We launched our Saudi Market Entry Series with one of the most important areas of focus when setting up a company in a new region – Corporate Tax. In that episode, we invited Arshed Zuhair, Director of Tax Advisory & Financial Reporting Services at Innovant Consultant & Management Solutions, to explain everything our clients needed to know about corporate taxes in KSA.
During the session, we noticed that one segment of taxation was a point of interest to our audience and warranted a full episode to dissect completely - which brings us to Episode 6 – Understanding Withholding Tax in KSA.
Here’s the recap of the episode hosted by Alex Nicholls, Business Development Lead at AstroLabs and once again featuring our Tax Specialist, Arshed Zuhair.
What is Withholding Tax?
Withholding Tax (WHT) is imposed on most payments made by a Saudi Arabian entity to any party that is not a resident of KSA. The Saudi Arabian entity is required by law to retain the applicable tax amount from the payment to the foreign entity and settle it to the GAZT (General Authority of Zakat & Tax in KSA).
Applicability of Withholding Tax
- Applies only to payments made for services, rent, profit distributions & other intangible outputs
- The liability to pay WHT is on the non-resident entity however it is the responsibility of the resident entity to collect it from the payment
- Doesn’t apply to payments made against ‘Imported Goods’ including any logistics related to such imports.
- Applies only to services which are consumed outside KSA (for example, hotel bookings in a foreign country, or a consultation related to a foreign project)
- Applies to services performed outside KSA but where the benefits flow to the KSA entity are still considered as consumed within KSA for WHT purposes & is still liable for WHT (cloud hosting of the main ERP system of the KSA entity outside Saudi Arabia)
How to Calculate Withholding Tax
1. Identify the applicable WHT rate based on the Categorization as well as the relationship with the Foreign party.
2. Deduct the relevant tax amount from the payment and settle the net amount to the supplier.
Note that WHT is calculated on the gross payment to be made to the service provider and deducted from it, not added to it.
Filing Withholding Tax
Here’s what you should know about filing withholding tax in KSA:
- WHT filing must be completed within the first 10 days of a calendar month for any payments made within the previous calendar month.
- WHT filing is done electronically in the GAZT portal of the KSA entity.
- Payments made to each foreign entity or supplier must be indicated in a separate line within the same tax filing.
- One line item should be dedicated to each supplier. If multiple payments are made to the same entity/supplier, the aggregated amount of all invoices processed in the month should be considered.
- The relevant contract with the foreign entity, the invoices & payment slips all need to be uploaded for each line item in the tax filing. If the payment is related to both goods and services, the invoice must clearly indicate the value of goods and value of services separately.
- If there are any delays in filing or paying WHT, GAZT shall impose a 1% penalty on the tax amount for every 30 day delay. For every 30 days added to the delay, the penalty percentage will be compounded on top of the total amount (including tax and penalty) payable at the end of the previous 30-day delay period.
Withholding Tax Categories
Here are the different categories and their corresponding WHT rates.
GAZT defines a related party as an entity, that is either under the direct control of the other entity or when both entities are under common control exercised either through shareholding, Governance or Financing.
Special considerations
- Payments made to a related party or head office that fall in the categories — Royalty of License Fees, Technical or Consulting Services, or Rent, the WHT applicable is 15%.
- WHT applicable on Interest and dividends will be 5% for both related as well as non-related parties
Withholding Categories with Examples
Management Fees
· Outsourced central management
· Management of hotels
· Management of ships & vehicle fleets
· Management of investment portfolios
Royalty or License Fees
· Payments for rights over Intellectual Property
· Payments for rights over scientific, Industrial & commercial equipment
· Payments for rights over natural or mineral resources
· Payments for rights to use and own computer software
Technical or Consulting Services
· Consulting & supervisory services
· Advertising & marketing services
· Maintenance & support services
· Software & IT services
International Telecommunications
· International Telephone & messaging services
· Use of International Satellite services
· Leasing Internet capacity & cables
· VPN’s and other offshore communication solutions
Rent
· Renting Real Estate
· Rent or lease of Equipment
· Renting server space and cloud storage
· Renting Internet domains
Withholding Tax – Double Taxation Treaties
KSA has entered into Double Taxation treaties with 52 countries around the globe. Double Taxation treaties primarily address how the different tax jurisdictions shall apply to entities operating in both countries and to minimize the potential for the same transaction to be taxed simultaneously in both jurisdictions.
