Double Tax Treaty signed with Saudi Arabia - 24/07/2013
A new door opens to the Middle East: Double Tax Treaty signed with Saudi Arabia
On the occasion of the most recent Luxembourg for Finance mission to the Middle East, the Minister of Finance announced that Luxembourg has concluded its first tax treaty with Saudi Arabia. The signing of this historic agreement on 7 May 2013 represents another milestone in the relationship between Luxembourg and Saudi Arabia, and more generally the Grand-Duchy’s relationship with the Middle East. This treaty will spur business communities on both sides to further strengthen and enhance the economic relationship between Luxembourg and Saudi Arabia.
Luxembourg’s tax treaty network continues to grow and now includes most of the Middle East countries, notably Bahrain, Qatar and the United Arab Emirates. In addition, negotiations are ongoing to conclude treaties with Egypt, Kuwait, Lebanon and Syria.
The main features of the new Luxembourg-Saudi Arabia treaty are as follows:
Permanent establishment (PE)
The treaty contains specific provisions on the definition of a PE and explicitly mentions that the provision of services (including consulting services) for a period of at least 6 months during any continuous 12-month period will give rise to a PE. All sites related to the extraction of natural resources will give rise to a PE.
The PE article also contains detailed provisions regarding the determination of the taxable basis of a PE in line with Saudi Arabia’s domestic law.
The withholding tax levied on dividends paid by a company resident in one contracting state to a resident of the other contracting state will be limited to 5% of the gross amount of dividends. No minimum holding period will be required to benefit from the 5% rate.
This provision grants a lower withholding tax rate than under Luxembourg domestic law, which imposes a 15% withholding tax on dividends paid to a nonresident company (under Luxembourg domestic law, however, the withholding tax rate could be reduced to 0% if the recipient of the dividends is resident in a tax treaty country).
Conversely, the provision is not more advantageous from a Saudi Arabian perspective, since Saudi domestic law imposes a 5% withholding tax on dividends paid by a resident company to a foreign shareholder, assuming no exemptions apply.
Income from receivables
The treaty allocates the right to tax income arising from receivables to the contracting state of the beneficiary. However, this provision will not impact interest payments made by a Luxembourg taxpayer, since, Luxembourg generally does not levy withholding tax on interest paid to a nonresident company under its domestic law.
In contrast, this provision makes interest paid by a Saudi resident to a Luxembourg resident more attractive as compared to Saudi domestic law, under which a 5% withholding tax is levied on interest payments, provided no exemption applies.
As a result of this provision, no withholding tax will apply to income from receivables between Saudi Arabia and Luxembourg residents.
The treaty limits the withholding tax levied on royalties by a company that is resident of one of the contracting states to a resident of the other contracting state to:
- 5% of the gross amount where the royalties are paid in consideration for the right to use industrial, commercial or scientific equipment (this should include all equipment related to mining, oil and gas activities); and
- 7% of the gross amount in all other cases
Again, this provision will not change the effect of Luxembourg domestic law, since no withholding tax is levied on royalties paid by a Luxembourg resident company to a nonresident.
The treaty is more advantageous than Saudi domestic law, under which a 15% withholding tax is levied on royalties paid by a resident company to nonresident company, provided no exemption applies.
The beneficial rates also apply to rental payments made for the right to use industrial, commercial or scientific equipment, as these are included in the treaty’s definition of royalties.
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