Small Business Guide to Kingdom of Saudi Arabia's Withholding Tax

Withholding Tax (WHT) is imposed on Saudi based businesses who make payments to overseas entities for items such as services, royalties, dividends etc. It is required that the business is to withhold a portion of the amounts paid to the overseas entity and pay this directly to ZATCA. The WHT basis is calculated based on total payments, not profit.

The WHT provisions' scope of application

WHT provisions are applicable based on the following provisions of the Law and its Regulation:

Withholding Agent - WHT rules apply only if the transaction is made by a Resident (Saudi Based Business) in the Kingdom who meets the residence requirements set out in the law, or if the settlement is made by a Non resident in the Kingdom who has a permanent establishment in the Kingdom. If the Resident is a legal person or a Non resident's permanent establishment, that person will be a Withholding Agent for all payments made to Non-residents from Kingdom sources. If the Resident is a natural person, he or she will only be compelled to withhold tax (become a Withholding Agent) if the payments to Non-residents are made in the course of the natural person's business. As a result, payments to Non-residents made by natural persons that are unrelated to their activity are not covered by WHT.

Payments Subject to WHT - the WHT clause only applies to payments made by a Resident to a Non-resident from a KSA source. The following crucial elements must be taken into account:

• The payment shall be paid from a Resident or a non-resident's Permanent Establishment to a non-resident - Any person who does not meet meet the criteria for Resident status outlined in the legislation is automatically classified as a Non-resident. But if a non-resident's permanent establishment in KSA receives an amount from a Resident, and the settlement is directly connected to the permanent establishment's business, the payment is treated as if it were made to a Resident, and the respective payments are not subject to WHT; such payments should be filed as part of the permanent establishment revenue. Similarly, if a Saudi Resident has a permanent establishment outside of Saudi Arabia and the foreign permanent establishment receives a payment from the Saudi Resident that is directly related to the permanent establishment's business, the payment is considered to have been made to a non-resident and may be subject to WHT. If the Saudi Resident is a Taxpayer, he or she may be allowed to deduct WHT from the amount of income tax that must be paid.

• The settlement should be made from a KSA source - In order for a payment to be under the scope of WHT, it must be obtained from a source within the Kingdom. When determining the source of revenue, the location of payment should not be considered. In other words, regardless of where the payment is made, the source is the one that matters when determining whether a payment made by a Resident to a non-resident is within the scope of the WHT provisions (i.e. is the subject of WHT).

Rates of WHT

If a settlement falls under the WHT clause, WHT should be applied. Different rates apply on different sorts of payments, ranging from 5% to 20%. As a result, it's critical to comprehend and evaluate the income's qualification, as this decides the WHT rate that will be applied. Below information compares the WHT rates for transactions with a non-related third party against those with a connected person as the beneficiary:

Payments for Management Services contracts are referred to as Management Fees. Contracts for hotel management and ship management are examples of this.

• Payment made by non-resident unrelated party 20%
• Payment made by non-resident related party 20%

Royalties are payments made in exchange for the use of or the right to use intellectual property, such as copyright, patents, designs, industrial secrets, trademarks and trade names, know-how, trade and business secrets, goodwill, and payments made in exchange for the use of information related to industrial, commercial, or scientific expertise, or for the right to exploit natural and mineral resources.

• Payment made by non-resident unrelated party 15%
• Payment made by non-resident related party 15%

Dividends are any profits transferred by a permanent establishment to related parties, as well as any distributions made by a Resident corporation to a non-resident shareholder.

• Payment made by non-resident unrelated party 5%
• Payment made by non-resident related party 5%

Rent - any amount paid in exchange for the use of a certain product; frequent examples are rent for a house, land, or an automobile.

• Payment made by non-resident unrelated party 5%
• Payment made by non-resident related party 5%

Any payment paid for the usage of money is referred to as loan returns. This includes earnings from any sort of loan transaction, whether supported by guarantees or not, and whether or not rights to share in the profits of the debited person are granted.

• Payment made by non-resident unrelated party 5%
• Payment made by non-resident related party 5%

Payments for insurance of assets, persons, activities, or hazards are referred to as insurance/reinsurance payments.

• Payment made by non-resident unrelated party 5%
• Payment made by non-resident related party 5%

Any type of technical, technological, or scientific service, including studies and research in various fields, surveying work of a scientific, geological, or industrial nature, consulting or supervisory services, or any type of engineering service, including relevant designs, is classified as technical and consulting services.

