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 The Most Frequently Asked Questions and Answers
Income Tax Law Issued by Royal Decree No. (M/1) 15 Muhrram 1425 H. (6/3/2004)
And
Implementing Regulations
The most frequently asked questions and answers are broken down into the following categories:
1- Rules for Subjection to Taxation 2- Tax-base and Tax Accounting Rules 3- Allowed Deductions 4- Taxation of Partnership 5- Taxpayers Registeration 6- Books and Records 7- Returns and Taxable Year 8- The Department's Right to Information 9- Related Persons and Persons Under Common Control 10- Withholding Tax 11- Advance Payments of Tax 12- Refund of Overpayment 13- Fines
1- Rules for Subjection to Taxation
Question (1): What is the determining criteria for subjection of GCC nationals or GCC companies exercising activities in the Kingdom to taxation or zakat ?
Answer: The determining criteria for subjection of GCC nationals or GCC companies to taxation or zakat is residence. A GCC national or company resident of the Kingdom and exercising activities in the Kingdom is subject to zakat. A GCC national or company non-resident of the Kingdom and derives income from a permanent establishment or a source in the Kingdom is subject to tax.
Question (2): Is a GCC natural person who is a partner in a resident capital company subject to zakat or tax? Are dividends paid to him subject to withholding tax?
Answer: A resident capital company is subject to zakat on the shares of the GCC natural person whether resident or not. Dividents paid to him are subject to withholding tax if he is not resident.
Question (3): Is a non-resident partner in a Saudi resident company who represents a governmental agency of a Gulf State subject to tax or zakat?
Answer: The non-resident partner in a Saudi resident company who represents a governmental agency of a Gulf Stateis subject to zakat, and any profit distribution to him is subject to withholding tax.
Question (4): Is profit distribution by Gulf companies and banks operating in the Kingdom to Gulf Governments subject to tax or zakat?
Answer: The profit distribution by Gulf companies and banks operating in the Kingdom to Gulf Governments is subject to withholding tax.
Question (5): Is a GCC person who is resident in a Gulf State other than Saudi Arabia considered resident in the Kingdom for tax and zakat purposes?
Answer: Article 3 of the Income Tax Law has defined the tax residency to be residency in the Kingdom of Saudi Arabia. Therefore, a GCC person who is resident in his country (a Gulf State other than Saudi Arabia) is not considered resident in the Kingdom for tax purposes. Furthermore, a Saudi person, natural or corporate, who does not meet the residency conditions as stated in the mentioned Article is not considered resident in the Kingdom and his activity income derived from a source in the Kingdom is subject to tax and not zakat.
Question (6): Is the share of a Gulf company (a company registered in one of the Gulf states other than Saudi Arabia) , fully owned by GCC nationals, in a resident capital company subject to tax or zakat? Are dividends paid by the resident company to the GCC company subject to withholding tax?
Answer: The share of a GCC company, fully owned by GCC nationals, in a resident capital company is subject to zakat . Dividends paid by the resident company to the non-resident GCC company are subject to withholding tax?
Question (7): A Bahraini company whose shareholders from Gulf States and non Gulf States, has a contract with a company resident in the Kingdom for provision of technical and consulting services. Is this contract subject to tax and at what rate?
Answer: Gross amounts paid to the Bahraini company for technical and consulting services are subject to withholding tax at 5% unless the Bahraini company has a permanent establishment in the Kingdom in which case it becomes subject to income tax provisions applicable to resident companies.
Question (8): A United Arab Emirates company has a contract with a resident company to construct a plastic plant. Is this contract subject to income tax or withholding tax?
Answer: Article 4 (b1) of the Income Tax Law stipulates the following to be a permanent establishment: construction sites, assembly facilities and the exercise of supervision activities connected therewith. So, the UAE company is considered to be exercising activities in the Kingdom through a permanent establishment and it is therefore subject to tax on its income from the contract and not to withholding tax.
Question (9): Are Saudi and Gulf partners in an insurance company, established in Bahrain and exercising activities in the Kingdom through an agent or branch, subject to zakat or tax?
Answer: This company is subject to tax as it is considered to be non resident carrying on activities through a permanent establishment in accordance with Article 2( c ) and Article 4(a) of the Income Tax Law and Articles 1(1) and 4(2) of the Implementing Regulations.
Question (10): What is meant by the permanent establishment according to Income Tax Law? Is it a legal entity or a legal definition?
Answer: Article (4) of Income Tax Law states that a permanent establishment of a non-resident in the Kingdom consists of a permanent place of the non-resident's activity through which it carries on business, in full or in part, including business carried on through its agent. Paragraph (b) of the same Article lists some particular cases that are considered to be permanent establishment while Paragraph (c) of the same Article lists some cases that are not considered to be permanent establishment. A permanent establishment is a term that indicates the cases which are considered permanent establishment of a non-resident for tax purposes but does not indicate a legal form or entity.
Question (11): If a resident entity leases digging platforms, ships and equipment from a non-resident party, shall the non-resident party be considered as having a permanent establishment according to Article 4(b) of the Income Tax Law, or shall payments to the non-resident party be subject to withholding tax?
Answer: If the non-resident party performs in the Kingdom any work related to such leased equipment, such as operation, supervision, maintenance or inspection, whether by itself or its authorized agent, it shall be considered to have a permanent establishment in the Kingdom according to Article 4(b) of Income Tax Law and shall be subject to the permanent establishment provisions. But if the non-resident party has only a lease of equipment with no associated work such as the ones previously mentioned, it shall not be considered to have a permanent establishment; in this case, lease services are subject to withholding tax at 5% of gross payment in accordance with Article (68) of Income Tax Law and Article (63) of Implementing Regulations.
Question (12): If an insurance company, registered in Baharain, carries out all its activities in the Kingdom through an agent who is the Saudi partner, and if its place of management, decision making and policy setting is the Kingdom, will it be considered resident in the Kingdom?
Answer: Article 3(b) of the Income Tax Law stipulates that a company is considered to be resident in the Kingdom during the taxable year if it meets any of the following conditions: 1- It is formed in accordance with the Companies Law. 2- Its central management is located in the Kingdom.
If evidences prove that the company's central management is located in the Kingdom, the company is considered to be resident in the Kingdom and is subject to zakat on Saudi shares and shares of others who are treated like Saudis whereas other shares are subject to tax.
Question (13): What is meant by "place of central management", stated in Article (3)(b2) of the Income Tax Law, which if met makes the company resident in the Kingdom?
Answer: The "place of central management" is the place from which a company is effectively managed and controlled. It is the place where the board of directors meet, and important policies and decisions are made regarding the company's management, business, investments that are necessary for the operation of the company at higher level.
Question (14): A Bahraini Insurance company whose partners are Bahrainis and Saudis has established an issurance company is Saudi Araia under the Cooperative Insurance System. The new company has acquired all operations, customers, offices and staff of the Bahraini company in the Kingdom in return for shares in the new company for the partners in the Bahraini company provided those partners dispose of their shares in the Bahraini company to the new company. Is this transaction subject to tax, or is it just an exhange of shares that result in no profit or loss to the Bahraini company?
Answer: There is a taxable disposition in this case. The gain from such dispositon is the difference between the compensation received for the disposed asset and its cost base. Under Article (9) (h, I, and l) of the Income Tax Law, the compensation received is not necessarily in cash; in kind compensation in form of shares in the new company is deemed to be cash compensation. Therefore, the capital gain realised from this transaction is taxable.
Question (15): A gulf joint stock company whose shares are traded in a gulf capital market has formed a Saudi limited liability company with Saudi partners. What is the tax treatment of dividends distributed by the Saudi company to the gulf joint stock company?
Answer: Profits distributions by the Saudi Limited company to the non-resident gulf company are subject to withholding tax regardless of nationalities and residency of owners of the gulf company.
Question (16): Is income of a subsidiary that is registered abroad, owned by a Saudi joint venture, and has no activity in the Kingdom taxable in the Kingdom? Is tax paid by such subsidiary in other countries on activities therein deductible in the Kingdom?
Answer: Under Article (5) (4) of the Implementing Regulations, income of a subsidiary that is registered abroad and fully owned by a Saudi joint venture is taxable and zakatable in the Kingdom even if derived outside the Kingdom. Income tax paid by such subsidiary in other countries on activities therein is not deductible in the Kingdom unless addressed under conventions for avoidance of double taxation with these countries.
Question (17): Are funds by a foreign partner of a joint venture to cover the cumulative losses of the joint venture taxable – funds could be equal or greater than the cumulative losses-? Shall such funding abolish the joint venture's rights to loss carry-forward?
Answer: Under Article ( 8) of Income Tax Law which defines taxable income, funds by a foreign partner of a joint venture to cover the cumulative losses of the joint venture are not taxable as they are not resulting from carrying out an activity. Such losses as long as they are real and approved by DZIT may be carried forward according to the provisons of Article (11) of the Implementing Regulations.
Question (18): A non-resident company deals with a Saudi Distributor to distribute the former's goods in the Kingdom. The non-resident company stores products in the Kingdom to supply the Saudi distributor at scheduled times. Is storing products in the Kingdom subject to tax?
