The Zakat, Tax and Customs Authority (ZATCA) has published a December 2025 tax bulletin clarifying how withholding tax (WHT) and income tax apply to technical and consultancy services provided by non-residents to Saudi residents, and how those rules interact with permanent establishment (PE) tests and Double Taxation Avoidance Agreements (DTAAs). The bulletin does not change the law; it settles uncertainty over service classification, royalty recharacterisation, bundled contracts and treaty application.
Key takeaways
- ZATCA's December 2025 bulletin is interpretive guidance, not a legislative change, but it directs how technical and consultancy fees paid to non-residents should be taxed.
- Technical services attract 5% withholding tax; payments recharacterised as royalties attract 15%, so the classification line is worth real money.
- Withholding is triggered by the payer being a Saudi resident or KSA permanent establishment — the place where the service is physically performed is irrelevant.
- Where a service creates or runs through a permanent establishment, income tax on the PE's profits replaces withholding tax.
- A DTAA can reduce KSA tax to nil where there is no PE, and where a treaty rate is higher than the domestic rate the lower domestic 5% still applies.
Substance over the contract label
The bulletin's starting point is that technical services are defined broadly — covering technical, technological, scientific, engineering, consulting and research work — and that classification turns on what is actually done, not on what the contract calls it. This "substance over form" approach means a group cannot avoid or attract withholding simply by relabelling an engagement. The base rate for a qualifying technical service is 5% on the amount paid to the non-resident.
Services versus royalties: the 5% / 15% line
A technical service is one where the provider uses its own expertise to perform work for the customer, taxed at 5%; a royalty is different in kind — the transfer of proprietary, non-public know-how that the payer can then use independently for its own account, taxed at 15%. That split is the most valuable distinction in the bulletin, and the tax follows the substance:
| Payment type | What it means | WHT rate |
|---|---|---|
| Technical service | Provider applies its expertise to perform the work | 5% |
| Royalty | Transfer of proprietary, non-public know-how for the payer's own use | 15% |
| Pure supply of goods | Goods delivered to the Kingdom, no accompanying service | 0% |
| Accompanying services | Installation, training or maintenance with a supply contract | 5% if they meet the technical definition |
That royalty line is where audit exposure concentrates, because recharacterising a service as a transfer of know-how triples the rate. Groups paying for anything that looks like transferred technology should be able to show why it is a service, not a royalty — a point that ties directly into transfer pricing analysis of intangibles.
Bundled contracts: unpicking goods from services
Many cross-border contracts bundle equipment with installation, training or maintenance. The bulletin treats the pure supply of goods to the Kingdom as outside withholding tax, but treats the accompanying services as arising from an activity carried out within the Kingdom — and therefore inside the 5% net where they meet the technical-service definition. The practical consequence is that a single invoice may need to be split, so that the goods and the services are each taxed correctly.
Does where the service is performed matter?
Where the service is performed does not matter for Saudi withholding tax. Taxability is triggered by the identity of the payer — a Saudi resident or a KSA permanent establishment — not by the physical location of performance. A non-resident consultant working entirely from abroad for a Saudi client is still within scope of the 5% charge. The common misconception that offshore performance escapes Saudi withholding is exactly what the bulletin corrects.
When income tax replaces withholding tax
Income tax replaces withholding tax once a non-resident crosses into having a permanent establishment (PE) in Saudi Arabia. Withholding is the mechanism for taxing non-residents who have no taxable presence, so once that presence tips into a PE — for example, physical presence beyond 183 days under some treaties, or services rendered through an existing PE — the income is no longer withheld and the profits attributable to the PE are taxed at the applicable income tax rate instead. Knowing which side of that line a project sits on is central to any international tax assessment of a Saudi engagement.
How treaties change the answer
DTAAs sit above domestic law, except for anti-avoidance rules, and the bulletin recognises two important consequences.
Under a treaty's business profits article, a non-resident with no permanent establishment in Saudi Arabia is often taxed at 0% in the Kingdom — but the relief depends on there genuinely being no PE.
The second consequence is a rate cap that runs the sensible way. Where a treaty permits a higher rate than domestic law — say 10% against the domestic 5% — the lower domestic rate applies. Treaty relief can reduce the Saudi charge but is not used to increase it above the domestic rate.
What payers and recipients should do
The bulletin rewards documentation. Payers should classify each engagement against the technical-service and royalty definitions before they pay, split bundled contracts between goods and services, and confirm residency and PE status. Where a treaty is in point, they should hold the evidence — chiefly a tax residency certificate and a PE analysis — to support the reduced or nil rate. In practice, SBC settles the classification and treaty evidence at contract stage, because the same file that supports a 5% rate is the file ZATCA asks for on audit. Getting it right early is far cheaper than defending it afterwards through an audit or dispute.
Frequently asked questions
What is the withholding tax rate on technical service fees in Saudi Arabia?
Technical and consultancy services provided by a non-resident to a Saudi resident are generally subject to 5% withholding tax on the gross amount paid. The definition is broad, covering technical, technological, scientific, engineering, consulting and research work, and classification depends on the substance of the work rather than the contract label.
What is the difference between technical services and royalties for KSA withholding tax?
A technical service is where the provider uses its own expertise to perform work, and is taxed at 5%. A royalty is the transfer of proprietary, non-public know-how that the payer can then use independently, and is taxed at 15%. Because the rate triples, the classification is a frequent source of dispute.
Do Saudi withholding tax rules apply to services performed outside the Kingdom?
Yes. Taxability is triggered by the payer being a Saudi resident or a KSA permanent establishment, and the physical location where the service is performed is irrelevant. A non-resident working entirely from abroad for a Saudi client can still be within the 5% withholding charge.
Can a tax treaty reduce Saudi withholding tax on service fees?
Yes. A DTAA overrides domestic law except for anti-avoidance rules, and under the business profits article a non-resident with no permanent establishment is often taxed at 0% in the Kingdom. Where a treaty rate is higher than the domestic 5%, the lower domestic rate applies.
How SBC Tax Consulting can help
SBC helps payers and non-resident providers classify service, royalty and mixed contracts correctly, split bundled supplies, and assess whether an engagement creates a permanent establishment. Our international tax team applies the relevant treaty, assembles the residency and PE evidence to support reduced rates, and defends positions on audit. To review a cross-border service arrangement, contact our advisors.
This publication is for general information only and does not constitute professional advice. Please consult your SBC advisor before acting on any matter covered here.