Saudi Arabia’s Approach to Double Taxation Agreements (DTATs)

Saudi Arabia, like many countries, seeks to foster international trade and investment while ensuring its tax system remains fair and transparent. To do this, the Kingdom has signed a number of Double Taxation Avoidance Treaties (DTATs) aimed at preventing the same income from being taxed in two different jurisdictions. One such agreement is highlighted in Circular No. (3227/19), dated 06/09/1431H (23/05/2010G), which clarifies the procedures surrounding withholding tax on payments made to non-residents under these treaties. 

DTATs and Withholding Tax 

Under Saudi tax legislation, when a payment is made by a resident of Saudi Arabia to a non-resident—whether it’s a dividend, royalty, or interest—Saudi law requires the resident to withhold tax and remit it to the General Authority of Zakat and Tax (GAZT), now part of the Zakat, Tax, and Customs Authority (ZATCA). However, DTATs, to which Saudi Arabia is a signatory, often provide for lower withholding tax rates or exemptions altogether. 

The circular’s primary focus is on clarifying procedures for cases where the tax withheld at the statutory rate exceeds the rates agreed upon in a DTAT. It aims to ensure uniformity in the application of DTATs and the handling of tax refunds for non-residents. 

Key Provisions and Procedures 

Withholding Tax Requirements Saudi residents making payments to non-residents—referred to as the “Withholding Payor”—must withhold tax at the statutory rate set forth in Saudi Arabia’s income tax legislation, regardless of whether the non-resident beneficiary is entitled to a lower rate or exemption under a DTAT. 

Claiming a Refund under a DTAT If a non-resident beneficiary is entitled to a reduced withholding tax rate or exemption under a DTAT, the Withholding Payor must take the following steps to claim a refund for any excess tax withheld: 

• Request from the Payee: The payee, a resident of the counterparty to the DTAT, must submit a letter to the Withholding Payor requesting a refund of the excess tax. 

• Residency Certificate: The payee must provide a certificate from the tax authority in their home country confirming that they are a tax resident there, in line with Article 4 of the DTAT. This also confirms that the income is subject to tax in that jurisdiction. 

• Proof of Tax Remittance: The Withholding Payor must submit the relevant withholding tax return to GAZT, including proof that the tax was paid. 

Refund Process Once the Authority receives all the necessary documents, it will review and verify that the non-resident payee is eligible for the reduced rate or exemption under the DTAT. If all requirements are met, the Authority will refund the excess tax in accordance with the earlier circular No. 3324/9 dated 16/06/1427H (12/07/2006G). 

Why This Matters for Businesses 

For businesses operating in Saudi Arabia, this circular offers clarity on how to navigate the withholding tax obligations when making payments to non-residents. It underscores the importance of understanding the relevant DTAT provisions to ensure compliance and avoid overpayment of taxes. Moreover, the process for claiming refunds is streamlined, ensuring that businesses and their non-resident partners are not subject to unnecessary tax burdens. 

Conclusion 

Circular No. (3227/19) provides an essential framework for businesses engaged in cross-border transactions involving non-residents. By following these procedures, companies can ensure compliance with Saudi tax laws while also benefiting from the reduced tax rates afforded under DTATs. This reflects Saudi Arabia’s commitment to fostering international business relations and maintaining a tax system that is fair and consistent with global standards. 

Summary

Circular No. (3227/19), issued on 06/09/1431H (23/05/2010G), outlines the procedures for applying Saudi Arabia’s Double Taxation Avoidance Treaties (DTATs). These agreements allow for reduced withholding tax rates on payments like dividends, royalties, and interest made to non-residents, compared to the default rates in Saudi tax law. 

The circular clarifies that the resident payor must initially withhold tax at the statutory rate but can claim a refund if the non-resident payee qualifies for a reduced rate under a DTAT. To request a refund, specific documentation, including proof of tax residency and remittance, must be submitted to the tax authority. This ensures compliance with DTAT provisions and prevents overpayment of taxes. 

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