According to the OECD guideline, a resident person shall have to pay taxes in his resident country based on the world income, while a non-resident person only needs to pay taxes in a contracting state based on the income derived from that state. According to this principle a resident person have to pay taxes twice in the resident state and other state based on the income derived only in that state. Therefore, in order to avoid double taxation, countries around the world entered into an agreement called Double Tax Avoidance Agreement. This agreement clearly summarizes who needs to pay taxes, where he needs to pay taxes, how much the maximum rate of taxes is which income is not taxable etc.
In 18th December 2018, UAE entered into an agreement between KSA in order to avoid double taxation and prevent tax evasion in between both countries. Are you doing business with KSA ( sales, purchase, provide service, obtain services etc) then this article specially for your attention.
The primary goal of this agreement
The main target of this agreement is to achieve three main goals. Such as
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Avoids Double taxes on the same income
This ensures same income should not be taxed in both UAE and KSA. This will help to manage cash flow of the businesses avoiding payment of taxes in both countries.
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Avoid Tax evasion and maintain tax fairness in the country
This ensures fairness of tax apportion between two countries and this helps to avoid favor taxes to one country.
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Maintain transparency between the two countries.
This ensures the transparent of tax policies of both countries and this will help to reduce the risks of exchanging the information between two countries
Specific topics on this agreement
This agreement consists of major topics and these headings are more important to both countries. such as
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Residency principle and tax impact
This expresses the residency principle of a natural person and a legal person separately. For natural persons residency determines using his domicile residence, habitual place of stay, maintaining his personal bank account etc. For legal person residency determine using place of incorporation, place of management, etc.
However, for any person who hold dual residency for both countries, tie break principle comes into the play. It indicates such a person ultimate residency for tax purposes is determined based on his permanent resident, personal and economic relationship or habitual presence.
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Permeants Establishment
This is a special term in double taxation and it consists of three major categories. If any business or businesses satisfy either one, it means the business holds permanent establishment in a contracting state. Thereafter income that is attributable to such permanent establishment should be taxed according to the relevant country’s domestic law as a business income. Below are mentioned major three categories of determining permanent establishment
- Fixed place of business operates – It includes a place of management, A branch, An office, Factory, a workshop or any other place of extraction.
- A building site, construction, installation, or assembling project services provided in the country for more than 6 months.
- The provision of service including consultancy and any other services for more than 183 days in any 12 month period
However, certain activities such as storage or information collection-related activities are excluded from this definition.
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Business Profits
The business profit of a contracting state should be taxed only in that state according to the domestic law of that state unless it is a PE of the other state. In this agreement ensure only profit attributable to the permanent establishment are taxed in that state under business profit. Under arm’s length basis.
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Dividend, Interest, and Royalty
There are some cap amounts of percentage or specific rules for each category and both countries have to follow these rules irrespective of the domestic law
Dividend – 5% on gross amount
Interest – Taxable only resident state of the recipient
Royalty – 5% wherever arises
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Technique of eliminating Double taxes
Both countries are obliged to provide tax credits for the taxes paid by another country as a deduction. Eg. A person resident in UAE has paid taxes for his income derived in KSA. Therefore when he calculates UAE tax liability, he is entitled to deduct foreign tax credit which he paid in KSA, and a tax deduction in UAE.
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Special exemptions
DTA between UAE and KSA given two special discounts for government I investments and cultural and educational payments. Any government-owned investment including the central bank exempt from taxation by other states. Similarly, any payment made for education, or cultural activities is exempt from taxation in other states.
Conclusion.
The UAE vs KSA tax treaty covers major transactions between two countries and it ensures tax impact for both countries are fair and justifiable. Building a relationship with other nations with trustworthy is a more important concept in the international market. Hence this agreement creates a transparency of the countries and transactions for the whole world.