KSA Cabinet approves Double Tax Treaty with the UAE
On 23rd May 2018, the Kingdom of Saudi Arabia (KSA) and the United Arab Emirates (UAE) executed a Double Tax Treaty with the UAE Minister of State for Financial Matters and the KSA Minister of Finance signing as representatives on behalf of both the countries.
Further advancement in this regard was made on 1st March 2019, when the Kingdom of Saudi Arabia published the Double Tax Treaty (“DTT”) with the United Arab Emirates (“UAE”) in its Official Gazette (Ummul Quraa). The UAE has not yet published the DTT in the UAE Official Gazette, and the DTT shall only be considered applicable from the first day of the second month following the month of its publication in the Official Gazette.
Key provisions:A summary of the key provisions of the DTT are as follows:
- Income in the form of interest and services fees shall be exempt from tax.
- Royalty payments shall be taxed at a reduced rate of 10%.
- Dividend income shall be charged a withholding tax of 5% (similar to that of KSA).
- No relief from non-resident taxation on the transfer of shares or immovable property.
- DTT shall apply on the foreign national residents residing in both the UAE and KSA.
- Government bodies and public financial institutions shall be exempt from withholding tax.
Elimination of Double Taxation:
The DTT provides for the elimination of double taxation by deducting such tax from the amount of tax payable in the UAE and KSA (except against Zakat payable in KSA).
In accordance with Article 1 of the DTT, both KSA and UAE residents shall be able to take advantage of the Double Tax Treaty. In a favourable move, persons who are resident in the UAE or KSA will also benefit from the DTT.
Article 6 of the DTT states that income derived by a resident of a contracting state (e.g. KSA), from immovable property situated in the other contracting state (e.g. The UAE), shall be taxed in that other contracting state (The UAE).
Article 13 of the DTT does not exempt gains arising on the transfer of (i) shares, and (ii) immovable property from one contracting state to other contracting state, from taxation in the other contracting state. The transfer of shares in listed companies are however, exempt from tax under the DTT.
Article 10 of the DTT states that withholding tax on dividends shall be 5%. Tax shall be applied in the country where the dividends have been received. The tax rate in the DTT is the same as applied by KSA on dividends i.e. 5%. No withholding tax is levied on the payment of dividends in the UAE.
Income in the form of Interest:
In accordance with Article 11 of the DTT, where the interest income arises in one contracting state but belongs to a person residing in the other contracting state, such income shall be exempt from tax. Withholding tax in KSA is 5% whereas UAE does not impose any withholding tax on interest.
The definition of interest under the DTT includes all forms of interest irrespective of their nature. They can arise from government securities, bonds, debentures, premiums and other forms of bonds and debentures. Penalty charges for delayed payments of interest shall be deemed as interest income for this purpose.
In accordance with Article 12 of the DTT, withholding tax on royalty payments shall be 10%. Currently, KSA is charging 15% tax on royalties. The UAE does not implement any tax on royalties.
The term "royalties" in the DTT comprises of “payments of any kind received as a consideration for the use of, any copyright of literary, artistic or scientific work (including cinematograph films, films or tapes used for radio or television broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or for the use of (or the right to use) industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience”.
The DTT provides that investments made by government bodies and public financial institutions shall be exempt from tax and income derived from such investments will also be exempt.
The DTT between KSA and the UAE is the first DTT between two GCC member states. It is expected to facilitate further cross-border trade and investment between the two states. These arrangements shall help in the eradication of double taxation, simplify cross border trade, boost foreign investment and provide protection to taxpayers from direct and indirect double taxation.
Should you require assistance or wish to learn more of the potential impact the above may have on you or your business, please do not hesitate to contact us.
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