Answer: Under Article 4(c1) of the Income Tax Law, storing goods in the Kingdom in order to supply a Saudi distributor is not considered a permanent establishment, and therefore is not subject to tax in the Kingdom.
Question (19): A head-office sells products directly to customers in the Kingdom identical to those sold by its permanent establsihment in the Kingdom. What is the tax treatment of these direct sales by the head-office?
Answer: If a head-office sells products directly to customers in the Kingdom identical to those sold by its permanent establsihment in the Kingdom, the permanent establishment must report such direct sales by its head-office and related costs in its return.
Question (20): Are shares of non-Saudi non-resident companies in Saudi resident joint capital companies deemed to be permanent establishemnts of the non-residents?
Answer: Shares of non-Saudi non-resident companies in Saudi resident joint capital companies are not deemed to be permanent establishemnts of the non-residents.
Question (21): Is a non-Saudi resident natural person subject to tax on income from deposits in accounts held in local banks?
Answer: A non-Saudi resident natural person is not considered to have an activity in the Kingdom if his sole source of income in the Kingdom, other than employment income (wages and salaries), is from deposits at bank accounts or from trading in shares of companies listed in the Kingdom’s Stock Market. Under Article (2) of the Implementing Regulations, such act is not considered a taxable activity in the Kingdom. However, if that person exercises professional, commercial or trade activity in the Kingdom, his income from bank accounts held in local banks is taxable with other incomes and he should report it in the annual return he is required to file with the Department and should pay tax accordingly.
Question (22): Is a non-resident shipping company’s income from transporting products of oil, hydrocarbons and liquefied gas tax-exempt under the provisions of the Income Tax Law like the old provisions?
Answer: The Income Tax Law has no provisions for exempting an income from a source in the Kingdom, such as from transporting any type of goods , crude or refined oil, other products and hydrocarbons. Under the Income Tax Law and its Implementing Regulations, non-resident shipping companies are subject to tax on income from transporting of passengers or any type of goods from the Kingdom’s ports.
Question (23): Are delivery contracts to the Kingdom that include associated work taxable?
Answer: Under Article (5) (7) and Article (16) (6) of the Implementing Regulations, contracts of delivery to the Kingdom shall not be considered as derived from an activity in the Kingdom, and only associated work performed in the Kingdom shall be taxable.
Question (24): A non-resident company has concluded a less-than-three-month contract with a resident entity for delivery of equipment. Delivery was associated with specific-valued services performed in the Kingdom. Is this contract considered to be a permanent establishment of the non-resident company? Shall the speicified values of the associated work of less than 10 % of the total value of the contract be accepted or be recomputed to be not less than 10% of the total value of the contract?
Answer: If the non-resident company has no pemanent place in the Kingdom through which it carries out its business totally or partially, and if it has no agent authorized to carry out its business in the Kingdom, it shall not be considered to have a permanent establishment in the Kingdom. Payments to this non-resident company shall be subject to withholding tax povisions of Article (68) of the Income Tax Law and Article (63) of the Implementing Regulations. In regard to associated work of delivery contracts, the provision of Article (16) (6) of Implementing Regulations shall be applicable,i.e. revenues of each associated work in the Kingdom shall be estimated at (10%) of the total value of the contract unless the value is specified in the contract in which case it shall be sufficient.
Question (25): How are non resident air, sea or land freight and transportation companies taxed?
Answer: Non Saudi air, sea or land freight and transportation companies that have branches registered in the Kingdom are subject to the provisions of Article 34 of the Income Tax Law (the tax base is presumtively estimated unless the concerned entity proves the correctness of its declared tax base). Non Saudi air, sea or land freight and transportation companies that have no permanent establishments in the Kingdom are subject to the provisions of Article 68 of the Income Tax Law, i.e. withholding tax for being non-resident.
Question (26): Are commercial bonds or Islamic bonds issued by a Saudi stock company to fund its projects subject to zakat or tax in respect of the issuer and the investor?
Answer: In respect to the issuer of the bonds, such bonds represent a financial obligation, like debts, and are dealt with according to Fatwa (religious ruling) number 23665, dated 15/4/1424 H issued by the Permanent Commission for Research and Fatwa. In respect to the investor in these bonds, if the investor is a resident Saudi, the amount of these bonds and their return is subject to zakat provisions. If the investor is a foreign or a non-resident Saudi, the return of such investment shall be subject to Income Tax Law issued by Royal Decree, number M/1, dated 15/1/1425H.
Question (27): A Saudi joint company consists of a Saudi company and a foreign company. An engineer who is a partner in the foreign company works in the joint company in the Kingdom in return for an annual salary and housing allowance. What is the proper treatment of such amounts paid to the engineer?
Answer: The engineer who works in the joint company is an indirect partner since he is a partner in the foreign company which is a partner in the joint company. Therefore, any amounts paid by the joint company to the engineer is considered distribution of profits which is for tax purposes a disallowed deduction according to Article 13(b) of Income Tax Law, and will be subject to withholding tax if the recipient is not resident in the Kingdom. Question (28): What is the tax treatment of a consortium of companies?
Answer: Under Article (57) of the Income Tax Law and Article (55) of Implementing Regulations, a consortium of companies should register with DZIT, and under Article (17) (5) of Implementing Regulations should file information return, and each member of the consortium is required to file its separate return and pay tax accordingly within the legally prescribed time.
Question (29): Are capital gains subject to income tax at 20% or to withholding tax?
Answer: Under Article 1(2b) of the Implementing Regulations, capital gains are subject to income tax at 20%, not withholding tax.
Question (30): Are capital gains resulting from disposition by nonresident Gulf partners of their shares in Saudi stock companies subject to tax, and at what rate?
Answer: Capital gains realized by a non resident Gulf company from disposal of its share or part of it in a Saudi resident capital company are subject to tax according to Article (1)(2b) of the Implementing Regulations. The non residnet Gulf company is required to file its return and pay due tax at 20% of realised capital gains unless conditions stiulated in Artilce (10)(a) of Income Tax Law and Article (7) of the Implementing Regulations concerning exempting capital gains apply.
Question (31): Are capital gains realized from disposal of securities traded in the Stock Market in the Kingdom exempted from tax? And if so, is the exemption applicable to both resident and nonresident investors? Shall the exemption apply regardless of the legal entity of the company whose stocks are traded ( open general stock company or closed general limited liability stock company)?
Answer: Capital gains from disposal of securities as stipulated in Article (2) of the Stock Market Law issued by Royal Decree number M/30, dated 02/06/1424 H. are tax-exempt if conditions stipulated in Article 7 of the Implemnting Regulations are met, whether the investor is resident or not, and regardless of the legal entity whose stocks are traded in the stock market in the Kingdom.
Question (32): A non-resident holding company had a share in a resident company. It has disposed of its share in total or in part to a non-resident subsidiary at the nonimal value as part of an interal local reorganization of the group. Are there tax consequences of this disposition?
Answer: Capital gains from disposal of a share in total or in part by a non-resident holding company to a subsidiary shall be taxable as the concerned entities, the transferor and the transferee, are two separate entities and each has its own independant character. Under Article (7) (b) of the Implementing Regulations, capital gains from disposition of an asset shall be determined by comparing the sale value of the disposed asset with its cost base. The cost base of the disposed asset shall be determined in accordance with Article (9) (d) of the Income Tax Law.
Question (33): Are capital gains realized by a foreign shareholder from an initial public subscription taxable?
Answer: Capital gains realized by a foreign shareholder from an initial public subscription are taxable as this comes prior to the phase of trading stocks in the Saudi Capital Market.
Question (34): What is the tax treatment of a nonresident investor in regard to its investments in the Saudi Capital Market?
Answer: Gapital gains realized by a nonresident investor from transactions with persons authorized to trade with the stocks of the Saudi Capital Market upon disposal of financial papers by sale are tax-exempt according the the provisions of Article (10)(a) of the Income Tax Law and Article (7) of the Implementing Regulations. Dividends paid by the company being invested in to the foreign non resident investor are subject to withholding tax at 5% upon transfer to the nonresident investor or credit to its account according to the provisions of Article (68) of the Income Tax Law and Article (63) of the Implementing Regulations.
Question (35): Are resident and non-resident legal heirs of shares in resident companies taxable on capital gains from the transfer of deceased persons' shares at cost?
Answer: Heirs of resident and non-resident shareholders are not taxable on inheritance or gifts they receive as such income is not from a taxable activity as defined in Article (1) of the Income Tax Law. However, the deceased non-resident shareholder (the disposer) shall be treated as having received compensation equal to the market value of the asset at the time of disposal in accordance with Article (9) (h) of the Income Tax Law, and the compensation value should be compared with the cost base to determine the taxable capital gains, if any. 2- Tax-base and Tax Accounting Rules
Question (1): A resident joint limited liability company has a contract with a resident entity. It has sub-contracted the maintenance and services part of the contract to its foreign partners. How is the contract taxed?
Answer: The Saudi joint limited liability company should file its zakat return by the end of the year and should report all its income from the contract. Since maintenance and services require presence in the Kingdom, the foreign partners are considered to operate in the Kingdom through a permanent establishment as stipulated by Article (4) of Income Tax Law. Therefore, foreign partners are required to comply with registration, filing and payment provisions of the Income Tax Law, and shall be subject to penalty provisions in case of non-compliance, whether foreigners execute work individually or jointly in a consortium.
