A Saudi-resident company pays (i) a dividend to its non-resident foreign shareholder and (ii) a management fee to an unrelated non-resident company for ship management services. Under Article 68 of the Saudi Income Tax Law, what withholding tax rates generally apply to these two payments respectively?
- 5% on the dividend and 20% on the management fee
- 20% on the dividend and 5% on the management fee
- 15% on both the dividend and the management fee, since both fall under a single 'other payments' category
- 5% on both the dividend and the management fee, since Article 68 applies one flat rate to all payments made to non-residents
Why A? And why not the others?
Correct answer: A. 5% on the dividend and 20% on the management fee
Article 68 sets a differentiated withholding tax schedule for payments to non-residents: dividends are withheld at 5%, while management fees, such as fees paid for managing a ship, are withheld at the higher rate of 20%, reflecting the schedule's treatment of management services as a distinct, higher-rated category. The option reversing the two rates is wrong because it assigns the higher management-fee rate to the dividend and the lower dividend rate to the management fee, the opposite of the actual schedule. The option applying 15% to both is wrong because 15% is the rate the schedule reserves for a different category, royalties, and Article 68 does not collapse dividends and management fees into one undifferentiated 'other payments' bucket taxed at that rate. The option applying a single flat 5% to both is wrong because Article 68 is explicitly tiered across several rates depending on payment type, not a uniform flat rate for every category of payment to a non-resident.
Source: Saudi Income Tax Law (Royal Decree No. M/1 of 1425H), Article 68 (withholding tax)