Executive summary

On 29 June 2025, Kuwait issued Decree-Law No. 80 of 2025, which was then published in the Official Gazette on 6 July 2025, according to press reports. The Decree Law ratifies the tax treaty (Treaty) that Kuwait has concluded with Saudi Arabia. The Treaty aims to avoid double taxation on transactions and investments between both jurisdictions, as well as preventing tax evasion and avoidance. As the Treaty has been ratified by both jurisdictions, Kuwait must now notify Saudi Arabia through diplomatic channels and exchange ratification instruments.

The Treaty will enter into force on the first day of the second month following the month in which the last notification is received. The Treaty's provisions with respect to withholding tax would apply from 1 January of the year following the date of the Treaty's entry into force.

The Treaty provisions are generally aligned with the United Nations (UN) and the Organisation for Economic Co-operation and Development (OECD) Model Tax Conventions, as well as the OECD's Base Erosion and Profit Shifting (BEPS) Action Plans.

The Treaty is a welcome addition to the tax treaty network of both the jurisdictions.

Detailed discussion

Background

Signed on 4 December 2024, in Riyadh, Saudi Arabia, the Treaty aims to prevent double taxation on income and curb tax evasion, marking a notable advancement in regional economic cooperation.

The conclusion of the Treaty signifies an important advancement in the collaboration between Kuwait and Saudi Arabia. The Treaty's objectives are to improve financial transparency, encourage cross-border trade and highlight Kuwait's dedication to maintaining a tax framework that aligns with global standards.

Highlights of the Treaty

Taxes covered

Article 2 of the Treaty states that it applies to Saudi Arabia's zakat and corporate income tax (CIT). For Kuwait, the taxes covered in particular are CIT, National Labor Support Tax and the Divided Zone CIT.

However, Kuwait zakat and the Domestic Minimum Top-up Tax (DMTT) are not specifically mentioned in the Treaty.

Other identical or substantially similar taxes that are imposed after the Treaty is signed would also qualify as "covered taxes" within the meaning of Article 2 of the Treaty.

Residence

Under Article 4 of the Treaty, from Kuwait's perspective, the term "resident" means an individual who is a Kuwaiti national and has a permanent home in Kuwait. The term also includes a company or entity incorporated in Kuwait.

From Saudi Arabia's perspective, the term "resident" means any person who, under the laws of Saudi Arabia, is liable to tax therein by reason of his domicile, residence, place of incorporation, place of management or any other criterion of a similar nature.

If an individual taxpayer has dual residence, residence will be determined through a tie-breaker rule considering certain factors, including permanent home, place of vital interests, habitual abode and nationality.

If a taxpayer other than an individual has dual residence, there is no tie-breaker rule to apply. Residence will be determined by mutual agreement and, until such agreement, any tax benefits may not be available to corporate persons.

Permanent establishment and business profits

Article 5 of the Treaty defines the concept of permanent establishment (PE), the purpose of which is to determine the right of a Contracting State (source state) to tax the business profits of an enterprise of the other Contracting State (residence state). Article 5 broadly follows the structure and content of the equivalent article in the UN Model Tax Convention.

Under Article 5(3)(a) of the Treaty, a building site or a construction, assembly or installation project in the source state constitutes a PE if the projects/site or activity lasts more than 183 days.

The provision of services, including consultancy or administrative services, creates a PE in the source state if the services are rendered for more than 183 days in the aggregate, within any 12-month period beginning or ending in the relevant fiscal year under Article 5(3)(b) of the Treaty. Additionally, Article 5(3)(c) provides that a PE will be established if substantial equipment is used, or activities are performed in relation to the exploration for or exploitation of natural resources located the source state for a period more than 30 days in total within any 12-month period beginning or ending in the relevant fiscal year.

Article 5 includes a negative list for activities considered ancillary and introduces anti-fragmentation rules. Under Article 5(6), a PE can also be created through a dependent agent authorized to conclude contracts or maintaining a stock of goods on behalf of a foreign enterprise. The definition of "closely related enterprises" is included to prevent PE avoidance.

Under Article 7 of the Treaty, only business profits attributable to a PE situated in the source state would be subject to tax in the source state. Importantly, Article 7 does not include any "force of attraction" provisions that may be found in some other Saudi treaties, which attribute to a PE profits derived by the head office from activities of a same or similar character as those carried out through the PE. Therefore, under the Treaty, only profits from activities carried out through a PE should be attributable to it.

Taxation of passive income and fees for technical services

The Treaty includes the following tax rates for certain items of income:

*The definition of technical services under this Article includes payments for any service of a managerial, technical or consultancy nature, but excludes payments made (1) to an employee of the person making the payment, (2) for teaching at or by an educational institution or (3) by an individual for services of personal use.

It is not common for tax treaties concluded by Kuwait and Saudi Arabia to specifically contain a separate article dealing with taxation of fees for technical services. In Kuwaiti and Saudi treaties, fees for technical services were normally treated as business profits and, therefore, governed by the provisions of Article 7. Based on the recent version of the UN Model Tax Convention, Article 13 of the Treaty is expected to provide more certainty on the taxation of fees for technical services in both jurisdictions.

Notably, fees for technical and consulting services paid from Saudi Arabia to service providers abroad are currently subject to 5% domestic withholding tax rate. Because the maximum rate of 10% provided in the Treaty is higher, the KSA domestic 5% rate should continue to apply to technical and consulting fees paid to service providers tax resident in Kuwait.

Capital gains

Capital gains derived from the alienation of shares of a company may be subject to tax in the source state, if at any time during the 365-day period preceding the transfer of ownership, the shares company derive more than 50% of its value from immovable property situated in the source state.

Capital gains derived from the alienation of shares of a company (other than mentioned above) may be subject to tax in the source state if the alienator held, directly or indirectly, at any time during the 365 days preceding the alienation, at least 25% of the company.

In all other instances, capital gains arising from the alienation of shares may be taxed exclusively in the residence state (unless disposed shares form part of the business property of a permanent establishment in the source state).

Government investments

Under Article 23 of the Treaty, a more favorable tax treatment is applied to the income from government investments in which no source taxation would apply on dividends, interest, royalties, income from technical services or capital gains, excluding income from immovable property or gains arising from the alienation of immovable property.

Anti-abuse rules and other provisions

The Preamble of the Treaty states that its purpose is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax avoidance or evasion, including through treaty-shopping arrangements.

Article 29 (Entitlement to Benefits) of the Treaty provides that the benefits of the Treaty shall not be granted if obtaining such benefits is one of the principal purposes of the arrangement/transaction (principal-purpose test).

Article 25 (Methods for Elimination of Double Taxation) provides for a tax credit as the double taxation elimination method to be applied by both states. However, in respect of Saudi Arabia, there is an exclusion that Article 25 does not affect domestic zakat provisions.

The Treaty also includes provisions for Mutual Agreement Procedures (MAP) and Exchange of Information.

Implications

GCC Member States, including Kuwait and Saudi Arabia are signing tax treaties to further facilitate the mutual flow of trade and investments, and further strengthen the economic ties between them. Businesses in Kuwait and Saudi Arabia should review their operating structures from a tax perspective, in light of the new tax treaty.