FTS Tax Rate Between India and Saudi Arabia Under DTAA

FTS Tax Rate Between India and Saudi Arabia

The India-Saudi Arabia Double Taxation Avoidance Agreement (DTAA), signed on 25 January 2006 and effective from 1 November 2006, takes a fundamentally unusual approach to the taxation of technical and consultancy services: the treaty contains no article on Fees for Technical Services (FTS). This deliberate omission distinguishes the India-Saudi Arabia DTAA from the vast majority of India's other tax treaties, which typically include a dedicated article taxing FTS at rates ranging from 10% to 15%.

The absence of an FTS article has profound practical implications. Under India's domestic law, fees for technical services paid to non-residents are subject to withholding tax at 20% (plus applicable surcharge and 4% health and education cess) under Section 115A read with Section 195 of the Income Tax Act, 1961. However, in the absence of a specific treaty article, FTS payments to Saudi residents typically fall under Article 7 (Business Profits), which means they are taxable in India only if the Saudi service provider has a permanent establishment in India. If there is no PE, the income is not taxable in India at all -- a result dramatically more beneficial than any treaty that caps FTS at 10% or 15%.

This structure was not accidental. The treaty text explicitly provides that the two Contracting States agreed to review the provisions of the Convention after five years from the date of entry into force to consider including an FTS article. That five-year window passed in 2011 without amendment, and as of 2026, the treaty still does not include an FTS provision. For the approximately 2.75 million Indian nationals (NRIs) living in Saudi Arabia and the growing number of Saudi companies investing in India, understanding this gap is essential for tax planning. For comprehensive guidance on structuring your India operations, consult BeaconFiling's tax advisory services and review our Saudi Arabia country guide.

Treaty Rate vs Domestic Rate: Detailed Comparison

Because the India-Saudi Arabia DTAA lacks a dedicated FTS article, the comparison is not between a treaty rate and a domestic rate in the traditional sense. Instead, the analysis depends on how the income is characterized:

Scenario 1: No PE in India -- 0% Tax (Article 7)

If a Saudi resident provides technical, managerial, or consultancy services to an Indian client and does not have a permanent establishment in India, the payment is classified as business profits under Article 7. Business profits are taxable only in the state of residence (Saudi Arabia). Since the treaty does not separately carve out FTS, the entire payment escapes Indian taxation.

Scenario 2: PE Exists in India -- Full Corporate Rate (Article 7)

If the Saudi service provider has a PE in India, the profits attributable to that PE are taxable in India as business profits. For foreign companies, the applicable rate is 35% plus surcharge and cess -- significantly higher than any FTS treaty rate. This makes PE avoidance critical for Saudi service providers.

Scenario 3: Indian Tax Authorities Recharacterize as Royalties (Article 12)

In some cases, Indian tax authorities may attempt to recharacterize FTS payments as royalties under Article 12, which carries a 10% treaty rate. This typically happens when the services involve the transfer of technical knowledge, know-how, or proprietary processes that could be construed as payments for the use of industrial, commercial, or scientific experience.

Section 90(2) of the Income Tax Act provides that where the Central Government has entered into a DTAA, the provisions of the Act shall apply to the extent they are more beneficial to the assessee. Since the treaty's business profits treatment (0% without PE) is more beneficial than the domestic FTS rate of 20%, the treaty prevails for Saudi residents without a PE in India.

Who Qualifies for the Business Profits Treatment

The key question for Saudi service providers is not whether they qualify for a reduced FTS rate, but whether they can demonstrate the absence of a PE in India. The relevant tests are:

No Permanent Establishment (Article 5)

The Saudi service provider must not have any of the following in India:

• A fixed place of business (office, branch, place of management)
• A building site or construction project lasting more than six months
• Personnel furnishing services (including consultancy) for a period aggregating more than 183 days within any 12-month period (service PE)
• A dependent agent who habitually exercises authority to conclude contracts on behalf of the enterprise

The six-month construction PE threshold and the 183-day service PE threshold are particularly important for Saudi companies deploying technical teams to India for project-based work.

Beneficial Ownership

The Saudi entity receiving the payment must be the beneficial owner of the income. Conduit arrangements where a Saudi entity merely receives payments on behalf of a third-country entity would not qualify for treaty protection.

Principal Purpose Test (MLI Modification)

Since both India and Saudi Arabia have ratified the MLI, the Principal Purpose Test (PPT) now applies. Treaty benefits can be denied if one of the principal purposes of an arrangement is to obtain those benefits. A Saudi entity established solely to route service fees through the treaty's business profits article could be challenged under the PPT.

FTS-Specific Treaty Provisions

The Deliberate Omission of FTS

The absence of an FTS article in the India-Saudi Arabia DTAA is not an oversight or drafting error. The treaty text explicitly acknowledges this gap: the Contracting States agreed to review the Convention after five years to consider including an FTS article. This language confirms that both India and Saudi Arabia were aware of the omission and chose to defer the matter.

