The Significance of Withholding Tax in Saudi Arabia

Written By Akshaya Ashok, Reviewed By Retheesh R S

Published on 05/12/2024

Withholding tax (WHT) is a significant factor regarding revenue formation and tax compliance in the Saudi Arabian economy. In its capacity as one of the key components of the Kingdom’s tax system, WHT enables various API entities to pay their due taxes and contribute to the government’s development programs and its effort to diversify the kingdom’s economy. In Saudi Arabia, WHT is charged on dividends, interests, royalties, fees and other types of income both for Saudi residents and non-Saudi residents. Specific regulation of WHT is quite complex and thus necessary that every taxpayer, business or financial institution must appreciate it as it eliminates various risks and enables a party to finally financially plan as appropriately as possible. In this blog, WHT regulations are discussed to analyse their significance, suitability and consequences on these stakeholders in Saudi Arabia.

What is Withholding Tax?

Withholding tax or WHT is the income tax that the taxpayer deducts at the source of income. This means that it is retained by the payer before the payment is made to the recipient. In other words, this tax is a kind of advance payment of the recipient’s income tax for the fiscal year when he/she received the income. Withholding taxes can be split into three basic categories.

• Income Tax: Generally imposed on any compensation, wages, salary, allowance, bonus or other remuneration paid by an employer to his employee on a monthly or weekly basis.
• Zakat: In some states, mainly of the Islamic Republic, it also comes into operation as a withholding tax on certain categories of income.
• Non-Resident Withholding Tax: Imposed on such payments made to non-residents: for services, dividends, interest and royalties.

Applicable Rates and Exemptions

However, the withholding tax depends on the type of payment as well as the jurisdiction of the payment. Common withholding rates include:

• Dividends: subject to a withholding tax rate that may range from 5% to 30%, depending on domestic laws and any applicable tax treaties.
• Interest: taxed at rates between 0% and 30%.
• Royalties: The withholding tax rates on royalties can also be between 5% and 30%.

Exemptions may Depend on:

• Tax Treaties: Most juridical systems of the world’s countries provide provisions that regulate the possibility of limiting or completely excluding withholding taxes on specific types of income.
• Particular Income Types: Depending on local laws, a particular kind of payment is exempted from WHT.

The Withholding Agent and the Taxpayer: Their Rights and Responsibilities

the withholding agent, which in most cases will be an employer, or any other payer, will be required to deduct the correct amount of withholding tax from amounts paid to employees or contractors.

• WHT computation is in line with the prevailing laws and regulations.
• Withholding the amount by remitting it to the appropriate taxing authority.

The taxpayer or income receiver shall report his total income via his annual tax return. He has to be repaid because of over withholding or he ends up paying for other taxes that are not withheld to the extent he desires.

Saudi Arabia’s Rules and Regulations on Withholding Tax

With regards to the withholding tax in Saudi Arabia, it shall be subjected to the Zakat, Tax and Customs Authority (ZATCA). In the organization, the local authority also implies the corresponding provision of the regulation for collecting withholding tax from the residents and the non-residents. Overseas investment is controlled by the Saudi Arabian General Investment Authority, while the foreign investor is subject to the country’s taxes.

The Income Tax for Foreign Employed Corporations for Dividends Interest Royalties and Fees

In Saudi Arabia, withholding tax rates are as follows:

• Dividends: Subject to a withholding tax rate of 5%.
• Interest Payments: Typically taxed at a rate of 5% for payments made to non-residents.
• Royalties: Withholding tax on royalties is generally set at 15%, although this can vary based on specific agreements or treaties.
• Fees for Services: Withholding tax is levied on all technical services at a rate of 10%.

Withholding Tax on Employment Income and Services

WHT (Withholding Tax) also applies to employment income in Saudi Arabia

The income tax withheld by an employer from an employee's salary shall be based upon progressive rates adopted by ZATCA. For services provided by non-residents, the withholding rate is approximately 10%.

Importance of Withholding Tax on the Economy of Saudi Arabia

Reinvestment by the Government Through the Revenue Stream of WHT

The WHT is one of the significant sources of revenue for the government in the Kingdom of Saudi Arabia. In this method, it collects revenues through taxation of payments made to non-residents. These payments accrue revenues that support public services and infrastructure development. The government can timely garner such revenues, which can stabilise the economy and fund other initiatives under Vision 2030.

The Pre-Conditions of Foreign Direct Investment and the Concept of Economic Growth

The withholding tax structure in Saudi Arabia is set to be the most conducive framework for foreign investment. Double taxation avoidance agreements under which a lower tax rate is offered to dividends, interest and royalties are used to lure big foreign firms to invest in the Kingdom. Foreign direct investment enhances the growth of the economy, creates employment opportunities for the citizens and brings innovation of new products into the economy.

