Tax Bulletin: Tax Treatment of Technical or Consulting Services in accordance with the Income Tax Law and Double Taxation Avoidance AgreementsFirst Edition, 1 December 2025 G
Contents
2. What is meant by Technical and Consulting Services
2.1 Know-how - Transfer of Knowledge - and Technical and Consulting Services
2.2 Supply Contracts Accompanied by Technical and Consulting Service
Record of Amendments
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The Zakat, Tax and Customs Authority has issued this tax bulletin for the purpose of clarifying certain treatments related to the application of the statutory provisions in force on the date of its issuance. The content of this bulletin shall not be considered an amendment to any of the provisions of the laws and regulations applicable in the Kingdom.
The Authority confirms its application of the clarifying treatments contained in this bulletin-where applicable-in light of the relevant statutory texts. In the event that any clarification or content in this bulletin is amended-for an unamended statutory text-the updated clarifying treatment shall apply to transactions that take place after the date of publication of the updated version of the bulletin on the Authority's website.
Introduction
The tax status of Technical and Consulting Services provided by a non-resident person in the Kingdom to a resident person in the Kingdom is considered one of the most important issues addressed by the Income Tax Law issued pursuant to Royal Decree No. (M/1) dated 15 Muharram 1425 AH, and its subsequent amendments (the "Law"), and its Implementing Regulations issued by Ministerial Decision No. (1535) dated 11 Jumada Al-Thani 1425 AH, and their subsequent amendments (the "Regulations"), and the Double Taxation Avoidance Agreements (the "Tax Treaties"). In view of their importance in the Law, its Implementing Regulations, and the Tax Treaties, the Authority has issued this bulletin with the aim of clarifying the tax treatment of Technical and Consulting Services provided by a non-resident person in the Kingdom to a resident person in the Kingdom in accordance with the Income Tax Law and its Implementing Regulations and in accordance with the Tax Treaties.
What is meant by Technical and Consulting Services?
The Implementing Regulations have expressly defined what is meant by Technical and Consulting Services, as they stipulated in Clause (3) of Article 63 as follows: "Technical and consulting services' means any kind of technical, scientific or technological services, including studies and research in different fields, surveying work of a scientific, geological or industrial nature, consultancy or supervisory services, or any kind of engineering services including related designs."
It is noted from this definition that it is important to accurately verify the nature of the service provided, as the tax treatment may differ depending on the services provided. Some services may appear similar to Technical and Consulting Services but are treated differently for tax purposes based on whether they fall within the meaning of Technical and Consulting Services as per the definition in the Regulations. It should also be taken into account that there may be cases where a contract includes a number of payments, only some of which are classified as consideration for Technical and Consulting Services. This can be illustrated in the following examples:[1]
Know-how - Transfer of Knowledge - and Technical and Consulting Services
Confusion may arise between the transfer of knowledge and Technical and Consulting Services due to the similarity of certain characteristics; however, accurate distinction between the two cases is very necessary for applying the correct tax treatment, and the difference between the two cases lies in the following:
In transfer of knowledge contracts, one party undertakes to transfer its own expertise, not disclosed to the public, to the other party so that the latter may use and operate it for its own account. It is known in this type of contracts that the transferor of knowledge is not required to undertake any role itself in using the knowledge granted to the other party, nor does it guarantee its result, and its principal obligation is often limited to providing the existing knowledge or expertise, which requires a much lower level of expenditure on its part. As for Technical and Consulting Services contracts, they are different; as one party undertakes to use its expertise customary to its profession in order to perform the work itself for the benefit of the other party. In this type of contracts, the knowledge or specific expertise is not always transferred to the other party. Such contracts usually involve the performance of services requiring a much higher level of operating expenditure by the service provider to fulfil its contractual obligations and accomplish the required work.
Payments in consideration for Technical and Consulting Services, for example:
Payments received in consideration for after-sales services.
Payments in consideration for purely technical services.
Payments in consideration for an opinion provided by an engineer, a lawyer, or others.
