Withholding Tax 

Question 1: When does Article 68 of the Income Tax Law on withholding tax enter into force?

Answer: Article 68 of the Income Tax Law on withholding tax enters into force as of the effective date of the Income Tax Law, i.e. 13/06/1425 H ( 30/07/2004), and it applies to any payments on or after the effective date of the Income Tax Law from a source in the Kingdom to a non-resident with no permanent establishment in the Kingdom.

Question 2: Are payments to a non-resident with a permanent establishment in the Kingdom subject to withholding tax provisions?

Answer: Payments to a non-resident with a permanent establishment in the Kingdom are subject to the provision as stated in Article 68(f) of the Income Tax Law: “If the amount referred to in this Article is paid to a non-resident who conducts business in the Kingdom through a permanent establishment, and the amount paid was directly connected with the business of the establishment, such amount shall be calculated in determining the tax base of the non-resident.” . Therefore, such payments are not subject to withholding tax and should be reported in the non-resident’s permanent establishment return.

Question 3: Is a company registered in one of the GCC states, but not resident in the Kingdom, subject to withholding tax?

Article 68 of the Income Tax Law and Article 63 of the Implementing Regulations stipulate that any payment by a resident in the Kingdom from a source in the Kingdom to a non-resident company ( GCC or non-Saudi company) is subject to withholding tax based on rates as specified by the Law and the Implementing Regulations.

Question 4: Is Withholding tax on non-resident companies applied to companies registered outside the Kingdom but exercise business in the Kingdom through an agent?

Answer: A non-resident company is considered to have a permanent establishment in the Kingdom if it operates in the Kingdom through a dependent agent who is authorized to do any of the following: a. negotiate on the behalf of the non-resident, b. conclude contracts on behalf of the non-resident, c. has a stock of goods on hand in the Kingdom to regularly meet the demands of clients on behalf of the non-resident. In this case, the non-resident company is considered to have a permanent establishment subject to tax provision applicable to resident taxpayers. The same thing applies to a non-resident insurance company that exercises business in the Kingdom through an agent who may not have an authority to negotiate or conclude contracts on behalf of the non-resident insurance company.

However, if the agent through which a foreign company operates is an independent agent with no authority to carry out the above- tasks, the foreign company is subject to withholding tax based on rates and types of payment as stipulated by Article 68 of the Income Tax Law and Article 63 of the Implementing Regulations.

Question 5: Tax treatment of following expenses charged by a head-office abroad to its permanent establishment or branch in the Kingdom?

1. The permanent establishment/branch’s share in the head-office expense is not an allowed deduction and is subject to withholding tax at a rate of 15% if paid to the head-office. It is noteworthy to state that withheld tax on an expense that is not allowed is deducted from income tax payable by the permanent establishment.

2. Interest on debit balance paid by a permanent establishment to a head-office is not an allowed deduction and is subject to withholding tax at 5%. It is noteworthy to state that withheld tax on an expense that is not allowed is deducted from income tax payable by the permanent establishment.

3. Direct expenses related to a permanent establishment are allowed deductions if they are of a type that is allowed and they meet the statutory general conditions as specified in Article 9(1) of the Implementing Regulations and are subject to withholding tax at 15%.

Question 6: Is tax withheld on a permanent establishment’s share in head-office expenses and on interest on the debit balance payable by the permanent establishment to the head-office deductible from the income tax on the permanent establishment?

Answer: As the share of the permanent establishment in the head-office expense and in the interest on debit balance is not an allowed deduction and is therefore added back to the tax base of the permanent establishment, Article 68(g) of Income Tax Law stipulates that withheld tax on these payments is deducted from income tax due on the permanent establishment.

Question 7: Based on Article 68(g) of the new Income Tax Law, is tax withheld on payments to a non-resident partner during 2004 in compliance with the new Income Tax Law provisions deductible from income tax for the year 2004 payable under the old law? Please explain the proper treatment of profit distribution, other payments for services and for head-office expenses, etc.

