Withholding Tax Rates: India to Saudi Arabia Under DTAA

India to Saudi Arabia Withholding Tax Rates Under DTAA

The India-Saudi Arabia DTAA, signed on 25 January 2006 and in force since 1 November 2006, provides significantly reduced withholding tax rates for Saudi residents receiving income from India. The treaty offers a 5% rate on dividends and 10% on interest and royalties, compared to India's domestic rate of 20% for non-residents.

What makes this treaty particularly powerful is the combination of low treaty rates and Saudi Arabia's zero personal income tax. For the 2.75 million NRIs in Saudi Arabia, dividends from Indian companies are effectively taxed at just 5% total -- 5% Indian withholding and 0% Saudi tax. This is one of the lowest effective tax burdens on Indian dividends available under any treaty.

To claim these reduced rates, the recipient must hold a valid Tax Residency Certificate from ZATCA (Zakat, Tax and Customs Authority) and file Form 10F on the Indian Income Tax portal. Without proper documentation, the Indian payer must withhold at the higher domestic rate.

For the complete treaty analysis, see our India-Saudi Arabia DTAA Complete Guide.

Dividend Withholding Rates

Dividends paid by an Indian company to a Saudi beneficial owner are subject to a maximum withholding rate of 5% under Article 10 of the DTAA.

Key points about dividend withholding under the India-Saudi Arabia DTAA:

• 75% savings: The 5% treaty rate represents a 75% reduction from the 20% domestic rate. This is among the highest savings percentages under any Indian DTAA.
• No tiered structure: The 5% rate is flat, regardless of the percentage of shareholding. Some Indian treaties (like with the US) have tiered rates based on ownership levels. The Saudi treaty is simpler.
• Zero Saudi tax on individuals: Saudi Arabia has no personal income tax. An NRI in Saudi Arabia receiving dividends from an Indian company pays 5% total tax globally. Compare this to a US-based NRI who pays 15-25% under the India-US DTAA plus US income tax on worldwide income.
• DDT abolished: Since April 2020, India no longer levies Dividend Distribution Tax. The 5% withholding under the treaty is the only tax on dividends.
• No surcharge or cess: Treaty rates are not subject to surcharge or health and education cess. At domestic rates, the effective rate exceeds 20% once these are added.

The 5% dividend rate is particularly relevant for NRIs in Saudi Arabia who have started companies in India or hold shares in Indian listed companies. The tax savings compared to the domestic rate are immediate and substantial.

Interest Withholding Rates

Interest arising in India and paid to a Saudi resident is subject to different rates depending on the recipient category.

The government exemption is significant for sovereign wealth fund activities. Interest income earned by the PIF (Public Investment Fund) or PIF-backed entities may qualify for the government exemption if the loans are guaranteed by the Saudi Government.

Key considerations:

• Bank loans: Interest paid by Indian borrowers to Saudi commercial banks (such as Al Rajhi Bank, Saudi National Bank, Riyad Bank) is subject to the 10% treaty rate.
• External Commercial Borrowings: Saudi lenders providing ECBs to Indian entities benefit from the reduced 10% rate, subject to RBI's ECB framework.
• NRE/NRO account interest: Interest on NRE accounts is already tax-free under Indian domestic law for non-residents. NRO account interest is taxable but benefits from the 10% treaty rate instead of the 30% domestic slab rate.
• Connected person exception: If interest exceeds the arm's length amount due to a special relationship, the excess is taxed under domestic law.

Royalty and FTS Withholding Rates

Royalties (Article 12)

Royalties mean 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. The 10% treaty rate provides a 50% reduction from the 20% domestic rate.

For Saudi companies licensing technology, IP, or brand rights to Indian operations, the 10% rate applies. This is relevant for SABIC, Saudi Aramco affiliates, and other Saudi entities that license proprietary technology to Indian joint ventures or subsidiaries.

Fees for Technical Services -- The Missing Provision

The India-Saudi Arabia DTAA does not include a separate article on Fees for Technical Services. This is one of the most significant features of this treaty compared to other Indian DTAAs.

