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December 9, 2021
2021-2213

Taiwan's tax treaty with Saudi Arabia enters into force

Executive summary

The Agreement for the Avoidance of Double Taxation with Respect to Taxes on Income and the Prevention of Tax Evasion signed on 2 December 2020 between Taiwan and Saudi Arabia (the Treaty) entered into force on 1 November 2021 and will be effective from 1 January 2022. The Treaty provides appropriate measures to avoid double taxation and a mechanism to resolve cross-border tax disputes between the two jurisdictions.

This Alert summarizes the key provisions in the Treaty.

Detailed discussion

Pursuant to the Press Release Statement issued by the Taiwan Ministry of Finance on 18 November 2021, the Treaty entered into force on 1 November 2021, after both Taiwan and Saudi Arabia completed the notification procedures. The Treaty will be applicable from 1 January 2022. The Treaty is intended to provide a more friendly tax environment in trade and investment, industrial cooperation, and technical exchange between Taiwan and Saudi Arabia. Its main objectives are to ensure double taxation is eliminated and to provide a dispute resolution mechanism to prevent and resolve disputes resulting from cross-border taxation.

Key provisions of the Treaty include:

Business profits

If an enterprise of Taiwan or Saudi Arabia carries on business in the other jurisdiction without constituting a permanent establishment (PE) therein, business profits of that enterprise are exempted from taxation in that other jurisdiction.

The types of PE under the Treaty include:

  • Physical PE: a place of management, a branch, an office, etc.
  • Construction PE: a building site, a construction, assembly or installation project, or related supervisory activities, continuing for more than six months.
  • Service PE: the provision of services (for the same or connected projects) for a period or periods aggregating more than six months within any twelve-month period.
  • Agency PE: a person acting on behalf of an enterprise of a jurisdiction and habitually exercising an authority to conclude contracts in the name of that enterprise in the other jurisdiction.

Withholding tax (WHT) rates

WHT rates under the Treaty are:

  • Dividends: 12.5%
  • Interest: 10% (a WHT exemption is available if paid to a Central Bank or a financial institution wholly owned or controlled by a public authority)
  • Royalties: 4% for the use/right to use of industrial, commercial or scientific equipment and 10% for all other cases

Capital gains tax

Capital gains tax provisions under the Treaty include the following:

  • If a company resident in Taiwan or Saudi Arabia held at least 25% of the total issued shares of a company resident in the other jurisdiction at any time during a seven-year period prior to the alienation of such shares (25% rule), then the gain derived from the share transfer may be taxable in the other jurisdiction. If not, (i.e., less than 25% ownership), the other jurisdiction will not have the taxing right on such gain.
  • In the case of a share transfer, the Treaty does not incorporate the concept/condition of a "property rich" share/entity (i.e., more than 50% of the value of shares or share capital is composed of real estate situated in the other jurisdiction) to determine the taxing right of each jurisdiction. In other words, even if the transferred company itself is property rich, the 25% rule would be the only criterion under the Treaty to determine the taxing right on the capital gains. As long as the 25% rule is met, the relevant gain derived from the transfer of shares would be taxed according to the domestic legislation of that other jurisdiction.

Mutual Agreement Procedure (MAP)

Residents of either jurisdiction may, within the stipulated duration, present their cases to the competent authority of either jurisdiction requesting to initiate a MAP to resolve/prevent disputes on the application of the Treaty and/or provide corresponding adjustments for transfer pricing cases.

Protocol

The Treaty also includes a protocol clarifying certain terms/treatment under the Treaty, specifically in the context of a resident of a territory (Article 4), business profits (Article 7) and the potential introduction of a non-discrimination Article in the Treaty under specified circumstances in the future.

Implications

Taiwan and Saudi Arabia have close trade relations and are key trading partners. The entry into force of the Treaty is expected to reduce the tax burden of companies resident in Taiwan or Saudi Arabia which carry on business in the other jurisdiction. For instance, from a Taiwan tax perspective, this may include lower WHT on payments to Saudi Arabian companies. From a Saudi Arabia tax perspective, this may include, subject to conditions, nil taxation of Taiwanese companies for services provided to entities in Saudi Arabia for less than 6 months within any 12-month period and foreign tax credit for Saudi Arabian companies for taxes paid in Taiwan.

The Treaty is expected to aid reasonable and stable taxation, resolve/prevent double taxation disputes, and remove tax obstacles from carrying out cross-border economic activities between Taiwan and Saudi Arabia.

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

Ernst & Young (Taiwan), Taipei

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

 

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