DTA between Switzerland and Saudi Arabia comes into force

The DTA is significant because it promotes economic relations between Switzerland and its most important trading partner in the Gulf region and adds an important partner to Switzerland's existing network of agreements in the Near and Middle East.

The DTA also takes into account the results of the BEPS project of the G20 and the OECD, which aims to combat the international reduction and shifting of profits. More information on the BEPS project can be found in our various blog articles on the BEPS project.

Essentially, the DTA is based on the OECD model tax convention. Below we explain some of the provisions and specificities of the DTA.

International tax consultancy

Residence (Art. 4)

If a person is a resident of both contracting states within the meaning of the DTA, the so-called tie-breaker rule applies analogously to art. 4 para. 2 OECD model tax convention, according to which only one of the two states is considered the state of residence under the DTA. The other state must therefore partially relinquish its right of taxation and is considered a source state under DTA law.

It should be emphasised in this context that the allocation of domicile of legal persons in the case of dual domicile under the DTA continues to be based on the place of actual management and not, as proposed in the BEPS project, on the basis of a mutual agreement procedure.

Dividends (Art. 10)

The DTA between Switzerland and Saudi Arabia provides for a general residual tax rate of 15 percent for dividends. If the dividends are paid to a company that holds at least 10 percent of the capital of the distributing company, or if the dividends are paid to the central bank, to institutions and funds wholly owned by the contracting states or to pension funds, the DTA provides for a reduced residual tax rate of 5 percent.

Income from receivables or interest (Art. 11)

For interest - which is referred to in the DTA as "income from receivables" at the request of Saudi Arabia - the DTA provides for a maximum taxation in the source state of 5 percent.

Since the withholding tax levied by Saudi Arabia on interest is currently 5 percent, the DTA has no direct consequences for effective taxation by Saudi Arabia. However, with the DTA, it will now be possible for Swiss residents to offset the residual Saudi withholding taxes incurred in Switzerland, thereby effectively eliminating international double taxation.

International tax consultancy

Royalties (Art. 12)

The base tax on royalties paid by a resident of a contracting state to a beneficial owner resident of the other state is reduced under the DTA as follows:

• Licence fees for the use of or the right to use industrial, commercial or scientific equipment: 5 percent;
• All other cases: 7 percent.

Since the definition of royalties follows the UN model tax convention, payments for the use of commercial, industrial and scientific equipment, namely leasing instalments, untypically also fall under the term royalties.

Since Switzerland does not have any withholding taxes on royalties, this provision has a particular impact on the tax situation of recipients of royalties from Saudi sources who are resident in Switzerland. These are subject to a withholding tax of 15% in Saudi Arabia.

Due to the low withholding tax rates of 5-7 percent, it will often be possible in practice for a corporation resident in Switzerland to effectively eliminate international double taxation by crediting Saudi withholding taxes. In this respect, the DTA thus brings considerable advantages for licensing activities from Switzerland. Before the DTA came into effect, Saudi withholding taxes in Switzerland could only be deducted at the level of the tax base, which meant that international double taxation continued to exist to a large extent.

Conclusion

The conclusion of the DTA between Switzerland and Saudi Arabia closed a major gap in Switzerland's network of agreements. Without this DTA, cooperation with an important trading partner in the Gulf region was more difficult, which thus hindered the radius of action of Swiss companies in the Middle East and Saudi Arabia. The new DTA also brings legal certainty and should have a generally positive effect on future cooperation with Saudi Arabia.