Landmark double tax treaty between the United Arab Emirates and the Kingdom of Saudi Arabia is published
The details of the long-awaited double tax treaty between the UAE and the KSA (the “DTT”), which was signed on 23 May 2018, have finally been made available.
The decision approving the DTT in KSA was recently published in the official Saudi Gazette, Umm Al-Qura, together with the text of the DTT. The publication of the decision in the official Gazette completes the ratification process for KSA. Both countries are required to notify the other of the completion of the procedures required by their law to bring into force the DTT.
The main features of the treaty are as follows:
- Treaty abuse: In line with the Multilateral Convention to Implement Tax Treaty related Measures to Prevent Base Erosion and Profit Shifting (“MLI”), to which both the UAE and the KSA are signatories, the DTT provides that treaty access will be denied where one of the principal purposes of the transaction or arrangement is to obtain treaty benefits.
- Effective date: The DTT will enter into force on the first day of the second month following the later of the above notifications. The DTT will become effective for payments made on or after 1 January following the date on which the DTT entered into force for withholding tax purposes and for tax years beginning on or after 1 January of the same year for income tax purposes.
- Persons covered: The DTT applies to persons who are residents of the UAE and the KSA. Importantly, the DTT is not restricted to GCC nationals; therefore, non-GCC nationals may also benefit from the DTT.
- Permanent establishment (“PE”): The DTT adopts the general OECD definition of a PE. A PE is a fixed place of business through which the business of an enterprise is wholly or partly carried on. A PE includes a place of management, a branch, an office, a factory but excludes activities of a preparatory and auxiliary nature.
- Income from immovable property: Such income may be subject to tax in the country where the property is located.
- Business profits: Business profits are taxable in the country of residence except where the enterprise carries on a business in the other country through a PE in which case the profits attributable to that PE may be taxed in the other country. Interestingly, the force of attraction rule in the KSA tax law, under which income generated by a head office from the sale of similar goods and performance of similar services as the PE are brought within the KSA tax net, has been incorporated in the DTT.
- Dividends: Dividends may be taxed in the source country but the tax will be limited to a maximum of 5% if the beneficial owner of the dividends is a resident of the other country.
- Interest: Interest income is taxable only in the country of residence if the recipient is the beneficial owner and a resident of that country.
- Royalties: Royalties may be taxed in the source country but the tax will be limited to 10% if the recipient is the beneficial owner and a resident of the other country.
- Capital gains: Any capital gains are taxable only in the country of residence unless one of the exceptions apply to give the taxing rights to the source country.
What does this mean for you?
The DTT is the first of its kind between two Gulf Cooperation Council member countries and will enhance the economic relations and bilateral cooperation between the KSA and the UAE.
Once effective, the DTT will have significant tax implications. The conclusion of the DTT may impact the existence of a PE and have the effect of reducing the withholding tax rate in the KSA. Businesses and persons with cross-border transactions should review their transactions and corporate structures as soon as possible to ensure that they are eligible for treaty benefits.
Given that both the KSA and the UAE are signatories to the MLI, it is important to note that the provisions of the DTT may be amended by the MLI depending on the final MLI positions adopted by the KSA and the UAE. Currently the KSA in its provisional MLI positions has already included the DTT as a covered agreement whereas the UAE has not yet included the DTT as such.
How can we help?
As the largest law firm in the Middle East with strong tax expertise, Al Tamimi & Company is well placed to advise you on the tax implications arising as a result of the application of the DTT including whether you qualify for treaty benefits.
We can also liaise with the tax authorities on your behalf to clarify their interpretation of the DTT and assist with the obtaining of tax residency certificates.
Please do not hesitate to contact Al Tamimi’s Tax Team if you require any assistance.