Learning about the taxation system is one of the most important aspects to consider when looking for a country to do business or work in. From this point of view, Saudi Arabia possesses all the necessary factors to attract investors and employees at the same time. This is because Saudi Arabia withholding tax does not imply any levy on natural persons. As long as the income derives from employment, there will not be any issues.
In this article, you will learn everything you need to know about withholding tax in Saudi Arabia. As a result, this represents a great advantage on the taxation of companies and benefits foreign investors. Fortunately, our specialists and company formation agents in Saudi Arabia can explain to you how taxation works in this country. Let us see:
- What is withholding tax?
- What is withholding tax for?
- Types of Saudi Arabia withholding tax
- What are the advantages of taxation in Saudi Arabia?
- How can Company Formation Saudi help you get more information about withholding tax in Saudi Arabia?
1. What is withholding tax?
Saudi Arabia withholding tax is public law revenue that consists of mandatory pecuniary benefits, unilaterally imposed by the State. Consequently, the public administration requires them because of the realization of the taxable event, which the law links to the duty to contribute.
1.1 Nature and characteristics
We can define its legal nature as a legal relationship. Hence, a tribute is a form of public income or patrimonial provision of a public nature, required of individuals.
1.2 Coercive nature
The coercive nature of withholding tax is present in its nature since the origins of this figure. Likewise, it assumes that public agents unilaterally impose that tribute. This way, by the constitutional principles and applicable legal rules. Additionally, without the concurrence of the will of the taxpayer, who can be coercively compelled to pay.
Due to this coercive nature, a principle that goes back to the claims against the medieval monarchs, in Tax Law the principle of legality governs. By the virtue of the same, the determination of the components of the tax obligation is reserved for the law.
1.3 Contributory nature
The contributory nature of the tax means that it is an income to finance public spending and cover social needs. Through the figure of the tax, citizens have to contribute to the effeteness of the state.
We can define taxes without reference to services provided or activities carried out by the Public Administration. Sometimes, they define them as those that do not imply consideration, which people have criticized. Therefore, it implies that there is a consideration in other types of tribute when the term “consideration” is not unilateral and coercive such as tax.
In taxes, businesses, even, acts or facts constitute the taxable event, which shows the taxpayer’s ability to pay. Thus, they are the most important due to the percentage they represent of the total public collection. Moreover, they are compulsory financial benefits established by the different state levels. Therefore, taxation in Saudi Arabia is the monetary obligation established by law, the amount of which is used to support public charges, especially State spending.
These are generally monetary benefits, and they are true benefits that arise from a tax obligation. Therefore, it is a payment obligation that exists by a legal bond. The active subject of tax relations in the State or any other entity that has tax powers. Additionally, it demands taxes for the exercise of sovereign powers, which have been assigned through a social agreement.
The other States give a different name to these taxes depending on the specific taxable event, among those set out above, that they levy.
1.5 Difference between rate and public price
Public price is the monetary consideration that the State receives for the provision of service voluntarily. Likewise, the taxpayer requests it under the same conditions as the private sector and public law.
It differs from the rate in that it is paid for the special use of the public domain, the provision of services, or the performance of activities under public law. Consequently, it is a mandatory request by the taxpayer. On the other hand, the private sector cannot carry out said service in any way.
2. What is withholding tax for?
Withholding tax in Saudi Arabia allows the State to offer citizens certain goods and services that aim increasing social welfare. In this sense, they use them to pay the payroll of those who work in the public sector. Along with this, thanks to them, they build infrastructures that allow the development of society.
Indeed, taxes make it possible to create a public educational system that trains all children and young people in a country. As a result, they can later join the labor market and generate wealth. Consequently, Education is the basis for the progress of any nation. On the other hand, imagine a country without roads, railway infrastructure, or ports that allow the transport of merchandise.
Consequently, this type of situation would completely block the economy and make life very difficult for citizens.
The payment of Saudi withholding taxes allows the creation of a public structure that allows acting on market failures, increasing the efficiency of the market. In addition, it will enable granting subsidies that reduce inequality and provide greater progress to the society of a country.
2.1 Main elements of taxes
Next, let us see some of the main elements that will help us understand what taxes are:
- Taxable event: The activities or situations that motivate the tax obligation.
- Taxpayer: The person or organization facing the obligation.
- Base: The amount on which they apply taxes.
- Tax rate: This is the proportion that is applied to the tax base to calculate the amount to be paid.
- Rate in taxes: is the amount they must pay.
3. Types of Saudi Arabia withholding tax
In this manner, they apply one tax or another depending on the activity on which it falls. These, despite being considered, all, a tribute, present variations in the amount that the interested party must pay.
