Definition of Withholding Tax in Saudi Arabia

Withholding tax is a direct tax deducted from amounts received by non-residents from sources within the Kingdom. The application of withholding tax began in 2004. This tax aims to ensure the collection of taxes due from non-resident individuals and companies that generate income from Saudi sources.

Historical Background

The tax system related to withholding tax in Saudi Arabia was issued by Royal Decree and Ministerial Resolution on 11/6/1425 AH, representing one of the pillars of the tax system in the Kingdom of Saudi Arabia. Withholding tax was previously known as "non-resident tax" in earlier years.

Who is Subject to Withholding Tax?

Non-Residents

Withholding tax is imposed on non-residents who do not have a permanent establishment in the Kingdom when they generate income from a source within the Kingdom. A non-resident person is defined as someone who does not qualify as a resident in the Kingdom, i.e., does not hold Saudi nationality or those treated as such.

Practical Examples

An American company provides technical services within the Kingdom and does not have a permanent establishment in the Kingdom. Therefore, tax must be withheld from the amount paid to it for these services.

Who is Responsible for Withholding Tax?

The party responsible for withholding and remitting the tax amount to the Zakat, Tax and Customs Authority is the resident who pays the amounts subject to "withholding tax" in the Kingdom to non-residents.

Entities Responsible for Remittance

Withholding tax is remitted by the following entities:

• Any company or natural person engaged in commercial activity and meeting the residency conditions specified in the system
• Permanent establishments in the Kingdom employing non-residents
• Government departments, ministries, public authorities, and any legal person or other institutional body in the Kingdom

Withholding Tax Rates in Saudi Arabia 2025

Withholding tax is one of the essential components of the Saudi tax system, with rates ranging from 5% to 20%. The rates are specified as follows:

5% Rate

• Rent: 5%
• Royalties and rent payments
• Flight tickets, air or sea freight

15% Rate

• Professional and consulting fees
• Technical and advisory services
• International telephone communication services (excluding payments to headquarters or related companies)
• Royalties, rent, payments to headquarters or related companies for technical, advisory services, or international telecommunications

20% Rate

• Management fees: Fees paid by establishment owners for contract-related services across various sectors
• Management contracts such as ship management or hotel management contracts

How to Calculate Withholding Tax

Basic Formula

Tax is calculated very simply using the following equation: Tax Value = Supply Value (excluding VAT) × Withholding Rate

Practical Example

For example, if a non-resident person's salary is 1,000 Saudi Riyals and their withholding rate is 15%, the tax amount would be calculated by multiplying the supply value (1,000 Riyals) × 15% to get the result (150 Riyals), which is the withheld amount, and the remaining amount (850 Riyals) is delivered to the beneficiary.

Procedures for Filing Withholding Tax Returns

Basic Steps

1. Access the Authority's electronic portal: zatca.gov.sa
2. Create a withholding form and fill in the financial data
3. Upload the form and the amount will be calculated electronically
4. Issue the invoice and pay it through the SADAD system

Required Timing

Withholding tax returns in Saudi Arabia must be filed within 10 days of the month following the transfer or payment to the non-resident.

Payment Deadlines

Withholding tax in Saudi Arabia must be paid no later than the tenth day of the month following the month in which amounts were received from the non-resident person.

Timing Example

An American company provides technical services within the Kingdom, and it does not have a permanent establishment in the Kingdom. The resident company paid an amount for those services on January 5, 2018. Therefore, the resident company must withhold tax from the amount paid to the American company and remit the due tax within the first 10 days of February 2018.

Penalties and Fines

Late Payment Penalty

1% of the unpaid amount for every 30-day delay

Detailed Penalties

A financial penalty of 1% of the tax amount that was not paid is imposed for each month in which payment was not made, in addition to paying the tax amount that has not yet been paid by its statutory due date. This applies in cases of:

• Failure to remit tax after withholding it
• Failure to provide documents containing withholding data

Manipulation Penalty

In case the violator deliberately fails to disclose withholding tax data or provides false data, a financial penalty of 25% of the unpaid tax value is imposed.

Entity Obligations

Basic Obligations

1. Registration with the Authority
2. Submit withholding forms through the Authority's portal account
3. Pay dues according to the withholding form
4. Provide information on withholding operations for each fiscal year
5. Maintain withholding-related records for at least 10 years

Installment Options

You can request to pay withholding tax amounts and penalties in installments by submitting a request to the Zakat, Tax and Customs Authority. The request must include:

• Details of the tax obligation and related financial periods
• Reasons for inability to pay on due dates
• Supporting documents
• Number of installments, their value, and advance payments

Responsible Authority

The Zakat, Tax and Customs Authority (formerly the General Authority for Zakat and Income) is one of the government entities that aims to collect zakat, taxes, and customs and provide high-quality services to taxpayers.

Key Differences: Withholding Tax vs. Income Tax

Target Application

• Withholding tax: Targets payments to non-resident companies in the Kingdom
• Income tax: Targets resident and non-resident companies according to specific controls

Exemptions

• Withholding tax: Some companies are exempt, such as gas, oil, and hydrocarbon companies
• Income tax: Most companies and commercial businesses are subject without exception

Tax Rates

• Withholding tax: Ranges between 5-20%
• Income tax: Varies according to income source and type, reaching up to 85% for some companies

Compliance Best Practices

For Saudi Companies

1. Identify non-resident suppliers and determine applicable rates
2. Implement proper withholding procedures at the time of payment
3. Maintain accurate records of all transactions
4. File returns on time to avoid penalties

For Non-Resident Companies

1. Understand your tax obligations in Saudi Arabia
2. Ensure proper documentation for all services provided
3. Consider tax treaty benefits if applicable
4. Engage local tax advisors for compliance support

Recent Updates and Changes

2025 Developments

The Saudi tax system continues to evolve with digitalization initiatives and improved compliance procedures. Recent updates include:

• Enhanced electronic filing systems
• Streamlined payment processes
• Improved taxpayer services

Conclusion

Withholding tax in Saudi Arabia is an important part of the tax system that ensures tax collection from non-residents who generate income from Saudi sources. By understanding the different rates (5%, 15%, 20%) and filing and payment procedures, entities can ensure full compliance and avoid penalties.

Important Compliance Tips:

1. Pay on the specified deadline (within 10 days of the following month)
2. Keep all documents for at least 10 years
3. Use the electronic portal of the Zakat, Tax and Customs Authority
4. Calculate the correct rate according to the type of service provided
5. In case of inability to pay, contact the Authority to request installments

Key Takeaways:

• Withholding tax applies to non-residents earning income from Saudi sources
• Rates vary from 5% to 20% depending on the type of service
• Returns must be filed within 10 days of the following month
• Penalties for non-compliance can be severe (1% monthly, 25% for fraud)
• Electronic filing through ZATCA portal is mandatory

For more information and updates, it is recommended to visit the official website of the Zakat, Tax and Customs Authority or consult with a specialized tax advisor.

---

This article is provided by Mezan.sa for informational purposes. Always consult with qualified tax professionals for specific tax advice.