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Taxation in Saudi Arabia

01/06/2020

Saudi Arabia levies corporate income tax on non-resident share in a resident corporation. The share of Saudi Arabia and GCC nationals are subject only to a religious levy called Zakat, The Saudi Arabia tax regulations came into effect from July 30, 2004 which has introduced certain new concepts and/or modified existing practices. The taxation system in the past was much less codified and a significant portion of the tax system in Saudi Arabia has evolved over a number of years through various practices.

The share of taxable profit owned by the non-residents will subject to 20% corporate income tax in addition to 5% withholding tax in Saudi Arabia.

A withholding tax is an amount that an employer withholds from employees’ wages and pays directly to the government. It is also known as retention tax as the tax is paid to the government by the payer of the income and not the recipient. The tax is withheld or deducted from the income due to the recipient.

The withholding tax in Saudi Arabia is applicable in the Kingdom of Saudi Arabia on the full amount paid to the non-resident as of 30.07.2004.

Withholding tax in Saudi Arabia is applicable when payments is made from a permanent establishment or a resident party or to a non-resident party for services performed. Withholding tax agent in Saudi Arabia is imposed on the full amount paid to a non-resident irrespective of any expenses incurred to earn this income, and not withstanding full or partial allowance/disallowance, as a deduction, of such payment.

According to General Authority of Zakat & Taxes (GAZT), it is required to declare and make payment of relevant amount of withholding tax in Saudi Arabia to GAZT and settle the withholding monthly tax returns to GAZT within 10 days of the month-end in which the payment is made. It is mandatory to submit an annual withholding return at the fiscal year end as per the withhold tax in the Saudi Arabia.

1. What is the withholding tax rate prevailing in Saudi Arabia?

According to the provisions of the article 68 of the Income Tax Law (ITL), the withholding tax in Saudi Arabia should be imposed on the total amount paid to the non-resident based on the nature of services and the rates defined are as follows

  • ♦ 20% - Management fees
  • ♦ 15% - Royalties
  • ♦ 15% - Amount paid to the head office or any of its other office to the permanent establishment of any kind
  • ♦ 5% - Loan Charge (proceeds/interest)
  • ♦ 5% - Technical and consulting services paid to non-related party
  • ♦ 5% - Payment for international telecommunication services paid to non-resident party
  • ♦ 5% - Payment for rental of movable property used in the Kingdom of Saudi Arabi
  • ♦ 5% - Dividends

2. What are the duties of the withholding person under the withholding tax in Saudi Arabia?

Any person withholding tax in KSA under the Income Tax Law, shall comply with the below following duties:

  • ♦ He should be registered with the General Authority of Zakat & Taxes (GAZT)
  • ♦ The amount withheld should be paid by the withholding person in Saudi Arabia within the first ten days from the month following the month of payment to the beneficiary
  • ♦ The withholding information should be filed for every fiscal year on the form prescribed by the GAZT not later than 120 days of the end of the fiscal year and not later than 60 days of the end of fiscal year for partnerships.
  • ♦ The withholding person in Saudi Arabia should provide the beneficiary with a certificate that states the amount that is paid to him and also the amount of tax withheld.

3. What are the payments that are not subjected to withholding tax in Saudi Arabia?

There are some payments to which the withholding tax in Saudi Arabia will not apply even though they are paid by a resident to a non-resident person. Below are the examples of such payments –

  • ♦ Amount paid for the purchase of goods, machines, equipment, spare parts or any other property.
  • ♦ Any payments that are not the source in the Kingdom of Saudi Arabia.

For instance, recruitment services paid for employment office abroad, School fees paid abroad, sales and distribution services for local products sold by distributors abroad.

4. How to calculate the withholding tax in Saudi Arabia?

The withholding tax in Saudi Arabia will be calculated at 5% in case of consultancy contract as per the below:

If the contract sum is for 9,00,000. The withholding tax will be at 5% on 9,00,000 which amounts to 45,000. The final settlement paid to the consultant would be 8,55,000 (9,00,000 - 45,000).

The withholding tax consultants are available in all cities of Riyadh, Jeddah and all over Saudi Arabia that provide their assistance in filing of the withholding tax return in a timely manner and fulfill all the requirements of withholding tax return in Saudi Arabia. Withholding Tax Return consultant in Riyadh, Saudi Arabia help the resident businesses in filing the withholding tax return and provide their support and impart their knowledge in Understanding withholding tax in the Kingdom of Saudi Arabia domestically as well as under the Double Tax Treaty between the UAE and Kingdom of Saudi Arabia.

Kingdom of Saudi Arabia (KSA) Double Tax Treaty

In May 2018, the United Arab Emirates (UAE) and the Kingdom of Saudi Arabia (KSA) signed the Double Tax Treaty (DTT) between the members of the Gulf Cooperation Council. The Double Tax Treaty is expected to apply from 1 January 2020 onwards.

The Double Tax Treaty will provide the taxpayers and withholding tax agents in the Saudi Arabia with a favorable tax treatment. The KSA Double Tax Treaty takes the withholding tax in Saudi Arabia also into consideration for dividends, interest, royalties. Under the Double Tax Treaty, the withholding tax in Saudi Arabia would be applicable as per below:

  • ♦ Dividends – The Double Tax treaty caps withholding tax in Saudi Arabia on dividends to 5% and therefore offers no relief from withholding tax on dividend payments from KSA to the UAE. No withholding tax is levied on the payment of dividends in the UAE.
  • ♦ Interest – The Double Tax treaty provides that interest is only taxable in the contracting state in which the recipient is resident. The withholding tax in Saudi Arabia on interest is 5% and in the UAE is 0%. Due to which, no withholding tax would apply on interest payments between USA and KSA residents.
  • ♦ Royalties – The Double Tax Treaty caps withholding tax in Saudi Arabia on royalty payments – payments for the use of or the right to use industrial, commercial or scientific equipment at the rate of 10%. However, the withholding tax in Saudi Arabia for domestic royalties is calculated at the rate of 15%.

The Double Tax Treaty may reduce the taxation of UAE residents in the Kingdom of Saudi Arabia and will also help in managing the withholding tax in Saudi Arabia.

An important development is the possibly to fully mitigate the domestic 5% Withholding tax on income from debt-claims paid by Saudi resident companies to UAE resident lenders , provided the transaction is at arm’s length and the recipient is the beneficial owner of such income.

The UAE – KSA Double Tax treaty provides for the elimination of double taxation by way of a credit against tax payable in the UAE and the KSA. Residents covered under the treaty includes any person who is liable to tax by reason of domicile, residence, place of incorporation or place of management, corporate entities, Sovereign Wealth Funds and similar government entities and other persons that are exempted from tax.