INDIA-SAUDI ARABIA DOUBLE TAXATION AVOIDANCE AGREEMENT

The government of India and the government of Kingdom of Saudi Arabia had signed a Double Taxation Avoidance Agreement (“DTAA”) for the avoidance of double taxation and the prevention of tax evasion with respect to taxes on income, which came in force from 1 November, 2006.

Applicability

The DTAA applies to the following taxes in the contracting states:

1. In India: The income-tax, including any surcharge thereon
2. In Saudi Arabia:

• the income-tax including the natural gas investment tax; and
• the Zakat.

Key takeaways

1. Residency: Any person who, under the laws of that state, is liable to taxation in that state by reason of his domicile, residence, place of management or any other criterion of a similar nature, is considered as a resident of that state.
2. Permanent establishments: As per the DTAA, permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
3. Income from immovable property: Income derived by a resident of a contracting state from immovable property situated in the other contracting state, may be taxed in that other contracting state.
4. Business partner: The profits of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other state but only so much of them as are attributable to that permanent establishment.
5. Dividend: Dividends paid by a company which is a resident of a contracting state to a resident of the other contracting state, may be taxed in that other contracting state.
6. Income from debt-claims: Income from debt-claims arising in a contracting state and paid to a resident of the other contracting state, may be taxed in that other state.
7. Royalties: Royalties arising in a contracting state and paid to a resident of the other contracting state, may be taxed in that other state.
8. Capital gains: Gains derived by a resident of a contracting state from the alienation of immovable property situated in the other contracting state, may be taxed in that other state.
9. Director’s fees: Payments derived by a resident of a contracting state in his capacity as a member of the board of directors of a company which is a resident of the other contracting state, may be taxed in that other state.
10. Withholding tax rates: A withholding tax rate of 5%, 10% and 10% has been agreed to between the contracting states in regards to dividend, interest and royalty. Additionally, an exemption has been granted to interests earned by government institutions.

Inference

The India- Saudi Arabia DTAA inculcates various beneficial clauses and provisions which facilitate the avoidance of double taxation and resolve any treaty- related issues that may arise amicably. The DTAA specifies that the credit method system shall be used so as to eliminate double taxation. The DTAA aims to provide tax stability to the residents of India and Saudi Arabia and facilitate mutual economic cooperation as well as stimulate the flow of investment, technology and services between the contracting states.