According to a recent update from Latvia's Ministry of Finance, the income and capital tax treaty between Latvia and Saudi Arabia entered into force on 1 July 2021. The treaty, signed 7 November 2019, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Latvian enterprise income tax, personal income tax, and immovable property tax. It covers Saudi Zakat and income tax including natural gas investment tax.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services within a Contracting State through employees or other engaged personnel for a period or periods aggregating more than 183 days within any 12-month period.

Offshore PE

The final protocol to the treaty includes the provision that a person that is a resident of a Contracting State and carries on offshore activities (defined as activities carried on in any area adjacent to the territorial waters of a Contracting State in connection with the exploration or exploitation of the seabed and its subsoil and their natural resources) in the other State shall be deemed to have a permanent establishment in that other State.

Additional Tax on PEs

The final protocol to the treaty includes the provision that profits of a company of a Contracting State carrying on business in the other Contracting State through a permanent establishment may, after having been taxed under Article 7 (Business Profits), be taxed on the remaining amount of its profits in the Contracting State in which the permanent establishment is situated and the tax so charged shall not exceed 5%.

Withholding Tax Rates

• Dividends - 0% if the beneficial owner is a company directly holding at least 25% of the paying company's capital; otherwise, 5%
• Interest - 0% if the beneficial owner is a company; otherwise, 5%
• Royalties - 5% for royalties for the use of, or the right to use, industrial, commercial or scientific equipment; otherwise, 7%

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

• Gains from the alienation of immovable property situated in the other State;
• Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State;
• Gains from the alienation of shares in a company or a comparable interest in a partnership, trust, or other similar entity deriving more than 50% of their value directly or indirectly from immovable property situated in the other State; and
• Gains from the alienation of shares in a company that is a resident of the other State, other than those mentioned above and those listed on a recognized stock exchange.

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Double Taxation Relief

Both countries apply the credit method for the elimination of double taxation.

Miscellaneous Provisions

Article 27 (Miscellaneous Provisions) includes the provision that a benefit of the treaty will not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the treaty.

Effective Date

The treaty applies from 1 January 2022.