Beyond VAT: zakat and withholding tax
This track has walked a full VAT cycle: issuing the invoice, keeping the record, filing and paying, correcting mistakes, and getting ready for a review. But a business's obligations towards the Zakat, Tax and Customs Authority do not stop at VAT. Two further obligations catch many owners off guard, precisely because they never surface in the daily invoicing routine: zakat (or income tax) and withholding tax.
Three separate obligations — one does not cover another
The common assumption sounds like this: "I filed my VAT return on time, so I'm compliant." That is only partly true. The three obligations differ in what triggers them, what they are calculated on, and how often they fall due. Being punctual on one does not compensate for being late on another.
| Obligation | What it applies to | Who ultimately bears it | Cycle |
|---|---|---|---|
| VAT | The value of the supply (your sales) | The customer; the business collects and remits | Monthly or quarterly, depending on the business |
| Zakat or income tax | The result of the activity and its statutory base | The business and its owners | Annual, after the financial year ends |
| Withholding tax | Amounts you pay to a non-resident party | The non-resident recipient; you must withhold and remit | On payment, with periodic and annual returns |
Zakat or income tax?
The general rule published by the Authority is that the split follows ownership: shares held by Saudi owners and GCC nationals treated as such fall under zakat, while the share held by a non-GCC investor is subject to income tax on its profits. A mixed-ownership company is treated under both, each share according to its own rule.
Here is where many businesses go wrong: zakat is not calculated on the net profit shown in your income statement. It is calculated on a zakat base with its own rules, adding some items and deducting others. So a business with modest profit may find its base larger than expected — or the reverse. The rates, the rules for computing the base, and the statutory deadline for the annual return are published on the Authority's website, zatca.gov.sa. That is the reference — not figures passed around in conversation.
Withholding tax: the obligation that appears the moment you pay abroad
This is the most neglected obligation among small and mid-sized businesses, because its nature is inverted: it does not arise from what you sell, but from what you buy. When a business resident in the Kingdom pays a non-resident party for a service, a right, or a benefit, the duty to withhold a percentage and remit it to the Authority falls on the paying business — not on the foreign supplier.
The percentage varies with the type of payment, and it is the Income Tax Law and its regulations that set it. Do not rely on a rate someone quoted you; classify the payment against the official source.
A concrete example
A business in Riyadh contracts a software developer resident outside the Kingdom to build a module in its system, for an agreed contract amount. At payment time it discovers the amount falls within the scope of withholding. The owner now faces a simple reality: either withhold the percentage and transfer the remainder — prompting the developer to object, since the contract never mentioned it — or absorb the difference, pushing the real project cost above the budgeted figure.
The lesson here is contractual rather than accounting. The wording of the contract decides who bears the withholding. One sentence stating whether the amount is inclusive or exclusive of taxes due in the Kingdom prevents an entire dispute later. The same logic applies to foreign software subscriptions, consultancy, and advertising on platforms based outside the Kingdom.
Why this matters operationally, not just on paper
The certificate the Authority issues for zakat and tax compliance is not an archive document. It is requested in government dealings and tenders, in many dealings with large companies, and in other administrative procedures. A business that is punctual on VAT but late on its annual return may discover the gap at the worst possible moment: while bidding for a contract.
Checklist
- Do you know whether your business falls under zakat, income tax, or both, based on its ownership structure?
- Are your financial year end and annual filing deadline in a calendar that reminds you, rather than in your head?
- Do you have a list of the non-resident suppliers you pay regularly?
- Do your contracts with them state explicitly who bears the withheld tax?
- Do you keep proof of remittance to give the supplier when asked?
This lesson is introductory and does not replace the official texts on the Zakat, Tax and Customs Authority website or advice from a specialist for your own case.