• Payment made by non-resident unrelated party 5%
• Payment made by non-resident related party 15%

Any payment for airline tickets, or fees for air freight and maritime freight, paid in the Kingdom to air and maritime transport companies, their agents or representatives, excluding payments for freight of commodities from outside the Kingdom to the kingdom's ports.

• Payment made by non-resident unrelated party 5%
• Payment made by non-resident related party 5%

Any monies paid to a non-resident party in exchange for services connected to the supply of International Telecommunications Services from the Kingdom include international phone services, telex, international roaming services, and leasing capacity in international cables and the internet.

• Payment made by non-resident unrelated party 5%
• Payment made by non-resident related party 15%

Any payment for land transportation (vehicle, bus, etc.) within the Kingdom of Saudi Arabia is referred to as in-Kingdom land transportation.

• Payment made by non-resident unrelated party 15%
• Payment made by non-resident related party 15%

Other payments for services not specifically stated and rendered in exchange for compensation, excluding those relating to the sale and purchase of goods or other properties, are subject to 15 percent WHT. Note that this only applies to payments made by a Resident to a non-resident, and that the payment is made from a KSA source.

• Payment made by non-resident unrelated party 15%
• Payment made by non-resident related party 15%

Exemptions and Reductions on WHT

Dividends distributed by enterprises involved in natural gas investment, oil, and hydrocarbons are currently subject to a special tax exemption. "Dividends by companies engaged in natural gas investment, oil and hydrocarbons are not subject to withholding tax," according to the directives and its regulations.

Apart from the foregoing, the legislation and its Regulation do not provide any further exclusions or reductions in WHT tax rates. WHT relief, on the other hand, may be obtained under an appropriate Double Taxation Treaty with Saudi Arabia.

Filing and Payment of WHT

The Withholding Agent must register with the ZATCA and file a monthly WHT declaration for any settlement that was subject to WHT during that month. There is no requirement to file a monthly WHT declaration if there are no payments subject to WHT. Within the first ten days of the month following the month of settlement to the recipient, the Withholding Agent files and pays the amount withheld if any. 

The Withholding Agent will issue a certificate to the beneficiary that details the amount paid to him as well as the amount of tax withheld. Aside from reporting and paying the WHT on a monthly basis, the Withholding Agent shall also file an annual report. This must be done no later than 120 days after the fiscal year of the Withholding Agent has ended. As the annual WHT filing is a summary of all monthly WHT declarations filed during the year, there should be no additional WHT payable in conjunction with the filing of the annual WHT declaration. In this regard, it's worth noting that, unlike monthly declarations, the yearly filing of the WHT declaration is required even if the WHT to be submitted is zero for the whole fiscal year.

Interaction with the Income tax system

The WHT provisions are designed to ensure that non-residents who derive revenue from a source in the Kingdom are correctly taxed. As a result, the WHT is essentially an advance levy for income tax on non-residents' income generated from sources within the Kingdom. 

Transactions to residents or permanent establishments in Saudi Arabia are not covered by the WHT, according to the definition. The reason for this is that non-residents are not eligible for these benefits. The sole distinction is that the WHT is applied to the gross amount, whereas income tax is applied to the net amount. If, on the other hand, tax is withheld for an amount paid to a Taxpayer that is included in the Taxpayer's tax base, the tax withheld is subtracted from the Taxpayer's tax payable against the tax base.

Record keeping

The Withholding Agent will have to supply ZATCA with each beneficiary's name, address, and registration number at the end of the fiscal year. Only if and to the extent that the Withholding Agent has access to this information. Additional information may be required and requested by ZATCA. 

The Withholding Agent should keep documents that indicate not only that he is in compliance with the law, but also that the withheld tax is correct. The name and address of the recipient/beneficiary, the kind of payment, the amount of payment, and the amount withheld are all included in these records. These records should be preserved for a minimum of 10 years from the date of payment, with the possibility of an extension if the matter is being considered by ZATCA or other relevant committees. If this is the case, the records should be preserved until the matter is resolved.

Penalties

For every thirty days of unpaid tax, the taxpayer is required to pay a penalty of 1%. This specifically refers to a delay in the settlement of withheld taxes. If there is a delay in paying over tax that is due to be withheld after the first ten days of the month following the month during which settlement is subject to withholding rules, the Regulation imposes a 1% underpayment of tax fine for each 30 days of delay. 

As a result, both late settlements and underpayments are subject to a 1% penalty. In addition to the late payment penalties, the provisions of the fraud penalty apply to a Withholding Agent who withholds information or presents inaccurate information and is required to pay withheld tax. If the taxpayer or its certified accountants gives incorrect information or conducts fraud with the goal of tax evasion, the penalty might be as high as 25%.