Saudi Arabia approves withholding tax reduction for technical services or consulting services

Background

The Minister of Finance of Saudi Arabia has issued Decision No. (25) on 8/01/1445H, corresponding to 26 July 2023. The decision was published in the Official Gazette on 15 September 2023 and will come into force on that date.

The decision includes various amendments to the Income Tax Bylaws¹ which include the following topics:

• deductible expenses in determining taxable income (article 9 Income Tax Bylaws);
• objections and appeals (article 60 Income Tax Bylaws); and
• withholding tax (article 63). 

Withholding tax

The decision foresees in the reduction of the withholding tax rate from 15% to 5% for payments for technical or consulting services or international telephone communications services, regardless of whether such payments are paid to the head office or a (related) group company.

Whilst Saudi Arabian withholding tax on technical or consulting services could potentially be mitigated under a Double Tax Treaty (if any and provided the service provider has no Permanent Establishment in Saudi Arabia), the relatively high tax rate for cross-border technical or consulting service payments between related parties was considered burdensome by many international business groups. The current approval for the reduction of said rate from 15% to 5% is a welcome relaxation for those groups.

Conclusion

Saudi Arabia’s withholding tax reduction is a welcome relaxation for foreign intra-group service providers.