The practical implications are complex:

• Without a PE in India: If a Saudi consultant provides technical, managerial, or consultancy services to an Indian client and does not have a PE in India, the income should be classified as business profits under Article 7. Business profits are taxable only in Saudi Arabia (the country of residence). This means zero Indian tax.
• With a PE in India: If the Saudi service provider has a PE in India, the profits attributable to the PE are taxable at regular Indian corporate rates.
• India's position: Indian tax authorities may argue that even without a specific FTS article, domestic law rates under Section 115A (20% for non-resident FTS, raised from 10% by Finance Act 2023) apply. This creates a risk of dispute, especially for large consulting engagements.
• Characterization risk: The absence of the FTS article makes the characterization of payments critical. Is it a royalty (10% treaty rate), business profits (0% without PE), or FTS (potentially subject to domestic rates)? Getting this classification right is essential.

Saudi-based consultants and service providers working with Indian clients should engage professional tax advisors to structure their engagements. The potential for zero Indian tax on consulting income (if classified as business profits without PE) is significant, but the risk of reclassification by Indian authorities is real.

Capital Gains Treatment

Capital gains under the India-Saudi Arabia DTAA provide India with relatively broad taxing rights:

• Immovable property: Gains from alienation of immovable property in India are taxable in India at domestic rates (short-term or long-term capital gains rates depending on holding period).
• Shares in immovable property companies: Gains from shares where the company's property consists principally of Indian immovable property are taxable in India.
• PE-related property: Gains from movable property that is part of a PE's business property in India are taxable in India, including on dissolution of the PE.
• Other shares: Gains from alienation of shares in an Indian company (not covered above) may be taxed in India. This is broader than many DTAAs and means most share sales by Saudi residents in Indian companies are subject to Indian capital gains tax.
• Other property: Gains from alienation of any other property are taxable only in Saudi Arabia.

For NRIs in Saudi Arabia holding Indian listed shares, the capital gains treatment depends on whether the gains are short-term (held for less than 12 months for listed shares) or long-term. Long-term capital gains on listed equity shares above Rs 1.25 lakh are taxed at 12.5% under Indian domestic law. The treaty does not provide a lower rate.

How to Apply Reduced Rates

Claiming the reduced withholding rates requires proper documentation. Here is the complete process:

Step 1: Obtain TRC from ZATCA

Apply to the Zakat, Tax and Customs Authority for a Tax Residency Certificate. Required documentation:

• Individuals: Valid iqama, proof of 183-day presence in Saudi Arabia during the fiscal year, Saudi address proof.
• Companies: Valid Commercial Registration (CR), active ZATCA tax registration, company bylaws.

Processing time: 2-4 weeks. The TRC must specify the period of residency and be valid for the Indian financial year.

Step 2: File Form 10F

Submit Form 10F electronically on the Indian Income Tax portal (incometax.gov.in). Required fields: name, status, nationality, TIN (ZATCA registration number), period of residency, and Saudi address.

Step 3: Submit to Indian Payer

Provide TRC, Form 10F, and a self-declaration of beneficial ownership to the Indian entity making the payment. The payer then applies the treaty rate (5% for dividends, 10% for interest/royalties) under Section 195.

Step 4: Form 15CA/15CB

The Indian payer files Form 15CA online and obtains a CA certificate in Form 15CB before making the remittance. The Authorized Dealer bank requires both documents to process the wire transfer to Saudi Arabia.

Step 5: Arabic Document Translation

Any documents in Arabic (including the ZATCA TRC if issued in Arabic, commercial registrations, and board resolutions) must be translated into English by a certified translator before submission to Indian authorities. Budget an additional 3-5 business days for translation.

Domestic Rates vs Treaty Rates Comparison

The savings on dividends are dramatic. On Rs 1 crore of dividend income, the treaty saves Rs 15.8 to 16.84 lakh compared to domestic rates. For large investors like PIF portfolio companies or NRIs with significant Indian equity holdings, the treaty benefit is material.

For FTS, the situation is nuanced. If the payment is classified as business profits (no PE), the effective rate could be 0%. If classified under domestic FTS provisions, it is 20% plus surcharge and cess. The characterization determines the outcome.