Question (2): How are capital gains resulting from disposition by a foreign partner of its share in a joint company computed?
Answer: Article 9(a) of Income Tax Law stipulates that gains from disposal of an asset is the difference between the compensation received for the asset and its cost base. Paragraph (d) of the same Article stipulates that the cost base of an asset purchased, produced, manufactured, or constructed by the taxpayer itself is the amount paid or incurred by the taxpayer in cash or in kind in the process of acquiring the asset.
Question (3): What does the "cost base" mean in determining the capital gains upon disposition by a foreign partner of its share in a resident capital company?
Answer: Article (9)(d) of Income Tax Law stipulates that the cost base of an asset purchased, produced, manufactured, or constructed by the taxpayer itself is the amount paid or incurred by the taxpayer in cash or in kind in the process of acquiring the asset.
Question (4): A foreign company incoroporated in Saudi Arabia with a capital of one million Saudi Riyal. A few years later the shareholders decided to sell the company at a time when the equity shares of shareholders have become three million Saudi Riyal resulting from statutory reserves and retained profits. What is the company cost base under Article (9)(d) for the sale purposes?
Answer: Under Article (9)(d) of Income Tax Law, the cost base to be considered and compared with the sale price in this case is one million Saudi Riyal as this amount represents the cost incurred by the taxpayer in acquiring the asset disposed of by sale.
Question (5): How are the world hotel management companies taxed on their management and operation of hotels in the Kingdom?
Answer: If a world hotel management company has physical presence in the Kingdom such as an office or employees in the local hotels being managed and through which it monitors the management and operation of the local hotels, this activity shall fall under the provisions of permanent establishment and other relavant provisions. And according to Article (68) of the Income Tax Law and Article (63) of the Implementing Regulations, profits transferred to a head-office abroad shall be subject to withholding tax at 5%. If the said company has no physical presence in the Kingdom and its management and operation business of local hotels is carried out from abroad, it will be considered a non-resident company and all payments to it shall be subject to withholding tax at 20% in accordance with Article (68) of the Income Tax Law and Article (63) of the Implementing Regulations
Question (6 ) What is the tax treatment of debit and credit differences resulting from evaluation of traded investments available for sale based on market prices prevailing at time of balance sheet preparation.
Answer: Debit or credit differences resulting from evaluation of traded assets including investments are not recognized to determine the taxable profits. The net taxable profit is determined based on statutory provisions and rules that recognize only real income, expenses and losses.
Question (7) May a non-resident entity use two methods to pay taxes: file a return on its main activity and at the same time allow some of its customers to withold and pay taxes directly to DZIT on its minor activities?
Answer: A non-resident entity either has a pemanent establsihment in the Kingdom through which it carries out its business or not. If it has a permanent establishment in the Kingdom, it shall file its return reporting all income from the Kingdom. If it has no permaenent establishment in the Kingdom, all payments to it from sources in the Kingdom shall be subject to withholding tax provisions according to services and rates as stipulated by the Income Tax Law and the Implementing Regulations. You can not be a tax-return filer and a withholdee ( in the case above) at the same time.
Question (8): How is tax computed on payments for maritime freight from the Kingdom?
Answer: If the transporting agency is resident in the Kingdom or operates in the Kingdom through a permanent establishment- if non resident-, it is required to file a tax-return within the legally prescribed period of 120 days of the end of its tax year and its tax base is subject to an income-tax rate of 20%. If the transporting agency is not resident in the Kingdom, nor operates in the Kingdom through a permanent establishment, its gross payments from a source in the Kingdom are subject to withholding tax at a rate of 5 % .
3- Allowed Deductions
Question 1: Is research and development expense incurred abroad by a head-office or a non-Saudi partner an allowed expense?
Answer: Under Article 9 (9) of the Implementing Regulations, research and development expense incurred in the Kingdom only is an allowed expense.
Question (2): What is the depreciation method under the Income Tax law? Is it still allowed for excessive use of assets to have an additional 50% of depreciation amount?
Answer: Article (17) of the Income Tax law stipulates the depreciation method to be the accelerated method. The said Article explains in detail how to compute the annual depreciation allowance, including additions to or reductions from the group assets. The Income Tax Law has no provisions for additional depreciation allowance for excessive use of assets ( run assets more than one shift). Unlike the old Income Tax Law, the new method deals with assets as groups and not individual items. In addition, the accelerated method for depreciation takes into account excessive use of assets ( run assets more than one shift).
Question (3): Should the taxpayer who uses a depreciation rate lower than the legally prescribed one use the prescribed rates? Will DZIT accept depreciation rates provided they are not higher than the legally prescribed rates?
Answer: Depreciation rates prescribed in Article 17(b) of Income Tax Law are the highest rates allowed for the concerned groups of assets. A taxpayer may use lower rates for the different groups of assets provided it complies with the group depreciation system as stipulated in Article (17) of Income Tax Law.
Question (4): Is the depreciation system of fixed assets as stipulated in the Income Tax Law applicable to zakat-payers and to Saudi partners in joint companies? If yes, is it applicable only to determine the adjusted zakat profit account or also to determine the net book value of fixed assets ( a charge to zakat base)?
Answer: DZIT's circular number 2574/9, dated 14/5/1426 H has allowed application of depreciation rules as stipulated in Article (17) of the Income Tax Law to Zakatpayers. DZIT's circular number 1724/9, dated 24/3/1427 has clarified that the net book value of fixed assets deductible from zakat base is determined as follows: (the balance of the value of the group at the end of the year as determined according to paragraphs a – e of Article (17) of Income Tax Law plus the 50% of deferred value of assets that are added during the year, minus the 50 % of deferred compensation for assets disposed of during the year.)
Question 5: What is the depreciation method applied for assets under Build, Operate and Transfer (BOT) contracts?
Answer: Article 17 (l) of Income Tax Law stipulates that assets under Build, Operate and Transfer (BOT) or Build, Own, Operate and Transfer (BOOT) contracts may be depreciated over the contract period or over the remaining period of the contract if acquired or renewed during that period. The straight-line method is applied on such contracts.
Question (6): What is the allowed expense for asset repair and imporvement under the Income Tax Law?
Answer: Article (18) of the Income Tax Law allows all expenses incurred for the repair and improvement of the asset groups provided that this expense amount does not exceed 4 percent of the balance of the value of the group ( after deduction of deprecation expense). The amount exceeding the 4-percent limit shall be added to the balance of the value of the group to be depreciated in the up-coming years.
Question (7): Are payments made by resident parties to nonresident parties in return for emoloyees' subscriptions in saving funds incorporated outsdie the Kingdom an allowed expense?
Answer: Under Article (9) of Implementing Regulations the above payments are unallowed expense.
Question (8): Are taxes, sales taxes, value-added taxes and other taxes paid abroad by a Saudi joint company on activities exercised abroad allowed deductions for zakat and tax purposes in the Kingdom?
Answer: Except for income taxes (Article 10 (5) of the Implementing Regulations), taxes paid abroad by a Saudi joint company such as sales tax, value-added tax and others as a result of exercising activities abroad are allowed deductions.
Question (9): Are payments, representing a permenant establishment's direct expenses, to a head-office an allowed expense?
Answer: A permanent establishment's direct expenses are allowed expenses provided that such expenses are of a deductible nature and meet the general conditions of deductible expenses as specified in Article (9)(1) of the the Imlementing Regulations.
Question (10): May a taxpayer deduct a loan interest if it has no taxable income nor any interest income (loan proceeds) during the year?
Answer: Under Article 9 (2) of the Implementing Regulations, a taxpayer who has incurred a loan interest but has no taxable income nor income from loan proceeds during a year may not deduct the loan interest incurred during the year, so losses resulted from the loan interest shall not be carried forward.
Question (11): What are the losses that may be carried forward under the provisions of Income Tax Law?
Answer: Under Article 11(3) of the Implementing Regulations, a taxpayer may carry forward losses as adjusted by DZIT, or as reported in the taxpayer’s return if DZIT has accepted such return.
Question (12): There is a joint company of 51 percent Saudi Share and 49 percent non-Saudi share with cumulative losses. If the Saudi partner sells the full Saudi share to another partner, will the non-Saudi partner lose the right to deduct its share in the accumulated losses?
Answer: Article 11(4) of the the Implementing Regulations stipulates that Losses that meet the provisions of loss carry-forward but incurred by a capital company that has been a subject of change of 50 percent or more in its underlying ownership or control can not be carried over to tax years following the year of change.
Question (13): A Gulf company's subsidiary was operating in the Kingdom before the Income Tax Law has become effective and was subject to Zakat. Under the effective Income Tax Law that subsidiary has become subject to tax. May the subsidiary carry forward its carried losses incurred before the effective date of the Income Tax Law?
Answer: The Gulf company's subsidiary which was not subject to tax before the effective date of the Income Tax Law may not carry the losses incurred during periods prior to the effective date of the Income Tax Law.
Question (14): Are losses incurred by a foreign or joint compay from sales of stocks in the Saudi Capital Market deductible to compute tax on the foreign partner?
