Saudi Arabia has seven new tax treaties effective from 1 January 2017

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1 23 January 2017 Global Tax Alert Saudi Arabia has seven new tax treaties effective from 1 January 2017 EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Seven new tax treaties for the avoidance of double taxation of income and capital (DTT or tax treaty) entered into by the Kingdom of Saudi Arabia (KSA) became effective from 1 January These tax treaties are with Algeria, Ethiopia, Kazakhstan, Macedonia, Portugal, Sweden and Venezuela. Another tax treaty with Egypt was signed early in 2016, and ratified by Egypt in late 2016, but not by KSA to date. Consequently, this Tax Alert does not cover the Saudi-Egyptian DTT. This Alert summarizes the key aspects of each new tax treaty. DTT KSA Algeria This new tax treaty provides for the maximum withholding tax (WHT) rates of 0% on dividends, 0% on income from debt-claims, and 7% on royalties. The time threshold for creation of a permanent establishment (PE) resulting from a activities in connection therewith is set at six months. The definition of a PE under Article 5(3)(b) includes a United Nations (UN) Model service PE provision, according to which, the furnishing of services within the contracting state would create a PE if the activity continues for more than 183 days during a 12-months period.

2 2 Global Tax Alert The definition of a dependent agent under Article 5(5)(b) also follows the UN Model and includes an agent, who, albeit having no authority to conclude contracts, habitually maintains stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise. which are set to prevail over the provisions of the tax treaty (Article 28(1)). Other treaty articles broadly correspond with either the Organisation for Economic Co-operation and Development (OECD) DTT KSA Ethiopia The new tax treaty provides for the maximum WHT rates of 5% on dividends, 5% on income from debt-claims, and 7.5% on royalties. A 0% WHT applies on income from debt-claims paid to a government body or to the national bank in relation to transactions with governmental entities. The other key features are: The definition of a PE under Article 5(3) does not include the UN-modelled provision on a service PE. The dependent agent definition under Article 5(5)(b) includes a UN-modelled provision, which includes an agent, who, albeit having no authority to conclude contracts, but habitually maintains stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise. Article 7(1) of the tax treaty provides for a limited force of attraction rule, whereby income from the sale of goods or merchandise or carrying on other business activities which are the same or similar to the goods sold or activities carried out through the PE, will be included into the PE s assessable income which is taxable in the source state. This is similar to the limited force of attraction rule provided under the KSA Income Tax Law Article 5(a)(10). The insertion of the force-of-attraction rule into tax treaties is a new tax treaty policy for KSA (see also similar provisions in the DTTs with Kazakhstan, Macedonia and Venezuela). The DTT provides that domestic tax anti-avoidance provisions prevail over the provisions of the tax treaty (Article 27), provided the main purpose or one of the main purposes of undertaking a transaction was to obtain the benefits under the tax treaty. Notably, the wording of this clause is similar to the principal purpose test found in Other treaty articles broadly correspond to either the OECD DTT KSA Kazakhstan The new tax treaty provides for the maximum WHT rates of 5% on dividends, 10% on income from debt-claims, and 10% on royalties. As per Article 26 of the tax treaty, dividends, interest and royalties derived by the government (including Saudi Arabian Monetary Agency and the National Bank of Kazakhstan) and wholly owned government entities are exempt from tax in the source state. Other key provisions are: Article 5(3)(b) includes a UN-modelled definition of a service PE which provides that the furnishing of services within the contracting state creates a PE if the activity continues for more than 183 days in a 12-months period. Article 7(1) of the tax treaty provides for a limited force of attraction rule, whereby income from the sale of goods or merchandise or carrying on other business activities which are the same or similar to the goods sold or activities carried out through the PE, will be included into the PE s assessable income which is taxable in the source state. This is similar to the limited force of attraction rule provided under the KSA Income Tax Law Article 5(a)(10). The insertion of the forceof-attraction rule into tax treaties is a new tax treaty policy development for KSA (see also similar provisions in the DTTs with Ethiopia, Macedonia and Venezuela).

