What is WHT in KSA?

Oftentimes, when a Saudi company hires a foreign consultant for their services, the consultant is subject to another legal tax obligation, which is withholding tax. When the Saudi Resident pays them for their services, the Resident deducts a certain percentage of the payment and remits it to ZATCA. This is tax withholding!

Withholding tax is a type of income tax that is taken from non-residents on the income they receive in Saudi Arabia for their services, but who do not have any permanent establishment there. Since they don’t have a foreign recipient to settle taxes directly, the Saudi Payer becomes legally responsible for withholding the allowable limit of tax from the payment. This deducted tax is then remitted to the legal tax authority, ZATCA, by the payer. This tax is computed on the gross amount that is paid to the non-resident to make certain that all the tax funds are fully cleared before they cross the borders.

What is Withholding Tax (WHT)?

Withholding tax is one of the standout contributors to Saudi Arabia’s economic development; it was established in 2005 to make sure that foreign entities that earn profits within the kingdom must also contribute to taxes just like locals. This creates an equitable tax framework for both residents and non-residents. When international service providers do not have a permanent establishment in KSA, the collection of tax from them becomes difficult; that’s why the responsibility is assigned to the Saudi payer. If the Saudi Payet neglects WHT compliance, it puts itself in legal danger. With the WHT introduction, the economic progression was strengthened, and the tax leakage on cross-border transactions was reduced.

What are the different kinds of Payments Subject to WHT in Saudi Arabia?

Not all payments made to foreign companies are subject to WHT in KSA, but certain categories with different WHT rates include:

These rates are not fixed and are prone to change as ZATCA very frequently updates its laws. It’s important to verify the applicable rate before deducting WHT and remitting it to ZATCA to prevent any legal obstacles.

Who Pays and Who Deducts WHT in KSA?

As discussed above, the duty to deduct WHT in KSA falls on the Saudi payer; this Saudi payer can be a Saudi resident company or a resident individual conducting business activities. They can also be permanent establishments of a foreign company or government entities making payments to non-residents. These non-residents actually paying the WHT in KSA are mostly referred to:

• A foreign business not having a legal establishment in KSA
• An individual who is a non-tax resident in KSA
• Entities offering services from beyond Saudi borders.

If the Saudi Payer is also registered for tax, they don’t have to separately register for WHT in KSA. All they have to do is file the required WHT return.

Understanding the Process of WHT Filing

The WHT process is simple; businesses have to determine if their payments have to undergo the WHT deductions and confirm whether the recipient is a non-resident or not. Once they know these details, they must apply the correct calculations and deduct these amounts before releasing the payment to their non-resident service provider. This withheld amount must be remitted to ZATCA, and the WHT return should be electronically filed through the ZATCA portal.

Let’s suppose a Saudi company hires a consultation firm with a fee of SAR 200,000, and the applicable WHT rate is 5%. The WHT tax will be SAR 10,000 (5% of SAR 200,000), which will be deducted from the total SAR 200,000, and the final payment made to the consultant will be SAR 190,000. The Saudi company will pay SAR 10,000 to ZATCA and SAR 190,000 to the foreign consultant. Withholding tax must be timely and accurately paid by the 10th of the month following the month in which the payment was made.

Maintaining Proper Documentation for Compliance

Just like for other taxes, businesses should keep their records saved for future audits and inquiries. This documentation covers their Commercial Registration (CR), agreements, supplier invoices, payment data, bank transfer receipts, tax residency certificate, and other supporting files. When a company keeps its documents archived properly, it facilitates them in tax treatments to reduce their tax liabilities or in case of any tax audits conducted by ZATCA.

Double Tax Treaties and Withholding Tax in Saudi Arabia

Saudi Arabia has signed treaties with various other countries to support international trade and attract foreign investments. The idea behind these tax treaties is to reduce tax rates and provide exemptions from WHT in KSA. As per the Double Taxation Avoidance Agreements (DTAAs), the same income cannot be taxed twice in both countries. This only applies to the treaty countries. If the recipient is from one of these countries, they get the benefit of tax exemption after meeting the treaty conditions and providing all necessary documents like TRC, etc.

Such as, as per the Saudi Arabia-UAE Tax treaty, which was effective from January 2020, its key policies included:

• Withholding tax exemption on all the service fees unless the services have a permanent establishment (PE) within the country
• Exemption from withholding tax also on the interest payments
• Lower 10% WHT rate on the royalty payments
• Withholding tax reduction of 5% on dividends
• Exclusion for UAE Sovereign Wealth Funds and Capital Gains from share sales in KSA

To know if your consultant’s country has a tax treaty with KSA and to gain the potential advantages, go through the list on the Saudi Ministry of Finance tax treaties page.

Why Businesses Must Emphasize Withholding Tax in Saudi Arabia?

Many businesses don’t prioritize withholding tax compliance like other taxes; however, neglecting WHT in KSA also leads to adverse legal consequences just like other taxes. ZATCA imposes monetary fines and penalties for late payment, delays in getting taxes cleared, and any overdue taxes. Therefore, it’s important that Saudi payers must apply the right amount of WHT, determine the residency status of the recipient correctly, maintain all supporting documentation, and prevent any delay in tax filing. Oftentimes, legal hurdles arise due to the misclassification of payments, subtracting the incorrect WHT rate, or due to not reconciling withholding tax with the accounting records. Businesses must also apply the DTAAs where applicable to lower the tax burdens on their payer and encourage cross-border transactions. Having a tax consultant by your side can help with the entire process. Hence, it’s better to hire a tax consultant internally or get help from an external accounting services provider to streamline the process overall.

How Accounting Services Can Be Beneficial?

The rules of Withholding Tax in Saudi Arabia can be complicated for the internal tax teams to understand and apply different percentages of WHT correctly. Apart from that, double tax treaties deductions are enforced with several policies, which, again, understanding and implementing can be intricate to avail the tax discounts. When a Saudi company hires WHT accounting services in KSA, they get the benefit of:

• Finding if the WHT actually applies or not through thorough assessments.
• Organizing and differentiating payments separately to get accurate tax calculations
• Determining if the recipient country is under the DTA and if any of the treaty rules apply to lower tax liability.
• Prepare and file the WHT returns by providing all the necessary documentation to ZATCA.
• Responding to ZATCA inquiries and representing the company in front of authorities on behalf of the company in case of Audits
• Proactively detecting the compliance gaps and promptly making vital moves to fix the problems before they become a major concern
• Offering dedicated support and advice to the teams not just regarding WHT but also related to other tax matters, to ensure that they are always on the right compliance track.

Why Choose SS&Co. for Withholding Tax Services in Saudi Arabia?

With the routine never-ending business tasks, understanding WHT, managing cross-border transactions, and fulfilling ZATCA compliance requirements can be really tough for the internal teams. With the support of SS&Co. accounting services, your teams are able to cut the stress of tax compliance and focus on other critical business areas that need the most attention. Through our teams of expert tax consultants and through the utilization of robust accounting tools, you gain access to unmatched professional support that always keeps you on the right side of Saudi tax laws. Our services are not just limited to tax services, but we also offer strategic guidance, which helps business authorities make thoughtful decisions for their future business growth that is sustainable and financially rewarding.