Answer: Losses incurred by a foreign or joint compay from sales of stocks in the Saudi Capital Market are not deductible to compute tax on the foreign company or on the foreign share in a joint company as profits realized from such sales are not added to the taxable profits provided the sales are done according to the Capital Market Regime and meet the respective controls as stipulated by Article (10)(a) of the Income Tax Law and Article (7) of the Implementing Regulations.
Question (15) : Some reinsurance companies abroad refuse to bear the witholding tax under Article (68) of the Income Tax Law making the local insurance companies bear it. Is it allowed to list such withholding tax born by the local companies as an allowed deduction in the Kingdom?
Answer: Under Article (13) of the Income Tax Law taxes and related fines or penalties (inclusive of witholding tax) paid in the Kingdom or in other countries are not deductible.
Question (16): If a head-office abroad purchses an insurance policy covering all its subsidiaries worldwide and allocates it in a fair manner among these subsidiaries. Is the allocated share to the local subsidiary an allowed expense?
Answer: The insurance expense is a direct expesne and should be actual in order to allow it as an expense to the subsidiary in the Kingdom whether paid directy by the subsidiary to the insurance company or through the head-office.
Question (17): Are fees paid to members of Boards of Directors of resident companies an allowed expense for tax purposes?
Answer: Fees paid to members of Boards of Directors of resident companies are not an allowed expense except for fees paid to stockholders of stock companies in accordance with Article (10)(1) of the Implementing Regulations.
Question (18): May a branch in the Kingdom reduce its computed income tax with the amount of withholding tax on payments paid to its head-office abroad for technical services provided to the branch by the mentioned head-office.
Answer: The branch in the Kingdom may not reduce its computed income tax with the amount of withholding tax on payments paid to its head-office abroad for technical services provided to the branch by the mentioned head-office, but the technical services expense is deductible for the branch.
Question (19): Is the interest expense of a resident capital company on a loan from a nonresident partner an allowed expense?
Answer: The interest expense of a resident capital company on a loan from a nonresident partner is an allowed expense provided the loan tranaction is at arm's length, and the interest payment is subjct to withholding tax at 5%.
4- Taxation of Partnership
Question (1): Is a GCC non-resident natural person who is a partner in a resident general partnership or in a resident limited partnership subject to tax or zakat?
Answer: The share of a GCC non-resident natural person in a resident general partnership company is subject to tax as he is considered to have a permanent establishment in the Kingdom in a form of an interest in the partnership in accordance with Article (4) (d) of the Income Tax Law. If the GCC non-resident natural person is a limited partner in a resident limited partnership, the provisions of the Income Tax Law concerning capital companies shall apply and he will be subject to zakat in accordance with Article (36)(c) of the Income Tax Law.
Question )2): May the net profit as adjusted of a non-Saudi partner in a partnership be adjusted with a loss as adjusted in another activity (partner with multiple personal activities)?
Answer: The non-Saudi natural person who is a partner in a partnership may include in his return all activities he excercises in his personal capacity in the Kingdom with adjustment between profits and losses in the same return.
Question (3) : There is a resident professional partnership with a partner who is a non resident professional prartnership. Are the partners in the non resident professional prartnership required to file their returns individually?
Answer: Partners in the non resident professional prartnership are not required to file their returns individually. The non resident professional prartnership shall be taxed on its interest, as part of the the resident professional partnership return, being a permenent establishment of a non resident in accordance with Article (4)(d) of Income Tax Law. 5- Taxpayers Registeration
Question (1): Are taxpayers registered with DZIT under the old Income Tax Law required to register again with DZIT in light the new Income Tax Law?
Answer: Taxpayers registered with DZIT are required to up-date their information to obtain financial numbers.
Question 2: What are the documents required to register a new taxpayer with DZIT and obtain a financial number?
Answer: The required documents to register a new taxpayer with DZIT and obtain a financial number are as follows: 1.A letter from the taxpayer requesting registration with DZIT and a financial number. 2. A filled out official registeration form; the form may be obtained from DZIT's Office at Investment Authority, DZIT's offices, or DZIT’s web-site (www.dzit.gov.sa). 3. copies of permits issued by governmental agencies (Municipalities, or Ministries of Information, Commerce, etc.). 4.A copy of commercial registration certificate of main office and subsidiaries if available. 5. Articles of association ( for comapies) and amendments thereof. 6. A copy of Investment permit. 7. A certificate of capital deposit at a bank for Saudi companies. 8. A copy of identity card for Saudis and of passport and resident permit for non-Saudis. 9. Notarized authorization to deal on behalf of the taxpayer with DZIT.
6- Books and Records
Question (1): May the fixed assets standard schedules used by taxpayers continue to be used, or is it necessay to move to new schedules under the new method of depreciation?
Answer: Article (58)(a) stipulates that a taxpayer, other than a non resident with no permanent establishment in the Kingdom, is required to maintain the necessary commercial books and accounting records in Arabic for precise determination of the tax pyable by it. Therefore, the maintained records should show precisely how the depreciation is determined in line with Article (17) of the Income Tax Law. 7- Returns and Taxable Year
Question (1): Are taxpayers required to file audited financial statements along with tax returns?
Answer: Taxpayer are not required to file audited financial statements along with tax returns, but DZIT has the right to request the audited financial statements if it deems necessary.
Question (2): Will it be satisfactory to DZIT to have the holding company file a consolidated return for all its subsidiaries or fully-owned companies, or should each company file its own separate return and pay tax accordingly?
Answer: Each subsidiary of or fully owned company to a holding company must file its separate tax return and pay due tax accordingly; the holding company tax return alone does not suffice.
Question 3: What is meant by a certificate by a chartered accountant of correctness of a tax return if taxable income exceeds one million Saudi Riyals? What are the criterion to which a chartered accountant should adhere in his work?
Answer: A certificate by a chartered accountant of correctness of a tax return means that a chartered accountant should certify the correctness of a tax return if taxable income exceeds one million Saudi Riyals; taxable income means income before deduction of expenses. The criterion to which a chartered accountant should adhere are those of the the Income Tax Law and its Implementing Regulations and thode of the Saudi Society for Chartered Accountants.
Question (4): May a foreign company operating in the Kingdom without a permit but is registered with DZIT and assessed based on its filed accounts continue to file its return on the same base under the effective Income Tax Law?
Answer: A foreign company operating in the Kingdom without a permit but is registered with DZIT and assessed based on its filed accounts may under the effective Income Tax Law continue to file its return on the same base if it operates in the Kingdom through a permanent establishment situated therein.
Question (5): May taxpayers file prelimenary returns and pay zakat and tax accordingly within 120 days of the end of the financial year and then file the final returns along with certificates by chartered accountants within 180 days of the end of the financial year as is the requirment by the Ministry of Commerce?
Answer: Artilce (60) of the Income Tax Law requires taxpayers to file their returns within 120 days of the end of the tax year the return represents; and Artilce (69) of the said law requires taxpayers also to pay due tax in accordance with their returns within 120 days of the end of the tax year the return represents. Minister of Finance has approved extension of these provisions to zakat returns as stipulated in DZIT's circular number 2574/9, dated 14/05/1426 H. Unlike the abolished old Income Tax Law, the effective Income Tax Law has no provisions for prelimenary returns.
Question (6): What is the return form for a permanent establishment of a non-resident that is assessed based on presumptive method?
Answer: A taxpayer who is subject to provisions of Article (34) of the Income Tax Law and Article (16) of the Implementing Regulations may use return form (4).
Question (7): Is the taxpayer required to attach all (14) schedules with return (1) even though some of them might not be applicable to the case, and may the taxpayer renumber the schedules?
Answer: If a schedule required to be attached with the return is not applicable to the taxpyer's case, a note of "not applicable" shlould be written on the return. The applicable schedules should be attached with the return with their original numbers unchanged for the purpose of computer processing.
Question (8): Is a licensed non-profit international school in the Kingdom required to file an annual return? And will it be subject to the non-filing fine if it files its return without certification by a chartered accountant or detailed schedules?
Answer: Although the school is a non-profit organization and tax-exempt, it is required to file an annual return ( form number 1) for information purposes and to provide DZIT with any data or detailed schedules the latter may deem necessary based on provisions of Article (61)(a) of the Income Tax Law. Filing the return without certification by a chartered accountant or detailed schedules does not make the school subject to the non-filing fine - the fine shall apply in case of a taxpayer who is subject to tax which is not the case for the school-. The school is also required to comply with the provisions of Article (61) ( c ) of the Income Tax Law as to supplying DZIT with information on contracts concluded with private sector and of Article (68) of the said law concerning witholding tax on payments from a source in the Kingdom to non residents.
Question (9): When and how the return should be filed in case of a taxpayer whose first fiscal year is long?
Answer: Article (18)(2) of the Implementing Regulations stipulates that a taxpayer, whose first fiscal year is a long year under the company's articles of association, shall file a tax return for the twelve-month period from the beginning of its fiscal year within one hundred and twenty days of the said period. After the closing of the long fiscal year, the taxpayer shall file with DZIT one consolidated tax return for the period and pay the due tax accordingly, after deducting the amount paid for the first period. Therefore, the taxpayer is required to file a return and pay accordingly within 120 days of the end of its frist twelve months, and upon closing its long fiscal period he is also required to file a consolidated return for the long fiscal period and pay accordinly, after deducting the amount previously paid with the first return.