3 Global Tax Alert 3 the ownership threshold. However, capital gains derived from sale of shares of a company by the Government (including Saudi Arabian Monetary Agency and the National Bank of Kazakhstan) and wholly owned government entities are exempt from tax in the source state. The DTT provides that domestic tax anti-avoidance provisions may prevail over the provisions of the tax treaty (Article 28), provided the main purpose or one of the main purposes of undertaking a transaction was to obtain the benefits under the tax treaty. This is in line with the recommendations made by OECD through the BEPS Action 6 as noted above. Under paragraph 1 of the Protocol to Article 10 (Dividends), the DTT grants the right to the source state to tax the aftertax profits of a PE (i.e., amount derived after deducting tax on business profits under Article 7 of the tax treaty), which is distributed by the PE to its head office, at a rate not exceeding 5%. This is similar to the provisions related to the branch remittance tax under the KSA Income Tax Law, and again, a new tax treaty policy development for KSA. Other treaty articles broadly correspond either to the OECD DTT KSA Macedonia The new tax treaty provides for maximum WHT rates of 5% on dividends, 5% on income from debt-claims (0% if the payer or the beneficial owner of such income is the Government, an administrative subdivision, a local authority, or the Central bank, or any other financial institution wholly owned by the Government), and 10% on royalties. activities in connection therewith is set as 183 days. The definition of a PE under Article 5(3)(b) includes a UN-model service PE, which provides that, furnishing of services within the contracting state creates a PE if the activity continues for more than 183 days in a 12-month period. The dependent agent definition (Article 5(5)(b)) has a UN-model based provision, which includes also an agent, who, albeit having no authority to conclude contracts, but habitually maintains stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise. Article 7(1) of this DTT provides for a limited force of attraction rule, whereby income from the sale of goods or merchandise or carrying on other business activities which are the same or similar to the goods sold or activities carried out through the PE, will be included into the PE s assessable income which is taxable in the source state. This is similar to the limited force of attraction rule provided under the KSA Income Tax Law Article 5(a)(10). The insertion of the force-of-attraction rule into tax treaties is a new tax treaty policy development for KSA (see also similar provisions in the DTTs with Ethiopia, Kazakhstan and Venezuela). which are set to prevail over the provisions of the tax treaty (Article 27), provided the main purpose or one of the main purposes of undertaking a transaction was to obtain the benefits under the tax treaty. Notably, the wording of this clause is similar to the principal purpose test found in Other treaty articles broadly correspond either to the OECD DTT KSA Portugal The new tax treaty provides for maximum withholding tax (WHT) rates of 10% on dividends (but 5% if the beneficial owner company holds directly at least 10% of the share capital or if the beneficial owner is a government body (including Saudi Arabian Monetary Agency and Central Bank of Portugal) or any entity wholly owned by the KSA government), 10% on income from debt-claims (0% if the beneficial owner of such income is the Government, an administrative subdivision, a local authority, or the entities wholly owned by the Government), and 8% on royalties.

