What is the WHT Rate in Saudi Arabia?

In modern times, when the economy is interconnected across the globe, cross-border transactions have become more common than ever. In the progressing countries like KSA, which deal day to day with a wide range of international practices, be it licensing of intellectual properties or borrowing from international lenders or buying technical services, a tax that is levied on the non-resident’s income sourced within the Kingdom is Withholding Tax (WHT). It is a mandatory obligation for any business operating across borders; however, KSA imposes a flexible system with rates that vary depending on the nature of payment. With this flexibility, not only can the foreign entities operate hassle-free, but also the KSA government can collect taxes effectively. This blog further explores the basic withholding tax rates, rules, treaties, compliance requirements, and one of the best accounting services providers to hire for complete WHT compliance.

What is Withholding Tax in Saudi Arabia?

Withholding tax is recognized globally and is implemented by most jurisdictions. The idea behind it is to make sure that government bodies are collecting enough taxes on the income that is paid to non-residents who otherwise don’t have any legal tax deductions in the country. In other words, one can say that the payer of the income, which is the source country, is obliged to subtract tax at source before transferring the amount to the foreign recipient. This facilitates the government in gathering taxes without depending on voluntary reporting by non-residents.

Withholding tax in Saudi Arabia hence plays a foundational role in the Kingdom’s taxation system. It is crucial to guard the country’s large sums of payments flowing outside the country for services, royalties, and financing. It is considered a part of income tax in Saudi Arabia and is looked after by the Zakat, Tax, and Customs Authority (ZATCA). Its core features comprise:

• Scope: It is applied when a Saudi Residents or a permanent business of a foreign company transmit money to a non-resident for services or rights that are used within the country
• Responsibility: The legal demand to withhold rest lies solely with the payer, which is the Saudi Company
• Remittance: The amounts that are withheld are then transmitted to ZATCA along with a WHT return
• Documentation: A WHT certificate is given by the payer to the non-resident to claim the foreign tax credit in the original home country.

The Basic WHT Rate Structure

Not like many countries with a fixed rate for withholding tax, Saudi Arabia divides corporate tax into multiple groups, and the rates are generally determined based on the nature of the payment. The general rates as per Saudi Laws for different categories include,

1.     Dividends

If a Saudi entity issues the profits to a foreign shareholder, then they are subject to 5% withholding tax. This relatively low tax rate is to attract foreign investors, and this rate can be further reduced under DTAs.

2.     Interest

An interest of 5% is applied to cross-border loans, bonds, and other debt instruments. This rate supports the capital inflows so that borrowing from other countries is not expensive. Interest is applied to both commercial and intragroup loans.

3.    Royalties

If the payment is made for any intellectual property like trademarks, copyrights, or licenses, then they are usually taxed at a 15% rate of WHT. This higher rate is important for ensuring that the Kingdom captures value from IP use. The classification of software can be tricky at times. Downloaded or perpetual licenses are considered royalties and charged at a 15% rate, while Cloud/SaaS may be classified as services and charged at 5–20%.

4.    Technical and Consulting Services

A WHT tax of 5% or 15% is levied on technical and professional services, while 20% of WHT is applied on management and administrative services. These two rates separate routine services from professional services.

5.    Other Services

There are certain areas where a fixed rate of 5% WHT is applied, such as,

• For international transportation services where WHT is applied to payments made to foreign shipping lines, airlines, or logistics companies for transferring goods or passengers.
• Telecommunication services where WHT is applied on payments to foreign telecom operators for international calls or data routing services.
• Insurance services where WHT is applied to Premiums paid by Saudi businesses to foreign insurers or reinsurers

This change in WHT rates depicts the Saudi’s attention to policy priorities. A lower rate of 5% is implemented on the invested income, while higher rates from 15%-20% are implemented on royalties and management services, which are considered as high profit areas.

