General Guideline for Withholding Tax

Tax Withholding As previously clarified, Tax Withholding is a mechanism for imposing Income Tax that differs from the general rule of taxation. It obliges the withholding agent in the Kingdom who makes payments from a source in the Kingdom to a non-resident who does not have a Permanent Establishment therein to withhold a percentage of the amount paid in accordance with the applicable tax rate and to remit or transfer the withheld tax amount to the Authority. It also differs in terms of determining the basis of withholding, which is based on the gross income rather than on profit; that is, the tax rate applicable to the income in accordance with the Withholding provisions is applied to the entire amount paid by the resident to the non-resident. This is illustrated in the example below: Payment: SAR 100 (SAR 95 is tranfered to the non-resident) Withheld tax (SAR 5) remitted to ZATCA Zakat, Tax and Customs Authority Invoice (For example: SAR 100) Country (X) Kingdom of Saudi Arabia Non-Resident Person Resident Person 2. Scope of Application of Tax Withholding Provisions In accordance with the provisions governing Income Tax, the Tax Withholding provisions shall apply when the following conditions are met(17): Person obligated to withhold tax Person from whom tax is withheld Payments subject to Tax Withholding It is the resident person, whether a taxpayer or non-taxpayer under the Law, and the Permanent Establishment of a non-resident, who makes payments from sources in the Kingdom to a non-resident and is responsible for withholding and remitting the tax amount to the Authority. The tax is imposed on a non-resident who does not have a Permanent Establishment in the Kingdom when such non-resident derives income from a source in the Kingdom. They include all payments from sources in the Kingdom, made by the withholding agent to non-residents, where such payments are in consideration for any of the types of income specified in Article 68 of the Law and Article 63 of the Implementing Regulations. They encompass all amounts paid in consideration for any type of services, with the Law defining services as: any work performed for consideration, excluding the purchase and sale of goods or any other property. Payments shall mean any consideration, whether in kind or in cash, that is settled, including settlements, discounts, and book adjustments. The following paragraphs provide further guidance regarding these principal provisions. (17). Article 68 of the Law. 2.1 Person Obligated to Withhold Tax The provisions related to Tax Withholding shall apply only if the person obligated to withhold is a resident in the Kingdom in accordance with the residency conditions specified in the Law and the Implementing Regulations(18), or if such person is a Permanent Establishment of a non- resident(19). Accordingly, every resident legal person and every Permanent Establishment of a non-resident that makes a payment from a source in the Kingdom to a non-resident shall be considered obligated to withhold tax. With respect to a resident natural person, such person shall not be considered obligated to withhold tax except in cases where they make a payment from a source in the Kingdom to a non-resident and where such payment is related to the activity carried out by the resident natural person. That is, the Tax Withholding provisions shall not apply to amounts paid by a resident natural person to any non-resident if such amounts are not connected to the activity of the resident natural person.