Capital Gains Tax Between India and Saudi Arabia Under DTAA

Capital Gains Tax Rate Between India and Saudi Arabia

The India-Saudi Arabia Double Taxation Avoidance Agreement (DTAA), signed at New Delhi on 25 January 2006 and effective from 1 November 2006, addresses capital gains taxation under Article 13 (Capital Gains). The treaty is based on the UN Model Tax Convention and has been further modified by the Multilateral Instrument (MLI), which came into force for India on 1 October 2019 and for Saudi Arabia on 1 May 2020.

Article 13 of the India-Saudi Arabia DTAA takes a comprehensive approach to capital gains, with six paragraphs covering different asset categories. Notably, the treaty includes a residuary clause (Article 13(6)) which provides that gains from the alienation of property not specifically covered in the preceding paragraphs are taxable only in the alienator's state of residence. This residuary clause has been the subject of significant ITAT jurisprudence, particularly regarding the treatment of rights entitlements and other novel financial instruments.

For personalised guidance on structuring cross-border investments between India and Saudi Arabia, consult BeaconFiling's tax advisory team.

Treaty Rate vs Domestic Rate: Detailed Comparison

Article 13 of the India-Saudi Arabia DTAA contains six paragraphs establishing a detailed framework for capital gains taxation:

Immovable Property (Article 13(1))

Gains from the alienation of immovable property as defined in Article 6, situated in India, may be taxed in India at full domestic rates. This includes land, buildings, agricultural property, and associated rights. India has complete taxing rights over gains from Indian real estate sold by Saudi residents.

Business Property Connected to a PE (Article 13(2))

Gains from the alienation of movable property forming part of the business property of a permanent establishment that a Saudi enterprise has in India, or movable property pertaining to a fixed base for independent personal services, may be taxed in India. This includes gains from the alienation of the PE or fixed base itself.

Ships and Aircraft (Article 13(3))

Gains from the alienation of ships or aircraft operated in international traffic, or movable property pertaining to their operation, are taxable only in the state where the enterprise's place of effective management is situated.

Shares of Indian Companies (Article 13(4))

Gains from the alienation of shares in Indian companies may be taxed in India. This gives India the right to tax capital gains at domestic rates when Saudi residents sell shares of Indian-resident companies:

Shares in Immovable Property Companies (Article 13(5))

Gains from shares whose value derives substantially from immovable property situated in India may also be taxed in India. This provision captures indirect real estate investments made through corporate structures and overlaps with India's domestic indirect transfer provisions under Section 9(1)(i).

Residuary Clause — Other Property (Article 13(6))

Gains from the alienation of any property other than those covered in Articles 13(1) through 13(5) are taxable only in the alienator's state of residence. This residuary clause is significant because it can exempt certain types of capital gains from Indian tax — including rights entitlements, derivatives, and other financial instruments that do not constitute "shares" under Article 13(4).

Who Qualifies for Relief on Capital Gains

The India-Saudi Arabia DTAA provides different levels of protection depending on the asset type:

Saudi Residents — Shares of Indian Companies

For gains from shares of Indian companies under Article 13(4), India has full taxing rights. Saudi residents must pay Indian domestic capital gains tax and then seek relief from double taxation. Since Saudi Arabia does not levy income tax on its nationals (the zakat system applies instead), the foreign tax credit mechanism operates differently than with most other countries. Saudi corporate entities subject to Saudi corporate income tax (CIT) at 20% on non-Saudi shareholders can claim credit for Indian tax paid.

Saudi Residents — Other Property (Article 13(6))

For assets falling under the residuary clause — including rights entitlements, warrants, and certain derivative instruments — gains are taxable only in Saudi Arabia. This provides a genuine treaty benefit and has been confirmed by ITAT jurisprudence.

Indian Residents — Saudi Assets

Indian residents who earn capital gains from Saudi assets can claim relief under Section 90 of the Income Tax Act for any Saudi tax paid on such gains.

MLI and Anti-Abuse Provisions

The MLI's Principal Purpose Test (PPT) applies to this treaty since both countries have ratified the MLI. Indian tax authorities can deny treaty benefits if they determine that one of the principal purposes of an arrangement was to obtain tax advantages, including routing investments through Saudi entities to exploit the residuary clause.

Capital Gains-Specific Treaty Provisions

Rights Entitlements — ITAT Jurisprudence

In a landmark ruling involving the India-Saudi Arabia DTAA, the Mumbai ITAT examined whether rights entitlements to shares constitute "shares" under Article 13(4). The tribunal held that rights entitlements are a separate and distinct right capable of independent transfer and are not equivalent to shares. Consequently, short-term capital gains from the sale of rights entitlements by a Saudi resident were held taxable only in Saudi Arabia under the residuary clause (Article 13(6)). This is an important precedent that distinguishes between shares and share-related instruments.

