On 17 May 2023, Saudi Arabia’s Zakat, Tax and Customs Authority (ZATCA) issued Circular No. 2303001 regarding the taxation of Permanent Establishments (PEs) in the context of Double Taxation Agreements (DTA).

The Circular serves to provide information and guidance regarding the PE relating to the performance of services determination and tax implications in the Kingdom of Saudi Arabia according to the DTA signed with foreign jurisdictions.

The Circular clarifies key concepts relating to the existence of a service PE:

Instances where a Service PE is established:

A Service PE is deemed to exist in the KSA when a non-resident enterprise provides services to a customer in KSA. The PE is determined by three tests: services provided through employees, physical presence in KSA for more than 183 days in a 12-month period, and activities conducted for the same or connected project.

If a PE is established, only profits directly attributable to the PE can be taxed in KSA, unless specified otherwise in the DTA. The PE is subject to income tax based on net income, calculated as gross income minus expenses incurred for conducting business through the PE.

The tax treatment for a Service PE in KSA follows the provisions of the DTAs and local Law.

Instances where a Service PE is not established:

If a Service PE is not established, the profits of a non-resident enterprise are generally taxable only in its country of residence. Service fees, which do not trigger a PE, fall under the scope of Article 7 of DTAs. In such cases, the income may not be subject to income tax in the country where the services are provided, but withholding tax (WHT) may apply. Some DTAs classify payments for technical services as royalty payments under Article 12, resulting in reduced WHT rates.