding tax must register on ZATCA portal and maintain accurate books and records for a minimum of 10 years.