Withholding tax in Saudi Arabia is a taxation system that requires companies to pay an amount of taxes which are withheld from the salaries paid to employees. Withholding tax must be done by companies from their employees’ salaries and must comply with the applicable regulations. In addition, withholding tax rates will vary depending on the type of salary received and how long a particular employee has been working for a Saudi Arabian business. The reason for withholding taxes is to help support the development of public projects by providing income for them. To learn more about how withholding tax works, read below.
Understanding Withholding Taxes
When you work in Saudi Arabia as an expatriate, you will notice that your employer withholds a certain percentage of your salary as withholding tax. So let’s see how Withholding Tax in Saudi Arabia Works. This income tax is deducted from your salary and paid to the government on your behalf to support public projects such as infrastructure development, housing schemes and education initiatives. As an employee, you will not have to pay any additional income tax in Saudi Arabia if you are non-Saudi, provided that you earn under the minimum taxable limit.
The amount of withholding taxes that employers deduct will depend on their employment contract with their employees. For instance, expatriates who work for companies based in KSA (Kingdom of Saudi Arabia) can expect their employers to deduct 5% from their basic salaries when they receive payments over twelve months or more than six months but less than twelve months. On the other hand, if your employer is based outside of KSA and they do not have a permanent establishment in the country (e.g., stock brokerages), they can deduct 10% from their employees’ salaries if they receive payments over twelve months or more than six months but less than twelve months.
The withholding tax rates applied to Saudi Arabian expatriates are regulated by the Ministry of Finance, which has a set of rulings for income tax deductions for foreign workers employed under different contracts. Therefore, as an employee, you must make sure that you understand how much you will need to pay in terms of withholding taxes, as well as if there is any way for you to reduce or avoid paying any additional income tax when working in Saudi Arabia.
Withholding Tax Categories in Saudi Arabia
There are three main categories of withholding tax in Saudi Arabia: labour income, non-labour business income and royalties. Labour income includes salaries, wages and other forms of compensation, while non-labour business income refers to payments businesses make to service providers or contractors. Royalties include any payment made for the use of intellectual property rights.
Labor Income Withholding Tax in Saudi Arabia
Labour income is subject to a 20% withholding tax under the standard framework for taxation in Saudi Arabia. However, this rate can be lowered depending on certain factors, such as the nature of the employment contract or whether the individual is considered a resident taxpayer. Additionally, employers must withhold taxes from employee wages and submit them directly to Saudi Arabia’s Ministry of Finance.
Non-Labor Business Income Withholding Tax in Saudi Arabia
The non-labour business income tax rate for withholding purposes is 20%. This rate can also be lowered under certain circumstances, including if the contract between the service provider and the business is considered a non-Saudi contract. As with labour income, businesses must withhold taxes from payments made to service providers or contractors and submit them directly to the Ministry of Finance on behalf of those individuals.
Royalty Withholding Tax in Saudi Arabia
Individuals who receive royalty payments from businesses in Saudi Arabia are subject to a 15% withholding tax under standard rules. However, the rate may be reduced depending on specific conditions, such as whether royalties come from a foreign company or whether the individual is considered a resident taxpayer.
There are various types of withholding taxes, and some common examples include the following:
- Royalties from patents or copyrights: 10%
- Interest on loans to residents: 5%-10%
- Interest on deposits with banks: 0.5%-20% of the total interest payments made to customers in a calendar year. The exact rate depends on the level of profits that the bank earned during each quarter and is calculated based on a sliding scale. For example, if a bank earns more than 300 million SAR in profits during 2016 but less than 450 million SAR, it will have an applicable tax rate between 5% and 15%. On the other hand, if they earn more than 450 million SAR during that period, they would be subject to tax at 2%.
- Fees and commissions for sponsoring foreign employees: 30%
In addition to these withholding categories, others are less common, such as the following:
- Payments to nonresident real estate owners who conduct commercial activities in Saudi Arabia: 5%
- Payment for services provided by an employer who is a resident: 20% (but only when payments exceed 100,000 SAR)
Taxpayers may be exempt from withholding taxes on certain types of income. However, certain conditions must be met before an exemption can be granted. For example, suppose you own a Saudi Arabian hotel and have rented out an entire building or multiple rooms to a nonresident individual or company. You can apply for an exemption from withholding tax on the derived rental income.
However, if any of the services related to accommodation are provided by a third party (e.g. cleaning and housekeeping), then this exemption does not apply. It also does not apply if the number of rooms rented out is below seven units, if there is a business relationship between both parties (e.g. where you provide consultancy services instead of simply renting out an empty building), or if an agent collects payments on your behalf instead of you receiving them directly (e.g. a representative collecting rent on your behalf).
