An illustrative calculation of what a Saudi company really pays a foreign service provider under net and gross pricing, with reverse-charge VAT and treaty relief.
When a Saudi company pays a foreign provider for services, it may have to withhold tax and remit it to ZATCA. Whether the provider or the Saudi company bears that tax depends on the contract: a gross price means the provider receives less, while a net price with a gross-up clause means the Saudi company pays more. The example uses an assumed rate for illustration only, since actual rates depend on the service type and any treaty.
The situation
A Saudi subsidiary engages a foreign engineering consultancy for design work at a fee of SAR 1,000,000. The consultancy wants to receive the full fee. The subsidiary wants to know the true cost under different contract terms.
Assumptions (illustrative)
- Agreed fee: SAR 1,000,000.
- Assumed withholding rate of 5 per cent, used only to show the method; confirm the actual rate for the service category with ZATCA.
- Reverse-charge VAT at the published headline rate of 15 per cent, recoverable in full because the subsidiary makes taxable supplies.
- Option A: fee is gross, tax withheld from it.
- Option B: fee is net, subsidiary grosses up.
- Option C: a treaty exempts the fee from withholding, with documents in place before payment.
Step 1: Option A: gross fee
SAR 1,000,000 multiplied by 5 per cent equals SAR 50,000 withheld; SAR 950,000 paid to the consultancy.
The subsidiary's cost stays at SAR 1,000,000, but the consultancy receives less than it expected unless it priced the tax in.
Step 2: Option B: gross-up formula
SAR 1,000,000 divided by (1 minus 0.05) equals approximately SAR 1,052,632.
To leave the consultancy with SAR 1,000,000 after withholding, the fee must be raised to this amount.
Step 3: Option B: tax withheld
SAR 1,052,632 multiplied by 5 per cent equals approximately SAR 52,632.
The gross-up costs the subsidiary SAR 52,632 more than option A, slightly above the simple 5 per cent, because tax is charged on the grossed-up amount.
Step 4: Reverse-charge VAT
SAR 1,052,632 multiplied by 15 per cent equals approximately SAR 157,895, declared as output and recovered as input.
For a fully taxable company this has no net cost, but it must be declared. A company with exempt activities would bear part of it.
Step 5: Option C: treaty exemption
SAR 1,000,000 paid with SAR 0 withheld, provided the treaty applies and the documents are accepted.
Many treaties restrict source taxation of service fees where the provider has no permanent establishment, but relief depends on residency proof and ZATCA procedures.
Step 6: Compare the options
Cost to the subsidiary: A SAR 1,000,000; B SAR 1,052,632; C SAR 1,000,000.
The difference between A and B is a commercial negotiation; the difference between B and C depends on paperwork completed before payment.
What changes the answer
- A higher rate for the service category raises the gross-up more than proportionally, because it is applied to the grossed-up amount.
- Classifying the payment as a royalty or management fee instead of a technical service can change the rate.
- Treaty relief claimed after payment usually means withholding first and waiting for a refund.
- Payments to a related party can carry different rates and trigger transfer pricing review.
- Late remittance of the withheld tax adds penalties for each month of delay.
What the numbers tell you
- Decide gross or net pricing at the quotation stage and write it into the contract.
- Collect treaty documents before the first invoice is paid.
- Budget gross-up cost for contracts where the provider insists on net payment.
- Ask a licensed adviser to classify each service type, since the category drives the rate.
Limits of this example
Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.
Domira works with foreign investors on the property side of entering Saudi Arabia: finding land or premises, due diligence, design, construction and asset management. For licensing, tax and legal steps, work with a licensed adviser; we coordinate with yours so the property decision fits the structure you choose.
Frequently Asked Questions
What is a gross-up clause in a Saudi contract?
A gross-up clause requires the payer to increase its payment so that, after withholding tax is deducted, the recipient receives the agreed amount. The payer bears the tax. Foreign providers often ask for it; Saudi payers should price it in and check whether a treaty could reduce the withholding, making the gross-up cheaper or unnecessary.
Does a foreign consultant pay tax in Saudi Arabia on fees from a Saudi client?
Usually through withholding: the Saudi client deducts tax from the fee and pays it to ZATCA, at the rate for the service type, unless a treaty reduces or removes it. If the consultant's presence in the Kingdom creates a permanent establishment, it may instead be taxed on profits. Ask an adviser to review days on site and the treaty.
Is withholding tax deductible for the Saudi payer?
When the payer bears withholding under a gross-up, the grossed-up fee is the expense, and its deductibility follows the general rules on business expenses, including transfer pricing for related parties. Tax that is simply deducted from the provider's fee is not an extra cost to the payer. Confirm the treatment for your contract with your adviser.
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