No Treaty Rate Cap on Share Gains

Unlike dividends (Article 10, capped at 5%) or interest (Article 11, capped at 10%), Article 13(4) does not impose any maximum tax rate on capital gains from shares. India applies its full domestic rates — 12.5% LTCG, 20% STCG on listed shares, and slab rates for STCG on unlisted shares.

Saudi Arabia's Unique Tax System

Saudi Arabia's tax system differs fundamentally from most treaty partners. Saudi nationals and GCC nationals owning businesses in Saudi Arabia pay zakat (2.5% of the zakat base) rather than income tax. Foreign investors in Saudi Arabia pay corporate income tax at 20%. This unique structure affects how double taxation relief operates — Saudi nationals receiving Indian capital gains may not have a Saudi tax liability against which to credit the Indian tax, potentially resulting in economic double taxation.

No FTS Article

The India-Saudi Arabia DTAA does not contain a separate article for Fees for Technical Services (FTS). Such income is either taxed as business profits under Article 7 (if connected to a PE) or falls under the "other income" article. This is relevant for Saudi companies providing technical services in India whose compensation may include a capital gains component.

Documentation Required

Saudi investors must maintain the following documentation for capital gains transactions involving Indian assets:

Tax Residency Certificate (TRC)

A Tax Residency Certificate from the Saudi General Authority of Zakat and Tax (GAZT, now known as ZATCA — Zakat, Tax and Customs Authority) is essential to establish treaty eligibility. The TRC confirms that the investor is a tax resident of Saudi Arabia for treaty purposes.

Form 10F

The Saudi resident must furnish Form 10F on India's Income Tax e-filing portal, providing details of status, nationality, Saudi TIN, and period of residential status.

Self-Declaration for Residuary Clause Claims

Saudi investors claiming that gains fall under the residuary clause (Article 13(6)) rather than Article 13(4) should provide a self-declaration explaining why the asset in question does not constitute "shares" under the treaty. Supporting legal opinions may strengthen the claim.

Form 15CA and Form 15CB

When sale proceeds are remitted from India to Saudi Arabia, Form 15CA (declaration of remittance) and Form 15CB (CA certificate) must be filed for remittances exceeding INR 5 lakh.

Withholding Procedure for Indian Payers

Indian entities making payments to Saudi residents on account of capital gains must comply with TDS obligations under Section 195:

TDS on Share Transactions

When a Saudi resident sells shares of an Indian company, TDS must be deducted at domestic capital gains rates under Article 13(4):

• LTCG on listed shares: 12.5% (Section 112A)
• LTCG on unlisted shares: 12.5% (Section 112)
• STCG on listed shares: 20% (Section 111A)
• STCG on unlisted shares: Applicable slab rate

TDS on Property Transactions

For immovable property sold by Saudi non-residents, the buyer must deduct TDS at 12.5% for LTCG or the applicable rate for STCG under Section 195.

TDS on Residuary Clause Assets

Where the Saudi seller claims that the gain falls under Article 13(6), the Indian payer should exercise caution. If the classification is uncertain, the payer should either deduct TDS at the applicable rate (and let the Saudi seller claim a refund) or require the seller to obtain a lower deduction certificate under Section 197 or a nil withholding order before processing the payment without TDS.

Section 197 Lower Deduction Certificate

The Saudi seller can apply to the Assessing Officer for a lower deduction certificate under Section 197 if the actual tax liability is expected to be lower than the TDS rate.

Common Disputes and Judicial Precedents

Rights Entitlements — Mumbai ITAT

The Mumbai ITAT's ruling that rights entitlements are not shares under Article 13(4) is the most significant precedent for the India-Saudi Arabia DTAA's capital gains provisions. The tribunal emphasised that rights entitlements are a transferable right to subscribe for shares, distinct from the shares themselves. This ruling benefits Saudi investors who trade in rights entitlements of Indian companies.

Zakat vs Income Tax — Credit Mechanism

A unique challenge for Saudi nationals is that zakat is not typically considered an "income tax" for treaty credit purposes. This means Saudi nationals who pay zakat in Saudi Arabia may not be able to credit it against Indian income tax under the treaty's elimination of double taxation article. The economic double taxation that results is an inherent limitation of the treaty for Saudi nationals.