Question (10): May a foreign company's permnent establishment in the Kingdom file a return for a long fiscal period?
Answer: A foreign compay's permanent establishment in the Kingdom may not file a return for a long fiscal period since the permanent establishment has no articles of association as prescribed in Article (18)(1)(b) of the Implementing Regulations.
8- The Department's Right to Information
Question (1): Article (61) (c) of the Income Tax Law stipulates that all persons and government bodies shall provide DZIT with information on contracts concluded with the private sector... Is this requirment limited to construction contracts or does it also include other types of contracts such as, lease contracts, sale and purchase contracts, security services contracts, maintenance services and other services contracts, and contracts concluded with non-resident parties?
Answer: Article (58) (1) of the Implementing Regulations requires all persons, natural or corporate, to provide DZIT with the basic information specified in Article (61) of the Income Tax Law, with regard to construction, service and delivery contracts, and their amendments that they may conclude with any person from the private sector. Article (58) (4) of the said regulations states that this requirement applies to contracts of all types and nature and with resident or non-resident parties, with exception of contracts of a value less than one hundred thousand riyals.
Question 2: Are there any tax obligations on a non-resident tax-exempt ( by a Royal Decree) company that has concluded a cotract with a resident party toward DZIT?
Answer: The non-resident company should register with DZIT and file its annual tax returns within the legally prescreibed periods in accordance with the provisions of Article (60) of the Income Tax Law and Article (57) of its Implementing Regulations. Additionally, it should comply with the provisions of Article (61) of the said law and Article (58) of its Implementing Regulations concerning supplying DZIT with the basic information of contracts, and their amendments, that it may conclude with the private sector within the legally prescribed periods. Furthermore, it should comply with the provisions of Article (68) of the said law and Article (63) of its Implementing Regulations with regard to withholding tax on payments from a source in the Kingdom to non-resident parties who are not tax-exempt and payment of such withheld tax to DZIT within the legally prescreibed periods.
Question (3): Who is the person (party) required to provide DZIT with form (5) concerning contracts concluded with private sector?
Answer: Under Article (61) ( c ) of the Income Tax Law the contracting party is required to fill out and stamp form (5) and submit it to DZIT within 3 months of the conclusion date of the contract.
Question (2): Should DZIT's form ( 5) on contracts be specifically used, or could other forms be used provided they show all data required by form (5)? Shall the contracts include various purchase orders, even recurrent ones? Is it required to report information on purcahse orders with the same supplier if the value of each order is less than (SR100.000) but the aggregate value is (SR 100.000) or above.
Answer: DZIT's form (5) is not mandatory for entities that have many contracts. These entities may submit a listing including all information required by form(5); they may even submit it in a soft copy (magnatic tape). The required contracts include purchase orders, which are considered contracts. If the aggregate value of purchase orders with the same supplier is (Sr100.000) or above, these orders should reported. 9- Related Persons and Persons Under Common Control
Question (1): A non-Saudi company owns 50% of a Saudi joint company and 70% of a subsidiary company. The subsidiary company provides marketing services outside the Kingdom to the Saudi joint company. Is there a relation between the Saudi joint company and the non-Saudi company's subsidiary for tax purposes under Article 64 of the Income Tax Law.
Answer: Under the concept of Article (64) of the Income Tax Law, the non-Saudi company's subsidiary and the Saudi joint company are related as the non-Saudi company owns 50% or more of the two companies.
Question (2): May you explain what is meant by "related persons" or "persons under common control" in regard to natural persons or capital companies? Is an affiliated or sister company that is less than 50% owned considered a related company?
Answer: Article (64) (a &b) of the Income Tax Law defines when a natural person is considered to be related with another natural person or company for tax purposes. As for capital companies, Article (64) ( c ) of the Income Tax Law defines when companies are deemed to under common control. An affiliated or sister company that is less than 50% owned is not deemed to be under common control for tax purposes.
10- Withholding Tax Question (1): When does Article (68) of the Income Tax Law on withholding tax enter into force? Answer: Article (68) of the Income Tax Law on withholding tax enters into force as of the effective date of the Income Tax Law, i.e. 13/06/1425 H ( 30/07/2004). 2. An inexhaustive list of payments that are subject to withholding tax provisons
3. Payments by residents to no residents not subject to withholding tax provisions
Question (4): Are payments to a non-resident with a permanent establishment in the Kingdom subject to withholding tax provisions?
Answer: Payments to a non-resident with a permanent establishment in the Kingdom are not subject to withholding tax; such payments should be reported by the permanent establishment in its return in accordance with Article 68(f) of the Income Tax Law.
Question (5): Are payments from a source in the Kingdom to a company registered in one of the GCC states subject to withholding tax?
Answer: Article (68) of the Income Tax Law and Article (63) of the Implementing Regulations stipulate that any payment by a resident in the Kingdom from a source in the Kingdom to a non-resident company ( whether a GCC company or not) is subject to withholding tax based on rates as specified by the Law and the Implementing Regulations.
Question (6): Is withholding tax applicable to payments to a non resident company that exercises business in the Kingdom through an agent?
Answer: A non-resident company is considered to have a permanent establishment in the Kingdom if it operates in the Kingdom through a dependent agent who is authorized to do any of the following: a. negotiate on the behalf of the non-resident, b. conclude contracts on behalf of the non-resident, c. has a stock of goods on hand in the Kingdom to regularly meet the demands of clients on behalf of the non-resident. In this case, the non-resident company is considered to have a permanent establishment subject to tax provision applicable to resident taxpayers. The same thing applies to a non-resident insurance company that exercises business in the Kingdom through an agent who may not have an authority to negotiate or conclude contracts on behalf of the non-resident insurance company.
However, if the agent through which a foreign company operates is an independent agent with no authority to carry out the above- tasks, the foreign company is subject to withholding tax based on rates and types of payment as stipulated by Article (68) of the Income Tax Law and Article (63) of the Implementing Regulations.
Question (7): A payment was subject to withholding tax and it was disallowed as an expense by DZIT due to absence of supporting documents. In this case, the disallowed payment was subjected to both income tax when disallowed as an expense and to withholding tax. Please explain the case from a legal point of view.
Answer: Article (63)(8) of the Implementing Regulations stipulates that the withholding tax shall be imposed on total amount paid to a non-resident notwithstanding full or partial allowance/disallowance, as a deduction, of such payment, as withholding tax is withheld at source upon payment to the recipient. If the taxpayer who claims the expense could not provide the documents supporting such expense, this expense shall be disallowed under Article (12) of the Income Tax Law and Article (9) (1a) of the Implementing Regulations and the taxpayer accounts shall be adjusted accordingly.
Question (8): Is the income tax payable by the permanent establishment reduced by the tax withheld on payments made by the permanent establishment to its head-office: the permanent establishment's share in the head-office expenses and in interest on the payable account by the head-office?
Answer: As the branch's share in the head-office expenses and in the interest on the payable account is not an allowed deduction, such payments shall be adjusted and added to the permanent establishment's tax base. And since payments to the head-office are subject to withholding tax, the withheld tax on such payments shall be deducted from the tax payable by the permanent establishment according to Article (68)(g).
Question (9): A head-office abroad of a non-resident's permanent establishment in the Kingdom provides technical services to the permanent establishment which in turn provides to its clients in the Kingdom. Are the amounts of such services subject to withholding tax?
Answer: If a head-office abroad of a non-resident's permanent establishment in the Kingdom provides technical services to the permanent establishment which in turn provides to its clients in the Kingdom, the amounts of such services shall be subject to withholding tax.
Question (10): Are the fully-owned subsidiaries abroad of a permanent establishment's head-office considered to be head-offices of the premanent establishment?
Answer: The fully-owned subsidiaries abroad of a permanent establishment's head-office are considered to be head-offices of the premanent establishment. Therefore, any payment by the permanent establishment to any of these subsidiaries abroad in return for services is subject to withholding tax at 15%; payments for royalties or commissions are not deductible expense.
Question (11): A non-resident shareholder in a resident capital company has, as an independent person, a contract with a resident company to provide technical and engineering services abroad. In this case, is this contract subject to withholding tax only or should it be reported in the resident capital company’s return? If the service contract includes delivery of materials, what is the tax treatment of the value of delivered materials?
Answer: The contract of the non-resident shareholder in a resident capital company is subject to withholding tax because the non-resident shareholder has executed the contract and provided the services therein in his independent capacity as a legal entity separate from the resident capital company. If the service contract abroad includes delivery of materials, the value of delivered materials is exempt ( reduced from the value of the contract) under Article 5(7) of the Implementing Regulations of the Income Tax Law.
Question (12): Are payments by resident companies to non-resident corporate partners or associated companies under a concluded technical agreement that provides for staff, technical and other services subject to withholding tax?
Answer: Payments by resident companies to non-resident associated entities under a concluded technical agreement are allowed deductions provided they meet conditions specified in Article 9(1) of the Implementing Regulations of the Income Tax Law; such payments are subject to withholding tax at a rate of 15% under Article 63 (1) of the Implementing Regulations of the Income Tax Law.
