On 4 February 2024, Saudi Arabia’s Zakat, Tax and Customs Authority (ZATCA) announced guidelines regarding the taxation of 29 types of software payments. These payments result from transactions between non-residents and residents of Saudi Arabia under the domestic Income Tax Law. Traditionally, payments to nonresidents for software usage licenses have been categorized as royalties and subjected to withholding tax (WHT).
Recently, ZATCA has enforced WHT assessments on distributors by asserting that payments to nonresidents for software distribution rights should be considered as royalties.
These guidelines aim to resolve existing tax disputes and provide guidance for future tax compliance.
The ZATCA guideline classified the software transactions into five income categories:
- Capital gains
- Commercial profits
- Royalties
- Technical services
- Other income/services
The main provisions for the taxation of these software payments are as follows:
Capital gains
As outlined in the Income Tax Law, non-residents in Saudi Arabia are subject to an Income tax at a 20% rate if their capital gains are deemed to originate in Saudi Arabia.
Royalties
As outlined in the Income Tax Law, royalties sourced in Saudi Arabia will be subject to withholding tax at a 15% rate.
Technical services
As per the Income Tax Law, technical services sourced in Saudi Arabia will be subject to withholding tax at a 5% rate.
Other income
As outlined in the Income Tax Law, income generated from other sources in Saudi Arabia will be subject to withholding tax at a 15% rate.