Many Double Taxation Treaties (DTT) include articles that offer preferential or reduced WHT rates as compared to the standard WHT rates applied by GAZT.
How to apply the concessionary WHT rates available in a DTT?
1. The KSA entity responsible for withholding WHT should request from the GAZT to apply the specific DTT when filing the WHT return for the specific payment.
2. Submission of tax residency certificate issued by the tax authorities in the country where the beneficiary/supplier is residing, which must be duly attested by the Saudi embassy in the country of the non-resident as well as the Ministry of Foreign Affairs in KSA.
3. Submission of an undertaking from the KSA entity that it would bear any tax or fine due on the non-resident payees due to incorrectness or error in the interpretation of the Tax provisions.
4. If the KSA entity is unable to fulfill the above conditions, they may apply the standard WHT rates and then later obtain a refund of the overpaid taxes.
The process to claim a refund on overpaid WHT within the past 5 years:
1. Submit a letter to GAZT requesting a refund of the overpaid taxes
2. A certificate issued by tax authorities of the beneficiary's country, certifying that the beneficiary is a resident of that country
3. A copy of withholding tax form used to pay the tax, along with the bank receipt confirming settlement of WHT with GAZT
Withholding Tax Rates according to DTT
Here are the WHT rates as per KSA’s DTT with UAE, UK, and Singapore. These are the leading countries that many Saudi entities have regular transactions with. You will find the DTT agreements with all 52 countries here.
* 15% of WHT is charged on dividends that are paid by Property Investment Vehicle
** 5% of WHT charged on royalties that are paid for the use of, or the right to use, industrial, commercial, or scientific equipment
Common questions about Withholding Taxes in KSA
Is travel from KSA to a foreign country subject to Withholding tax?
If the airline used for ticketing has a KSA entity or presence, the payment will be made within Saudi Arabia, therefore it’s not subject to WHT.
However, if the airline used for ticketing doesn’t have a KSA presence, the payment will be made to an entity outside Saudi Arabia, for which WHT is applicable.
Do software and IT applications belong to Royalties or Technical Services?
If the purchaser has the right to only use the software and has no control over where the software is installed/hosted and about the allocation of resources then it shall be considered as a Royalty. If the purchaser has significant control on how the software is managed or has the right to sell or distribute the software as they wish, then it shall be considered as a Technical service. Most SaaS models will fall under Royalties instead of Technical services.
Is the Principal portion of a Loan instalment subject to WHT?
No. Only the interest portion of a loan instalment subject to WHT. The principal portion is free of WHT.
Are Dividends to a non-resident subject to WHT if Income Tax has already been charged over the profit attributable to the non-resident?
Yes. Irrespective of whether the dividend is a post or pre Zakat/Income Tax, if the recipient of the dividend is not a resident of KSA the dividend shall be liable for 5% WHT.
How does WHT apply if the payments to a Head Office or related party is a reimbursement in nature?
If the payment can be clearly proven to be a reimbursement of an expense then one can apply the non-related party WHT rate that is applicable to the particular expense.
How does WHT taxes apply on Freelancing platforms or other subscription services where the tax cannot be deducted from the payment?
If the freelancing platform has a presence in Saudi Arabia, they have their own policies to pay the WHT taxes through the KSA entity.
In other cases, the KSA entity pays the full amount to the service company, and pays the withholding tax themselves which is then claimed back from the service provider for example through a debit note.
This is also how WHT is worked out when using services or subscription models where deducting the WHT from the payable amount is not an option.
That brings us to the end of this week’s episode. We believe it was useful to you and provided all the necessary information around Withholding taxes in Saudi Arabia. If you have doubts related to WHT or corporate taxation and accounting in KSA, you can write to [email protected] or [email protected]. We’d be happy to guide you.
We have some exciting webinars coming up in the next few weeks to make your entry to KSA a smooth and hassle-free one.
Registration links for our upcoming webinars:
· Understanding Saudization in The Kingdom – 30th March 2021
· Top 10 things to know when setting up a company in Saudi Arabia – 6th April 2021
· Understanding the Fintech Ecosystem in Saudi Arabia featuring Fintech Saudi – 20th April 2021
You can also check out the recap of our previous episodes here.