The double taxation agreement between the Government of the Hashemite Kingdom of Jordan and the Government of the State of Bahrain, signed in Manama on 8 February 2000, caps the tax that the source state may impose on dividends and interest paid to a resident of the other contracting state at no more than 10% of the gross amount, where the beneficial owner is resident in that other state.
Scope of the Agreement and Its Definitions
Under its first article, the Agreement applies to persons who are residents of one or both of the contracting states, and covers, on Jordan's side: income tax, the distribution tax, and the social services tax imposed in addition to income tax, and on Bahrain's side: any tax on income imposed after the date of signing the Agreement (excluding the income tax on oil companies imposed under Bahraini Decree-Law No. 22 of 1979).
Dividends: a 10% Cap
The Agreement provides that dividends paid by a company resident in one state to a person resident in the other state may be taxed in the state of residence of the paying company under its laws, but the tax charged on the beneficial owner of the dividends shall not exceed 10% of the gross amount of the distributions.
Interest: the Same 10% Cap
The Agreement provides that interest arising in one state and paid to a resident of the other state may be taxed in the source state under its laws, but if the recipient is the beneficial owner of the interest, the tax charged shall not exceed 10% of the gross amount of the interest.
When Does a Permanent Establishment Arise for Construction and Services?
The Agreement provides that a building site, construction, assembly or installation project does not constitute a permanent establishment unless it lasts more than six months within any twelve-month period, and the same standard — a duration exceeding six months within a twelve-month period — applies to the furnishing of services, including consultancy services, provided by an enterprise through its employees or other personnel. In practice, this means a construction project or a package of consultancy services completed in under six months does not create a permanent-establishment tax liability in the state where it is carried out, unlike one that exceeds that period.
Why One Common Rate for Both Dividends and Interest?
Notably, the Agreement chose the same rate — 10% — for both dividends and interest, unlike some other treaties that set different rates for each type of income. This cap remains the maximum the source state may impose, while each state retains the right to apply a lower tax, or a full exemption, under its own domestic law if that is more favourable to the taxpayer.
Legal References
- Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and Capital Between Jordan and Bahrain (Manama, 8-2-2000) — Article One: Personal Scope, and Article Two: Taxes Covered
- Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and Capital Between Jordan and Bahrain — Dividends Article: 10% Cap
- Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and Capital Between Jordan and Bahrain — Article Eleven: Interest, 10% Cap
- Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and Capital Between Jordan and Bahrain — Permanent Establishment Article: the Six-Months-Within-Twelve-Months Test
For questions about your specific situation, you can ask the Jordan or Bahrain Tax & Legislation Helper on Helpers, or consult a licensed chartered accountant.