Dividend Tax Rate Between India and Saudi Arabia Under DTAA

Dividend Tax Rate Between India and Saudi Arabia

The Double Taxation Avoidance Agreement (DTAA) between India and Saudi Arabia, signed at New Delhi on 25 January 2006 and effective from 1 November 2006, provides one of the most favourable dividend withholding tax rates in India's treaty network. Under Article 10(2) of the treaty, dividends paid by a company resident in one Contracting State to a beneficial owner resident in the other State are subject to a maximum withholding tax rate of just 5% of the gross amount. This is significantly lower than India's domestic withholding rate of 20% (plus applicable surcharge and cess) and is among the lowest DTAA dividend rates that India has negotiated with any country.

This favourable rate reflects the strong bilateral economic relationship between India and Saudi Arabia, with Saudi Arabia being one of India's largest trading partners and a major source of foreign investment, particularly in the energy, infrastructure, and petrochemicals sectors. The low dividend rate is especially significant for Saudi sovereign wealth funds and institutional investors with substantial investments in Indian companies.

Treaty Rate vs Domestic Rate: Detailed Comparison

The difference between the DTAA rate and India's domestic rate represents substantial tax savings for Saudi investors:

Under Indian domestic law, dividends paid to a non-resident are subject to withholding tax at 20% under Section 115A of the Income Tax Act. When surcharge and health and education cess of 4% are factored in, the effective domestic rate can reach approximately 22.88% or higher. The DTAA rate of just 5% therefore delivers a saving of approximately 17-18 percentage points, making Saudi Arabia one of the most tax-efficient jurisdictions for receiving Indian dividends.

Since the abolition of the Dividend Distribution Tax (DDT) from April 2020, the tax burden on dividends has shifted entirely to the recipient. For Saudi investors in Indian companies, the 5% DTAA rate has become even more critical for tax-efficient repatriation of profits.

A unique feature of the India-Saudi Arabia tax landscape is that Saudi Arabia does not levy personal income tax on individuals. Saudi Arabia's tax system instead relies on Zakat (religious levy on Saudi and GCC nationals) and corporate income tax (20% on non-GCC foreign investors). This means that for Saudi individual investors, the 5% Indian withholding tax under the DTAA may be the only tax on their Indian dividend income.

Who Qualifies for the Reduced Rate

To claim the reduced 5% withholding rate on dividends under the India-Saudi Arabia DTAA, the recipient must satisfy the following conditions:

Beneficial Ownership Requirement

Article 10(2) requires the dividend recipient to be the beneficial owner. The recipient must have the genuine right to use and enjoy the dividend income without being contractually or legally obligated to pass it on to another person. Nominee arrangements, agent structures, and conduit entities are not eligible for the reduced rate.

Tax Residency in Saudi Arabia

The recipient must be a tax resident of Saudi Arabia as defined under Article 4 of the treaty and the domestic laws of Saudi Arabia. A valid Tax Residency Certificate (TRC) issued by the Saudi General Authority of Zakat and Tax (ZATCA, formerly GAZT) is required. Saudi Arabia issues TRCs to entities and individuals subject to its tax or Zakat jurisdiction.

Principal Purpose Test (MLI)

Following the ratification of the Multilateral Instrument (MLI) by both India and Saudi Arabia, the Principal Purpose Test (PPT) now applies to the India-Saudi Arabia DTAA. Treaty benefits can be denied if the tax authorities reasonably conclude that one of the principal purposes of an arrangement was to obtain the reduced 5% dividend rate. India's GAAR provisions (Chapter X-A of the Income Tax Act) provide an additional layer of anti-avoidance protection.

Permanent Establishment Exception

The reduced rate under Article 10 does not apply if the beneficial owner of the dividends carries on business in India through a Permanent Establishment (PE) situated in India and the shareholding generating the dividends is effectively connected with such PE. In that case, the dividends are taxable as business profits under Article 7.

Dividend-Specific Treaty Provisions

Article 10 of the India-Saudi Arabia DTAA contains important provisions regarding the treatment of dividends:

Definition of Dividends

Under Article 10(3), "dividends" is defined to include income from shares, "jouissance" shares or "jouissance" rights, mining shares, founders' shares, or other rights (not being debt-claims) participating in profits, as well as income from other corporate rights that is subjected to the same taxation treatment as income from shares under the laws of the State where the distributing company is resident.

