The income and capital tax treaty between Saudi Arabia and Switzerland entered into force on 1 April 2021. The treaty, signed 18 February 2018, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Saudi Zakat and income tax, including the natural gas investment tax. It covers Swiss federal, cantonal, and communal taxes on income, including total income, earned income, income from capital, industrial and commercial profits, capital gains, and other income, and taxes on capital, including total property, movable and immovable property, business assets, paid-up capital and reserves, and other items of capital.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services through employees or other engaged personnel if the activities continue for the same or connected project within a Contracting State for a period or periods aggregating more than 183 days within any 12-month period.

Withholding Tax Rates

• Dividends - 5% if the beneficial owner is a company directly holding at least 10% of the paying company's capital, or the beneficial owner is the Central Bank of the other Contracting State or an institution or fund, wholly owned by the other Contracting State or a pension scheme that is a resident of the other State; otherwise, 15%
• Interest - 5%, with an exemption for interest paid:
  • to the Government of the other Contracting State including its administrative subdivisions or local authorities;
  • to the Central Bank of that other State;
  • to a pension scheme of that other Contracting State;
  • with respect to an indebtedness arising as a consequence of the sale on credit of any equipment, merchandise, or services;
  • on any loan of whatever kind granted by a financial institution; or
  • on loans between companies
• Royalties - 5% for royalties paid for the use of, or the right to use, industrial, commercial, or scientific equipment; otherwise, 7%

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

• Gains from the alienation of immovable property situated in the other State;
• Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State;
• Gains from the alienation of shares deriving more than 50% of the value directly or indirectly from immovable property situated in the other State; and
• Gains from the alienation of shares of a non-listed company that is a resident of the other State if the alienator, at any time during the 12-month period preceding such alienation, held directly or indirectly at least 10% of the capital of that company - tax rate limited to 15%.

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Double Taxation Relief

Saudi Arabia applies the credit method for the elimination of double taxation, while Switzerland generally applies the exemption method. However, in respect of income covered by Articles 10 (Dividend), 11 (Interest), and 12 (Royalties), Switzerland may allow a deduction of the Saudi tax paid (not exceeding Swiss tax), a lump sum reduction of the Swiss tax, or a partial exemption. In addition, a Swiss resident company deriving dividends from a Saudi company will be entitled to the same relief that would be granted to the Swiss company if the company paying the dividends were a resident of Switzerland.

Non-Discrimination

The treaty does not include a non-discrimination article.

Limitation on Benefits

Article 28 (Miscellaneous Provisions) provides that a benefit of the treaty will not be granted if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the treaty.

Arbitration

The final protocol to the treaty includes the provision that in the event that Saudi Arabia agrees to include an arbitration provision in an agreement or convention for the avoidance of double taxation with another country, the competent authorities of Saudi Arabia and Switzerland will start negotiations, as soon as possible, with a view to concluding an amending protocol to insert an arbitration provision into the Saudi-Swiss tax treaty.

Effective Date

The treaty applies from 1 January 2022.