The Double Tax Treaty (“DTT”) between the UAE and the KSA provides a significant tax incentive for businesses operating in the two contracting states. A positive impact on investment and trade between the two contracting States is expected in the aftermath of its entry into force.

This is the first DTT signed between two GCC countries. KSA is a member of the G20 and a key player in the GCC economy and on the global oil markets. It is keen to reinforce its promising investment environment. On the UAE side, the signing of this DTT reinforces its status as a regional hub for foreign investments and shows its commitment to its continued attractiveness and excellence.

Both contracting countries are members of the BEPS inclusive framework and signed the Multilateral Instrument (“MLI”). Signing such a bilateral DTT is a new step towards compliance with BEPS minimum standards – notably regarding transparency and tax avoidance. It goes hand in hand with the extensive TP legislation recently published in KSA.

This article highlights the key features of the DTT, analyses its tax implications for businesses operating in the two contracting states, and provides an overview of dispute resolution under the DTT.

1.About the Treaty

Due to lengthy negotiations, the treaty is based on the 2014 OECD Model Tax Convention, even though the model was updated in 2017.

However, the KSA has already included this DTT in the list of its Covered Tax Agreements (“CTA”) in the MLI. It is yet to be included by the UAE, since the UAE signed the MLI shortly after the treaty.

The treaty will enter into force on the second month of the official notification between the two contracting countries. It is expected that the treaty will apply as of 1 January 2020.

2.Key Features 

Persons covered

Only the “residents” of the contracting states shall benefit from this treaty.

This residence principle is generally adopted by the KSA in most of its recent treaties, contrary to the UAE which has recently opted for a citizenship criterion, such as for its recently concluded DTT with Brazil.


As a primary definition for “resident”, the treaty uses the standard language of the OECD Model Tax Convention.

An additional interesting provision is that the DTT expressly qualifies as resident, any legal person established, existing and operating in accordance with the legislations of the contracting states and generally exempt from tax:

if this exemption is for religious, educational, charity, scientific or any other similar reason; or

if this person aims at securing pensions or similar benefits for employees.

Although the treaty does not specify whether the residence concept is applicable to businesses established in the Free Zones (UAE) or the Special Economic Zones (KSA), the competent tax authorities are required to coordinate to determine the requirements and conditions to be satisfied to be entitled to any tax benefit granted by this treaty.

Permanent Establishment “PE” Clause

The PE clause is largely based on the OECD Model Tax Convention but features two elements inspired by the UN Model. It notably qualifies:

As a PE: a building site, construction or installation project after 6 months (12 in the OECD Model)

As a service PE: providing services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose if their presence lasts for a period or periods aggregating more than 183 days in any 12-month period

Taxes covered, rates and double taxation elimination

The DTT covers income tax and Zakat in the KSA and income tax in the UAE, in spite of the absence of a federal income tax law in the UAE.

No withholding tax regime applies in the UAE. The table added to this article shows the impact on the withholding tax rates in the KSA and the consequences of the treaty.

The DTT will not apply for royalty payments in case the beneficiary has a PE in the source country (exceptions apply). Similarly, excessive interest payments made between related parties shall not benefit from the DTT exemption.

The treaty provides for source country taxation only on income from natural resources exploration and development. The elimination of double taxation is performed through the tax credit method.

Zakat and the Treaty

Zakat is covered by the treaty (for the KSA). An interesting provision, introduced in several DTTs concluded by Saudi Arabia (e.g. Georgia, Mexico and Kazakhstan), states that “In the case of the KSA, […] the methods for elimination of double taxation will not prejudice the provisions of the Zakat collection regime.”

This provision may have an impact on Zakat for UAE businesses, considering the recent update of the Zakat implementing regulations.

3.Other provisions

Investments owned by Governments (e.g. investments of Central Banks, financial authorities and governmental bodies) shall be exempt from taxes in the other contracting state. The income from such investments (including the alienation of the investment) is also exempt. The exemption does not include immovable properties or income derived from such properties.