Answer: Tax withheld in compliance with the new Income Tax Law provisions on payments to a non-resident partner during the year 2004 may not be deducted from Income tax payable for the same year under the old Income Tax Law for the following reasons:

1. Different applicable laws: The subjection to income tax is in compliance with the old Income Tax Law whereas the subjection of payments to withholding tax is in compliance with the provisions of the new Income Tax Law effective as of 13/06/1425 H (30/07/2004). Therefore, Tax withheld under an income tax law can not be deducted from income tax under a different income tax law.

2. Different tax bases of the two taxes: Income tax is calculated on the taxpayer’s profits realized during the year 2004 whereas withholding tax is calculated on payments to non-resident parties.

3. Different tax entities: Taxing the tax-base of a resident capital company is a separate matter from withholding tax payable on distributed profits to its partners because capital companies are legal entities independent of its shareholders as stipulated by Article 63 (1,6) of the Income Tax Law’s Implementing Regulations.

It is noteworthy to state that Article 68(g) of the new Income Tax Law applies to a completely different situation of a permanent establishment for a non-resident who receives from a source in the Kingdom payments directly connected with the business of its permanent establishment in the Kingdom and from which tax was withheld and such payments were included in the tax base of the permanent establishment. In this case, tax withheld may be deducted from total amount of tax payable by the permanent establishment.

Question 8: A resident has withheld tax on payments for services provided by a non-resident who has a permanent establishment in the Kingdom. Is the non-resident ( required to file a tax return ) entitled for a refund of withheld tax in case of a loss return?

Answer: The non-resident with a permanent establishment in the Kingdom, being required to file a tax-return, is entitled for a refund of withheld tax if the tax return shows a loss and provided that payment to the non-resident from which tax was withheld is directly connected with the business of the permanent establishment as stipulated by Article 68(f).

Question 9: A non-resident shareholder in a resident capital company has, as an independent person, signed a contract with a resident company to provide technical and engineering services from abroad. In this case, is this contract subject to withholding tax only or should it be reported in the resident capital company’s return? If the service contract includes delivery of materials, what is the tax treatment of the value of delivered materials?

Answer: The contract concluded with a non-resident shareholder in a resident capital company is subject to withholding tax because the non-resident shareholder has executed the contract and provided the services therein in his independent capacity as a legal entity separate from the resident capital company. If the service contract from abroad includes delivery of materials, the value of delivered materials is exempt ( reduced from the value of the contract) under Article 5(7) of the Implementing Regulations of the Income Tax Law.

Question 10: Are payments of wages and salaries of labors of a head-office abroad charged to the head-office current account for tasks executed in the Kingdom subject to withholding tax?

Answer: Payments of wages and salaries of labors of a head-office abroad charged to the head-office current account for tasks executed in the Kingdom are allowed deductions and subject to withholding tax at 15%.

Question 11: What is the rate of withholding tax on payments to a head-office or to an associated company for technical and consulting services and on loan proceeds? Is it 5% or 10%?

Answer: Payments for technical and consulting services paid to a related party outside, including a head-office or an associated company, are subject to withholding tax at a rate of 15%. Loan proceeds are subject to withholding tax at a rate of 5%. In addition to being subject to withholding tax, “loan proceeds” paid to a head-office by a fully owned branch is not an allowed deduction under Article 10(b) of the Implementing Regulations of the Law.

Question 12: Are profits transferred by a permanent establishment to its head-office abroad subject to withholding tax even though such profits were being subject to income tax before distribution?

Answer: Article 5(a-6) of the Income Tax Law stipulates that profit distribution by a resident company is considered from a source in the Kingdom. Article 63 (6) of the Implementing Regulations considers profits transferred by a permanent establishment to associated parties to be distribution of profits, and its sub-paragraph ( c ) states that subjecting the profits of a distributing company to income tax should not preclude imposition of withholding tax on its profits being distributed. Therefore, profits transferred by a permanent establishment to its head-office abroad after such profits being subject to income tax are subject to withholding tax.

Question 13: Are payments by resident companies to non-resident corporate partners or associated companies under a concluded technical agreement that provides for staff, technical and other services subject to withholding tax?

Payments by resident companies to non-resident corporate partners or associated companies under a concluded technical agreement are allowed deductions provided they meet conditions specified in Article 9(1) of the Implementing Regulations of the Income Tax Law. Therefore, such payments are subject to withholding tax at a rate of 15% under Article 63 (1) of the Implementing Regulations of the Income Tax Law.

