Executive summary

On 13 February 2025, Decree No. (1) of 2025 (Decree) on the ratification of the double tax treaty (DTT) between Qatar and Saudi Arabia was published in the Official Gazette. The Amir of Qatar had issued the Decree on 15 January 2025, ratifying the Agreement between the Government of the State of Qatar and the Government of the Kingdom of Saudi Arabia for the Avoidance of Double Taxation with respect to Taxes on Income and for the Prevention of Tax Evasion and Avoidance.

The DTT is aimed at enhancing economic cooperation between the two countries, reducing double taxation, and fostering a transparent and predictable tax environment for bilateral investment by businesses and individuals in both countries.

The treaty partners shall inform the other state in writing, through diplomatic channels, when the ratification procedures in their respective state have been completed. The DTT shall enter into force on the first day of the second month following the month in which the last such notification was received.

Once effective, the DTT will become the second effective DTT that Qatar has concluded with other GCC states, after its DTT with Oman.

Highlights of the DTT

Scope

The DTT applies to Saudi Arabia and Qatar, including their economic zones and continental shelves.

Taxes covered

The DTT applies to income taxes imposed by a contracting state and levied on gross income or on elements of income, including taxes on gains resulting from the alienation of ownership of movable or immovable property. The current taxes to which the agreement applies are zakat and income tax in Saudi Arabia and income tax in Qatar.

Residence criteria

A person may apply the provisions of the DTT, provided they are considered as resident in one of the treaty partner jurisdictions, in accordance with the terms of the DTT. A resident means a person liable to tax in a contracting state based on its domicile, residence, place of establishment or any other criterion of a similar nature. It also includes the state itself and its subdivisions/authorities.

The DTT provides for a tiebreaker rule in case of dual residence, which for individuals is determined by considering, in this order, (i) permanent home, (ii) center of "vital" interests, (iii) habitual abode, (iv) nationality, (v) mutual agreement by the competent authorities of the treaty partners.

For legal entities, there is no specific tiebreaker rule in the case of dual residence. In such circumstances, the competent authorities of the treaty partners shall mutually agree on the state in which the person is resident for the purposes of the DTT. Absent this agreement, no DTT benefits shall be available for a dual resident person.

The DTT also includes specific reference to transparent structures aimed at preventing double taxation or non-taxation due to differences in tax treatment.

Permanent establishments

The definition of a permanent establishment (PE), in principle, is in line with the Organisation for Economic Co-operation and Development (OECD) definition, and includes the following situations:

• A "fixed place" PE, which includes an office, a branch or other fixed place of business through which the activities are carried out
• A "construction site" PE, which is deemed to exist only if the project or work lasts more than 183 days
• A "service" PE, which may be deemed to exist if services are provided, including advisory services, through the employees of an enterprise of one contracting state in the other contracting states for an aggregate period of 183 days in any 12-month period
• A "dependent agent" PE, which may be deemed to exist if an enterprise of one contracting state carries out activities in the other contracting state through a person (other than a person with an independent status) that habitually concludes or plays a principal role in concluding contracts on behalf of the enterprise in that other state

Additionally, the DTT provides that a PE shall be deemed to exist where an enterprise of one contracting state carries out exploration or exploitation of natural resources in the other contracting state for a period totaling more than 30 days in any 12-month period.

Separately, the DTT lists the preparatory and auxiliary activities that should not lead to triggering the creation of a PE. The DTT contains special provisions aimed at preventing artificial avoidance of a PE by fragmenting a cohesive operating business into several small operations, which, being viewed on a standalone basis, may be considered as preparatory or auxiliary activities and not constituting a PE — the above is in line with the Action 7 of the Base Erosion and Profit Shifting (BEPS) Action Plan.

Business profits

Business profits shall be taxable only in the state where an enterprise is located, unless the income is attributable to a PE in the other jurisdictions. The profits of the PE should be determined as if it were a separate and independent business from its head office. Further, the DTT indicates that the business profits article shall not prevent either contracting state from taxing income or profits from any form or insurance activities in accordance with its own regulations.

Income from international transportation

International transportation income is taxable only in the residence state. This income includes rental/lease income and charter income from the international operation of ships, aircraft and road vehicles.

DTT withholding tax (WHT) rates

Under the DTT, the following rate limits are applicable for passive income:

• Dividends: The DTT provides for a 5% WHT rate on dividends.
• Interest: The DTT provides for a WHT exemption on interest.
• Royalties: The DTT provides for an 8% WHT rate on royalties.
• Technical service payments: The DTT provides for an 8% WHT rate on technical service payments. Income from technical services shall include any payment for any service of an administrative, technical or consulting nature.

To apply the DTT WHT provisions outlined above, the recipient of the payment should be the beneficial owner and DTT WHT rates only apply to the portion of the payment that is at arm's-length. If the payment is not at arm's length due to a special relationship between the payer and the beneficial owner, the excess portion will continue to be taxable under the domestic law WHT provisions.

Domestic procedures with respect to claiming DTT WHT relief should continue to be followed.

Capital gains

The alienation of shares, or similar rights in a partnership or a trust, may be taxed in a contracting state where the entity is located only if the entity is classified as "property-rich" (i.e., more than 50% of its total assets consists of immovable property located in the state) at any time within the 365 days preceding the transfer.

In addition, the DTT outlines a specific provision related to the sale of a "significant" holding, referring to shares, or similar rights in a partnership or a trust, in which the alienator holds/has held at least 25% of the capital at any time within 365 days prior to the transfer. Where a resident of one contracting state disposes of a "significant" holding in the other state, the sale shall be taxed in that other state at a rate not exceeding 15%.

The taxing rights with respect to assets other than those outlined above are allocated to the jurisdiction where the alienator is a resident.

Other income

Income not covered in other parts of the DTT should be taxable only in the jurisdiction where the recipient is a resident.

Government investments

The DTT provides for special rules with respect to government investments. More precisely, investments of a contracting state in the other contracting state and the respective income or gains derived shall be taxable only in the first-mentioned state. This provision does not apply to income from immovable property or gains arising from the disposal of immovable property.

In the case of Qatar, this provision applies to the State or any administrative or political division, local authority, statutory body, agency, instrument or public law entity of it, and any entity wholly owned, directly or indirectly.

In the case of Saudi Arabia, this provision applies to the State or any administrative or political division, local authority, statutory body, agency, instrument or public law entity of it, and any entity wholly owned, directly or indirectly.

The DTT lists specific entities, in both Qatar and Saudi Arabia, for which the special rules on government investments are intended to apply.

Elimination of double taxation

The DTT provides the following mechanisms for the avoidance of double taxation:

• With respect to Qatar: An exemption is provided in circumstances where Saudi Arabia may tax that source of income. This provision does not apply in cases where taxing rights over the source of income were allocated to Saudi Arabia only.
• With respect to Saudi Arabia: A deduction is provided up to the level of tax/zakat that would otherwise have been paid on that source of income.

Mutual Agreement Procedure

Taxpayers may present cases of double taxation to the competent authorities of either state, which must seek to resolve the issue through mutual agreement. The taxpayer should present the case within three years of the first notice of the action that led to the imposition of tax contrary to the provisions of the DTT.

Entitlement to benefits

Benefits under the agreement may be denied if obtaining the benefits was one of the principal purposes of an arrangement or transaction.

Implications

Businesses in Qatar and Saudi Arabia should review their operating models in light of the new DTT to determine its impact on their operations and investments.