Withholding tax plays a vital role in the revenue systems of many countries, including Saudi Arabia. It ensures advance tax collection and helps maintain a steady flow of public revenue.
For businesses pursuing company formation in Saudi Arabia, understanding the withholding tax regime is essential to avoid penalties and maximize tax benefits through bilateral treaties.
This post explores the procedures, documentation, and key concepts around withholding tax in the Kingdom and offers clarity for foreign entities seeking business setup in the KSA.
Withholding Tax Claims in Saudi Arabia – A Detailed Overview for Foreign Investors
– What Is Withholding Tax (WHT) and Why It Matters?
Withholding tax is the amount deducted at source by the payer from payments made to foreign entities for services or other income streams. Instead of waiting for the recipient to pay their taxes, the payer remits the amount to the Saudi government. It helps:
- Spread out tax liability over time
- Promote voluntary compliance
- Minimize collection costs
- Prevent revenue loss
- Ensure a regular income stream for the government
Some common terminologies related with WHT in the KSA include:
- Withholding Agent: The payer in Saudi Arabia who is responsible for deducting the tax
- Recipient: The party (usually non-resident) entitled to payment
- Nature of Payment: Determines the applicable tax rate (e.g., technical services, rent, royalties, etc.)
– Payments Subject to Withholding Tax in Saudi Arabia
Saudi tax law provides specific rates depending on the service rendered. Understanding these categories is essential for those pursuing Saudi business formation, particularly if payments are being made to foreign service providers.
- 20% for management fees
- 15% for royalties and technical or consulting services paid to related entities
- 5% for unrelated technical services, rent, dividends, shipping, and insurance
- 15% for other types of payments
– Consideration of Tax Treaties
Saudi Arabia has over 60 active tax treaties. These treaties may allow reduced withholding tax rates. For instance, if a treaty sets the rate at 15% for a type of income instead of 20% under domestic law, the treaty rate applies. To benefit, the payer or the recipient must submit proper documentation such as:
- Tax residency certificate
- DTA (Double Tax Agreement) application forms
- Signed undertakings assuming liability for errors
– Withholding Tax on Payments to Residents
Unlike some countries, Saudi Arabia typically does not apply withholding tax to payments made to residents unless they meet specific criteria. However, when considering business incorporation in the KSA, foreign investors must check if their entity classifies as a non-resident.
– Timeline and Compliance
Under Saudi law (Article 63), withholding tax must be deposited within 10 days of deduction. This is crucial for both payers and recipients to remain in good standing with Saudi tax authorities. The withholding agent is required to:
- Deposit tax with ZATCA (Zakat, Tax and Customs Authority)
- Provide the recipient with a withholding tax certificate
– How to Claim Withholding Tax Credit?
For foreign entities that have paid withholding tax in Saudi Arabia, the tax paid can often be claimed as a foreign tax credit in their home country. This helps avoid double taxation.
Companies undergoing company formation in Saudi Arabia should plan ahead to ensure proper documentation and avoid missing credit opportunities.
Steps:
- Obtain a withholding tax certificate from the Saudi payer
- File a foreign tax credit claim with your local tax authority
- Submit relevant proof and documents as required
– Reduced Rate Application vs. Refund Process
If a taxpayer wants to apply a reduced rate under a tax treaty, there are two options listed below.
a) Benefit at Source
- Apply the lower rate directly at payment stage
- Submit Tax Residency Certificate, Form Q/7B, and undertaking Form Q/7C via ZATCA portal
- Await ZATCA approval (usually via acknowledgment receipt)
b) Refund Procedure
- Pay withholding tax at regular rate
- File for refund later using the same set of documents
The benefit-at-source approach is simpler and preferred by most businesses with ongoing payments. Consulting professionals in Saudi ensures these processes are carried out accurately.
– Role of Professional Support
Navigating the withholding tax regime, especially in cross-border scenarios, requires experience. Many businesses partnering with tax advisory experts like Nimbus Consultancy receive support in:
- Gathering and submitting the correct documents
- Managing filings through ZATCA
- Reducing the risk of non-compliance or underreporting
Engaging tax professionals is particularly beneficial during early business incorporation in the KSA to set up compliant systems from the start. As part of broader business setup in the KSA, foreign investors must:
- Understand the applicable tax rates and their basis
- Identify any relevant tax treaties
- Maintain and submit accurate documentation
- Choose the right procedure for claiming treaty benefits
With proper guidance and due diligence, foreign businesses can avoid tax pitfalls and create strong foundations for growth.