Question 14: Are the following payments by a branch in the Kingdom to a regional center or head-office abroad subject to withholding tax?

a. Payments that represent the in-the-Kingdom branch’s share in general and administrative expenses. b. Reinsurance premiums c. Cash payments for investments

Answer: Article 63 of the Implementing Regulations applies to the above items: payments that represent the in-the-Kingdom branch’s share in general and administrative expenses, reinsurance premiums and cash payments for investments. The branch’s share in administrative and general expenses is subject to withholding tax at 15%, and reinsurance premiums at 5%. In regard to cash payments for investments, if such payments are to finance the branch's investments abroad and the income from such investments is reported in the accounts of the branch in the Kingdom and the investment principal will be finally returned to the Kingdom, there is no withholding tax on such payments. If these payments are transfers to the head-office, they are considered profits transferred to associated parties and should be subject to withholding tax at a rate of 5%.

Question 15: Is the amount of technical services paid to a non-resident and borne by a non-resident partner who later recovers from the resident company subject to withholding tax, and if so, at what rate?

Answer: The amount of technical services paid by a resident company to a non-resident partner who is an associated party is subject to withholding tax at a rate of 15%.

Question 16: A case: A Saudi company has a related company abroad that has no activity in the Kingdom. The related company markets the products of the Saudi company outside the Kingdom (providing client services, finance and marketing) for a commission. The related company charges the Saudi company the cost of these services. Does withholding tax apply to commission payments, and if so at what rate?

Article 5 (7) of the Income Tax Law stipulates that payments by a resident company to its head-office or a related company abroad for services done by such are considered from a source in the Kingdom. Therefore, commission payments to the related company for providing client services, finance and marketing are subject to withholding tax at a rate of 15%.

Question 17: Is a resident capital company subject to a tax,upon distribution of profits, other than the 20 percent stipulated under Article 7 of the Income Tax Law for non-Saudi shares?

Answer: The 20 percent tax stipulated under Article 7 of the Income Tax Law regards income tax on tax base of resident capital companies. Article 6 of the Income Tax Law defines the tax base of a resident capital company to be the share of non-Saudi partners in taxable income for any activities from a source in the Kingdom less deductions as allowed by the Income Tax Law. Paragraph (e) of the same Article stipulates that the tax base of a capital company is determined separately of its shareholders or partners. Article 5(a-6) of the Income Tax Law stipulates that dividends paid by a resident company are income from a source in the Kingdom. Article 63 of the Implementing Regulations of the Income Tax Law stipulates that a withholding tax of 5% to be imposed on dividends to non-resident partners. Paragraph (6-c) of the same Article emphasizes that subjection of a distributing company to income tax shall not preclude imposition of withholding tax on its dividends. Therefore, imposition of income tax on the tax base of a resident capital company is separate from imposition of withholding tax payable on dividends to its partners because capital companies are legal entities independent of their shareholders and taxation of these companies is separate from the statutory taxes on their partners.

Question 18: Is withholding tax payable on net profits distributed and paid to a a non-resident partner after taking out payable tax on the non-resident partner’s share in profits or is it payable on gross amount distributed inclusive of payable tax?

Answer: Withholding tax is payable on profits distributed to partners notwithstanding any settlements or deductions between the company and the partners entitled to the profits.

Question 19: What is the tax treatment of payments made by resident parties to non-resident parties for the financial year of 01/01/2004 to 31/12/2004 under the new Income Tax Law?

Answer: Payments made to non-resident parties up to the date of 29/07/2004, the effective date the new Income Tax Law, are taxed under the old Income Tax Law; payments made after that date are subject to withholding provisions of Article 68 of the new Income Tax Law.

Question 20: Are amounts actually paid after 30/07/2005 subject to withholding provisions of the new Income Tax Law notwithstanding the taxes paid on such amounts when became accrual to non-resident parties?

Answer: Amounts paid to non-resident parties after 30/07/2004 but for past periods and on which non-resident parties tax was paid are not subject to withholding tax provisions one more time; the same provision also applies to reported -but not paid- tax for past periods.