Question (13): Are cash payments for investment by a branch in the Kingdom to its head-office abroad subject to withholding tax?
Answer: If cash payments for investments by a branch in the Kingdom to its head-office abroad are to finance the branch's investments abroad and the income from such investments is reported in the accounts of the branch in the Kingdom and the investment principal will be finally returned to the Kingdom, there is no withholding tax on such payments. If these payments are transfers to the head-office, they are considered profits transferred to associated parties and should be subject to withholding tax at a rate of 5%.
Question (14): A resident company has opened a branch abroad. The branch abroad rented a premise to carry out activities therein. Is the amount transferred by the resident company to its branch abroad to pay for the rent subject to withholding tax as it a payment from a head-office to a branch?
Answer: Such payment paid by the head-office to its branch abroad is not a payment for services but a payment to a nonresident via the branch for the rental of a real estate used for the branch's purposes. Article (5)(a2) of Income Tax Law does not consider such payment arising from a source in the Kingdom as it arose from immovable property situated outside the Kingdom, therefore such payment is not subject to withholding tax.
Question (15): A Saudi resident capital company (the parent company) has a branch in England. The parent company has a contract with another resident company for provision of services. The branch abroad has provided the services on behalf of the parent company and the branch has invoiced its parent company not the recipient company. Is the payment by the parent company to its branch abroad for the services subject to withholding tax, and if yes, could the parent company deduct the withholding tax in its return?
Answer: When a non-resident provides services to a resident, payments by the latter to the former for such services are subject to withholding tax notwithstanding method of payment: directly to the branch or via the branch's parent company. Since the branch's income will be included in the parent company's tax base, the latter is entitled to deduct the withholding tax from its payable income tax.
Question (16) : If a non-Saudi natural person and owner of a sole proprietorship under the Foreign Capital Investment Law withdraws part of the year's expected profits for living expenses to him and his family, is that personal withdrawal subject to withholding tax, being dividends?
Answer: Money withdrawn by the owner is distribution of profits, whether from realized or expected profits. Since the sole proprietorship profits are subject to income tax in the Kingdom before distribution of profits, withdrawn amounts shall be subject to income tax in the taxpayer's return of his sole proprietorship and not to withholding tax.
Question (17): Is withholding tax payable on post tax net profits distributed to a non-resident partner ( net of tax payable on the non-resident partner’s share in profits) or is it payable on pre tax gross amount of distribution?
Answer: Withholding tax is payable on post tax net profits distributed to the non-resident partner. Example: The share of the non-resident partner in gross profit ( net of reserves) is SR 1.000.000. Income tax payable on his share of profit at a rate of 20% is SR. 200.000. Withholding tax is applied to the post tax net profit, which is SR 800.000.
Question (18): Are amounts paid to non-resident parties for services provided to resident parties at cost basis with no profit margin subject to withholding tax?
Answer: Amounts paid to non-resident parties for services provided to resident parties at cost basis with no profit margin are subject to withholding tax because such payments are related to services and activities performed in the Kingdom.
Question (19): Are settlements (settlement of debit and credit accounts) between resident and non-resident parties resulted from provision of services by non-resident parties to resident parties subject to withholding tax though there is no actual payment? If so, what is the date to be used for the purpose of withholding tax payment?
Answer: Withholding tax is payable upon payment or deemed payment (clearance or settlement of accounts). The date of settlement is considered to be the date of payment unless the settlement is between related parties in which case it is the date of book entry.
Question (20): Is the reinsurance premiums' gross amount or net amount ( net of commissions to insurance companies) subject to withholding tax?
Answer: Reinsurance premiums' gross amount (before any deductions) is subject to withholding tax as per Article 63 (8) of the Implementing Regulations. The commission amount paid to an insurance company is an income to it. The reinsurance company from which tax is withheld is a separate taxpayer from the insurance company.
Question (21): A Saving Insurance Company has entered into life insurance policies with non-Saudi residents (policy holders). If some of these life insurance policy holders leave the country for good and want to transfer their policies to their home countries and per their requests their premiums are transferred to other insurance companies in their home countries, shall these premiums be subject to withholding tax upon transfer abroad?
Answer: If a life insurance company transfers life insurance policies to policy holders home countries and that results in transfer of the policy holders premiums to other insurance companies in policy holders home countries, such transferred premiums are considered premiums paid to non-residents and are, according to Article (63) (1) of the Implementing Regulations, subject to withholding tax at a rate of 5%.
Question (22): What are the documents that DZIT may provide to non-resident reinsurance companies proving payment of taxes on income from reinsurance to the Kingdom in order for these companies to settle taxes with their home countries?
Answer: Article 68 (b-2) of the Income Tax Law stipulates that a person withholding tax shall provide the beneficiary ( the non-resident party) with a certificate stating the value of the amount paid to him and the value of the tax withheld. Therefore, a company that withholds and pays taxes to DZIT on reinsurance premiums should provide the beneficiary with the stated certificate. If endorsement by DZIT of the said certificate is needed, a request to that effect may be presented to DZIT.
Question (23): If a head-office abroad purchases an insurance policy covering all its subsidiaries worldwide and allocates it in a fair manner among these subsidiaries. Will the share of the Saudi subsidiary in the acquired consolidated insurance policy paid to the head office be subject to withholding tax at 5 percent ( being insurance premium) or 15 percent ( being payment for services to head-office or related company)?
Answer: The Saudi subsidiary's share in the consolidated insurance policy paid to the head-office abroad is subject to withholding tax at a rate of 5% ( being insurance premium) provided it has no profit element.
Question (24): A resident party pays interest payment on a loan from a group of resident and non-resident banks, and the loan-manager bank, resident or non-resident, collects interest payments from the resident party to distribute among all loan-participating banks. Are all interest payments to the managing bank and due to all participating banks or only those amounts due to non-resident banks subject to withholding tax?
Answer: Interest payments to a resident loan-manager bank are not subject to withholding tax and the manager bank, in this case, has to report all these payments as income and they will be subject to tax or zakat as the case may be. When the resident loan-manager bank makes interest payments to non-resident banks, it has to withhold the statutory tax on these payments. If the loan-manager bank is a non-resident bank, interest payments to the manager bank and due to all loan-participating banks are subject to withholding tax.
Question (25): Are payments made by branches abroad of Saudi companies and banks to third parties abroad subject to withholding tax?
Answer: If payments made by branches abroad of Saudi companies and banks to third parties abroad are for loan charges, technical or consulting services, or royalties, they are subject to withholding tax, otherwise not if totally performed abroad.
Question (26): Is freight and Insurance cost for goods delivered to the Kingdom (CIF or FOB) subject to withholding tax?
Answer: Uder Article 5 (7) and Article 63 (4) of the Implementing Regulations, cost of freight and insurance of goods delivered to the Kingdom (CIF or FOB) shall not be subject to withholding tax as it is considered part of the cost of goods.
Question (27): Are payments to foreign shipping companies for freight of goods from the Kingdom to assembly points outside the Kingdom subject to withholding tax? Are payments to foreign shipping companies for freight of goods from the assembly points outside the Kingdom to the rest of the world subject to withholding tax?
Answer: Payments to nonresident companies for freight of goods from the Kingdom to outsdie are subject to withholding tax under Article 5(a)(8) of the Income Tax Law.
Payments to nonresident companies for freight of goods from assembly points outside the Kingdom to final destinations are subject to withholding tax if the freight company is contracted to deliver the package to final destinations; in this case the transaction ( shipping from the Kingdom to final destinations) is one transaction though it is done in parts and by different shippers. But if the freight company obligation ends at the assembly point outsdie the Kingdom, shipping the freight from such assembly points to final destinations is a separate transaction, and income from such transaction is not considered from an activity in the Kingdom and therefore is not subject to withholding tax.
Question (28): Ship agents pay to the Kingdom's Ministry of Finance an amount of 57 hallals a ton of the ship registered tonnage, a tonnage fee. Will this fee continue in addition to withholding tax of 5%, or will it be cancelled?
Answer: Withholding tax is an income tax payable on freight payments notwithstanding any other fees imposed on freights under other Laws.
Question (29): Are commercial ships and oil and gas tankers flying the Saudi or other GCC member States flag exempt from withholding tax on sea freight payments?
Answer: The criteria is the person who exercises transportation activity. If the ship is owned by or works for a Saudi resident company, the Saudi resident company must report realized income in its annual return; and it must withhold and pay tax on ship lease payments if the leaser is not resident in the Kingdom. If the ship is owned by or works for a non-resident company, payments for freights from the Kingdom’s ports are subject to withholding tax.
Question (30): Is withholding tax on ships coming into the Kingdom’s ports applicable from the arrival or departure date? How is withholding tax applied if the freight the ship transports is located at two Saudi ports?
Answer: The criteria is the date of payment as the Law and Regulations stipulate that the withholding tax is payable upon payment, and it should be paid over to DZIT within the first ten days of the month following the month of payment.
Question (31): Is withholding tax applicable to payments to airlines agents and representatives who are resident in the Kingdom and have commercial registers and file with DZIT?
Answer: Payments to resident airlines agents and representatives are not subject to withholding tax; but transfers of such amounts by resident agents and representatives to non-resident transportation companies shall be subject to withholding tax at a rate of 5%.