There is no provision in the treaty for non-discrimination, assistance in the collection of taxes or territorial extension.

The entitlement to the benefits of the treaty will not be granted in case the main purpose of the transactions or the arrangements at stake is proved to be the enjoyment of such a benefit.

4.Dispute Resolution under the DTT

The treaty provides for a Mutual Agreement Procedure (“MAP”) which can be requested to the competent authority in any of the contracting states within 3 years from the first notification of the action resulting in taxation not in accordance with the provisions of the Convention.

The dispute resolution provision requires the “Competent Authority” of each respective State to communicate with each other directly (not through diplomatic channels) to resolve complaints filed by persons.

Albeit each State’s respective courts may have a domestic perception to certain issues, Articles 31 and 32 of the Vienna Convention have generally permitted domestic courts to account for such the provisions of treaties and analyze them from a domestic perception.

Unlike dispute resolution provisions under domestic law, as general practice on an international level, Article 25 of the DTT can be triggered by a taxable person before a taxation that the taxable person believes is unjust is charged against him, but as a general matter, that complaint must present that the unjust measure of taxation expected is probable – not just possible.

The question arises with respect to each State’s administrative and constitutional litigation avenues; if a competent authority of either state takes a decision that is deemed unconstitutional, can it be challenged before the constitutional circuits of either State? If a person disagrees with a decision, can they challenge it before the administrative circuits of either State? Which ruling would take precedent?

Another item to consider is Article 25(1) which requires notification by the person to occur within three years of the “first notification of the action resulting in taxation not in accordance with the provisions of the Convention”. This raises questions as to whether the three period continues to apply if a domestic litigation process is in play, or whether the period would commence after a final and binding judgement occurs. The effect of a taxable person challenging a matter through domestic proceedings and in parallel triggering the DTT is to be seen.

It has also been noted in general commentaries on the OECD Model Tax Convention of 2014 that criminal penalties imposed by domestic courts or prosecution authorities would not be subject to the procedures of a DTT. As general practice, the “Competent Authority” would not have jurisdiction to decrease or annul such penalties.

As a solution to these uncertainties between challenges and court proceedings, on 21 November 2017, the OECD approved amendments to the OECD Model which the inclusion of arbitral proceedings into Article 25. Article 25(5) of the 2017 version provides that, in the cases where the competent authorities are unable to reach an agreement under a Mutual Agreement Procedure within two years, the unresolved issues will, at the request of the person who presented the case, be solved through an arbitration process. Whether this mechanism will be adopted is a potential given that these novel regulations are in their early stages.

For the time being, the general consensus is that given the lack of no overarching international tax specific court to provide guidance for the interpretation of DTTs, there is no certain unification of interpretations and courts in each of KSA and the UAE may interpret the DTT in a particular manner if issues under the DTT are brought forth in domestic proceedings.

The MLI is meant to improve the dispute resolution mechanisms when the treaties are covered treaties by the contracting parties.

Lastly, as GCC investors become more attuned to intra-GCC treaty applications, and given the rise of investment arbitration in the MENA region, Emirati or Saudi investors could potentially look into challenging unfavorable double taxation decision by triggering investment protection treaties; which usually have more flexible dispute resolution provisions. Moreover, investors may choose to directly resort to investment protection treaty protections as a direct access to arbitral proceedings without waiting for a competent authority to issue a decision.


Even though this DTT between the KSA and the UAE is largely based on the OECD model 2014, the PE definitions it provides adopted from the UN model, broadens the scope of the activities taxable in the source countries, and will require specific attention.

The relief of withholding tax on royalties and interests, along with the MAP will reinforce the business relationships between these two countries.

Finally, it is to be expected that the treaty will soon be notified by the UAE as a CTA under the MLI. In such case, businesses willing to benefit from this DTT will have to satisfy the Principal Purpose Test for the concerned transactions or other investment arrangements.