The New Saudi Arabia, Japan tax treaty

November 24, 2010  |  Developments, News, Tax Treaties

News, information

the 15th of November, 2010, Mr. Seiji Maehara for the Government of Japan and Mr. Ibrahim Al-Assaf for the Government of the Kingdom of Saudi Arabia the text of the new double taxation convention between the Government of Japan and the Kingdom of Saudi Arabia (below the ‘Treaty’).  A link to the English text of the Treaty can be found here.

Entry into force

The new Treaty still requires ratification by the Government of Japan and by the Kingdom of Saudi Arabia and will enter into force on the first day of the second month following the date of receipt of the later of the notifications from the state concerned that its internal procedures required for ratification of the Treaty have been completed.

In the case of Japan, the convention will be applicable with respect to taxes withheld at source for amounts taxable on or after the 1st day of January in the calendar year following the date on which the Treaty enters into force.  Accordingly, if the ratification process is completed in 2011, then for Japan the Treaty should apply to income subjected to withholding taxes from 1 January 2012.  Please refer to the withholding tax section for further information on withholding taxes, including related administrative and legal matters.

For Japanese taxes on income which are not withheld at source, the treaty will apply for any taxable year beginning on or after the 1st of January in the calendar year next following the month in which the treaty enters into force.  As an example, again assuming the treaty was ratified in 2011, the Treaty may first apply to Japanese companies with a 31 March year-end for the year to 31 March 2013.

Notable Treaty terms

Interestingly, the Treaty has been prepared in Japanese, Arabic and English with all text being equally authoritative, although in the case of divergence of interpretation the English text prevails.  The Treaty follows closely the OECD Model Tax Convention.  A few points of interest in the Treaty are as below:

Construction site, service permanent establishment

A building site, construction site, assembly or installation project gives rise to a permanent establishment only if the site activities last more than 183 days.

Furnishing of services and similar consulting services gives rise to a permanent establishment if carried on for a period in aggregate of more than 183 days within any 12-month period.


The Withholding tax rate on dividends is reduced to 5 per cent when at least 10 per cent of the voting shares in a company held for a period of at least 183 days at the on the day on which entitlement to the dividends is determined.  In other cases, dividend withholding tax is 10 per cent.

Interest, income from debt claims

The withholding tax rate on interest and similar income from debt claims is reduced to 10 per cent, although can be reduced to zero in the case of certain government debts or debts guaranteed by government bodies of the two respective states.  The protocol to the Treaty gives more information with respect to bodies qualifying for this treatment.


Withholding taxes on royalties are reduced to 5 per cent for those paid for various industrial, commercial or scientific purposes or 10 per cent in other cases.

Sale of shares, shares in “land rich” companies

Japan and Saudi Arabia both reserve the right to tax gains from the alienation of shares or other comparable interests in a company that drives of at least 50 per cent of its value, directly or indirectly, from immovable property including real estate situated in each of the respective states.

Both Japan and Saudi Arabia also retain the right to tax gains from a sale of shares in a company when 25 per cent or more of the shares concerned are held by a resident of the other contracting state.  In Japan’s case under Japanese domestic law a sale of such an interest would typically give rise to Japan source income.  The Treaty would apparently not protect Japanese tax from applying to such income.

Other income, including income or gains from a tokumei kumiai

Under paragraph 3 of article 22 (the ‘Other Income’ article) when paragraph 3 applies it will allow Japan and Saudi Arabia to tax ‘other income’ arising in each of their respective states.  The protocol makes it clear that this will include allowing Japan to tax income or gains arising in Japan derived by a resident of Saudi Arabia from an interest in a Japanese sleeping partnership or ‘tokumei kumiai’ agreement.

Limitation of benefits

Article 24 is the Treaty’s limitation on benefits article.  In contrast to the US/Japan Treaty which includes a detailed and comprehensive set of (relatively) subjective tests that must be passed in order for parties to avail themselves of treaty benefits, the article simply states a more subjective test that “…no relief shall be available under [the Treaty] if the main purpose or one of the main purposes of any person…was to take advantage of [the Treaty]…”.

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