Question (32): An advertisement company outside the Kingdom provided services to a resident Saudi company in a form of advertisement hours on TV satellite stations to promote the Saudi company's products outside the Kingdom. Are payments by the Saudi company to the outside advertisement company for this promotion campaign subject to withholding tax?
Answer: If the advertisement company abroad provides only advertisement services to the local company to promote the latter's products on satellite channels without any involvement in the design of the promotion film or in related studies, the payments received by such advertisement company for such work are not considered to arise from a source in the Kingdom and therefore are not subject to withholding tax. If the promotion services are accompanied by any work in the Kingdom by such advertisement company, the whole work carried by such company shall be subject to withholding tax at a rate of 5%.
Question (33): A resident advertisement company advertises for foreign companies and products in Saudi media of press, radio and television. This company has an agent outside the Kingdom to do marketing among foreign producers and companies for a percentage of income from these ads. Are these payments by the resident advertisement company to its agent outside the Kingdom subject to withholding tax?
Answer: If the outside agent’s work is solely marketing of advertisements for foreign products and companies and has no role in the design of the advertisement plan or in related studies, payments to such agent for such work is not subject to withholding tax under Article 5(a)(8) of the Income Tax Law as these payments are considered to result from services fully performed outside the Kingdom. If, in addition to marketing, the agent plays a role in the above-mentioned work (the design of the advertisement plan or related studies), the agent’s work is then considered technical services and it is subject to withholding tax at 5% notwithstanding the place of performance of such services as stipulated by Article 63 (1,3) of the Implementing Regulations of the Income Tax Law.
Question(34): What are the justifications for imposing withholding tax on technical and consultant services performed outside the Kingdom?
Answer: Due to the nature of technical and consulting services as they involve provision of scientific services and transfer of know-how, Article 5(3) of the Implementing Regulations of the Income Tax Law considers income derived from technical or consulting services to be derived from an activity in the Kingdom and therefore from a source in the Kingdom. Therefore, such payment is subject to withholding tax notwithstanding the place of performance of the service.
Question (35): Are payments to visiting individuals, doctors and others, who perform temporary work in the Kingdom subject to withholding tax?
Answer: In absence of employment relationship, payments received by visiting individuals (doctors or others) who perform temporary work in the Kingdom are subject to income tax at 20% or withholding tax at 15% based on residency conditions. The following criteria determine the presence of an employment relationship:
- The employer is the sponsor of the employee under the Residency Law. - The employer has the legal right to monitor the performance of the employee. - The employer monitors the working hours and timetable of the employee. - Employment is of a continuous nature. - The employer determines place of work of employee. - The employer provides tools and other facilities for work.
Question (36): Some resident non Saudi academicians who work in public and private universities make in addition to their regular wages and salaries extra income from copyrights, research papers, technical consulting, and scientific contributions to research centers or professional associations in the Kingdom. Is this extra income subject to withholding tax, noting that such academicians conduct no business (formally) in the Kingdom?
Answer: The above resident non-Saudi academicians are subject to tax on the extra income under Article 2(b) of the Income Tax Law. Therefore, they are required to register with DZIT, file returns on all their income from the Kingdom other than wages and salaries resulting form the employment relationship with their employers.
Question (37): Is a purchase by a resident company of computer software or training programs from abroad subject to withholding tax? Are later up-dates and up-grades taking place outside the Kingdom and sent to the Kingdom by freight or over internet subject to withholding tax?
Answer: Purchases by a resident company of computer software or training programs from abroad to sell in the local market are considered inventories and are not subject to withholding tax. If the computer software or training programs purchased from abroad are intended to be used by the purchaser per a license by the seller and the purchaser has no right to sell or dispose of these items and they are always related to up-dates and up-grades by the producing company abroad, this transaction falls under intangible rights (royalties) and is subject to a 15% withholding tax. Software and program up-grades fall under technical and consulting services subject to a 5 % withholding tax notwithstanding the place of performance of these services.
Question (38): Are payments to noresident parties for purchase or lease of TV films, programs and series subject to withholding tax?
Answer: Payments to noresident parties for purchase of TV films, programs and series including transferring all rights to purchased items are not subject to withholding tax. But if the purchase or lease is for the purpose of local broadcasting per a license by a buyer without transferring the right to dispose of such items to the purchaser, the payment is considered for a royalty and it is subject to withhoding tax at a rate of 15%.
Question (39): Are payments to noresident parties for obtaining news reports ( political, economic, sports .etc.), for correspondants' services, or subscription in on-line stock screens subject to withholding tax?
Answer: Payments to noresident parties for obtaining news reports, or for correspondants' services are considered payments for other services, and payments for subscription in on-line stock screens are considered payments for royalties, and in the three cases such payments are subject to withholding tax at a rate of 15%.
Question (40): Are tax payments by a resident company to foreign countries on income arose in these countries subject to withholding tax?
Answer: Tax payments by a resident company to foreign countries on income arose in these countries is not subject to withholding tax and such payments are not an allowed deduction.
Question (41): What does "other payments" of Article 63(1) of the Implementing Regulations of the Income Tax Law mean?
Answer: Article 63(7) of the Implementing Regulations defines "other payments" as payments from a source in the Kingdom to a non-resident for services other than services mentioned in paragraph(1) of the same Article.
Question(42): Are there payments to non-residents, with no permanent establishment in the Kingdom, for services performed by such non-residents not subject to withholding tax?
Answer: Payments for services fully performed outside the Kingdom other than technical and consulting services are not subject to withholding tax.
Question(43): Is it allowed for a non-resident recipient of payments that are subject to withholding tax in the Kingdom to file a tax-retun with DZIT and pay tax accordingly on a presumtive base according to Article (16) of the Implementing Regulations?
Answer: The Income Tax Law does not allow a non-resident recipient of payments that are subject to withholding tax in the Kingdom to file a tax-retun with DZIT and pay tax accordingly as withodling tax is on the gross amount of a payment.
Question (44): How is the withholding tax computed on work associated with delivery contracts if the value of such work is not specified in the contract?
Answer: Article 16 (6) of Implementing Regulations applies to all delivery contracts that are assessed based on estimation. In the presence of work associated with delivery contracts to the Kingdom whose value is not specified in detail in the contract, revenues of each associated work in the kingdom shall be estimated at (10%) of the total value of the contract. If the contractor does not fall within the scope of the definition of a permanent establishment in the Kingdom, article (68) of Income Tax Law stipulates that a withholding tax shall be applied according to the set rates.
Question (45): Is a contract between a resident company and a non-resident company (with no permanent establishment in the Kingdom) for repair of equipment and machines subject to withholing tax provisions? Answer: Repair work done by a non resident company ( with no permanent establishment in the Kingdom) is subject to withholding tax at a rate of 5%, being technical and consulting services. This provision is applicable notwithstanding the place where the service is performed according to article 63 (1,3) of the Implementing Regulations.
Question (46): Are services provided to a Saudi joint company by its foreign partner who controls less than 50% of the said company subject to withholding tax at a rate of 15% or 5%?
Answer: A foreign partner who controls less than 50% of a Saudi joint company is not a related person according to article (64) of the Income Tax Law. Therefore, services provided by such partner to the Saudi joint company are not subject to 15% withholding tax rate but to 5% withholding tax rate. Control occurs when the ownership share is not less than 50% according to Article 64 (c ) of the Income Tax Law. 11- Advance Payments of Tax Question (1): Is the payment of tax in advance installments applicable to the first year of implementation of the Income Tax Law? If yes, is the tax computed based on last year tax as per return or is the last year's tax recomputed based on the new Income Tax Law provisions, and so are the advance installments?
Answer: Article 64(1-b) of the Implementing Regulations of the Income Tax Law states that an advance payment of tax is 25 percent of the taxpayer's tax liability for the previous year as per the return. The same paragraph states that the tax liability for the previous year means tax liability under the provisions of the Income Tax Law and its Implementing Regulations. This means that the obligation to make advance payments of tax shall start as of the second year of implementation of the Income Tax Law. For example: If a taxpayer's financial year ends 31 December of every year, the taxpayer shall be obligated to make an advance payment of tax for the first time starting the 6th month of 2006.
Question (2) : What is the taxable year upon which advance payments of tax are computed? Is it the Gregorian year, Hejrra year or the taxpayer's financial year?
Answer: The taxable year upon which advance payments of tax are computed is the taxpayer's financial year which should conform to the taxable year as specified by the Income Tax Law unless DZIT authorises a different year in accordance with Article (22)(a & b) of the Income Tax Law, and Article (18)(1) of the Implementing Regulations. 12- Refund of Overpayment
Question (1): What are the documents a taxpayer should submit in order to get refunds of overpayments?
Answer: To get refunds of overpayment, a taxpayer should submit a request for refund and attach proving documents of overpayment provided the taxpayer has filed all returns required. It should be noted that a refund request will not be considered in case of objection or appeal unless a final resolution has been issued proving the taxpayer's right in the overpayment.
Question (2): Shall the Department compute and pay compensation of 1 percent of the overpayment for every 30 days in case of appeals if the resolution of the Appeal Committee is in favor of the taxpayer.
