The Swiss Confederation and the Sultanate of Oman signed on 22 May, 2015 a new Double Taxation Agreement (“DTA” or the “Agreement”) for the avoidance of double taxation with respect to taxes on income. We can certainly be satisfied of this very positive outcome that will undoubtedly strengthen and foster bilateral relations between the two countries.
Background of bilateral relations
Since the establishment of diplomatic relations between Switzerland and Oman in 1973, the two states have significantly deepened their relations on a political, cultural and economic level, especially over the past few years. Aside from agreements regarding investment and trade, Switzerland and Oman entered into an agreement in tax matters applying to revenues from international air transportˡ.
At the end of 2010, Switzerland and Oman concluded negotiations on a DTA, which took place in the context of the Swiss Federal Council decision of March 2009 on extending administrative assistance in tax matters. These discussions already contained an administrative assistance clause in tax matters following the OECD² standard along with other provisions beneficial for the economics relationships among the two countries (notably the reduction of the withholding tax on dividends and interest).
Main aspects of the new DTA
– Dividends, interest and royalties
The new DTA applies to taxes on income, which means federal, cantonal and communal taxes on income in Switzerland and the income tax in Oman. The most significant benefits of the new Agreement are certainly the reduction of withholding taxes on dividends (Art. 10), interest (Art. 11) and royalties (Art. 12). In short, the taxation will be as follows:
– Taxes on dividends in the source state shall not exceed 5 percent of the payment if the beneficial owner is a company holding directly at least 10 percent of the capital of the company paying the dividends. In all other cases, dividends can be taxed at a maximum rate of 15 percent in the source state. This is a key advantage as Swiss domestic legislation provides a withholding tax on dividends of 35 percent, which constitutes a definitive tax burden for recipients domiciled abroad.
– In some situations, the source state shall exempt from tax dividends paid by one of its companies when the beneficial owner is a pension scheme/fund, a political subdivision or the Central Bank of the other contracting state.
– Taxes on interest in the source state shall also not exceed 5 percent if the beneficial owner of the interest is a resident of the other contracting state. Moreover, certain interest payments will only be taxable in the state of residence.
– Taxes on royalty payments shall not exceed 8 percent in the source state if the beneficial owner of the royalties is a resident of the other contracting state.
- Exchange of information and other provisions
One of the most important provisions of the Agreement is the one regarding exchange of information stating that the authorities “shall exchange information as is foreseeably relevant for carrying out the provisions of this Agreement or to the administration or enforcement of the domestic laws concerning taxes covered by the Agreement insofar as the taxation thereunder is not contrary to the Agreement”.
This provision has to be read in conjunction with the Protocol which provides clarifications of great importance as (i) the contracting states cannot engage fishing expeditions or request information that is unlikely to be relevant to the tax affairs of a taxpayer, (ii) exchange of information will only be requested once all regular internal sources of information available under the internal taxation procedure have been exhausted and (iii) some specific information shall be provided by the requesting state in the frame of a request for information (identity of the person under examination, period of time and tax purpose for which the information is requested, name and address of any person who could be in possession of the information, etc.).
Furthermore, it has to be kept in mind that exchange of information is not restricted to residents of Switzerland or Oman.
Finally, regarding the elimination of double taxation, Switzerland shall in principle exempt income deriving from Oman and taxed in this State. On its part, the Sultanate of Oman shall avoid double taxation by deducting the income tax paid in Switzerland from the Omani tax.
Once approved by the appropriate legislative bodies (Parliament) in both countries, the DTA will enter into force³. Therefore, the agreement regarding income derived from international air transport will logically cease to have effect.
From that time, the Agreement will clearly strongly contribute to the development of bilateral economic relations and facilitate trade between the two countries.