UAE-KSA Double Tax Treaty: All You Need to Know

Saudi Arabia entered into a Double Tax Treaty with UAE in March 2019 that was subsequently made public through its publication in the Official Gazette, Ummul Quraa, marking a pivotal moment in the effort to streamline cross-border economic activities, simplify tax procedures, and ensure equitable taxation for both individuals and businesses operating in these two nations.

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Double Tax Treaty, Significant Clauses:

1. Exemption from Withholding Tax (WHT) on Interest and Service Fees (Article 11): The Double Tax Treaty encompasses significant exemption concerning Withholding Tax on interest and service fees, offering relief from the taxation associated with such income.
2. Reduced WHT Rate on Royalty Payments (Article 12): Royalty payments, encompassing the usage of industrial, commercial, or scientific equipment, are subject to a reduced WHT rate of 10%. This reduction enhances the tax efficiency of cross-border royalty transactions.
3. Maximum 5% WHT on Dividends (Article 10): The DTT establishes a cap of 5% on WHT for dividends, harmonizing it with KSA's domestic dividend WHT rate. This measure promotes investment and financial flows between the UAE and KSA.
4. No Relief from Non-Resident Taxation on Asset Transfers: Importantly, the DTT refrains from providing relief from non-resident taxation on the transfer of shares or immovable property, ensuring that such transactions are subject to taxation.
5. Benefit for Foreign National Residents (Article 1): The DTT extends its benefits to foreign national residents of the UAE or KSA, encompassing individuals beyond the nationals of the contracting states.
6. Sovereign Wealth Funds and Tax-Exempt Entities (Article 27): Sovereign Wealth Funds and specific tax-exempt entities qualify for DTT benefits, further encouraging investment from these entities.

Residency and Covered Entities

The DTT applies to residents of both KSA and the UAE, encompassing individuals and companies. Importantly, residency for DTT purposes is not confined to nationals of the UAE and KSA alone; foreign national’s individuals residing in either country can also avail themselves of the treaty's advantages. Individual residents and corporate entities are covered under this taxation by considering the factors of management place, incorporation, residence, or domicile of the entities. This category also includes Sovereign Wealth Funds, specific government entities, and other tax-exempt entities with distinct purposes, such as religious, educational, charitable, scientific, or similar objectives.

Permanent Establishment (PE):

Permanent Establishment is considered under the double tax treaty for the purpose of "service PE,"Contracting countries within their borders can avail of the services under such an arrangement in a year for 183 days or more. Additionally, a PE can be established if a construction project in the other state extends beyond six months. Notably, unlike the domestic PE definition in KSA, the DTT does not establish a de Minimis threshold.

International Shipping and Business Profits 

The company's profits are not subject to tax in the contracting countries unless the entity operates its business activities through a permanent establishment(PE) in that state. It explicitly states that income not explicitly addressed in the DTT is subject to taxation solely in the contracting state where the recipient maintains residency. Additionally, it stipulates that profits arising from international shipping and air transport are taxable exclusively in the state where the company's effective management is located.

Interest, Royalties, and Capital Gains

Interest income is subject to taxation only in the contracting state where the recipient maintains residency, eliminating withholding tax between UAE and KSA residents. A ten percent withholding tax is applicable on Royalty payments. Capital gains originating from share or property transfers are not exempt from taxation in the other contracting state.

Elimination of Double Tax and Procedure of Mutual Agreement:

The provisions of elimination of the Double Tax Treaty are incorporated by offering a credit except Zakat against tax payable in the KSA and UAE. Taxpayers can utilize the Mutual Agreement Procedure to seek assistance in settling disputes regarding the understanding of the DTT This process can be initiated within a three-year period from the date of dispute notification to the relevant tax authority.

Sovereign Exemption and Entry into Force:

Taxation exemptions are extended to investments carried out by government bodies and public financial institutions. Income from "government investments," excluding real estate, is also considered tax-exempt. After publication in the official Gazette, the double tax treaty became effective.

OECD Multilateral Convention:

Multilateral Convention OECD is signed by both the states KSA and UAE to implement the measures of BEPS (Base Erosion and Profit Shifting) Double Tax Treaties. However, it's important to note that the UAE-KSA DTT is not classified as a "covered" DTT under the Multilateral Convention. Consequently, the Principal Purpose Test (PPT) does not currently apply to it. Nonetheless, the DTT includes a Principal Purpose Test (PPT) provision, preventing the utilization of DTT benefits in transactions where the primary purpose is to obtain those benefits. Hence, entities seeking relief under the DTT must ensure they maintain operational substance and a principal commercial purpose.

Conclusion

The UAE-KSA Double Tax Treaty represents a comprehensive framework for cross-border taxation, fostering investment and economic activities between these two nations while providing a clear structure for dispute resolution and the elimination of double taxation. Its provisions encompass various types of income, introduce reduced withholding tax rates, and establish guidelines for taxation procedures. This treaty plays a pivotal role in enhancing economic cooperation and dismantling tax-related barriers between the UAE and KSA.

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