3.1 According to base
- Indirect taxes: They are those that are applied to goods and services and therefore affect people “indirectly”, the best known is the value-added tax.
- Direct taxes: These, tax directly on individuals or companies. For example, income tax, profits or companies, successions and donations, and wealth tax.
3.2 Taxes according to rate-based relationship
- Progressive: In this case, the higher the base, the higher the applicable tax. Hence, for instance, the higher the income of a family, the greater the amount they must pay.
- Proportional: Taxpayers must pay the same proportion of their base. For example, a 10% tax applies regardless of the number of company profits.
- Regressive: Taxpayers with a smaller base end up paying a higher amount. For instance, in this case, when the poorest people end up paying more taxes than the richest.
To sum up, the main types of Saudi Arabia withholding tax are direct and indirect taxes. This is the first established classification. Likewise, it differentiates those taxes that directly tax people or companies. However, their opposites apply to goods and services and therefore indirectly affect people.
3.3 Fundamental principles of withholding taxes
Generally, governments want to apply taxes as fairly as possible. To achieve this, they apply two fundamental principles: horizontal equity and vertical equity. The first holds that they should treat taxpayers who have the same characteristics in the same way. The second principle indicates that people who are in different circumstances should be treated differently following some criterion of justice.
4. What are the advantages of Saudi Arabia withholding tax?
The cost of Saudi Arabia withholding tax is quite low, and certainly, its taxation helps it. Next, we analyze the most important taxes in Saudi Arabia. As we can see, they are few and generally low:
Let us start our discussion of Saudi Arabia withholding tax by looking at how they tax earned income.
4.1 Social security
In most developed countries, social security charges are usually the most important cost for both workers and companies. Nevertheless, Saudi Arabia withholding tax depends on whether we are nationals of the country or foreign workers. As far as foreign workers are concerned, the only payment taken into account is occupational accident insurance. For this concept, the company must pay the equivalent of 2% of the worker’s gross salary.
The maximum base for such a position is 540,000 Saudi Riyals per year (€120,000). Hence, the maximum payment will be 10,800 riyals (€2,400) per year. As for national workers, we can say that there is a social security system similar to that of Western countries. In addition, both the Saudi worker and the company must bear the costs.
National workers in Saudi Arabia must contribute 10% of their gross salary to social security: 9% for social insurance and 1% for unemployment insurance. As a result, the maximum base for such payments is also 540,000 Riyals per year (€120,000).
As for companies, they must pay the equivalent of 12% of the worker’s gross salary: 9% for social security, 1% for unemployment insurance, and 2% for work-related accident insurance. The same maximum base of 540,000 riyals is valid here as well.
4.2 Income tax (IRPF)
Income tax does not exist in Saudi Arabia, so workers will not have to pay any percentage of their salary to the treasury.
4.3 Taxes on capital income
For those residents of Saudi Arabia with savings and investments, capital income will be exempt from tax in virtually all situations.
This means that they should not tax the interest, dividends, or real estate income received. In the same way, the capital gains obtained with the purchase-sale of assets will not be subject to the payment of Saudi taxes either. At the same time, it is important to mention that Saudi Arabia also does not have a wealth tax.
4.4 Corporation tax
As far as companies are concerned, they will have to pay taxes on the profits made. The general corporate tax in Saudi Arabia is 20%.
However, it is crucial to note that if a Saudi shareholder owns a company, it may be subject to Zakat, an Islamic tax that works differently. In this case, they will pay an amount close to 2.5% of the estimated value of the company. For these companies, the corporate tax would not be applicable.
Ideally, the company should have good compliance with its tax obligations and a solid and sustainable tax structure. In this manner, allowing them to enjoy security and confidence for the disclosure of operations according to the regulations that apply to them. However, this could not be beneficial for the company itself. In addition, it can be an issue for the government that captures the financing of its public spending through these taxes.
To sum up, corporate taxes, include all the services we provide to legal entities, mainly related to the imposition of income tax.
5. How can Company Formation Saudi help you get more information about Saudi Arabia withholding tax?
Learning about taxes in a different such as Saudi Arabia can be complicated and quite stressful. Nevertheless, on Company Formation Saudi, we have many specialists at your disposal who can help you and advise you about taxation in Saudi Arabia. Indeed, you do not have to go through tedious processes to achieve your goals and dreams with our company formation agents in Saudi Arabia. On the other side, you can count on an array of services such as:
- Virtual office services.
- Payroll services.
- Branch services.
- Accountant services.
- Immigration process.
- Legal services.
Would you like to contact Company Formation Saudi to obtain more information about Saudi Arabia withholding tax? We can help you solve any legal matter if you call us at +971 43 316 688. Email us at firstname.lastname@example.org.