New Netherlands – Saudi tax treaty provides opportunities for structuring investments into Saudi
The tax treaty between the Netherlands and Saudi Arabia (the "Treaty") has become effective as of 1 January 2011 (click here for more details on the Treaty, Stibbe Tax Alert of 22 October 2008). Since the Treaty contains a unique provision which should generally protect Dutch investors against a 20% Saudi Arabian ("Saudi") capital gains tax levy upon a sale or a transfer of the shares of a SA subsidiary, it can be most beneficial for non-Saudi investors to structure their investments into Saudi Arabia (inbound investments) through a Dutch intermediate company. The attractive and robust tax system and reliable and flexible corporate laws of the Netherlands allow for the efficient structuring of Dutch (holding) companies.
In Saudi Arabia a capital gains tax at the rate of 20% is levied upon the transfer of shares in a Saudi entity by a non-Saudi shareholder. According to the Treaty - which contains a unique provision which is not included in the tax treaties entered into by SA with some 20 other countries - a Dutch entity should be protected against such capital gains tax levy, provided that it beneficially holds at least 10% of the shares of the Saudi entity and the shares are acquired after a date that the Treaty was signed (i.e. after 13 October 2008). Furthermore, under the Treaty in certain reorganisation structures such capital gains tax may be postponed until the date on which the final alienation of investment is made, even in case the interest would be below 10%.
Also the domestic Saudi rate on royalty payments of 15% can generally be reduced to 7% under the Treaty. Income from debt claims and dividend distributions by a Saudi entity to non-Saudi shareholders are subject to a 5% domestic withholding tax in Saudi Arabia, which rate is in principle not further reduced under tax treaties (including the Treaty) entered into by Saudi Arabia.
It can be concluded that the Netherlands with its unique Treaty with Saudi Arabia and its robust and long established position for (joint venture) holding and financing entities, is excellently positioned to be a leading jurisdiction for investments into Saudi Arabia.