On 4th January 2012 Malta and the Kingdom of Saudi Arabia concluded the Convention for the Avoidance of Double Taxation and the Prevention of Tax Evasion with respect to Taxes on Income. This is the first legal toll regulating taxation matters between the two countries; however, economic, trade, scientific and cultural relations were already addressed in the agreement entered in 2006. The treaty is in force by L.N. 25 of 2013.
1. Definitions
Generally speaking, the Convention follows the OECD’s Model, however with some alterations. It extends the definition of a permanent establishment, which now includes also a place of extraction of natural resources and so-called “service PE”, which arises when furnishing of services in the other state continues for a period or periods aggregating more than 6 months within any 12-month period. The Convention introduced a complex formula for allocation of profits to a permanent establishment, especially in case of deductions. It also keeps, abandoned by the OECD Model, provision on independent personal services, which completes the system of taxation of individuals.
2. Taxation of particular types of income
Majority of provisions allocate taxing rights to both countries. In case of dividends Saudi Arabian withholding tax rate is 5% but in case of Malta is limited by tax chargeable on underlying profits; moreover, in the latter, the provision refers explicitly to Maltese imputation system, basically leaving no room for withholding tax.
The Convention provides for an unusual solution in case of taxation of royalties. Namely, royalty payments for the use of, or the right to use, industrial, commercial, or scientific equipment bear 5% withholding tax, whereas in all other cases the rate is 7%. The OECD removed the leasing of industrial, commercial, or scientific equipment from the “royalties” provision, suggesting that income generated on such transactions is not of “royalty” nature and therefore should fall under business income. Nevertheless, many Maltese double tax treaties still apply the old approach (e.g. with Syria, Poland, Singapore, Belgium).
Taxation of interest payments was granted exclusively to the residency state of the recipient, so no withholding tax emerges. It should be noted that parties of the treaty acknowledged rules of Islamic finances and substituted “interest” with “income from debt-claims” since the notion of interest is alien to Islamic legal system. Potential double taxation is avoided by the credit method.
3. Exchange of information and anti-avoidance measures
The Convention regulates an exchange of information, which importance is strengthen by the fact that Saudi Arabia has not concluded with Malta any bilateral Agreement on Tax Information Exchange, based on the OECD model (TIEA). However, on the very same day when Malta deposited the instrument of ratification of amended Convention on Mutual Administrative Assistance in Tax Matters (29th May) Saudi Arabia signed this convention, highlighting this way its commitment to international co-operation in this matter.
Despite the latest trends and developments in the field of tracking tax evasion and tax avoidance, the treaty does not contain limitation of benefits clause, even of a general character.
