Saudi Income Tax Law
Withholding tax [Article 68, new insertion 1] – Salary payments to non-resident employees
The Saudi Arabian Government has unveiled a new draft outlining potential changes to the Income Tax Law, inviting public feedback. These proposed changes follow recent enhancements made to the tax regulations.
These suggested alterations further demonstrate the dedication of the Saudi Government and the Zakat, Tax, and Customs Authority (ZATCA) to foster a business-friendly environment in the country, particularly concerning withholding tax and research and development expenditures.
A detailed breakdown and insights on these propositions are delineated below.
- In the past, ZATCA subjected payments made to employees without Iqamas or those working from outside the country to withholding tax.
- The new proposal suggests exempting all employee payments from withholding tax, regardless of their status.
- Additionally, it’s being recommended to categorize remuneration given to board members as salaries.
Withholding tax [Article 68, new insertion 2] – Payments to foreign tax-transparent entities
- Before, the Income Tax Law was unclear on the withholding tax implications for payments made to non-resident, tax-transparent entities. This led to doubts about whether withholding tax was applicable to the portions of those payments traceable back to individuals who are tax residents in KSA.
- The current suggestion is that any portion of a payment that can be traced back to a KSA tax resident should not undergo withholding tax when paid to non-resident entities that are recognized as tax-transparent in their home jurisdiction.
Withholding tax [Article 68] – Proposed changes to withholding tax rates
| Sr. No. | Current description and rates | Proposed description and rates | ||
| 1 | Rents | 5% | Rents | 5% |
| 2 | Royalty and proceeds | 15% | Royalty | 15% |
| 3 | Loan fee between related companies including bonds and sukuk | 5% | ||
| 4 | Dividend Distribution | 5% excluding listed securities, funds, investment abroad and the issuance of bonus shares. | ||
| 5 | Management fee | 20% | Services | 10%. The Regulations will detail the timeline for application and any deviations from the withholding tax spectrum |
| 6 | Payments for airline tickets, air or maritime freight | 5% | ||
| 7 | Payments for international telecommunication services | 5% | ||
| 8 | Any other payment specified in the Regulations, provided the tax rate does not exceed | 15% | ||
The main points concerning the aforementioned topics are summarized below:
- Based on the wording used, it seems that withholding tax would only apply to payments of loan fees (interest) in the context of loans between related parties. Payments of loan fees (interest) to unrelated third parties would not be subjected to withholding tax.
- To encourage foreign investment in the Saudi stock exchange, there’s a proposal to eliminate the withholding tax on dividend payouts by publicly listed companies.
- The proposed rate for withholding tax on services stands at 10%. The Minister is given the authority to issue guidelines detailing the implementation timeline and any deviations from this rate. Although the language in the proposed change is somewhat ambiguous, it suggests that the withholding tax on service fees wouldn’t surpass 10%.
Most strikingly, the adjustment in the withholding tax rate for service payments could affect management fees (currently taxed at 20% withholding rate) and technical service fees for related parties (currently at 5%, a reduction from 15% as per Ministerial Resolution No. 25 from July 2023, which became operational recently in September 2023. For more details, you can refer to our prior notification).
Research and Development Expenses [Article 16]
- At present, tax deductions related to research and development (R&D) costs are restricted to expenses directly linked to the generation of taxable revenue, excluding land and capital costs that may be eligible for depreciation deductions.
- The new suggestions empower the Finance Minister to draft Regulations clarifying the tax implications of R&D-related expenses. This proposed change is lauded, as it grants the Minister the flexibility to introduce tax breaks for R&D initiatives, promoting innovation and steering the Kingdom towards being a knowledge-driven economy.
Please Note:
The provided information is a concise overview of the amendments in the Tax by-laws and Zakat regulation. It is presented in broad terms and should not be considered comprehensive or applicable to individual scenarios. Actions based on this information should be taken with caution as the application of these principles varies based on individual circumstances. We strongly suggest seeking expert advice before making or abstaining from any decisions based on this content.
Tass & Hamjit is available to guide readers on the practical application of the principles discussed in this document to their unique situations. However, Tass & Hamjit assumes no responsibility or liability for any damages or losses incurred by anyone acting or abstaining from action based on the information in this publication.
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