The Income Tax Treaty also referred to as the Double Tax Avoidance Agreement between the United Arab Emirates (‘UAE’) and the Kingdom of Saudi Arabia (‘KSA’) entered into force on 1 April 2019. The Treaty, signed on 23 May 2018, is the first of its kind between the two GCC countries.
We present herewith the highlights of the Tax Treaty:
Any Person subject to tax because of his residence, place of establishment, place of administration, including administrative departments or local governments.
Tie Breaker Rule:
IndividualPermanent Home Vital Interest Habitual Residence (Usual Residence) Citizenship As decided by the Competent Authorities
Other than an individualPlace of Effective Management (actual administrative center)
Installation PE: If the project continues for more than 6 months
Service PE: Providing Services for more than 183 days during any 12 month period that begins or ends in the relevant fiscal year.
Agency PE: Habitually exercising authority to conclude contracts. Also if a dependent agent maintains a stock of goods from which it regularly delivers goods on behalf of the enterprise.
Exemption for auxiliary and preparatory activities and facilities for maintaining the stock of goods for delivery on behalf of the enterprise will not apply to a fixed place of business used or maintained by an enterprise, if the enterprise or a connected enterprise, carries on business activities at that same place or another place in the same State. (Anti-fragmentation Clause)
Profits of the project shall be subject to tax in the country where it has a PE. The quantum of profits that would be taxed can be the profit attributable to the PE in that State. The profits would be calculated after deducting allowable expenses as specified in Article 7.
The treaty also has a limited force-of-attraction rule due to which profits from sales of goods or merchandise of the same or similar kind as those sold through the PE, as well as from other business activities carried on in that other state would have to be included in the profits of the PE.
Reference to Article in the Tax Treaty
Nature of payment
Withholding Rate as per Tax Treaty
Withholding Rate as per Domestic law in KSA1
|No specific Article in Tax Treaty||Fees for Technical Services||NA||5% / 15%3|
|No specific Article in Tax Treaty||Management Fees||NA||20%3|
Currently, there is no capital gains tax in UAE. The provision of capital gains is therefore more relevant for UAE investors investing in KSA.
|Profits arising from||Taxability|
|Profit on Sale of Immovable property||Taxed in KSA if the immovable property located in KSA|
|Profit on sale of movable assets||Taxed in KSA if the entity has a PE in KSA|
|Profit on sale of unlisted company shares||Taxed in KSA if shares are of KSA resident Company|
|Profit on sale of listed shares||Exempt (subject of prescribed conditions)|
|Profit on transfer of ownership of ships and aircraft||Taxable in the State where the actual management center of the project is.|
An individual (resident in UAE) providing professional services in KSA shall be taxed in KSA to the extent of the profit attributable to that fixed base/activities performed in KSA, if:
Remuneration paid to the Board of directors of a company may be subject to tax in the State in which the Company is resident.
Double taxation can be eliminated under the DTAA by way of credit against tax payable.
However, DTAA clearly mentions that these provisions cannot reduce any Zakat tax obligations in the KSA.
Government investments are exempt from tax in the other contracting states.
Income resulting from such investments, including gain on disposal would also be exempt.
For International Taxation Support
CA. Manu Palerichal
CEO & Partner
CA Purvi Mehta
Asst. Manager – International Taxation
M: +971 52 280 0480