Payments in consideration for consultancy provided electronically.
It should also be noted that there are contracts that may include both the transfer of knowledge and Technical and Consulting Services; for example, the franchisor transfers its expertise and knowledge to the franchisee, in addition to providing it with technical services such as assistance or support.
It is worth noting the difference in tax treatment between amounts paid for the transfer of knowledge and amounts paid for the provision of Technical and Consulting Services, as know-how transfer contracts fall under royalties.
Therefore, they are subject to a withholding tax at a rate of 15%, whereas contracts for technical and consulting services fall under Technical and Consulting Services and are subject to a withholding tax at a rate of 5%.
Supply Contracts Accompanied by Technical and Consulting Services
If the activity carried out by a non-resident is solely the supply of goods to the Kingdom, this supply is not subject to withholding tax, as it is a goods supply activity without accompanying works, and this supply is not considered to arise from an activity performed in the Kingdom. However, if the supply includes accompanying works such as installation, maintenance, training, or technical services, then these accompanying works are deemed to arise from an activity performed in the Kingdom. If such works fall under the definition of Technical and Consulting Services, they are subject to a withholding tax at a rate of 5%.[2]
Example
A company resident in the Kingdom (Company S) entered into a contract with a non-resident company (Company Z) for Company Z to supply equipment and provide support and maintenance services to Company S. Is this transaction subject to tax?
The non-resident company that entered into this contract does not have a permanent place in the Kingdom to conduct its business wholly or partly, nor does it have an agent licensed to operate in the Kingdom. Therefore, it is not considered a permanent establishment in the Kingdom. The amounts paid to it for the accompanying works-Technical and Consulting Services-are subject to a withholding tax at a rate of 5% in accordance with the provisions of Article 68 of the Law and Article 63 of the Regulations.
Tax Treatment of Technical or Consulting Services According to the Income Tax Law and its Implementing Regulations
If such services are provided through a permanent establishment of the non-resident person in the Kingdom, that establishment shall be subject to income tax in accordance with the provisions of the Law and the Regulations.[3] However, if such services are provided by a non-resident person who does not have a permanent establishment in the Kingdom, and the provision of these services does not result in the existence of a permanent establishment in the Kingdom, then, in accordance with the provisions of the Law and the Regulations, every resident, whether a taxpayer or not under the Income Tax Law, and the permanent establishment in the Kingdom of a non-resident, who pays an amount to a non-resident for technical and consulting services must withhold tax at a rate of 5% of the amount paid, regardless of the place where these services are performed and the place of their payment. Consequently, the aforementioned amounts are subject to a 5% withholding tax, whether these technical or consulting services are provided by the head office of the resident company, any related company, or[4] by a non-resident, unrelated person. This can be illustrated in the following example:
A resident company in the Kingdom (S) contracted with an unrelated non-resident company in the Kingdom (Z) (which has no permanent establishment in the Kingdom), for Company S to provide a design concept and Company Z to only design these ideas and follow up on their implementation to ensure they are applied according to Company S's ideas. Does this transaction fall under the category of Technical or Consulting Services, or does it fall under the category of royalties, and what is the tax treatment?
It is clear from the above example that Company Z is not granting Company S licenses or use of intellectual property for the design, but rather is executing the design for Company S at its request. Therefore, the amounts paid by Company S to Company Z fall under Technical or Consulting Services and are subject to a withholding tax at a rate of 5%.
Double Taxation Avoidance Agreements
In the context of cross-border transactions, the Kingdom has concluded more than (60) tax agreements. These tax agreements allow for the reduction or exemption of withholding tax on payments made by a resident person in the Kingdom to a non-resident person in the Kingdom, subject to certain conditions. They also take precedence over the Law and its Implementing Regulations, with the exception of the provisions of Article 63 of the Law relating to anti-tax avoidance measures. We present below the tax treatment of Technical and Consulting Services in accordance with the provisions of double taxation avoidance agreements.
