Saudi Arabia: Application of Tax Withholding in Accordance with Double Taxation Avoidance Agreements (DTAs)

Scope of Withholding Tax in the Kingdom under the Tax Law and Tax Treaties

Application of Withholding Tax under the Income Tax Law - Withholding tax is imposed on income earned by a non-resident from a source within the Kingdom.

The tax is primarily withheld on payments made by a resident or a permanent establishment in the Kingdom to a non-resident from a source within the Kingdom.

For the purposes of withholding tax, the definition of a resident includes the following:

• A legal entity or an individual — only in the context of their business activity — who meets the residency requirements in the Kingdom as stipulated under the Income Tax Law.
• Any government department, ministry, or public authority.
• Any other legal entity or established body within the Kingdom.

To determine whether there is a withholding tax obligation, the following factors must be considered:

1. Who is responsible for withholding tax?
The responsible party is the resident or permanent establishment making payments from sources within the Kingdom to a non-resident. Such a party is accountable for withholding the tax.

2. Which payments are subject to withholding tax?
These are payments made to non-residents as specified in Article 68 of the Income Tax Law or Article 63 of the Implementing Regulations. Examples include dividends, income from debt claims, royalties, technical services, and management fees.

3. What constitutes the source of payments subject to withholding tax?
Any payment originating from a source within the Kingdom is considered subject to withholding tax.

The following are examples of types of income that a non-resident may earn from sources within the Kingdom, and are therefore subject to withholding tax provisions:

In accordance with the provisions of Article 68 of the Income Tax Law and Article 63 of the Implementing Regulations:

• Management Fees
• Distributed Profits – meaning any distribution from a resident company to a non-resident shareholder, as well as any profits remitted from a permanent establishment to related parties.
• Rental Payments, whether operating or finance leases, including:

Leasing of immovable property.

Leasing of movable property located within the Kingdom.
Rental payments generally include a component of income from debt claims that falls within the scope of withholding tax.

• Sale or Licensing of Industrial or Intellectual Property in the Kingdom, also referred to as royalties, excluding the sale of full ownership rights in licensed industrial or intellectual property.
• Loan Yields: amounts or income derived from debt claims.
• Insurance or Reinsurance Premiums.
• Technical or Consulting Services, even if fully performed outside the Kingdom.
• Services Rendered Fully or Partially within the Kingdom.
• Payments Arising from Commercial Activities Conducted for Profit within the Kingdom.

Type of Payment – Withholding Tax Rate

Based on the provisions of Article 68 of the Income Tax Law and Article 63 of the Implementing Regulations, the withholding tax rate shall be applied:

• Management Fees – 20%
• Royalties – 15%
• Dividends – 5%
• Rent – 5%
• Insurance or Reinsurance Premiums – 5%
• Technical and Consulting Services – 5%
• Payments for Airline Tickets or Air/Sea Freight – 5%
• International Telephone Communication Services – 5%
• Any Other Services from Sources within the Kingdom – 15%

Application of Withholding Tax in Accordance with Tax Treaties Concluded by the Kingdom of Saudi Arabia

The Kingdom has concluded more than fifty-six (56) tax treaties to avoid double taxation. In the context of cross-border transactions, it is necessary to consider the application of any relevant tax treaty, in addition to domestic regulations, to determine the appropriate tax treatment for any type of income.

Generally, tax treaties take precedence over domestic law in the Kingdom. Taxpayers are entitled to benefit from requesting the application of any exemption or reduced withholding tax rates provided under a relevant and applicable tax treaty.

Business Profits

The article addressing business profits—typically Article Seven (7) in tax treaties—serves as the primary rule for determining whether payments or services, other than those specifically covered by separate articles in the treaty, are subject to taxation in the Kingdom of Saudi Arabia.

Generally, the right to tax business profits earned by a non-resident belongs to the country of residence of the non-resident, unless the non-resident has a permanent establishment in the Kingdom. In such cases, business profits may be taxed in the Kingdom, but only to the extent attributable to the permanent establishment.

Income from Immovable Property

This article clarifies how income from immovable property is taxed by a country other than the country of residence of the income recipient.

According to the article on income from immovable property—typically Article Six (6) in a tax treaty—the country in which the income-generating property is located has the right to impose tax. 

Dividends
In accordance with the provisions of the relevant article in the tax treaty—typically Article Ten (10)—this article outlines the rules for taxing dividend distributions. Generally, the source country retains the right to levy tax on income derived from dividends, even if such income is paid directly to a resident of another country with which the source country has a tax treaty. However, if the dividend recipient is the beneficial owner, the source country may grant a tax exemption or apply a reduced withholding tax rate as specified in the treaty.

Fees for Technical Services:
According to the article on fees for technical services – generally Article 12(a) of the tax treaties – fees for technical services arising in one country and paid to a resident of another country are, in principle, subject to taxation in the country where the individual or permanent establishment receiving the payments resides.

Procedures for Implementing Tax Treaty Provisions Related to Withholding Tax:

Procedures for Implementing Tax Treaties:

For the purpose of determining whether the conditions for applying specific provisions of a tax treaty are met, taxpayers should first ensure that they fall within the scope of the treaty in accordance with Articles 1 and 2, which relate to the persons covered and the types of taxes included in the treaty.

In cases where the tax treaty provides for a tax exemption or a reduced tax rate, the taxpayer should determine whether they are eligible to benefit from the exemption at source or entitled to a tax refund.

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Reference/Citation

Application of Tax Withholding in Accordance with Double Taxation Avoidance Agreements (DTAs) | Zakat, Tax, and customs Authority

https://zatca.gov.sa/ar/MediaCenter/Publications/Documents/WHT%20via%20DTAs.pdf

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