In December 2025, ZATCA has clarified the distinction between transfer of know-how/knowledge and technical or consultancy services which directly affects Withholding Tax (WHT) treatment.

Key Distinctions

• Know-How Transfer: Involves providing proprietary knowledge that enables the recipient to use it independently; treated as royalties and subject to 15% WHT, unless an applicable treaty provides a lower rate.
• Technical/Consultancy Services: The provider performs work using expertise without transferring proprietary knowledge; WHT depends on treaty provisions (0%, a treaty rate, or the 5% domestic rate).

Permanent Establishment (PE) Impact

• Non-Residents Without a PE: WHT is the final tax.
• Non-Residents With a PE: Income is treated as business income and taxed under corporate tax rules after deducting expenses.

Point of View

In brief, ZATCA’s clarification on the distinction between the transfer of know-how and the provision of technical or consultancy services provides useful guidance for the withholding tax treatment of outbound payments. In practice, applying this distinction requires careful consideration of the substantive characteristics of each arrangement, particularly where contractual structures are complex or involve multiple elements.

Classification is generally informed by the economic substance of the transaction rather than contractual terminology alone. Relevant considerations include whether the recipient can use the information independently after delivery, whether the information is proprietary or confidential, and whether it has continuing commercial value beyond the engagement. Where treaty relief is considered, further analysis may be required to identify the applicable treaty article, particularly where no specific fees for technical services provision exists. Depending on the facts, the manner and duration of service delivery may also have implications beyond withholding tax, including potential permanent establishment considerations.

Domestic groups often enter complex third-party arrangements, including contracts where technology is embedded in equipment supply, engineering procurement and construction projects, or integrated solutions. In such cases, tax treatment may depend not only on the technology involved but also on how the scope of work is defined, documented, and commercially priced.

In this context, maintaining a clear and proportionate breakdown of service scope and value within the contract or statement-of-work may support appropriate tax characterisation. Based on experience, a well-structured and mutually agreed scope and value breakdown can help demonstrate the nature of the services performed and the extent to which any independently usable know-how is made available, while avoiding unnecessary complexity. Where appropriately implemented, this approach may reduce the risk of the application of higher withholding tax rates or challenges to treaty treatment in composite arrangements.

International groups frequently rely on intra-group arrangements to access technology, systems, or specialised expertise developed elsewhere within the group. These arrangements may involve centralised development, ongoing support, and local implementation, and may require careful analysis of the nature of what is made available to the local entity, the degree of ongoing reliance on the service provider, and consistency with the group’s broader operating and pricing framework.

In light of the above, periodic reviews of arrangements involving know-how, intellectual property, or technical services may assist in ensuring alignment between contractual terms, commercial substance, and tax treatment, while supporting appropriate withholding tax outcomes.

Recommended Actions

• Periodically review existing and new arrangements involving know-how, intellectual property, or technical and consultancy services to confirm that contractual terms and pricing reflect the underlying commercial substance.
• Pay particular attention to mixed or bundled contracts, including whether consideration for know-how and services is appropriately delineated where commercially justified.
• Where relevant, assess the availability and application of tax treaty provisions based on the specific facts and circumstances of the arrangement.
• Consider whether statements of work and supporting documentation provide a clear and proportionate description of service scope and value, without introducing unnecessary complexity.
• Apply a structured and consistent review approach to support appropriate withholding tax treatment under Saudi domestic law and applicable tax treaties.