What is withholding tax?
Published
Withholding tax is income tax collected at source: when a Saudi-resident business (or a permanent establishment in the Kingdom) pays a non-resident for Saudi-source income, the payer must withhold a percentage and remit it to ZATCA. The taxpayer is the non-resident; the duty to withhold and remit sits with the payer - you.
Rates by payment type
| Payment type | Rate |
|---|---|
| Dividends | 5% |
| Interest / financing returns | 5% |
| Rent | 5% |
| Insurance and reinsurance premiums | 5% |
| Royalties (licences, trademarks, IP) | 15% |
| Management fees | 20% |
| Technical, consulting, and other services | Varies with the service's classification (between 5% and 15%) |
These are the general domestic rates under the Income Tax Law; service classification in particular is where the detail and updates live, and double tax treaties can reduce or eliminate the rate, subject to documentation - above all a tax residency certificate for the beneficiary.
A full example: Al-Waha licenses foreign software
Al-Waha contracts a non-resident company for an annual software licence of SAR 20,000 - a royalty payment at 15%.
Contract value = SAR 20,000Withholding at 15% = SAR 3,000 ← remitted to ZATCATransferred to vendor = SAR 17,000
The entry:
| Account | Debit | Credit |
|---|---|---|
| Software licence expense | 20,000 | |
| Withholding tax payable | 3,000 | |
| Bank | 17,000 |
Then on remittance: withholding tax payable 3,000 debit, bank 3,000 credit.
The "guaranteed net" case: if the contract says the vendor receives SAR 20,000 net, Al-Waha bears the tax through a gross-up:
Taxable gross = 20,000 ÷ (1 − 0.15) = SAR 23,529.41Withholding = SAR 3,529.41True cost = 23,529.41 instead of 20,000 ← a 17.6% increase nobody priced
A "net of taxes" clause in a foreign contract raises your real cost - catch it before signing, not after.
Obligations and deadlines
- Monthly remittance and statement within the first ten days of the month following the payment month.
- An annual withholding return per the authority's requirements.
- A certificate/statement to the beneficiary showing the amount, rate, and tax withheld, which they need to evidence the tax at home.
- Applying a reduced treaty rate requires the documentation (tax residency certificate and whatever the authority requires) to be in place before applying it.
How it differs from VAT
| Withholding tax | VAT | |
|---|---|---|
| Nature | Income tax on the non-resident | A consumption tax |
| Who bears it | The non-resident beneficiary | The end consumer |
| Your role | Withholder and remitter | Collector and remitter |
| Can both apply? | Yes - a foreign service invoice can attract withholding and VAT under the reverse charge at the same time |
That reverse-charge point is widely missed: importing a service from a non-resident can require you to self-account for VAT as output and input on your own return, in addition to withholding - two independent treatments of the same invoice.
Frequently asked questions
I pay a foreign freelancer through a platform - do I withhold?
If the payment is to a non-resident for a Saudi-source service, withholding rules apply in principle per the service's classification. The payment channel or an intermediary does not remove the obligation - borderline cases go to a specialist.
I forgot to withhold and paid in full - now what?
The obligation to the authority sits with the payer. In practice you bear the tax (on gross-up logic) plus any late penalties - remit and correct immediately.
Is withholding computed on the amount including VAT or before it?
Withholding is computed on the consideration due to the beneficiary for the service; the interaction with VAT and the reverse charge is settled with your accountant - not by intuition.