Withholding Tax in Saudi Arabia: Rate, Process, Scope and Penalties

When a Saudi or non-resident business, individual, or other entity earns income in Saudi Arabia, it is subject to withholding tax. This tax is deducted at the source by the resident entity making payments to non-residents, based on a specified rate. When a Saudi or non-resident business, individual, or other entity earns income in Saudi Arabia, it is subject to withholding tax. This tax is deducted at the source by the resident entity making payments to non-residents, based on a specified rate.

When a Saudi or non-resident business, individual, or other entity earns income in Saudi Arabia, it is subject to withholding tax. This tax is deducted at the source by the resident entity making payments to non-residents, based on a specified rate.

This article explains all about withholding tax in Saudi Arabia, including what it is, scope, purpose, applicability, calculation, payment, and reporting.

What is Withholding Tax (WHT) in Saudi Arabia?

Saudi Arabia follows a destination-based taxation system, which means income earned within the Kingdom is subject to tax, regardless of the recipient's residency. 

Withholding tax (WHT) in Saudi Arabia is a tax imposed on income earned by non-resident entities for services provided within the country.  This tax applies to payments made to non-residents, regardless of the type of establishment they deal with (governmental, non-governmental, or semi-governmental). 

Scope of Withholding Tax

WHT applies to non-resident entities deriving income from Saudi Arabia. Here’s a detailed explanation:

• Non-Residents: Withholding tax is applied to non-resident entities (individuals, corporations, etc.) that earn income from Saudi sources. Non-residents are entities without a permanent establishment (PE) in Saudi Arabia.
• Income from Activities in Saudi Arabia: Any income arising from activities conducted within Saudi Arabia is subject to WHT. This includes income from immovable property, disposal of shares in a company owning such property, or leasing movable property used in the Kingdom.
• Disbursements: Payments made for services rendered wholly or partially in Saudi Arabia fall under the withholding tax regulations.
• Permanent Establishments: If a non-resident has a permanent establishment in Saudi Arabia, income connected to the PE’s activities is not subject to WHT. 

Withholding Tax Process in Saudi Arabia

1. Identify the Withholding Person: This is the entity or individual in Saudi Arabia making the payment to a non-resident, which could be a government body, private company, or organization.
2. Calculate the Withholding Tax: Calculate the tax on the total payment and applicable tax rate to the non-resident without deducting expenses.
3. Deduct the Tax at Source: Withhold the applicable tax amount from the payment to the non-resident.
4. Remit the Withheld Tax: Pay the withheld tax to the Zakat, Tax and Customs Authority (ZATCA) within ten days of the end of the month in which the payment was made.
5. File the Withholding Tax Return: Submit a monthly return to ZATCA detailing the non-resident beneficiary, payment type, amount, and tax withheld. An annual return is also required within 120 days of the fiscal year-end (60 days for partnerships).

Purpose of withholding tax in KSA

• Secures tax revenue: By collecting taxes upfront, KSA minimises the risk of non-payment by non-residents.
• Simplifies tax administration: Withholding taxes ease tax collection and compliance for the government and taxpayers.
• Prevents tax evasion: The system is a deterrent against non-residents attempting to avoid paying taxes on income earned in KSA.

Withholding Tax Rate in Saudi Arabia

The rate of withholding tax in Saudi Arabia depends on the nature of income. Here are the applicable WHT rate

How to calculate withholding tax in KSA?

Calculating WHT involves:

1. Identifying the applicable rate: Refer to the table or seek professional guidance for specific cases.
2. Determining the gross payment amount: This forms the base for tax calculation.
3. Multiplying the rate by the gross amount: This final step provides the WHT amount due.

Responsibilities of the Withholding Person

In Saudi Arabia, the withholding person—essentially the resident individual or entity making a payment to a non-resident service provider—has several key responsibilities under the withholding tax (WHT) regulations. 

• Withholding Tax Deduction: Deduct the appropriate tax from the payment to the non-resident based on the payment type and tax rates.
• Payment to ZATCA: Remit the withheld tax to the Zakat, Tax and Customs Authority (ZATCA) within ten days of the payment to the non-resident.
• Filing Returns:
  • Monthly: File a monthly return detailing payments and withheld taxes within ten days of each month.
  • Annual: File an annual return summarizing withheld taxes within 120 days of the fiscal year-end (60 days for partnerships).
• Record Keeping: Maintain records for at least ten years, including beneficiary details, payment types, amounts, and tax deducted.
• Compliance Documentation: Ensure records are adequate for demonstrating compliance, especially for audits or ZATCA requests.
• Issuing Certificates: Provide certificates confirming tax deduction and payment to non-residents if requested.

KSA withholding tax treaties with other countries

Double taxation treaties (DTTs) exist between KSA and several countries. These treaties may reduce or eliminate WHT rates for treaty residents under specific conditions. Consulting a tax professional is recommended for navigating DTTs and claiming potential benefits.

Penalty for Non-Compliance with Withholding Tax

Non-compliance with withholding tax regulations in Saudi Arabia can lead to:

• Monthly Penalty: A penalty of 1% of the unpaid tax is imposed for every 30 days of delay from the due date.
• Additional Penalty: An additional penalty of 25% of the unpaid tax may be levied if the Zakat, Tax, and Customs Authority (ZATCA) suspects tax evasion.