This deliberate omission has been judicially recognized. Indian tribunals have held that when a DTAA does not contain a specific FTS article, the income from services rendered in the normal course of business is to be classified as business income under Article 7. In the absence of a PE, such income is not taxable in India. This principle has been applied to treaties with other countries that similarly lack FTS articles, including the India-UAE DTAA.

Distinction Between FTS and Royalties

The critical boundary is between technical services (which fall under business profits in this treaty) and royalties (which are taxed at 10% under Article 12). Article 12 defines royalties as payments for the use of, or the right to use, any copyright, patent, trademark, design, model, plan, secret formula or process, or for information concerning industrial, commercial, or scientific experience.

Indian tax authorities have sometimes argued that payments for technical services involving the sharing of know-how or proprietary methodologies constitute royalties rather than business profits. The distinction turns on whether the payment is for the use of existing knowledge (royalty) or for the rendering of services (business profits). Where services are rendered using proprietary knowledge but no knowledge is transferred to the Indian recipient, the payment should be classified as business profits, not royalties.

Interaction with Domestic FTS Definition

Under Section 9(1)(vii) of the Income Tax Act, FTS is defined broadly to include consideration for any managerial, technical, or consultancy services (including the provision of services of technical or other personnel). This domestic definition is much broader than what would typically be covered by an FTS article in a DTAA. The absence of such an article in the India-Saudi Arabia treaty means the entire domestic FTS scope is effectively negated for Saudi residents without a PE in India.

Documentation Required

Even though no specific FTS treaty rate applies, Saudi service providers must maintain proper documentation to substantiate the business profits classification:

Tax Residency Certificate (TRC)

The Saudi resident must obtain a Tax Residency Certificate from ZATCA (Zakat, Tax and Customs Authority). For individuals, this requires a valid iqama and evidence of at least 183 days of physical presence in Saudi Arabia. For companies, a valid Commercial Registration and ZATCA tax registration are required.

Form 10F

Form 10F must be filed electronically on India's income tax e-filing portal, providing details such as the recipient's status, nationality, Saudi Tax Identification Number, and period of residential status.

Self-Declaration

A comprehensive declaration confirming: (i) Saudi tax residency; (ii) beneficial ownership of the service income; (iii) absence of any permanent establishment in India; (iv) that the services constitute business activities and not royalties. This declaration should specifically address why the payments are not covered by Article 12 (royalties).

Service Agreement and Scope of Work

Given that Indian tax authorities may scrutinize whether services should be classified as royalties rather than business profits, maintaining a detailed scope of work or service agreement is critical. The agreement should clearly describe the nature of services rendered and confirm that no intellectual property or technical know-how is being transferred to the Indian client.

Withholding Procedure for Indian Payers

Indian entities paying for technical services to Saudi providers face a unique compliance challenge due to the absence of an FTS article:

Section 195 Assessment

Under Section 195, the Indian payer must assess whether the payment is chargeable to tax in India. If the Saudi provider has no PE in India and the payment constitutes business profits under Article 7, the payer may apply nil withholding. However, exercising this judgment carries risk -- if the tax department later determines the service constitutes royalties under Article 12, the payer faces interest and penalty under Section 201.

Section 195(2) Application for Determination

To mitigate risk, the Indian payer can apply to the Assessing Officer under Section 195(2) for a determination of the appropriate withholding rate. The AO will examine whether the Saudi provider has a PE in India and whether the payment constitutes business profits or royalties.

Lower Deduction Certificate (Section 197)

Alternatively, the Saudi service provider (or the Indian payer on behalf of the provider) can apply for a lower deduction certificate under Section 197, which authorizes the payer to withhold at a rate lower than the statutory rate (including nil).

Form 15CA and Form 15CB

For remittances exceeding INR 5 lakh, Form 15CA/15CB compliance is mandatory. The Chartered Accountant issuing Form 15CB must specifically address the absence of an FTS article in the treaty and confirm that the payment falls under Article 7 (business profits). The CA should also certify whether the Saudi provider has a PE in India.

Common Disputes and Judicial Precedents

ITAT Rulings on Treaties Without FTS Articles

Multiple ITAT rulings have addressed the treatment of technical service payments under DTAAs that lack FTS articles. In cases involving the India-UAE DTAA (which also lacks an FTS article), the tribunal consistently held that in the absence of a specific FTS provision, income from services rendered in the normal course of business is classified as business income under Article 7. This principle applies equally to the India-Saudi Arabia DTAA.

Royalty vs Business Profits Characterization

The most common dispute involves Indian tax authorities attempting to recharacterize service payments as royalties under Article 12. Authorities argue that when a Saudi provider shares proprietary methodologies, technical processes, or specialized know-how while rendering services, the payment constitutes consideration for the use of industrial, commercial, or scientific experience. Courts have generally held that the mere use of expertise in providing services does not make the payment a royalty -- there must be a transfer of rights or know-how to the recipient for the royalty characterization to apply.

Service PE Disputes

Saudi companies deploying personnel to India for technical services face service PE disputes. Under Article 5, the furnishing of services through employees or other personnel constitutes a PE if such activities continue for a period or periods aggregating more than 183 days within any 12-month period. Tax authorities closely monitor the duration of personnel deployment and have challenged cases where multiple short-term deployments are aggregated to exceed the 183-day threshold.

