For corporate taxpayers in Saudi Arabia, royalty payments to non-residents are subject to a specific Withholding Tax (WHT) rate of 15%. This rule is critical for businesses engaging in licensing, intellectual property usage, and technology transfer agreements with foreign entities. This guide will explain the scope of this tax, compliance requirements, and strategies for managing costs.
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What Are Royalty Payments?
Royalty payments refer to amounts paid to a non-resident for the right to use intellectual property (IP), patents, trademarks, copyrights, software licenses, or other proprietary technology. In Saudi Arabia, such payments fall under the definition of royalties as per the Income Tax Law and its implementing regulations.
The 15% Withholding Tax Rate
Under Saudi Arabia’s tax framework, royalties paid to non-resident entities are subject to a flat WHT rate of 15%. The payer (Saudi entity) must:
- Deduct the tax from the gross royalty amount at the time of payment.
- Remit the WHT to ZATCA within the specified deadline.
- File a WHT return disclosing the transaction details.
Failure to comply can lead to significant penalties, interest charges, and possible disputes during ZATCA audits.
Scope of Taxable Royalties
The following payments are generally considered taxable royalties:
- Software licensing fees and SaaS subscriptions to foreign providers.
- Payments for the use of patents, trademarks, and brand rights.
- Franchise fees to non-resident franchisors.
- Fees for using foreign-owned industrial processes or know-how.
- Broadcasting and distribution rights for media content.
WHT Calculation Example
| Description | Amount (SAR) |
|---|---|
| Gross royalty payment to foreign licensor | 200,000 |
| WHT @ 15% | 30,000 |
| Net payment to foreign licensor | 170,000 |
Important: The WHT is borne by the recipient unless the contract specifies that the Saudi payer will gross-up the amount.
Filing and Payment Deadlines
- WHT must be remitted to ZATCA by the 10th day of the month following the payment month.
- Late payments attract penalties of 1% of the unpaid tax per 30 days of delay.
- Supporting documents such as contracts, invoices, and proof of payment must be retained for audit purposes.
Double Tax Treaty Considerations
Saudi Arabia has signed Double Taxation Avoidance Agreements (DTAAs) with several countries. If applicable, the treaty may reduce the WHT rate below 15%. To claim the benefit:
- Obtain a valid tax residency certificate from the non-resident’s jurisdiction.
- Submit the certificate to ZATCA before applying the reduced rate.
Common Compliance Mistakes
- Misclassifying service fees as royalties or vice versa.
- Failing to withhold tax on non-cash or in-kind royalty payments.
- Not considering treaty provisions before applying WHT.
- Incorrect calculation of the gross-up amount when the payer bears the tax.
Best Practices for Corporate Taxpayers
- Review all cross-border IP-related contracts for royalty implications.
- Integrate WHT checks into payment approval workflows.
- Maintain detailed transaction records to support tax filings.
- Consult tax experts when structuring licensing agreements to optimize costs.
Key Takeaways
- Royalty payments to non-residents are subject to 15% WHT in Saudi Arabia.
- Tax treaties may offer reduced rates, but documentation is essential.
- Failure to comply can result in financial penalties and increased scrutiny from ZATCA.
