KSA Guideline For Taxation Of Software Payments: Key Observations & Takeaways

In January 2024, Saudi Arabia’s Zakat, Tax and Customs Authority (ZATCA) released a comprehensive guideline on the tax treatment of different software payments resulting from transactions between non-residents and Kingdom of Saudi Arabia (KSA) residents, in the context of the domestic Income Tax Law.

The ZATCA recognizes that the digitalization of the economy has increased the challenges with respect to the tax categorization of software payments, particularly in cross-border transactions, and has therefore issued clarifications on how to apply the KSA Income Tax Law to such products.

The guideline issued by ZATCA categorizes different software transactions into five income categories:

• Capital gains
• Commercial profits
• Royalties
• Technical services
• Other income/services

Our key takeaways, grouped by income category, are as follows:

Capital gains

KSA non-residents may be subject to KSA Income Tax at a 20% rate if they derive capital gains considered to be sourced in KSA, as detailed in the Income Tax Law. The guideline issued by ZATCA has clarified that the following payments shall be categorized as capital gains:

• Payments for the transfer of the full ownership of the copyright on the software.
• Payments for the transfer of part of the rights in the copyright that constitute a distinct and specific property.

Commercial profits

ZATCA’s guideline has clarified that the following payments should be categorized as commercial profits:

• Payments for the acquisition of the right to distribute copies of a software program without the right to reproduce the program.
• Payments for the right to use software developed by a non-resident.
• Payment for the provision of goods in the context of a mixed contract (i.e., contracts providing rights in relation to software systems with secondary services).
• Payments for software access for business use, without granting the right to modify the software.

We understand  that the above payments, when derived by non-residents, should not be taxable in KSA under the Income Tax Law, unless attributable to a permanent establishment.

Royalties

Royalties considered to be sourced in KSA, as detailed in the Income Tax Law, may be subject to the KSA withholding tax at a 15% rate. The guideline has clarified that the following payments should be categorized as royalties:

• Payments for the transfer of part of the rights in copyright (e.g., right to reproduce) that do not constitute a distinct and specific property.
• Payments for the right to make multiple copies of the program and distribute them in the market, while also having the right to reproduce or modify the software.
• Payments for information concerning industrial, commercial or scientific knowledge (e.g., access to the source code) involving the transfer of rights to modify/update such information.
• Payments for the right to make multiple copies of the software program for operation within its own business (site, enterprise or network license).
• Payments for access to an online database containing private and confidential data.
• Payments for the right to reproduce and modify software in the context of mixed contracts (i.e., contracts providing rights in relation to software systems with secondary services).
• Payments for software access for business use, with the right to modify the software.

Technical services

Technical services considered to be sourced in KSA, as detailed in the Income Tax Law, may be subject to the KSA withholding tax at a 5% rate. The guideline has clarified that the following payments should be categorized as technical services:

• Payments for the development of software, where full ownership is transferred after development completion.
• Payment for the provision of non-ancillary services in the context of a mixed contract (i.e., contracts providing rights in relation to software systems with secondary services).

Other income

Other income considered to be sourced in KSA, as detailed in the Income Tax Law, may be subject to the KSA withholding tax at a 15% rate. The guideline has clarified that the following payment should be categorized as other income:

• Payments for access to an online database containing public content.

The above examples and interpretation were clarified by ZATCA in the context of the domestic Income Tax Law. However, as expressly stated in the guideline, the interpretation above may be overruled depending on the specific wording of any applicable Double Tax Treaty.

Please reach out to a member of the A&M Tax Team if you have any questions or would like to discuss how this could impact you.

https://www.alvarezandmarsal.com/insights/ksa-guideline-taxation-software-payments-key-observations-takeaways