In addition to these instances, certain types of businesses may be granted exemption from some nonresident withholding taxes on certain types of income they receive. For example, certain real estate businesses, such as property developers and construction companies, may be exempt from withholding tax if the following conditions are met:
- They own or rent a building to build it up for sale;
- The property is sold within five years after the date of completion or the date when it was first rented out, and
- Payments are made to nonresidents either directly or through an agent.
As this is a complex area of taxation law in Saudi Arabia, you should carefully consult your tax advisor before attempting to apply for exemption from any withholding tax. Failing to meet the requirements can result in heavy fines and penalties being imposed on you, so it is important to proceed with caution if you are considering applying for an exemption.
How to Calculate Withholding Tax in Saudi Arabia
The Ministry of Finance in Saudi Arabia uses a withholding tax rate established for each type of transaction and depends on economic activity. The tax rates range from 0% to 20%.
In addition to these general rates, there are some exemptions from withholding tax in Saudi Arabia. These include:
Interest and dividends paid by companies located in KSA – 0% tax rate. These payments are exempt from income taxes under Article 98 of the Income Tax Act.
Rental income from property located in the Kingdom – 0% rate if all rental expenses can be deducted (these expenses must not exceed 10% of the annual rental income). However, if rental expenses are less than 10%, then a 5% tax rate applies.
Income from insurance policies and annuities – 0% tax rate (this is under Article 98 of the Income Tax Act).
Gains from stock trading on the Saudi Stock Exchange, Tadawul. There are two types of transactions that people can make at the exchange: 1) Transactions between investors in TASI (Saudi Stock Exchange); 2) Transactions between investors in non-Tas’heel companies (these companies are licensed by SEC): 0% tax rate for both types of transactions. TASI is an electronic transaction system in KSA where people can buy, sell and trade stocks online with other market members through an internet portal provided by a broker who charges commissions but not taxes.
Sale of stocks in companies not licensed by the Saudi Arabian Capital Markets Authority (CMA) – 0% tax rate.
Capital gains from securities transactions as long as they are sold on the Saudi Stock Exchange. Investors should know that these exemptions do not apply to their other assets and income earned outside Saudi Arabia. Additionally, individuals working in KSA but living in another country must file a tax return with both countries to receive any tax exemption or refunds for taxes paid. Investment income earned by residents living overseas still needs to be reported on their annual income tax forms, even if it is exempt from withholding tax. Individuals who make capital gains through retail trading at the Saudi Stock Exchange must understand these rules to ensure they are paying only what they need.
Applicability of Withholding Tax
In Saudi Arabia, withholding tax applies to all payments made to non-residents. However, there are some common exemptions to withholding tax in Saudi Arabia, which include:
Dividends paid by Saudi Arabian companies to corporate entities located outside the Kingdom. The amount should be at most 50% of the total dividend. This exemption applies only if the underlying shares in a listed company remain unsold for at least 45 days after the payment date of dividends.
Interest payments are earned from any form of debt instrument issued by a Saudi company or financial institution concerning bonds and notes traded on an official stock exchange. Any other forms of investments do not qualify for this exemption. The exemption addition, the exemption does not apply when interest income exceeds SAR 500,000.
Payments are made for services rendered or goods supplied by a nonresident company to a Saudi resident company for an aggregate amount of SAR 500,000 in any given financial year. The exemption does not apply if the underlying contract was entered into after December 31st, 2013 and before January 1st, 2014, with effect from January 1st, 2018.
Payments from business activities in Saudi Arabia are exempt from withholding tax. This exemption applies when the underlying service supplies telecommunication equipment installation and maintenance services. The compensation should be at least SAR 2 million per annum. In addition, a nonresident party must own 50% or more shares in the company carrying out the services in Saudi Arabia.
Withholding tax exemptions do not apply in Saudi Arabia when the annual income of a nonresident exceeds SAR 1 million or 50% of the total amount paid to them. Withholding tax rates apply to residents and nonresidents if their taxable income falls under these thresholds. Additionally, individuals who live outside KSA but work there need to file an annual income tax return with Saudi Arabia and the country of their domicile to claim any refunds for taxes that have been withheld from them. Otherwise, they will need to negotiate directly with their employers for any refunds due. They may also be at risk of being assessed by Saudi Arabia’s financial authorities because they failed to comply with local Islamic finance regulations.