Tax Evasion Prevention and Compliance

The main reason is withholding tax important in the prevention of continued tax evasion is because goes a long way in denying taxpayers schemes ways to conceal their income or avoid paying tax in its entirety through source deductions.ZATCA plays a strict regulatory and penalty role to ensure taxpayer compliance with their obligations.

Alignment with International Tax Standards

Saudi Arabia's withholding tax regulations have also commenced to take a line that is aligned with international tax standards, especially the OECD. This alignment is not only helpful in enhancing the credibility of the Saudi tax system but also aids in facilitating international trade and investment. In participating in global tax initiatives and treaties, Saudi Arabia has aligned itself with fair taxation practices and cooperation with other nations.

Effects of Withholding Tax on Businesses

Compliance Requirements for Withholding Agents

Withholding agents are businesses that have specific obligations that must be fulfilled under Saudi law. They must:

• Compute Withholding Tax: Determine the proper amount of WHT to withhold from any payment made to non-residents.
• Timely Remittance: Ensure that taxes withheld are paid to ZATCA within ten days after the month in which the remittance was made.
• Filing Returns: Return submission with details of all payments made and taxes withheld in the monthly withholding tax return.

Non-compliance with these leads to penalties, and fines charged as a percentage of delayed payment.

Tax Implications for Taxpayers (Residents and Non-Residents)

WHT (withholding tax) is a direct expense for non-residents as it decreases their net income either from services rendered or investments in Saudi Arabia. However, they can enjoy lower rates due to applicable double taxation treaties. For residents, even though WHT does not apply to their domestic income, knowledge of WHT implications is essential when dealing with non-resident service providers or partners.

Cash Flow and Financial Planning Impact

Withholding tax can drastically influence cash flow for businesses:

• Cash Outflow: The burden of deducting WHT on payments made causes a reduction in the cash available for further capital reinvestment or operational expenses.
• Financial Planning Issues: Project Costs for hiring contractors or investors who are not residents need to be factored in with regard to withholding tax. Proper planning will help maintain the required.

Withholding Tax Exemptions and Exceptions

Government Entities and Exempt Institutions

There are some government entities and exempt institutions in Saudi Arabia that are exempted from the WHT. The list includes:

• Government Agencies: Generally, payments received by different government departments for services or contracts are not subjected to WHT (withholding tax).
• Educational Institutions: Other educational institutions may also be able to be exempted on particular grounds, especially if the government funds it or registers it.

These exemptions are intended to make the government processes lighter and push out services to the public without imposing extra taxes.

Diplomatic Missions and International Organisations

The diplomatic missions, as well as international organisations, operating in Saudi Arabia are exempted from local taxation, Withholding Tax, unless otherwise provided for. These include;

• Embassies and Consulates: Income received by foreign diplomatic missions for services rendered is exempt from withholding tax.
• International Organisations: The United Nations or World Bank among others, could also be exempt through particular treaties or agreements that accord tax exemptions.

These exemptions are built upon the concepts of the principle of diplomatic immunity and encouraging international cooperation.

Certain Industries and Activities 

A few industries, particularly of prime importance to the Saudi economy, might have particular WHT exemptions:

• Oil and Gas Industry: The reduced rate or actual exemption under investment promotion agreements may be applicable to a company that is engaged in the search for oil and gas or the production of oil and gas.
• Free Zones: Businesses located within designated free zones may be exempt from WHT on specific types of income to promote foreign investments.

These provisions are designed to promote investment in strategic sectors and attract foreign capital.

Challenges and Best Practices

Withholding Tax compliance in Saudi Arabia may present challenges, despite its critical nature. Typical challenges that face most entities include:

• Complexity of WHT regulations and frequent updates
• Determining WHT applicability and rates
• Inaccurate reporting and record-keeping
• Lack of sufficient guidance on WHT exemptions and exceptions

   

Best Practices to Minimise WHT Liabilities and Ensure Compliance include the following:

• Conduct regular WHT audits and reviews
• Accurate and detailed records of income and payments
• Consult professional advice from accredited tax experts
• Monitor changes and updates in regulations
• Engage an efficient system of computation and filing of WHT
• Proper documentation of WHT exemptions and exclusions
• Open communications with Saudi tax authorities

Conclusion 

Withholding Tax remains a cornerstone of Saudi tax measures since it stimulates economic growth and increases transparency. Therefore, to mitigate risks in optimising tax liabilities and align with the country's economic vision, know the regulations regarding WHT and best practices. For expert WHT guidance, tailored tax solutions, and proactive advisory services, partner with Reyson Badger. Our experienced practitioners have in-depth knowledge of tax regulations in Saudi Arabia, ensuring smooth WHT compliance and strategic tax planning. 

Written By

Akshaya Ashok

Akshaya Ashok is a content writer specializing in creating content focused on accounting and auditing. With over two years of experience, she has developed expertise in crafting professional content for the financial sector.