4 4 Global Tax Alert The definition of a PE under Article 5(3)(b) includes a UNmodel service PE provision under which, the furnishing of services within the contracting state creates a PE if the activity continues for more than 183 days in a 12-months period. As per Article 13(4) and Article 13(5), the source state has taxing rights over capital gains arising from the disposal shares of a company consisting of more than 50% of immovable property assets, as well as on capital gains arising from company shares where the participation is at least 20% of the share capital of the company. which prevail over the provisions of the tax treaty Articles 27(1) and 27(2), provided the main purpose or one of the main purposes of undertaking a transaction was to obtain the benefits under the tax treaty. This clause has a similar meaning to the principal purpose test found in Further, any benefits under this tax treaty shall be granted only to a resident of a state who is the beneficial owner of the income derived from other state (Article 27(3)). This is different from traditional beneficial ownership provisions, which are regularly included only in the text of Articles 10, 11 and 12. However in the case of this DTT the beneficial ownership test is required to be satisfied with respect to the treaty as a whole. Other treaty articles broadly correspond either to the OECD DTT KSA Sweden The new tax treaty provides for maximum WHT rates of 10% on dividends (but 5% if the beneficial owner company holds directly at least 10% of the share capital, 0% on income from debt-claims, and 7% on royalties (but 5% if the royalties are in connection with the use or right to use industrial, commercial or scientific equipment). Other key features of this tax treaty are: The definition of a PE under Article 5(3)(b) includes a UNmodel based provision on service PE provision, according to which, the furnishing of services within the contracting state creates a PE if the activity continues for more than 183 days in a 12-month period. As per Article 13(4) and Article 13(5), the source state has taxing rights over capital gains arising from the disposal shares of a company consisting of more than 50% of immovable property assets; as well as on capital gains arising from company shares where the participation is at least 25% of the share capital of the company. The DTT contains reference to domestic tax anti-avoidance provisions which prevail over the provisions of the tax treaty (Article 28(1)), provided the main purpose or one of the main purposes of undertaking a transaction was to obtain the benefits under the tax treaty. This clause has a similar meaning to the principal purpose test found in The Article 28(2) also contains also a different antiavoidance provision that restricts treaty benefits with respect to companies subject to low-tax regimes that may be used for inappropriate purposes e.g., entities carrying on banking, shipping, financing or insurance activities or by providing administrative services to group companies, which are subject to lower a tax rate as compared to local companies carrying on a similar business. This provision is unlikely, to be relevant to KSA resident entities when claiming treaty benefits in Sweden, but a proper analysis needs to be made in each respective case. Other treaty articles broadly correspond either the OECD DTT Saudi Arabia Venezuela The new tax treaty provides for maximum WHT rates of 5% on dividends, 5% on income from debt-claims (0% if such income is paid to the Government, Central Bank or any other financial institution wholly owned by Government or performing functions of a governmental nature or to any resident with respect to the debt guaranteed or financed by the above mentioned parties), and 8% on royalties.

5 Global Tax Alert 5 The definition of a PE under Article 5(3)(b) includes a UNmodel based provision on service PE, according to which, furnishing of services within the contracting state creates a PE if the activity continues for more than 183 days in a 12-months period. Article 7(1) of the tax treaty provides for a limited force of attraction rule, whereby income from the sale of goods or merchandise or carrying on other business activities which are the same or similar to the goods sold or activities carried out through the PE, will be included into the PE s assessable income which is taxable in the source state. This is similar to the limited force of attraction rule provided under the KSA Income Tax Law Article 5(a)(10). The insertion of the force-of-attraction rule into tax treaties is a new tax treaty policy development for KSA (see also similar provisions in the DTTs with Ethiopia, Kazakhstan and Macedonia). which may prevail over the provisions of the tax treaty (Article 27), provided the main purpose or one of the main purposes of undertaking a transaction was to obtain the benefits under the tax treaty. Notably, the wording of this clause is similar to the principal purpose test found in Other treaty articles broadly correspond either the OECD For additional information with respect to this Alert, please contact the following: Ernst & Young & Co (Public Accountants), Riyadh Asim Sheikh asim.sheikh@sa.ey.com Ahmed Abdullah ahmed.abdullah@sa.ey.com Franz-Josef Epping franz-josef.epping@sa.ey.com Hosam Abdulkareem hosam.abdulkareem@sa.ey.com Imran Iqbal imran.iqbal@sa.ey.com Nitesh Jain nitesh.jain@sa.ey.com Parvez Maqbool parvez.maqbool@sa.ey.com Sohail Nini sohail.nini@sa.ey.com Vladimir A Gidirim vladimir.gidirim@sa.ey.com Yousef Eldaw yousef.eldaw@sa.ey.com Ernst & Young & Co (Public Accountants), Al-Khobar Syed Farhan Zubair farhan.zubair@sa.ey.com Javed Aziz Khan javed.aziz@sa.ey.com Jude desequeira jude.desequeira@sa.ey.com Ali Sainudheen ali.sainudheen@sa.ey.com Hatem Ghobara hatem.ghobara@sa.ey.com Ernst & Young & Co (Public Accountants), Jeddah Craig McAree craig.mcaree@sa.ey.com Irfan Alladin irfan.alladin@sa.ey.com Ayman Abu El Izz ayman.abueizz@sa.ey.com Mohammed Desin mohammed.desin@sa.ey.com

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