Double Tax Treaties (DTAs) Impacts on Withholding Tax Rates

Saudi Arabia has signed multiple Double Taxation Agreements (DTAs) with various countries around the globe. These treaties help to facilitate in,

• Lowering the rates of domestic withholding tax, such as the dividends rate, from 5% to 0-5% and royalties from 15% to 5-10%.
• Exempting certain incomes, which restricts tax authorities from taxing some specific business profits
• Preventing double taxation from two jurisdictions by offering credit for Saudi WHT against the taxes they have paid in their home country.

These DTAs not only reduce the tax burdens on multinational businesses but also allow them to plan for taxes. For Example, if a UK parent company is receiving royalties from a Saudi subsidiary, then they can get the advantage of a reduced treaty rate. Likewise, an interest payment to a bank in France can be exempted under the treaty signed between the KSA and France. That being said, it is mandatory to provide the right documentation, certificates of tax residence from the home country, and proof to avail the DTA’s benefits.

Interaction with Corporate Tax and Zakat

Since the Saudi multi-taxation system can be confusing, specifically for multinational businesses, it is essential to understand how WHT differs from other taxes in Saudi Arabia. Such as,

1. Corporate Income Tax is only paid by foreign entities owning companies in KSA, which are subject to a fixed rate of 20% corporate tax.
2. Zakat is paid by only GCC or Saudi-owned businesses operating in KSA. Which is 2.5% of the Zakat base
3. Permanent Establishment (PE): If there is any non-resident who has a PE in Saudi Arabia, they are legally obliged to pay the tax under the corporate income tax instead of WHT for their Saudi-sourced income.

Withholding Tax Compliance Implications

In KSA, the Saudi Payer is chiefly responsible for looking after the withholding taxes; he needs to

• Properly identify the tax category
• Compute the correct tax rate at source
• Submit this amount to ZATCA within the 10 days of the coming month
• File the WHT returns every month
• Issue certificates to the non-resident parties

It is important that business maintains all the contracts, invoices, residency certificates, and evidence of remittance to deal with any audits conducted by ZATCA. In case of missed documentation, late filing, or improper calculations, ZATCA imposes heavy fines and penalties, such as,

• Late payment fine in case of submitting after the deadline
• Under-withholding penalties if the payer miscalculates the rate
• Interest charges for any unpaid amounts

These fines not just cause financial risks but also operational and reputational risks. Hence, it is important to use a professional approach while dealing with Withholding Tax compliance.

Best Withholding Tax Practices for Business

Some of the most professional practices to keep the business always in line with withholding tax include,

• Accurately map the payment flows to find out the right tax exposures
• Thoroughly review each contract to make sure that tax requirements allocate WHT responsibility
• Gather the documentation and residency tax certificates before remitting taxes to find out the treaty rates
• Train finance teams on the legal classification of payments and hire new teams for non-skilled employees
• Keep a track of ZATCA’s continuously changing guidelines related to WHT to stay compliant proficiently
• Hire external tax consultants in case of any inefficiency in WHT calculation, classification, and handling.

How SS&CO KSA Helps in WHT Compliance

We understand the fact that handling withholding tax can be extremely overwhelming for non-Saudi residents. With the language barrier, multi-taxation system, and ever-changing laws, many foreign businesses rely on an external best provider for their WHT compliance. SSCOKSA, being one of the leading accounting services providers,

• Right classification (dividends, royalties, services, etc.) by reviewing the payments thoroughly
• Filing WHT returns monthly to stay away from any disputes, missed deadlines, and other legal hurdles
• Assisting businesses in claiming lower rates under the Double Tax Treaties by organizing the certificates and applying the right rates.
• Offering support in case of any external audits and representing the company in front of tax authorities on the company’s behalf
• Offering training to internal teams and deploying advanced tools to automate routine operations for better compliance.

SS&CO KSA acts as an extended part of your team and offers the most professional tax services that are not just bound to withholding tax, be it VAT, corporate tax filing, or ZAKAT compliance; we cover it all. Hire us today and let us keep you free from not just penalties but also stress.