Question 21: Are amounts paid to non-resident parties for services provided to resident parties at cost basis with no profit margin subject to withholding tax?

Answer: Amounts paid to non-resident parties for services provided to resident parties at cost basis with no profit margin are subject to withholding tax because such payments are related to services and activities performed in the Kingdom.

Question 22: Are settlements (settlement of debit and credit accounts) between resident and non-resident parties resulted from provision of services by non-resident parties to resident parties subject to withholding tax though there is no actual payment? If so, what is the date to be used for the purpose of withholding tax payment?

Answer: Withholding tax is payable upon payment or deemed payment (clearance or settlement of accounts). The date of settlement is considered to be the date of payment unless the settlement is between related parties in which case it is the date of book entry.

Question 23: Is the reinsurance premiums' gross amount or net amount ( net of commissions to insurance companies) subject to withholding tax?

Answer: Reinsurance premiums' gross amount (before any deductions) is subject to withholding tax as per Article 63 (8) of the Implementing Regulations. The commission amount paid to an insurance company is an income to it. The reinsurance company from which tax is withheld is a separate taxpayer from the insurance company.

Question 24: What are the documents that DZIT may provide to non-resident reinsurance companies proving payment of taxes on income from reinsurance to the Kingdom in order for these companies to settle taxes with their home countries?

Answer: Article 68 (b-2) of the Income Tax Law stipulates that a person withholding tax shall provide the beneficiary ( the non-resident party) with a certificate stating the value of the amount paid to him and the value of the tax withheld. Therefore, a company that withholds and pays taxes to DZIT on reinsurance premiums should provide the beneficiary with the stated certificate. If endorsement by DZIT of the said certificate is needed, a request to that effect may be presented to DZIT.

Question 25: What is the tax treatment of a non-resident reinsurance broker who does matters related to reinsurance with non-resident reinsurance companies so local insurance company has no direct relation with reinsurance companies?

A non-resident reinsurance broker who does matters related to reinsurance with a non-resident reinsurance companies so local insurance company has no direct relation with reinsurance companies is considered a reinsurance company and tax should be withheld on all amounts reinsured through this broker as if they were with reinsurance companies.

Question 26: Are reinsurance premiums paid to French reinsurance companies not subject to the Saudi withholding tax provisions based on the treaty between the Kingdom of Saudi Arabia and the Republic of France for avoidance of double taxation?

Answer: The treaty between the Kingdom of Saudi Arabia and the Republic of France for avoidance of double taxation states in Article 14(1) “The profits of an enterprise of a contracting State is taxable in that State only unless that enterprise exercises industrial or commercial activities in the other contracting State in which case they may be taxable in the other contracting State but only when such profits are related to the enterprise activities in that State”. Article 5(2) of the Implementing Regulations of the Income Tax Law considers reinsurance premiums to arise from an activity in the Kingdom and so from a source in the Kingdom if the secured asset is located in the Kingdom or if the insurance is on activities or risks related to an activity exercised in the Kingdom. Therefore, reinsurance premiums paid by a resident insurance company to a non-resident French insurance company are subject to withholding tax as stipulated by the Income Tax Law.

Question 27: Are interest payments by Saudi banks to non-resident banks or lending institutes subject to withholding tax?

Answer: Article 68 (a) of the Income Tax Law stipulates that every resident which pays an amount to a non-resident from a source in the Kingdom shall withhold tax from the paid amount according to the set rates. This general provision is applicable to all bank interest payments to non-residents, banks or others.

Question 28: A resident party pays interest payment on a loan from a group of resident and non-resident banks, and the loan-manager bank, resident or non-resident, collects interest payments from the resident party to distribute among all loan-participating banks. Are all interest payments to the managing bank and due to all participating banks or only those amounts due to non-resident banks subject to withholding tax?

Interest payments to a resident loan-manager bank are not subject to withholding tax and the manager bank, in this case, has to report all these payments as income and they will be subject to tax or zakat as the case may be. When the resident loan-manager bank makes interest payments to non-resident banks, it has to withhold the statutory tax on these payments. If the loan-manager bank is a non-resident bank, interest payments to the manager bank and due to all loan-participating banks are subject to withholding tax.

