Qatar-Saudi Arabia Treaty to Avoid Double Taxation

Qatar-Saudi Arabia Double Tax Treaty

The governments of Saudi Arabia and Qatar signed a historic Double Tax Treaty (DTT) on July 11, 2023, with the objectives of enhancing economic cooperation, avoiding double taxation, and preventing fiscal evasion in terms of taxes on income. Since both countries are increasing their bilateral trade and cross-border investments, this treaty becomes significant in providing tax certainty and improving business efficiency between the two members of the Gulf Cooperation Council (GCC).

This article explores the major provisions of the Qatar-Saudi Arabia DTT, specifically focusing on withholding tax (WHT) provisions, eligibility requirements for treaty benefits, and their effects on businesses and investors.

Objectives of the Qatar-Saudi Arabia DTT

Double tax treaties are vital to avoid double taxation of the same income as it crosses the border. The DTT between Saudi Arabia and Qatar aims to:

1. Prevent double taxation of income earned from activities between the two nations.
2. Avoid tax evasion and avoidance.
3. Offer lower tax rates to specific types of cross-border payments.
4. Encourage cross-border investment and trade by providing tax transparency and equality.

Major Withholding Tax (WHT) Provisions

One of the most important provisions in the DTT is the restriction on withholding taxes for payments of passive income like dividends, interest, royalties, and service fees. Below is an outline of the treaty's major WHT provisions:

I. Dividends

Where an entity in a jurisdiction pays dividends to a person of the other nation, the DTT sets maximum withholding tax for the latter country at 5% of gross dividend amount. This concessional rate fosters cross-border capital investment in stocks and eases relief on imposing higher local taxes.

II. Interest

The DTT grants full exemption from withholding tax on interest payments. In other words, when a Saudi or Qatari entity pays interest to the resident of the other country, there is no withholding tax to be paid. This is specially advantageous for cross-border financing by lowering the total cost of borrowing for borrowers.

III. Royalties

The DTT gives a full exemption from withholding tax on interest payments. This implies that when a Saudi or Qatari entity is paying interest to someone who is resident in the other country, there is no withholding tax. This is especially good for cross-border financing, lowering the cost of debt for borrowers overall.

For royalty payments, which cover payments for the use of intellectual property, trademarks, copyrights, patents, or technical know-how, the DTT caps withholding tax at 8% of the gross amount. This reduction in rate makes licensing arrangements and intellectual property transactions more tax-effective between the two countries.

IV. Technical Service Fees

Fees for technical services, including consultancy, management, or technical services, are also liable to a maximum withholding tax rate of 8%. This is in line with the increasing exchange of professional and technical know-how between Qatar and Saudi Arabia, especially in areas such as energy, infrastructure, and technology.

Conditions for Availing of Lower Withholding Tax Rates

To avail of the lower withholding tax rates under the DTT, the following conditions need to be met:

1. Beneficial Ownership

The beneficiary of the payment should be the beneficial owner of the income. This implies that the beneficiary should have complete control over the income and should not be an intermediary or conduit.

2. Arm's-Length Principle

The treaty provides that only payments reflecting an arm's-length price qualify for the lower rates. In the event of a special relationship between the recipient and the payer (e.g., related-party transactions), and in the case where the payment would have been higher than what had been agreed between unrelated parties, the excess portion may not be subject to the lower rate and might be charged under domestic law.

3. Procedural Compliance

Taxpayers wishing to enjoy treaty benefits need to comply with the respective domestic procedures in their home country. This generally entails submitting:

1. A valid residency certificate issued by the tax authority.
2. Proof of beneficial ownership.
3. Any other documentation specified by the local tax laws of Qatar or Saudi Arabia.

Impact on Cross-Border Transactions

The enactment of the Qatar-Saudi Arabia DTT has a number of significant implications for companies conducting business between the two nations:

1. More Investment

With increased tax clarity and certainty in treatment, investors will find it more convenient to invest in long-term projects and joint ventures between Saudi Arabia and Qatar.

2. Financing Efficiency

The full exemption on withholding tax on interest payments increases the appeal of cross-border financing arrangements, particularly for infrastructure and corporate financing.

3. Increased IP and Services Trade

The lowered WHT on royalties and technical service fees promotes companies to license intellectual property and offer specialized services across borders, which facilitates innovation and the transfer of knowledge.

Interaction with Domestic Tax Laws

It should be noted that although the DTT sets maximum withholding tax rates, actual taxation may differ depending on domestic law. For example:

1. Qatar does not normally withhold tax on dividends and interest under domestic law, but withholds 5% royalty withholding tax and charges a 5% technical service fee withholding tax on payments to non-residents.
2. Saudi Arabia, however, taxes withholding on various cross-border payments at standard domestic rates of:

1. 5% on dividends.
2. 5% on interest.
3. 15% on royalties.
4. 15% on technical service fees.

The DTT confirms that where higher domestic rates apply under domestic law, treaty rates will apply if due procedures are adhered to.

Conclusion

The Qatar-Saudi Arabia Double Tax Treaty marks an important achievement in promoting economic cooperation between two of the Gulf region's most vibrant economies. With the promise of lower withholding tax rates and protection against double taxation, the DTT facilitates a better legal and tax environment for cross-border trade.

Businesses and investors between Saudi Arabia and Qatar ought to evaluate the possible advantages of the DTT, comply with the eligibility rules, and liaise closely with tax consultants in order to properly navigate domestic law as well as treaty provisions. As regional integration in the GCC intensifies, such treaties are critical instruments to construct more powerful, more resistant, and more competitive economies.