Single Flat Rate

Unlike many other Indian DTAAs that employ tiered rates based on shareholding percentages (e.g., the India-USA DTAA with 15%/25% rates, or the India-Germany DTAA with 10% for substantial holdings), the India-Saudi Arabia DTAA applies a single flat rate of 5% regardless of the level of equity participation. Whether a Saudi investor holds 1% or 100% of an Indian company, the same 5% rate applies.

No Tax Sparing Provision

Unlike some older Indian DTAAs (such as the original India-Israel or India-Japan treaties), the India-Saudi Arabia DTAA does not contain a tax sparing (deemed tax credit) provision. This is consistent with the more modern approach to treaty drafting that India has adopted since the early 2000s.

Interaction with Saudi Tax System

Saudi Arabia applies different tax regimes depending on the taxpayer's nationality. Saudi and GCC nationals pay Zakat (2.5% on Zakat base), while non-GCC foreign investors pay corporate income tax at 20%. The DTAA's credit mechanism ensures that Indian withholding tax on dividends can be credited against the appropriate Saudi tax or Zakat liability, preventing double taxation.

Documentation Required

To claim the reduced 5% withholding rate on dividends, Saudi beneficial owners must provide the following documentation to the Indian payer:

Tax Residency Certificate (TRC)

A valid TRC issued by ZATCA (Zakat, Tax and Customs Authority of Saudi Arabia) for the relevant financial year. This is the primary document establishing treaty eligibility under Section 90(4) of the Indian Income Tax Act. ZATCA issues TRCs to entities and individuals within its tax and Zakat jurisdiction.

Form 10F

Form 10F is a self-declaration providing the taxpayer's status, nationality, Saudi tax identification number (TIN), period of residential status, and address in Saudi Arabia. Since 2022, Form 10F must be filed electronically on the Indian income tax e-filing portal.

No Permanent Establishment Declaration

A declaration confirming that the Saudi recipient does not have a PE in India, or that the shares generating dividend income are not effectively connected with any PE in India.

Beneficial Ownership Declaration

A self-declaration confirming that the Saudi entity is the genuine beneficial owner of the dividends and is not acting as an agent, nominee, or conduit for another entity.

Withholding Procedure for Indian Payers

Indian companies distributing dividends to Saudi residents must follow specific compliance procedures under the Income Tax Act:

Section 195 Compliance

Under Section 195 of the Income Tax Act, any person paying income (including dividends) to a non-resident must deduct tax at source. When the DTAA rate of 5% is lower than the domestic rate and the payee has furnished valid documentation, the payer may apply the treaty rate.

Form 15CA and Form 15CB

For remittances exceeding specified thresholds, the Indian payer must file Form 15CA (online declaration) and obtain a Form 15CB certificate from a Chartered Accountant. Form 15CB certifies the nature of the remittance, the applicable DTAA provisions, and the rate of tax deducted. Both forms must be completed before the remittance is processed through an authorized dealer bank.

Lower Withholding Certificate

Where appropriate, the payer or payee may apply to the Assessing Officer under Section 197 for a lower or nil withholding certificate. This is relevant for large institutional investors such as Saudi sovereign wealth funds (e.g., the Public Investment Fund) that receive substantial dividend flows from Indian investments.

Common Disputes and Judicial Precedents

Beneficial Ownership in Sovereign Wealth Fund Structures

Saudi sovereign wealth funds and government-linked entities often invest through multi-layered structures. Indian tax authorities may examine whether the immediate recipient entity is the beneficial owner or merely a conduit. However, government-to-government investments and investments by recognized sovereign funds generally face less scrutiny.

Deemed Dividends under Section 2(22)(e)

Loans or advances by Indian companies to their Saudi shareholders may be classified as "deemed dividends" under Section 2(22)(e) of the Indian Income Tax Act. Whether such deemed dividends qualify for the 5% DTAA rate depends on whether they fall within the treaty's definition of "dividends" under Article 10(3). Indian tribunals have taken varying positions on this issue.

Absence of FTS Article

Notably, the India-Saudi Arabia DTAA does not contain a separate article on Fees for Technical Services (FTS), unlike most other Indian DTAAs. This means that FTS payments to Saudi residents are taxable as business profits under Article 7 (taxable only if a PE exists in India) rather than at a specified withholding rate. This structural feature can affect the overall tax planning for Saudi companies with diversified business activities in India.

