General Guideline for Withholding Tax

Payments to a Non-Resident In accordance with the provisions governing Income Tax, a non-resident is defined as any person who does not satisfy the conditions required to acquire resident status. Accordingly, any person who does not meet those conditions (see Section 1-1-2) shall automatically be considered a non- resident. Where a non-resident carries on an activity in the Kingdom through a Permanent Establishment, and such Permanent Establishment receives payments that are directly connected with the activity carried on by the non-resident through it, such payments shall be considered made to a resident. the amount in question shall not be subject to Tax Withholding and must be declared as part of the income of the Permanent Establishment in its Income Tax return(29). Similarly, where a person resident in the Kingdom carries on an activity outside the Kingdom through a Permanent Establishment, and such foreign Permanent Establishment receives payments from a resident in the Kingdom that are directly connected with the activity carried on by the non-resident through it, such payments shall be considered made to a non-resident and shall therefore be subject to Tax Withholding. However, the resident person may be entitled to deduct the tax withheld from the Income Tax due, as illustrated in Example (3) below. Example (3): If a Saudi capital company (the Parent Company), resident and subject to tax, owns a foreign branch in the United Kingdom, and the Parent Company concludes a contract with a resident company to provide technical services thereto, and the branch provides such services to the local company on behalf of the Parent Company, provided that the branch issues the invoice to the Parent Company and not to the resident company, shall tax be withheld on the amounts paid by the Parent Company to the branch? If yes, shall the Parent Company be entitled to deduct the tax withheld in its tax return? (29). Paragraph (f), Article 68 of the Law. Since such services are rendered from a foreign entity to a local entity, they shall be subject to Tax Withholding regardless of the method and place of payment, whether the amounts are paid directly to the branch or through the Parent Company to which the service-providing branch belongs. As long as the branch’s revenues are included within the tax base of the Parent Company, the Parent Company shall be entitled to deduct the tax withheld from the Income Tax due thereon. The concept of “payments” shall be interpreted broadly to include any consideration, whether in cash or in kind, that is paid, including settlements, discounts, and book adjustments. In this sense, cash payments as well as in-kind payments that replace them or by any other means that results in the discharge of liability between the transacting parties and have the same economic effect shall be considered “payments” for Tax Withholding purposes. This shall also include payments in the form of credit balances, offset settlements, or other similar accounting arrangements or adjustments.