UAE SAUDI ARABIA Double Tax Treaty

INTRODUCTION

On 23 May 2018, the United Arab Emirates (UAE) and the Kingdom of Saudi Arabia (KSA) signed an agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital Double Tax Treaty (DTT).

This agreement represents the first DTT among Gulf Cooperation Council (GCC) Members. The DTT entered into force on 1 April 2019 and it generally applies from 1 January 2020. The DTT might offer potential reduction or an exemption from the KSA domestic withholding tax (WHT) with respect to payments made from KSA to UAE.

APPLICABILITY:

  • This convention shall apply to persons who are residents of one or both the contracting states”
    • Any person* who is liable to tax by reason of his domicile, residence, place of incorporation, place of management or any other criteria of a similar nature.
    • Sovereign Wealth Fund or similar government owned entities
    • Entities that are tax exempted or not subject to tax because of religious/charitable/educational/scientific or similar purpose
  • Taxes on income, capital and Zakat (applicable in KSA only).

*Person includes an individual, a company and body of persons including the state and its local authorities

TAXABILITY OF INCOME:

  • BUSINESS PROFITS
    • It includes income from manufacturing, mercantile, banking, insurance, from the operations of inland transportation and furnishing of services
    • Profits shall be taxable only in country of residence unless business is carried out through a permanent establishment (PE) in another country

Note :

    • Permanent establishment (PE) means a fixed place of Business through which the business is wholly or partly carried on.
    • It includes a place of management, a branch, an office, a factory, a workshop and any place of extraction of natural resources.

*Subject to Force of Attraction Rule

    • When the head office provides goods or services directly to customers in the country of permanent establishment, and the PE is also involved in the same line of activity, the profits earned by the head office directly shall be taxed as profits attributable to the PE
  • INCOME FROM IMMOVABLE PROPERTY
    • Immovable property shall have the meaning as per the law of country where property is situated.
    • Income derived by a resident of one country from Immovable property situated in other country may be taxed in other country
  • CAPITAL GAINS
    • Gains from alienation of Immovable Property shall be taxable in the country where the Immovable Property is situated
    • Gains from transfer of shares in the resident unlisted company in other country may be taxed in other country
    • Gains from alienation of any other property shall be taxable only in the resident country of alienator
  • DIVIDENDS, INTEREST, ROYALTY & OTHER INCOME
    • Dividends, Interest, Royalty, Debt claims of every kind, secured or unsecured, private or government & Other Income paid to the resident to other country shall be taxable in other country
    • Such Income should not be effectively connected to fixed base or Permanent establishment of Payee, in the country of Payer
    • Royalties & Dividend is taxed at 10% & 5% respectively under the UAE KSA treaty.
  • INDIVIDUAL TAXABILITY
    • Income derived from Professional Services by a resident Individual shall be taxable only in the country of residence except when individual has fixed place in other country to perform his activities
    • Salary, wages or similar remuneration derived by a resident of country, in respect of employment exercised in another country, may be taxed in such other country
    • Income derived by Artist & Sportsperson, Students & Teachers from his personal activities exercised in other country may be taxed in that other country but will be exempt in other country from tax when the visit to the other country is supported by Public funds of resident country or takes place under a cultural agreement or arrangement between the Government of both countries
  • OTHER PROVISIONS
    • Income resulting from the exploration and exploitation of natural resources in other country shall be taxable only in other country
    • This treaty shall not supersede the application of domestic provision to prevent tax evasion and tax avoidance
    • There will be ‘’Principle Purpose Test’’ applied to ensure that the benefit will not be granted if obtaining the benefit was one of the main purpose for entering into that particular transaction or arrangement
    • The recipient of income/capital has to demonstrate business purpose & Economic Substance in the resident country to ensure the application of the treaty
    • The tax authorities have the right to conduct Transfer Pricing adjustments for non-arm’s length transactions/arrangements if there is excessive payments of interest or royalties towards related parties
    • This treaty shall not affect the application of local laws on Income from insurance Activity

METHODS OF ELIMINATION OF DOUBLE TAXATION

  • Exemption Method
  • Credit Method
    • Resident country shall allow a credit against the tax on income payable in the resident country
    • Credit cannot be availed against Zakat liability 

POTENTIAL BENEFITS UNDER THE WITHHOLDING TAX TREATY

  WHT rates under KSA domestic tax law  WHT rates under the DTT
Dividend 5%    5%
Interest 5%    0%
Royalty 15%    10%
Management fees 20%     0%*
Fees for technical services 5% / 15%**     0%*

 

*Related person is defined as:

  • In case of natural person –spouse or an in-law or a relative up to the fourth degree*Related person is defined as:
  • In case of company -person having 50% or more share, directly or indirectly, in capital, profit or voting rights

SETTLEMENT OF DISPUTES

As per ‘’Mutual Agreement Procedure’’, a Resident may approach competent authority of its country, if he/her considers that actions of any of the two country results (or will result) in not allowing him/her the benefits conferred by this agreement within 3 years of such action irrespective of the remedy provided by Domestic law.

How can we help?

Our team in UAE and KSA has vast experience in supporting clients with the application of treaty benefits.  WE can provide assistance to:

  • Get tax relief under any Double Taxation Treaty (DTT)s;
  • Assistance for getting Tax Residency Certificate or Tax Domicile Certificate;
  • Obtain and filing supporting documentation such form Q7B and form Q7C; and
  • Analyze the UAE Economic Substance Regulations impact, compliance review and reporting support.
  • Analyze the applicability of the UAE-KSA Double Taxation Treaty to ensure the applicability of tax treatments and facilitate cash repatriation from foreign countries;
  • Help with the interpretation of DTTs and provide insights on its applicability and interpretation by the relevant authorities