GAAR and Substance Requirements

With the 5% rate being one of the lowest in India's treaty network, India's GAAR provisions may be invoked in cases where arrangements are structured specifically to route dividends through Saudi Arabia to benefit from this low rate. Taxpayers must ensure their Saudi entity has genuine commercial substance.

Practical Examples and Calculations

Example 1: Saudi Individual Receiving Dividends from Indian Stocks

A Saudi tax resident individual holds shares in an Indian listed company. The company declares dividends of INR 10,00,000.

• Without DTAA: Tax at domestic rate = 20% + 4% cess = 20.80% = INR 2,08,000
• With DTAA: Tax at treaty rate = 5% = INR 50,000
• Net saving: INR 1,58,000 (approximately USD 19,000)

Since Saudi Arabia does not levy personal income tax, the INR 50,000 withheld in India may be the only tax paid on this income, resulting in an effective global tax rate of just 5%.

Example 2: Saudi Sovereign Wealth Fund Receiving Dividends from Indian Portfolio

A Saudi sovereign wealth fund holds a diversified portfolio in Indian listed companies worth INR 5,000 crore. Annual dividend income = INR 200 crore.

• Without DTAA: Tax at domestic rate ≈ 22.88% = INR 45.76 crore
• With DTAA: Tax at treaty rate = 5% = INR 10 crore
• Net saving: INR 35.76 crore (approximately USD 43 million) per year

Example 3: Saudi Company Receiving Dividends from Indian Joint Venture

A Saudi petrochemical company holds 40% shares in an Indian joint venture. The JV distributes dividends of INR 50,00,00,000.

• Saudi company's share: INR 20,00,00,000
• Without DTAA: Tax at domestic rate ≈ 22.88% = INR 4,57,60,000
• With DTAA: Tax at treaty rate = 5% = INR 1,00,00,000
• Net saving: INR 3,57,60,000 (approximately USD 430,000)

The Saudi company would then credit the 5% Indian tax against its Saudi corporate income tax liability (20% for non-GCC foreign investors operating through Saudi entities) or Zakat obligation, as applicable.

Frequently Asked Questions

What is the dividend withholding tax rate under the India-Saudi Arabia DTAA?

Under Article 10(2) of the India-Saudi Arabia DTAA, the maximum withholding tax rate on dividends is just 5% of the gross amount, provided the recipient is the beneficial owner and a tax resident of Saudi Arabia. This is one of the lowest DTAA dividend rates in India's treaty network.

Why is the India-Saudi Arabia DTAA dividend rate so low compared to other Indian treaties?

The 5% rate reflects the strong bilateral economic ties between India and Saudi Arabia and was negotiated to encourage investment flows, particularly from Saudi institutional and sovereign investors. It also reflects Saudi Arabia's unique tax system, which relies on Zakat and corporate tax rather than personal income tax.

Does Saudi Arabia impose any tax on dividends received from India?

Saudi Arabia does not levy personal income tax on individuals. Saudi nationals pay Zakat (2.5% on Zakat base), and non-GCC foreign companies pay corporate income tax at 20%. The 5% Indian withholding tax may be the only tax for Saudi individual investors, while corporate investors can credit it against their Saudi tax liability.

Is there a different DTAA rate for substantial shareholdings vs portfolio investments?

No. The India-Saudi Arabia DTAA applies a single flat rate of 5% on all dividends regardless of the percentage of shareholding. There are no tiered rates based on equity participation, unlike some other Indian DTAAs such as with the USA or Germany.

What documents does a Saudi investor need to claim the 5% DTAA rate?

A Saudi investor must provide a valid Tax Residency Certificate from ZATCA, Form 10F (filed electronically), a beneficial ownership declaration, and a no-PE declaration. The Indian payer must file Form 15CA and obtain Form 15CB before remitting the dividend.

Does the India-Saudi Arabia DTAA have an FTS article?

No. The India-Saudi Arabia DTAA does not contain a separate article on Fees for Technical Services. FTS payments to Saudi residents are taxable as business profits under Article 7, meaning they are taxable in India only if the Saudi recipient has a Permanent Establishment in India.

How does the MLI affect dividends under the India-Saudi Arabia DTAA?

Both India and Saudi Arabia have signed and ratified the MLI. The Principal Purpose Test (PPT) now applies, allowing Indian tax authorities to deny the 5% rate if one of the principal purposes of an arrangement was to obtain the treaty benefit. Saudi Arabia deposited its MLI ratification instrument in January 2020, with the MLI entering into force from 1 May 2020.