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

Saudi Arabia has emerged as a primary economic hub in the Middle East for international businesses. One of the significant tax obligations for companies and individuals operating within KSA—mainly when dealing with non-resident service providers is Withholding tax (WHT) in Saudi Arabia. It is a tax mechanism that ensures that the Kingdom secures tax revenue from cross-border transactions at the point of payment.

If you are making or receiving payments for goods or services in Saudi Arabia, understanding WHT is crucial. This guide walks you through the fundamental concepts of withholding tax, including its scope, process, rates, calculation methodology, and compliance requirements.

What is Withholding Tax (WHT) in Saudi Arabia?

Withholding tax (WHT) is a tax deducted at source by a Saudi resident (or a permanent establishment, if applicable) on payments made to a non-resident for services or activities that have a “Saudi source” or are utilized within the Kingdom. Under Saudi Arabia’s destination-based tax system, any income generated within the country is considered taxable, irrespective of the recipient’s country of residence.

Key Points

• WHT targets non-resident beneficiaries like individuals or entities that do not have a registered presence or permanent establishment (PE) in the Kingdom.
• It primarily applies to outflow payments such as royalties, fees for technical or consulting services, dividends, and interest.
• The withholding agent (payer) is responsible for deducting the tax from the payment and remitting it to ZATCA.

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. 

Examples of Withholding Tax (WHT)

Understanding practical scenarios helps clarify WHT in Saudi Arabia. Below are some common examples:

• Consulting Services: A Saudi entity hires a non-resident consultant to provide advice on market entry strategy. The consultant performs part of the work remotely and part on-site in Saudi Arabia. The payments made to the consultant are subject to WHT.
• Royalty Payments: A local company licenses software from an international vendor. The fee for using the software in Saudi Arabia is considered a “royalty.” The standard WHT rate for royalties is 15%, unless a Double Taxation Treaty (DTT) reduces this rate.
• Interest on Loans: A non-resident bank loans a Saudi business. Interest payments to the non-resident bank are typically subject to a 5% WHT.
• Equipment Rental: A Saudi construction firm rents machinery from an overseas supplier for use on a local project. The rental payments are generally subject to a 5% WHT.

Withholding Tax Process in Saudi Arabia

The process for applying Saudi withholding tax follows these steps:

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

Notable Points

• Technical Services Rate: Often 5%, though certain classifications or legacy rules might differ.
• Double Taxation Treaties: These rates can be reduced or eliminated if a relevant DTT applies.
• Gross Basis: WHT is calculated on the total payment (gross) made to the non-resident.

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.
• Remitting the WHT to ZATCA: Use the ZATCA eServices portal to pay the withheld tax. Payment is due within 10 days after the month of payment or accrual.
• Filing WHT Returns: The Monthly Return Must be filed through ZATCA WHT Return Portal on or before the 10th of the subsequent month. The Annual Return must be filed within 120 days of the fiscal year-end (or 60 days for specific entities like partnerships).
• Record Keeping: Maintain records for at least ten years, including beneficiary details, payment types, amounts, and tax deducted. 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.

What Are Double Taxation Treaties (DTTs) in KSA?

A Double Taxation Treaty (DTT) is an agreement between two countries designed to prevent the same income from being taxed twice. Saudi Arabia has signed over 50 DTTs with various nations—such as France, Germany, the UK, China, and many GCC member states.

Key Features of DTTs

1. Reduced Rates: A lower WHT rate, or even a complete exemption, may apply to certain types of income (e.g., dividends, royalties, interest) if the recipient resides in a treaty partner country.
2. Treaty Eligibility: The non-resident must present a Tax Residency Certificate (TRC) from their home country and often must meet other documentation requirements.
3. Refund Mechanism: If the reduced rate was not applied at the time of withholding, the non-resident can typically file for a refund from ZATCA by providing proof of tax residency and relevant treaty provisions.

Look in the ZATCA Tax and Customs Agreements Page to see whether your country has a DTT with KSA and  if you qualify for reduced WHT.

Penalty for Non-Compliance with Withholding Tax

ZATCA imposes strict penalties to encourage timely compliance. Non-compliance with withholding tax regulations in Saudi Arabia can lead to:

• Late Payment Penalty: 1% of the unpaid tax for every 30 days (or part thereof) of delay.
• Fines for Incorrect Filings or Evasion: If ZATCA suspects tax evasion, an additional penalty of 25% of the unpaid tax may apply. Underreporting or other filing inaccuracies can trigger penalties ranging from 5% to 25% of the tax difference.
• Interest: Delays may attract interest charges if the settlement is significantly overdue. 

Conclusion

Withholding Tax (WHT) is critical in securing Saudi Arabia’s tax revenue from cross-border business activities. Understanding the scope, process, and withholding tax rates in Saudi Arabia is essential to ensure compliance, minimize exposure to penalties, and leverage Double Taxation Treaties (DTTs) to lower your overall tax burden.

Remember that timely filing and payment—within 10 days of each month—are essential to avoid penalties and maintain a healthy relationship with Saudi tax authorities.

E-Services & Guides Link from ZATCA

• WHT Return Filing eService (Arabic PDF Guide)
• WHT Payment eService (Arabic PDF Guide)
• WHT Return Filing Service Page (English) 
• WHT Payment Service Page (English)