Answer: If the Appeal Committee's resolution is in favor of the taxpayer, the 1 percent compensation for every 30 days of delay shall be computed as of the date of the taxpayer's refund request and subject to other conditions as stated in Article (66) of the Implementing Regulations.
Question (3): In case of an overpayment of withholding tax, can it be refunded, or be used to offset future withholding tax on the same recipient or other recipients? If such an overpayment of withholding tax resulted from an error (material error), can it be refunded?
Answer: Article (68) (e) of the Income Tax Law stipulates that if an amount is paid to a non-resident and tax is withheld for it in accordance with the provisions of the said Article, that amount shall be final. Withholders are required to strictly observe the provisions of the said Article, taking into cosideration that withholding tax is on payments which are definite in amount, nature and applicable rate as specified in the Income Tax Law and the Implementing Regulations. Such overpayments can not be used to offset tax liabilities on other non-resident parties as different taxpayers have different liabilities. If an overpayment resulted from a material error (mathematical error), the recipient may claim a refund by submitting a refund request with documents proving the error for DZIT consideration.
Question (4): A foreign company's subsidiary in the Kingdom has overpayment with DZIT. May the subsidiary use such overpayments to offset withholding tax on its payments to its head-office abroad or to offset advance tax payments due on it?
Answer: If the subsidiary has overpayment with DZIT after all its issues with DZIT are settled, it may use such overpayment to offset any withholding tax due on its payments to its head-office or to offset any advance tax payments due on it.
Question (5): A foreign company ( a head-office abroad) had a subsidiary in the Kingdom. The head-office decided to change the subsidiary to a limited liability company with the head-office owning 90% of the shares and an affiliated non-resident owning the remaining 10%. Is the new company entitled to the loss carry-forward provisions in regard to the old subsidiary's loss confirmed by DZIT? Is it also entitled to the overpayment of tax by the old subsidiary to offset its tax liabilities that may arise in future?
Answer: The limited liability company is not entitled to the loss carry-forward provisions in regard to the old subsidiary's loss confirmed by DZIT. Neither is it entitled to the overpayment of tax by the old subsidiary to offset its tax liabilities that may arise in future. The two entities have separate legal characters and separate liabilities. However, the old subsidiary could, after finally settling its issues with DZIT, request the transfer of any overpayment it may have with DZIT to the new liability company according to the provisions of DZIT's circular number 3853, dated 3/09/1424 H. 13- Fines Question (1): What are the penalties payable by the taxpayer if it files a return of income above one million SR without certification by a chartered accountant?
Answer: Article (76) (a) of the Income Tax Law stipulates that a taxpayer not complying with the provisions of Article (60) (a, b, d, f) of the said law shall be subject to a fine. Article (60) (a) of the said law stipulates that every taxpayer required to file a return shall file it in the prescribed form. Article (67) (1) (b) of the Implementing Regulatins stipulates that a fine for failure to file the return shall apply in case of failure to file the return in accordance with the approved form, even if filed within the due date. Therefore, absence of certification by a chartered accountant of a return of income above one million SR makes the taxpayer subject to the fine stipulated by Article (76) (a) of the Income Tax Law due to failure by the taxpayer to comply with the above provisions, i.e. failure to comply with the approved form.
Question (1): What are the return fields considered to be mandatory to fill out for tax purposes and failure to fill out any of them shall invoke the non-filing fine?
Answer: All return fields of financial amounts used to determine the taxpayer's tax base along with their relevant detailed schedules are mandatory. Failure to report any of them is considered non-compliance with Article (60) (a) of the Income Tax Law, Article (57) (1 & 2) and Article (67) (1b) of the Implementing Regulations, and shall invoke the non-filing fine.
Question (3) : Examples of application of fines on a capital company:
1.A capital company of gross income of one million Saudi Riyals (SR 1.000.000) and its payable tax is SR. 40.000. It has filed its return within the legally prescribed period but paid only SR. 35.000. It paid the remaining balance of SR. 5.000 after two months of the legally prescribed period. The penalty applicable in this case is penalty for failure to file as specified in Article 67(1-c) of the Implementing Regulations of the Income Tax Law due to non-payment of tax per the return and is computed at 1 percent of gross income (1* 1.000.000 = SR.10.000) because it is higher than 10 percent of unpaid tax, in addition to 1 percent of unpaid tax for every 30 days of delay ( 5000*2% = SR. 100).
2.In the same example, two years after filing the return and 22 months after payment of the remaining tax balance of SR. 5.000, the Department did an audit of the company’s return and made a final reassessment and computed tax at SR. 70.000. In this case, the penalty applicable is for failure to file a return (SR.10.000) as it is higher than 25 percent of SR. 30.000 ( underpayment of tax), in addition to a penalty of delay of payment at 24 percent, representing 1 percent for every 30 days of delay * SR. 30.000= SR.7200.
3. Assuming the company filed an objection to the Department’s assessment within the legally prescribed period and the resolution by the Objection Committee was issued a year later ( i.e. 3 years after filing the return and 34 months after full payment of tax per the return) and tax per the resolution is SR. 60.000 instead of SR. 70.000. Based on the resolution, the penalty is SR. 10.000 ( for failure to file a return), in addition to 20.000 * 36% = SR. 7200.
Question (4): What are the penalties applicable to a capital company that has no income but incurred expenses and has failed to make timely filing of its return.
Answer: No penalties applicable to a capital company that has no income but incurred expenses and has failed to make timely filing of its return because it has realized no income.
Question (5): If a monthly withholding tax return is filed and tax paid accordingly after the prescribed date but during the 30 days of delay, shall the delay fine and the non-filing fine be applicable?
Answer: Under Article (68) (2) of the Implementing Regulations the delay fine shall not apply if the delay period is less than thirty days from the due date; A non-filing fine shall not also apply in case of a filing delay of a withholding tax form.
Question (6): A taxpayer whose financial year ends on 31/12/2005 has filed its return and paid tax accordingly on 29/05/2006. Shall tbe taxpayer be subject to the non-filing fine but not to the 1 percent delay fine?
Answer: Under Article (67) (1) of the Implementing Regulations the non-filing fine shall apply in case of failure to file the return within 120 days from the end of the fiscal year. The dealy fine of 1 % for every thirty days of delay shall not apply if the delay period is less than 30 days from the due date.
Question (7): If a taxpayer files a tax-retun within the legally-prescribed period, later, the financial statements show differences ( in minus or plus) from the filed tax-return. May the taxpayer file a revised return? Will the revised return be subject to the non-filing fine?
Answer: The legally-prescribed period to file the tax-return -120 days of the end of the taxpayer's financial period - is sufficient to make any reconciliation by the chartered accountant based on its audit. After that, there should be no reason for differences between the tax-return and the financial statements. Differences that appear later in favour of DZIT shall be subject to the legally-prescribed fines. Differences in favour of the taxpayer shall entitle the taxpayer to a refund of overpayment upon submitting the proving documents in accordance with provisions of Article (72) of the Income Tax law and Article (66) of the Implementing Regulations. The filed tax-return that fails to comply with the provisions of Article (67) (1) of the Implementing Regulations shall be subject to the non-filing fine.
Question (8): Are tax differences and fines resulting from reassessments by DZIT after the Income Tax Law has become effective ( 30/07/2004) but for taxable periods before the effective date of the said law subject to the delay fine of 1% for every 30 days of delay under the Income Tax Law?
Answer: Tax differences and fines resulting from reassessments by DZIT after the Income Tax Law has become effective but for taxable periods before the effective date of the said law are not subject to the delay fine of 1% for every 30 days of delay as the provisions of the said Income Tax Law are not applicable to these periods.
Question (9): If the non-registeration fine is applicable to a taxable sole proprietorship, will the the taxpayer's taxable year, whether Hejra or Gregorian, make a difference?
Answer: The non-registeration fine stipulated by Article (57) of the Income Tax Law and Article (55) of the Implementing Regulations is applicable if the taxpayer fails to register with DZIT before the end of its financial year, whether Gregorian or Hejra. And it is applicable on all taxpayers, individuals and companies. It should be noted that the general practice for individuals is to have a normal 12-month year, unless he requests a shorter one.
Question (9): Is the delay fine on tax differences- resulting from final reassessment by DZIT-as stipulated by Article (77) of the Income Tax Law which is 1% (of underpayment) for every 30 days of delay computed from the end of the filing period or from the date of final reassessment by DZIT? If the delay fine is computed from the end of the filing period, is there a time limit for DZIT to make the final reassessment since the latter DZIT makes the reassessment the higher the delay fine on the taxpayer will be?
Answer: The delay fine is computed on tax underpayment, which is the difference between the amount the taxpayer has paid during the legally prescribed period and the amount payable by the taxpayer under the provisions of the Income Tax Law. The amount payable by the taxpayer includes adjustments made by DZIT which have become final according to Article (71) (2) of the Implementing Regulations and also includes objected/appealed cases. The fine is computed from the legally prescribed date for filing until the date of payment in accordance with Article (67) (3) of the Implementing Regulations.Under Article (65) (a) of the Income Tax Law, DZIT may, with a reasoned notification, make or amend a tax assessment within five years from the end of the legally prescribed period for filing for any taxable year, or at any time, upon a written appoval of the taxpayer.
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Brief Information on DZIT