Question 29: Are payments, other than loan charges, by resident banks to non-resident banks for bank services, such as remittance fees and corresponding bank fees subject to withholding tax?

Payments, other than loan charges, by resident banks to non-resident banks for bank services, such as remittance fees and corresponding bank fees are not subject to withholding tax provided the services are fully performed outside the Kingdom.

Question 30: Are the interests on a loan from a non-resident partner in a resident capital company allowed deductions?

Answer: The interests on a loan from a non-resident partner in a resident capital company are allowed deductions provided the transaction is at arm’s length and the interests are subject to withholding tax at 5%.

Question 31: How is the withholding tax computed on payments for maritime freight from the Kingdom, and at what rate?

If the transporting agency is resident in the Kingdom or operates in the Kingdom through a permanent establishment- if non resident-, it is required to file a tax-return within the legally prescribed period of 120 days of the end of its tax year and its tax base is subject to an income-tax rate of 20%. If the transporting agency is not resident in the Kingdom, nor operates in the Kingdom through a permanent establishment, its gross payments (no local deductions) from a source in the Kingdom are subject to withholding tax at a rate of 5 % .

Question 32: Are the following types of payments paid abroad to unrelated parties subject to withholding tax and at what rate? - Monthly fees paid to a ship manager for management and provision of technical services at foreign ports and overseas. - Brokerage fees paid to a ship manager for leasing ships on spot markets. - Fees paid to a ship manager for preparing and making arrangement for lease contracts and providing after-lease follow-up.

Answer: All above items of payments are management fees and are subject to withholding tax at a rate of 20%.

Question 34: Are the following types of payments paid abroad subject to withholding tax and at what rate?

- Insurance premiums to security/guard clubs. - Payments to consultants for consultation on different subjects. - Attorney fees. - Payments to Container lease companies for containers used on ships owned by a resident capital company. - Amounts for maintenance of the company containers abroad. - Amounts paid to ship docks abroad for general maintenance of ships. - Interest payments on loans for ships.

The above items are either insurance premiums, payments for technical or consulting services, payments for lease services or loan proceeds, and they are all subject to withholding tax at a rate of 5%.

Questions 34: Are the following payments abroad subject to withholding tax?

- Compensation to clients upon settlement of claims. - Recruitment fees to recruitment offices abroad to recruit staff on ship boards. - Fees for storage of containers at foreign ports. - Fees paid to agents abroad for services in their countries including marketing, and documentation of freight. - Fees to foreign port authorities. - Fees to the authority of Suez Canal for passing through the canal. - Amounts for acquisition of assets, repair parts and fuel. - Periodical fees for participation in international and regional conferences. - Amounts to transporting companies for inland transportation of containers (from a foreign sea port to a final inland destination) .

Answer: Under Article 5 (a-8) of the Income Tax Law, all above items are not subject to withholding tax because they arose from performing services totally outside the Kingdom.

Question 35: Ship agents pay to the Kingdom's Ministry of Finance an amount of 55 hallals a ton of the ship registered tonnage, a tonnage fee. Will this fee continue in addition to withholding tax of 5%, or will it be cancelled?

Answer: Withholding tax is an income tax payable on freight payments notwithstanding any other fees imposed on freights under other Laws.

Question 36: Are commercial ships and oil and gas tankers flying the Saudi or other GCC member States flag exempt from withholding tax on sea freight payments?

Answer: The criteria is the person who exercises transportation activity. If the ship is owned by or works for a Saudi resident company, the Saudi resident company must report realized income in its annual return; and it must withhold and pay tax on ship lease payments if the leaser is not resident in the Kingdom. If the ship is owned by or works for a non-resident company, whether Saudi, of other GCC states or non-Saudi, payments for freights from the Kingdom’s ports are subject to withholding tax.

Question 37: Is withholding tax on ships coming into the Kingdom’s ports applicable from the arrival or departure date? How is withholding tax applied if the freight the ship transports is located at two Saudi ports?

Answer: The criteria is the date of payment as the Law and Regulations stipulate that the withholding tax is payable upon payment, and it should be paid over to DZIT within the first ten days of the month following the month of payment.

Question 38: For countries that have treaties with the Kingdom for avoidance of double taxation on income from international operation of ships, is the tax paid in the Kingdom or in the other country?