Tax Treatment of Technical or Consulting Services According to Double Taxation Avoidance Agreements
Some double taxation avoidance agreements include a special article imposing a final tax on the gross amount of fees for technical services, in line with the practice in the United Nations Model Double Taxation Convention. In other cases, technical services may be included in the definition of royalties to be treated as such. In the absence of this article or the inclusion of such services in the definition of royalties, the consideration paid for technical services is treated as part of business profits. The tax treatment of payments for technical services under double taxation avoidance agreements can be clarified as follows:
First: Income Tax on Business Profits:
Permanent Establishment and Business Profits
According to the provisions of the Business Profits article (Article 7), profits arising from the conduct of business, including profits from the provision of technical or consulting services, are not subject to tax in the source state-the Kingdom-unless the service provider-the non-resident-has a permanent establishment in the Kingdom, and that non-resident person is subject to tax only on the profits attributable to that permanent establishment. Therefore, if the agreement lacks a specific article imposing a final tax on the gross amount of fees for technical services or does not include technical services in the definition of royalties to be treated as such, the consideration paid for technical services will not be subject to tax in the Kingdom unless the service provider has a permanent establishment in the Kingdom in accordance with the provisions of the agreement.
Taking into consideration that if the service provider is a natural person and the services are performed by himself and for his own account-meaning they fall under the provisions of independent personal services-then the provisions of the article on independent personal services shall be applied, not the article on business profits.
Example 1
A company resident in the Kingdom entered into a contract with a company resident in Great Britain for the British company to provide consulting services to the company resident in the Kingdom, which requires the presence of the British company's employees in Saudi Arabia for a period of 30 days during the relevant year to provide the services.
Referring to the provisions of the tax agreement concluded between the Kingdom and the Government of the United Kingdom of Great Britain and Northern Ireland, it was found that a permanent establishment may also include the furnishing of services, including consulting services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within the contracting state for a period or periods aggregating more than 183 days within any twelve-month period. Since this paragraph does not apply to the British company's case as its physical presence in the Kingdom did not exceed 183 days during the relevant year, these services do not constitute a permanent establishment in the Kingdom and are not subject to tax in the Kingdom.
Example 2
A company resident in the Kingdom contracted with a non-resident company in the Kingdom-a Swiss company-for the Swiss company to provide technical services to the resident company in the Kingdom, noting that the performance of these services requires the presence of the Swiss company's employees in the Kingdom for a period exceeding 200 days during the year.
Referring to the provisions of the tax agreement concluded between the Kingdom and the Swiss Federal Council, it was found that a permanent establishment may also include the furnishing of services, including consulting services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within the contracting state for a period or periods aggregating more than 183 days within any twelve-month period. Since this paragraph applies to the Swiss company's case, as its employees were present in the Kingdom for a period exceeding the duration specified in the agreement, these services constitute a permanent establishment for the Swiss company in the Kingdom and are subject to tax in the Kingdom.
Second: Withholding Tax on Fees for Technical Services:
Fees for Technical Services
Some tax agreements may include an article on fees for technical services (12/A), or technical services may be included in the definition of royalties to be treated as such, under which the contracting state where the fees for technical services arise has the right to impose a withholding tax in accordance with the provisions of the domestic law of the contracting state, provided that the rate does not exceed the maximum limit agreed upon by the two states.
Examples
A company resident in the Kingdom contracted with a non-resident company in the Kingdom-resident in State S and having no permanent establishment in the Kingdom-for the non-resident company to provide technical services to the resident company in the Kingdom. It is noted that there is a double taxation avoidance agreement between the Kingdom and State S which stipulates that technical services are subject to a final tax not exceeding 10%.
Despite the absence of a permanent establishment for the non-resident company providing the services, the payments for those services made by the resident company in the Kingdom to the non-resident company may be subject to withholding tax in the Kingdom. Since the rate provided in the Law is 5%, which is lower than the rate provided in the agreement, which is 10%, the lower rate of 5% shall be applied.