Withholding Tax in Saudi Arabia | Calculation Process Explained

Overview

The term ‘withholding tax’ generally refers to a specific amount withheld from the income generated by a business, entity, or any other payment activity. The business owner pays this amount directly to the government, or in large organizations, the employer deducts it from the employee’s wages. Similarly, if a resident or non-resident business, individual, or entity earns income in Saudi Arabia, they must pay withholding tax at a rate determined by the income. By the end of this article, you will clearly understand withholding tax in Saudi Arabia, how to calculate it, and the penalties for non-compliance.

Who Should Pay Withholding Tax (WHT) in KSA?

Saudi Arabia taxes income earned within the Kingdom, regardless of the recipient’s residency, following a destination-based taxation system. WHT applies to payments made to non-residents, regardless of the type of establishment they deal with – governmental, non-governmental, or semi-governmental. Here’s a detailed explanation of who must pay WHT:

• Non-Residents: These are entities without a permanent establishment (PE) in Saudi Arabia. They are subjected to paying Withholding tax for the income earned from resources available within Saudi.
  (Note – Non-residents with a permanent establishment in Saudi Arabia are exempt from WHT on income generated through the PE’s activities.)
• Profitable activities in KSA include income from real estate, share disposals, trade benefits, or leasing movable property within the Kingdom.
• Disbursements: Payments made for services rendered completely or partially in Saudi Arabia fall under the withholding tax regulations.

How to calculate withholding tax in KSA?

• Identifying the applicable rate – Refer to the table given below to calculate the tax amount while we at Arnifi provide you with professional guidance for specific cases.
• Determining the gross amount i.e., calculating the total value of income, revenue, or payment before any deductions such as taxes, fees, or other expenses. This forms the base for tax calculation.
• Multiply the specific rate by the gross amount to determine the exact amount to withhold.

How to Process Withholding Tax in Saudi Arabia?

• Calculate the tax on the total payment and applicable tax rate (refer to the above table) to the business/entity/individual without deducting expenses.
• Withhold the applicable tax amount from the payment to the non-resident.
• Pay the withheld tax to the Zakat, Tax, and Customs Authority (ZATCA) within ten days after the end of the month in which you made the payment.
  (Zakat – a digital platform created by Saudi Arabia’s Zakat, Tax, and Customs Authority to streamline services related to zakat, tax, and customs.)
• Submit a monthly return to ZATCA detailing the beneficiary, payment type, amount, and tax amount withheld.

Purpose of withholding tax in KSA

• Ensures tax revenue: Collecting taxes at the source reduces the risk of non-payment by non-residents in KSA.
• Streamlines tax administration: Withholding taxes simplifies the process of tax collection and compliance for both the government and taxpayers.
• Combats tax evasion: The system acts as a safeguard against non-residents avoiding taxes on income earned in KSA.

Withholding Tax Regulations

In Saudi Arabia, the withholding person, whether a resident individual or entity making payments to a non-resident service provider has several key obligations under the withholding tax (WHT) regulations –

• Tax Deduction: Deduct the applicable tax from the payment to the non-resident based on the type of payment and tax rates.
• Payment to ZATCA: Remit the withheld tax to the Zakat, Tax, and Customs Authority (ZATCA) within ten days of making the payment to the non-resident.
• Filing Returns: Submit a monthly return, detailing payments and withheld taxes, within ten days of each month. An annual return summarizing the withheld taxes must also be filed within 120 days of the fiscal year-end (60 days for partnerships).
• Record Keeping: Retain records for at least ten years, including details of beneficiaries, payment types, amounts, and taxes deducted.
• Compliance Documentation: Ensure records are comprehensive and can demonstrate compliance, especially in the case of audits or ZATCA requests.
• Issuing Certificates: Provide certificates confirming the tax deduction and payment to non-residents upon request.

KSA withholding tax treaties with other countries & Penalties

Saudi Arabia has signed double taxation treaties (DTTs) with several countries. These treaties can reduce or eliminate withholding tax (WHT) rates for treaty residents under specific conditions. We recommend consulting a tax professional to navigate DTTs and claim any potential benefits.
Failure to pay withholding tax in KSA can result in a monthly penalty of 1% on the outstanding tax amount. An additional penalty of 25% tax if the Zakat, Tax, and Customs Authority (ZATCA) suspects tax evasion.

Arnifi – Your chosen partner for resolving complicated tax compliance & accounting

We offer a comprehensive suite of services tailored to meet the unique needs of your enterprise. That includes free tax advisory, tax compliance, VAT registration, accounting and bookkeeping, and customized auditing solutions. You can choose the services that best suit your business needs from our flexible tax packages. By selecting the right plan, you ensure efficient management of your finances while staying compliant with all regulatory demands. Our experts will help you navigate Saudi Arabia’s withholding tax process, ensuring compliance and avoiding penalties. With our support, you can confidently navigate the complexities of withholding tax regulations and optimize your tax strategy. Check the link to explore the best options for your business.