A Saudi-resident company pays two separate amounts to unrelated non-resident companies during the same month: a royalty for the right to use a patented industrial process, and a fee for international telecommunications services connecting its Saudi offices with an overseas call center. Under Article 68 of the Saudi Income Tax Law, what withholding tax rates generally apply to these two payments respectively?
- 5% on the royalty and 15% on the telecommunications payment
- 15% on the royalty and 5% on the telecommunications payment
- 20% on both payments, since both are payments to non-residents for the use of the payer's technology or infrastructure
- 5% on both payments, because Article 68 applies one uniform reduced rate to every payment connected with technology or communications services
Why B? And why not the others?
Correct answer: B. 15% on the royalty and 5% on the telecommunications payment
Article 68's withholding tax schedule places royalties, including payments for the right to use a patented industrial process, in the 15% category, while international telecommunications services sit in the lower 5% category alongside rent and air or sea freight, so the royalty is withheld at 15% and the telecommunications fee at 5%. The option reversing the two rates is wrong because it assigns the lower rate to the royalty and the higher rate to the telecommunications payment, the opposite of the schedule. The option taxing both at 20% is wrong because 20% is the rate the schedule reserves for a different category, management fees, and neither a royalty nor an international telecommunications payment falls into that bucket. The option applying a single flat 5% to both is wrong because Article 68 is explicitly tiered by payment type rather than collapsing every technology- or communications-related payment into one uniform reduced rate.
Source: Saudi Income Tax Law (Royal Decree No. M/1 of 1425H), Article 68 (withholding tax rate schedule)