Global Tax Alert | 27 August 2013

New Luxembourg-Saudi Arabia tax treaty published

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The text of the income and capital tax treaty with Saudi Arabia was published recently. The treaty was signed on 7 May 2013. Before coming into force, the treaty will require being ratified by Luxembourg and Saudi Arabia. If this occurs in 2013, the new treaty will be applicable from 1 January 2014 onwards.

Key elements of the treaty

  • The treaty definition of a permanent establishment includes “service permanent establishments” in line with the 2001 United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model).1
  • Article 7 of the treaty includes various restrictions regarding the deduction allowed for certain expenses incurred by a permanent establishment.
  • Luxembourg will exempt assets allocated to a Saudi Arabia permanent establishment from Luxembourg net worth tax. However, Luxembourg will only grant a credit in respect of taxes on income realized through a Saudi Arabia permanent establishment and gains from the alienation of assets of a Saudi Arabia permanent establishment, unless the permanent establishment is engaged in agricultural, industrial, infrastructure or touristic activities in Saudi Arabia. This is an exception from the general Luxembourg treaty practice to exempt profits of foreign permanent establishments.
  • Withholding tax on dividends will be limited to 5%, provided the recipient is the beneficial owner (instead of 15 % withholding tax under Luxembourg domestic law). Saudi Arabia levies 5% withholding tax on dividends under its domestic law. Under Luxembourg domestic law, dividends distributed by Luxembourg companies to companies in treaty jurisdictions are exempt from withholding tax under certain conditions.2 Once the treaty is in force, dividends paid to Saudi Arabia companies can benefit from this exemption.
  • Interest will not be subject to withholding tax (instead of 5 % withholding tax on interest paid under a debt obligation – except on bank deposits3 – under Saudi Arabia domestic law). Luxembourg does not levy withholding tax on interest under its domestic law.
  • Withholding tax on royalties will be limited to 5% or 7%4 (instead of 15% withholding tax on royalties under Saudi Arabia domestic law). Luxembourg does not levy withholding tax on royalties under its domestic law.
  • Capital gains on the disposal of shares representing at least 25% in a Saudi Arabia or Luxembourg company as well as shares in companies whose assets consist of real estate (no minimum required) are taxable in the country where the company is located.
  • Dividends received by a Luxembourg company from a Saudi Arabia company are exempt from Luxembourg income taxes if the Luxembourg company held at least 10% in the Saudi Arabia company from the beginning of the accounting year and if the Saudi Arabia company is subject to a tax in Saudi Arabia that is comparable to Luxembourg corporate income tax. A similar exemption (with a slightly different holding requirement) applies under Luxembourg domestic law. However, the treaty exemption also applies if the Saudi Arabia company is exempt from tax or benefits from a reduced tax rate and if the dividends are paid out of profits from agricultural, industrial, infrastructure and touristic activities.
  • Collective investment vehicles such as SICAVs and SICAFs (including SICAV-SIFs and SICAF-SIFs) that are established in a contracting state are considered tax residents and beneficial owners for purposes of the treaty.

Endnotes

1. “The furnishing of services, including consultancy services, by an enterprise of a territory through employees or other personnel or persons engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) in the other territory for a period or periods aggregating more than 6 months within any twelve-month period.”

2. The parent company must be fully subject to tax corresponding to Luxembourg income tax, and has to hold, or commit to hold, at least 10% of the share capital or a participation with acquisition cost of at least EUR 1.2 million.

3. Interest on bank deposits is withholding tax free.

4. 5% withholding tax on royalties paid for the use of, or the right to use industrial, commercial or scientific equipment, 7% for other royalties.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP, Luxembourg Tax Desk, London
  • Gergely Szatmári
    +44 20 7783 0582
    gszatmari@uk.ey.com
Ernst & Young LLP, Luxembourg Tax Desk, New York
  • Jurjan Wouda Kuipers
    +1 212 773 6464
    jurjan.woudakuipers@ey.com
  • Lea Boudoux
    +1 212 773 5957
    lea.boudoux@ey.com
  • Hermann Schomakers
    +1 212 773 2985
    hermann.schomakers@ey.com
Ernst & Young LLP, EMEIA Financial Services Luxembourg Tax Desk, New York
  • Raffaele Gargiulo
    +1 212 773 3505
    raffaele.gargiulo@ey.com
  • Guillaume Roux
    +1 212 773 3677
    guillaume.roux@ey.com
Ernst & Young LLP, Luxembourg Tax Desk, Chicago
  • Alexandre J. Pouchard
    +1 312 879 3007
    alexandre.pouchard@ey.com
  • Estelle Collardeau
    +1 312 879 2897
    estelle.collardeau@ey.com
Ernst & Young LLP, Luxembourg Tax Desk, San Jose
  • Xavier Picha
    +1 408 918 5880
    xavier.picha@ey.com

EYG no. CM3763