The withholding rule: the resident payer is responsible for withholding the tax and remitting it — not the non-resident recipient. If they fail to withhold, they are the ones pursued for it, even after paying the full amount over.
1 When does withholding tax arise?
A resident payer
A business inside the Kingdom
A non-resident recipient
With no permanent establishment in the Kingdom
Income from a source in the Kingdom
As defined in the law
Withhold and remit
Deduct from the payment and pay it to the Authority
When the conditions come together, withholding applies from the first riyal with no minimum
2 Payments subject to withholding
The rate differs by type of payment. These are common examples for illustration — the rate in force for each case must be verified from the official source:
| Type of payment | Examples |
|---|---|
| Management fees | Management or supervision provided by a foreign party |
| Royalties and fees for the use of rights | Trademarks · software · intellectual property |
| Technical and consulting services | Engineering or technical advice from outside the Kingdom |
| Rent | Renting equipment or assets from a non-resident |
| Dividends and financing returns | Distributions and returns on loans |
| Tickets, international transport and telecoms | As provided for in the law |
Rates differ and are amended
Do not apply one rate to every payment, nor a rate you memorised before. Classifying the payment itself can be a matter of judgement (a technical service or a royalty?), and the wrong classification changes the rate. Refer to the income tax law, its regulations and the Authority’s guides, and involve a specialist in unclear cases.
3 A worked example
A Saudi business contracts a non-resident consulting firm for a service of SAR 100,000. Assume for illustration that the rate prescribed for this type — given its classification in law — is 5%:
| Contract value | 100,000 |
| Withholding tax deducted | (5,000) |
| Amount transferred to the consultant | 95,000 |
| Remitted to the Authority | 5,000 |
The common mistake: transferring the full 100,000 and discovering the obligation later. The business then bears the tax out of its own funds and may face a late payment penalty. The remedy: state explicitly in the contract how withholding tax is handled and who bears it.
4 Double taxation treaties
The Kingdom has treaties with a number of countries to avoid double taxation. These treaties may reduce the withholding rate or exempt certain types of income, but the benefit is not automatic: it requires procedures and documents, chiefly a tax residency certificate for the recipient, plus whatever the Authority requires under its published procedures.
5 Income tax on businesses
| Case | The prevailing treatment |
|---|---|
| A business owned by Saudis or GCC nationals | Zakat on the zakat base |
| A business owned by non-Saudis | Income tax on taxable net profit |
| A mixed business | Split according to ownership shares |
| A permanent establishment of a non-resident | Income tax on the income attributed to it |
The tax base is computed by adjusting accounting profit: expenses not allowed for tax are added back, non-taxable income is deducted, and special rules for depreciation, provisions, bad debts and others are applied under the law.
Accounting profit ≠ the tax base
An expense acceptable for accounting may be disallowed for tax — an unrealised provision, a fine, or an expense with no supporting document. That is why a reconciliation between accounting profit and the tax base is prepared and kept as part of the return file.
Lesson summary
- Withholding is the resident payer’s responsibility, and applies from the first riyal with no minimum.
- The rate depends on the type of payment, and classifying the payment itself needs care.
- Addressing withholding in the contract prevents a later dispute and loss.
- Treaty relief may reduce the rate, but through procedures and documents, not automatically.
- The tax base is derived from accounting profit through statutory adjustments.
6 Test yourself
Three quick questions
Choose the answer you think is correct — the result appears immediately.
1. A business transferred the full amount to a non-resident supplier without withholding. Who is pursued?
The duty to withhold and remit falls on the resident payer, and paying the full amount does not discharge it.
2. Does a double taxation treaty apply automatically?
The benefit is conditional on proving the recipient’s tax residency and completing the Authority’s procedures.
3. A traffic fine was recorded as an expense in the books. Its effect on the tax base?
Fines and penalties are normally among the items disallowed for tax, so they are handled in the reconciliation.