Withholding Tax in the UAE Vs Saudi Arabia

Overview:

The UAE has been long recognized as a global hub for business. One of the most striking omissions in the UAE’s tax landscape is a withholding tax, which is contrasted with that of neighboring Saudi Arabia (KSA), in which WHT is an intrinsic part of its tax structure especially in the regard to payments for non-resident recipients.

What is Withholding Tax?

Withholding tax is the tax levied by the government, which the payer deducts at the source while making a payment to the non-residents. Such payments are usually made in the form of service charges, royalties, dividends, or interest. Basically, WHT ensures that the government collects taxes from foreign entities that derive income from activities within its jurisdiction.

UAE: A Tax-Free Haven for Withholding Tax

The absence of WHT in the UAE is an advantage to businesses and individuals. This means that no taxes are deducted from payments made to foreign entities or individuals, regardless of the nature of the services or income. This policy reflects the broader commitment of the UAE to maintaining a competitive and investor-friendly environment. With its zero WHT regime, the UAE attracts multinational companies and foreign investors seeking to minimize tax obligations while operating in a strategically advantageous location.

What is Withholding Tax (WHT) in Saudi Arabia?

Saudi Arabia follows a destination-based taxation system. Income earned within the Kingdom is subject to tax regardless of the recipient’s residency status.

Withholding tax (WHT) in Saudi Arabia refers to a tax levied on income earned by non-resident entities for services provided within the country. This tax applies to payments made to non-residents, irrespective of whether the payer is a governmental, non-governmental, or semi-governmental entity.

Scope of Withholding Tax

WHT is applicable to non-resident entities earning income from Saudi Arabia. Below is a detailed overview:

Non-Residents: The withholding tax applies to non-resident entities, whether individuals or corporations, earning income from Saudi sources. Non-residents are entities that do not have a permanent establishment in Saudi Arabia.

Income from Activities in Saudi Arabia: Any income received from activities performed within Saudi Arabia is liable to WHT. This includes income from immovable property, disposal of shares in companies owning such property, or leasing movable property used within the Kingdom.

Expenses: All payments made for services rendered wholly or partly in Saudi Arabia are covered by withholding tax rules.

Permanent Establishments: Income relating to the operations of a non-resident’s permanent establishment in Saudi Arabia is WHT-exempt.

Withholding Tax Procedure in Saudi Arabia

The withholding tax procedure involves the following steps:

Identify the Withholding Party:
This refers to the Saudi-based entity or individual making a payment to a non-resident, which could be a government body, private company, or organization.

Calculate the Withholding Tax: 
The tax amount is arrived at based on the application of the effective rate to the total payment made to the non-resident, net of expenses or free of any deduction.

Transfer the Withheld Tax: 
Deduct the applicable tax amount from the amount paid to the non-resident. Credit the withheld tax to the ZATCA within ten days after the month the payment was made.

File the Withholding Tax Return:
 An individual must provide a return to ZATCA on a monthly basis that documents the payment type, amount, non-resident beneficiary details and the tax withheld. In addition, an annual return must be made within 120 days of the fiscal year-end (60 days for partnerships).

Objectives of Withholding Tax in KSA

Withholding tax provides three purposes:

Ensures Tax Collection: Generally speaking, by collecting taxes at the source, Saudi Arabia reduces the risk of collecting non-payment from non-residents.

Reduces the complexity of the tax administration, since withholding taxes streamline the tax collection and compliance processes for the government and the taxpayer.

Thwarts Tax Avoidance: This system deters non-residents from evading taxes on the income earned within Saudi Arabia.

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Also Read: Entrepreneur License in KSA – Process & Benefits