Common Mistakes and Compliance Tips

Based on our experience handling India-Saudi Arabia cross-border transactions, here are the most common errors:

• Assuming the 5% rate applies automatically: Without a TRC and Form 10F, the Indian payer must withhold at 20%. Many NRIs in Saudi Arabia are unaware of the documentation requirements and lose the treaty benefit on their first dividend payment.
• Expired TRC: TRCs are valid for one fiscal year. NRIs receiving regular dividend or interest income from India must renew annually. ZATCA processing takes 2-4 weeks, so apply early.
• Arabic documents without translation: Saudi Commercial Registrations, board resolutions, and sometimes TRCs are issued in Arabic. Indian banks and tax authorities require English. A certified translation adds 3-5 days.
• Misclassifying FTS as royalties: Some Saudi service providers try to classify consulting fees as royalties to use the 10% treaty rate. Indian tax authorities scrutinize such characterizations. If the payment is for services (not for the use of IP), it does not qualify as royalties.
• Ignoring PE risk for service providers: Saudi consultants deploying personnel to India for more than 183 days within a 12-month period create a Service PE. This triggers full Indian tax on business profits attributable to the PE, which is typically higher than any withholding rate.
• Not filing Form 15CA/15CB: Authorized Dealer banks will not process outward remittances without these forms. This is a regulatory requirement, not discretionary.
• Overlooking transfer pricing on related-party payments: Payments between related Indian and Saudi entities must be at arm's length. Above-market royalties or management fees face transfer pricing adjustment and penalties under Section 92 of the Income Tax Act.

For complete compliance support including TRC coordination, withholding calculations, and remittance documentation, reach out to our cross-border payments team.

Frequently Asked Questions

Can an NRI in Saudi Arabia claim the 5% dividend rate on Indian listed shares?

Yes, provided you meet the conditions. You must be a tax resident of Saudi Arabia (183-day presence with valid iqama), hold a TRC from ZATCA, and file Form 10F. The 5% rate applies to dividends from both listed and unlisted Indian companies. Your depository participant and broker will need the TRC and Form 10F on file to apply the reduced rate.

What if the Indian payer withholds at 20% instead of 5%?

You can claim a refund of the excess withholding by filing an Indian income tax return under Section 139(1). Declare the dividend income, claim the 5% treaty rate, and request a refund of the difference (15%). The refund process typically takes 6-12 months. To avoid this, submit your TRC and Form 10F to the Indian payer before the dividend record date.

Is FTS taxable in India for a Saudi consultant without a PE?

This is the most debated question under the India-Saudi Arabia DTAA. Since there is no specific FTS article, consulting fees should be classified as business profits under Article 7, which are taxable in India only if a PE exists. Without a PE, the income should not be taxable in India under the treaty. However, Indian tax authorities may attempt to apply domestic rates. Professional advice is essential for structuring such engagements.

How does the government interest exemption work for PIF investments?

Interest paid to the Government of Saudi Arabia, the Saudi Central Bank (SAMA), or government-owned financial institutions is exempt from Indian withholding under Article 11(3). Whether PIF or PIF-backed entities qualify depends on whether they meet the definition of government or government-owned institutions under the treaty. This requires case-by-case analysis.

Do I need to renew my TRC every year?

Yes. Tax Residency Certificates from ZATCA are valid for one fiscal year. If you receive ongoing Indian income (dividends, interest, royalties), you must obtain a new TRC each year. Apply at least 4 weeks before the start of the Indian financial year (April 1) to ensure continuity.

What is the withholding rate on interest from Indian government bonds?

Interest on Indian government bonds paid to a Saudi resident is subject to the 10% treaty rate under Article 11(2). However, if the Saudi recipient is a government entity, the Saudi Central Bank, or a government-guaranteed institution, the interest may be exempt under Article 11(3). For NRIs holding Indian government securities through RBI's Fully Accessible Route, the 10% treaty rate applies.

Can I combine the 5% dividend rate with Section 115BAC (new tax regime)?

The 5% DTAA rate and the domestic tax regime are separate frameworks. As a non-resident, your dividend income is taxed at the lower of the treaty rate (5%) or the domestic rate (20% under Section 115A). The new tax regime under Section 115BAC applies to resident individuals and does not affect withholding on payments to non-residents. The treaty rate of 5% is always more favorable than any domestic rate for Saudi-resident recipients.