Answer: There is a treaty with the United States of America according to which tax is paid in the country of incorporation of the company.

Question 39: Are payments for services performed totally outside the Kingdom subject to withholding tax in the following cases: - Research and study expenses. - Advertisement expenses. - Legal expenses.

Answer: These payments are subject to withholding tax at 5% of gross amount notwithstanding the place of performance of these services as they are considered technical and consulting services according to provisions of Article 63 (3) of the Implementing Regulations of the Income Tax Law.

Question 40: Are payments for brokerage and middleman services for work outside the Kingdom subject to withholding tax?

Answer: Payments for brokerage and middleman services for work outside the Kingdom are not subject to withholding tax if paid to unrelated party.

Question 41: Are payments for subscription in periodicals outside the Kingdom, and for recruitment services totally done outside the Kingdom subject to withholding tax?

Answer: As far as these services are done totally outside the Kingdom, they are not considered from a source in the Kingdom under Article 5 (8) of the Income Tax Law, and so they are not subject to withholding tax.

Question 42: Are payments for management and control of companies' investment portfolios outside the Kingdom subject to withholding tax?

Answer: Yes, Payments for management and control of companies' investment portfolios outside the Kingdom are subject to withholding tax at a rate of 20 % under Article 68(a-3) of the Income Tax Law.

Question 43: A resident advertisement company advertises for foreign companies and products in Saudi media of press, radio and television. This company has an agent outside the Kingdom to do marketing among foreign producers and companies for a percentage of income from these ads. Are these payments by the resident advertisement company to its agent outside the Kingdom subject to withholding tax?

Answer: If the outside agent’s work is solely marketing of advertisements for foreign products and companies and has no role in the design of the advertisement plan or in related studies, payments to such agent for such work is not subject to withholding tax under Article 5(a-8) of the Income Tax Law as these payments are considered to result from services fully performed outside the Kingdom. If, in addition to marketing, the agent plays a role in the above-mentioned work (the design of the advertisement plan or related studies), the agent’s work is then considered technical services and it is subject to withholding tax at 5% notwithstanding the place of performance of such services as stipulated by Article 63 (1,3) of the Implementing Regulations of the Income Tax Law.

Question 44: A resident exhibition company has an agent outside the Kingdom to market exhibition spaces in the Kingdom among foreign exhibitors and pays the agent a commission which is a percentage of the space rental amounts. Are these payments by the resident exhibition company to its outside agent subject to withholding tax?

Answer: Payments by A resident exhibition company to its marketing agent outside the Kingdom in return for marketing exhibition spaces in the Kingdom among foreign exhibitors are not subject to withholding tax under Article 5 (a-8) of the Income Tax Law as such payments arise from services fully performed outside the Kingdom.

Question 45: Are payments of royalties to a non-resident GCC party in return for using its name by a Saudi Company subject to withholding tax?

Answer: Yes, payments of royalties to a non-resident GCC party in return for using its name by a Saudi Company is subject to withholding tax.

Question 46: Are payments of social insurance by a resident company to a Social Insurance Organization outside the Kingdom subject to withholding tax?

Answer: A Social insurance payment by a resident company to a Social Organization outside the Kingdom is not an allowed deduction and is subject to withholding tax 5%.

Question 47: What are the justifications for imposing withholding tax on technical and consultant services performed outside the Kingdom?

Due to the nature of technical and consulting services as they involve provision of scientific services and transfer of know-how, Article 5(3) of the Implementing Regulations of the Income Tax Law considers income derived from technical or consulting services (if the service is given to a person resident in the Kingdom or it is related to an activity carried out in the Kingdom) to be derived from an activity in the Kingdom and therefore from a source in the Kingdom. Therefore, such payment is subject to withholding tax notwithstanding the place of performance of the service.

Question 48: Are legal expenses paid abroad subject to withholding tax, and at what rate?

Answer: Legal expenses incurred abroad fall under technical and consulting services subject to a 5% withholding tax notwithstanding the place of performance of such services.

Question 49: Are school tuitions paid abroad subject to withholding tax and at what rate?

Answer: School tuitions paid abroad are not subject to withholding tax because they are for an activity exercised out