GAAR and Treaty Shopping

India's General Anti-Avoidance Rule (GAAR) can deny treaty benefits where arrangements are primarily designed to obtain tax advantages. The India-Saudi Arabia treaty's favourable dividend rate (5%) and the residuary clause for capital gains make it a potentially attractive routing jurisdiction, which increases GAAR scrutiny.

Indirect Transfers and Section 9(1)(i)

India's indirect transfer provisions under Section 9(1)(i) Explanation 5 assert taxing rights over shares deriving value substantially from Indian assets. For Saudi investors selling shares of Saudi or third-country holding companies with significant Indian asset exposure, this provision may apply even if the transaction occurs entirely outside India.

Practical Examples and Calculations

Example 1: Saudi Investor Selling Indian Listed Shares (LTCG)

A Saudi corporate entity purchases 20,000 shares of an Indian listed company at INR 300 per share (INR 60,00,000) in March 2024. The shares are sold in July 2026 at INR 600 per share (INR 1,20,00,000).

• Capital gain: INR 1,20,00,000 - INR 60,00,000 = INR 60,00,000
• Exempt amount: INR 1,25,000 (Section 112A)
• Taxable LTCG: INR 58,75,000
• Tax in India: 12.5% of INR 58,75,000 = INR 7,34,375
• Saudi treatment: If the entity is subject to Saudi CIT at 20%, it can claim foreign tax credit for Indian tax paid. If the entity pays only zakat, economic double taxation may result.

Example 2: Saudi Investor Selling Rights Entitlements (Residuary Clause)

A Saudi resident receives rights entitlements in an Indian company and sells them on the market for INR 5,00,000 (cost: NIL). The holding period is less than 12 months.

• Asset type: Rights entitlements — not shares under Article 13(4)
• Treaty treatment: Falls under Article 13(6) — taxable only in Saudi Arabia
• Indian tax: NIL (based on ITAT precedent)
• Saudi treatment: Gain reportable under Saudi tax/zakat rules

Example 3: Saudi Company Selling Indian Property

A Saudi real estate company sells commercial property in Hyderabad purchased in 2021 for INR 2,00,00,000, sold in 2026 for INR 3,50,00,000.

• Capital gain: INR 3,50,00,000 - INR 2,00,00,000 = INR 1,50,00,000
• Classification: Long-term (held more than 24 months)
• Tax in India: 12.5% of INR 1,50,00,000 = INR 18,75,000
• TDS deducted by buyer: 12.5% under Section 195
• Saudi treatment: Gain reported in Saudi Arabia; credit for Indian tax available if subject to Saudi CIT

Frequently Asked Questions

Does the India-Saudi Arabia DTAA reduce capital gains tax on shares?

No. Article 13(4) gives India the right to tax capital gains from shares of Indian companies at full domestic rates. There is no treaty-imposed cap on capital gains tax rates for share transactions. Relief comes through the foreign tax credit mechanism.

What is the residuary clause and how does it benefit Saudi investors?

Article 13(6) provides that gains from the alienation of property not covered in Articles 13(1) through 13(5) are taxable only in the alienator's state of residence (Saudi Arabia). This benefits Saudi investors dealing in non-share financial instruments such as rights entitlements, warrants, and certain derivatives.

Are rights entitlements treated as shares under the treaty?

No. The Mumbai ITAT has ruled that rights entitlements are a separate and distinct right, not shares under Article 13(4). Gains from selling rights entitlements fall under the residuary clause (Article 13(6)) and are taxable only in Saudi Arabia.

How does Saudi Arabia's zakat system affect double taxation relief?

Saudi nationals pay zakat (2.5% of the zakat base) rather than income tax. Since zakat may not qualify as an "income tax" for treaty credit purposes, Saudi nationals who pay Indian capital gains tax may face economic double taxation — the Indian tax is not creditable against zakat.

Does the MLI affect capital gains under this treaty?

Yes. Both India and Saudi Arabia have ratified the MLI. The Principal Purpose Test (PPT) applies, meaning India can deny treaty benefits — including the residuary clause exemption — if the primary purpose of an arrangement is to obtain tax advantages.

What is the dividend withholding rate under this DTAA?

The India-Saudi Arabia DTAA provides one of the lowest dividend withholding rates in India's treaty network at 5%, compared to the domestic rate of 20% plus surcharge and cess. This is specified under Article 10(2) of the treaty.

Can a Saudi investor apply for a lower TDS certificate?

Yes. Under Section 197 of the Income Tax Act, a Saudi non-resident can apply to the Assessing Officer for a lower deduction certificate if the actual tax liability is expected to be lower than the TDS rate. For assets falling under the residuary clause, a nil withholding order may be appropriate.