Impact of Saudi Arabia's Zero Personal Income Tax

Saudi Arabia does not levy personal income tax on individuals. Indian tax authorities have occasionally argued that treaty benefits should be restricted when the residence country does not tax the income -- a form of "subject to tax" argument. However, Indian courts have rejected this argument, holding that the absence of taxation in the residence country does not affect the applicability of DTAA provisions. The treaty does not contain a "subject to tax" clause, and the benefits apply regardless of Saudi Arabia's domestic tax treatment.

Practical Examples and Calculations

Example 1: Saudi IT Consulting Firm Providing Remote Services (No PE -- 0% Tax)

A Saudi-based IT consulting firm provides software development advisory services to an Indian client remotely from Riyadh. No personnel are deployed to India. The annual fee is INR 2,00,00,000 (INR 2 crores).

• PE in India: None -- all services rendered from Saudi Arabia.
• Classification: Business profits under Article 7.
• Tax under domestic law: 20% = INR 40,00,000 (plus surcharge and cess, effective ~INR 43,68,000)
• Tax under DTAA: 0% (business profits, no PE)
• Tax saving under DTAA: INR 43,68,000 (entire tax eliminated)

Example 2: Saudi Engineering Company Deploying Team to India (PE Risk)

A Saudi engineering company deploys a team of 5 engineers to an Indian infrastructure project. The engagement spans 200 days (exceeding the 183-day service PE threshold). The project fee is INR 5,00,00,000 (INR 5 crores).

• PE in India: Yes -- service PE triggered (200 days > 183 days).
• Classification: Business profits attributable to PE under Article 7.
• Tax under DTAA: 35% on profits attributable to PE (plus surcharge and cess)
• Key lesson: If the engagement had been structured as 170 days (below 183-day threshold), no PE would exist and the entire payment would be tax-free in India.

Example 3: Saudi Company Licensing Know-How (Royalty -- 10% Tax)

A Saudi company licenses a proprietary chemical process to an Indian manufacturer. The payment is INR 1,00,00,000 (INR 1 crore) per year.

• Classification: Royalty under Article 12 (payment for the use of a secret process).
• Domestic rate: 20% = INR 20,00,000 (plus surcharge and cess, effective ~INR 21,84,000)
• DTAA rate (Article 12): 10% = INR 10,00,000
• Tax saving under DTAA: INR 11,84,000

Frequently Asked Questions

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

There is no specific FTS tax rate because the India-Saudi Arabia DTAA does not contain a Fees for Technical Services article. Technical and consultancy service fees paid to Saudi residents are treated as business profits under Article 7 and are taxable in India only if the Saudi provider has a permanent establishment in India. Without a PE, the effective rate is 0%.

Why does the India-Saudi Arabia DTAA not have an FTS article?

The omission was deliberate. When the treaty was signed in January 2006, both countries agreed to review the Convention after five years to consider including an FTS article. That review did not result in an amendment, and the treaty continues without an FTS provision as of 2026. This gap benefits Saudi service providers by allowing technical service income to be classified as tax-free business profits (if no PE exists).

Can Indian tax authorities still tax technical service payments to Saudi residents?

Only in limited circumstances: (1) if the Saudi provider has a permanent establishment in India (the profits attributable to the PE are taxed as business profits at 35%); or (2) if the payment is recharacterized as royalties under Article 12 (taxed at 10%). For genuine service payments where the provider has no PE and no know-how is transferred, the income should not be taxable in India under the treaty.

What is the risk if the Indian payer applies nil withholding?

If the Indian payer determines that the Saudi provider has no PE and applies nil withholding, but the tax department later disagrees (by finding a PE or recharacterizing the payment as royalties), the payer faces liability under Section 201 as an assessee-in-default, including interest at 1% per month. To mitigate this risk, payers can seek a determination under Section 195(2) or the Saudi provider can obtain a lower deduction certificate under Section 197.

How is the service PE threshold calculated for Saudi companies?

Under Article 5 of the India-Saudi Arabia DTAA, the furnishing of services through employees or other personnel constitutes a PE if such activities continue for more than 183 days within any 12-month period. The days are aggregated across all service engagements by the enterprise in India, not counted per individual project. Multiple short deployments that together exceed 183 days can trigger a PE.

Does Saudi Arabia's zero personal income tax affect DTAA benefits?

No. Indian courts have consistently held that the absence of taxation in the residence country does not affect DTAA applicability. The treaty does not contain a subject-to-tax clause. Saudi residents can claim full treaty benefits regardless of whether Saudi Arabia taxes the same income domestically.

Should a Saudi service provider seek a lower deduction certificate?

Yes, this is recommended. Obtaining a lower deduction certificate under Section 197 (or a nil withholding determination under Section 195(2)) provides formal tax authority approval for the nil or reduced withholding rate, significantly reducing the compliance risk for both the Saudi provider and the Indian payer.