Sign up for tax alert emails    GTNU homepage    Tax newsroom    Email document    Print document    Download document

April 30, 2021
2021-5508

Saudi Arabia clarifies permanent establishment force of attraction rules

Executive summary

The Saudi Arabian General Authority for Zakat and Tax (GAZT), in April 2021, published Circular No. 2104001, entitled Force of Attraction rule in the context of permanent establishment. The Circular confirms the GAZT’s approach to applying the force of attraction principle under the Income Tax Law and several of Saudi Arabia’s tax treaties. The GAZT has affirmed that when a treaty does not contain a force of attraction rule, only the profits that are directly attributable to a permanent establishment (PE) should be taxed in Saudi Arabia.

The Circular continues the GAZT’s focus on PE taxation in Saudi Arabia. Nonresidents investing into Saudi Arabia without operating through a Saudi legal entity should review the PE rules and confirm that they are applying the PE rules and income determination principles correctly.

Detailed discussion

Income Tax Law

Under the Income Tax Law, a nonresident person that has a PE in Saudi Arabia is required to pay 20% corporate income tax (CIT) on the profits attributable to that PE. In addition, a force of attraction principle requires the PE to also pay CIT on income from:

  • The sale of goods in the Saudi Arabia of the same or a similar nature as those sold through the PE.
  • Rendering services or carrying out another activity in Saudi Arabia of the same or a similar nature as the activity performed by the PE.

For example, if a nonresident person established a PE in Saudi Arabia to sell electronic goods, and also made online sales to Saudi Arabian customers through a website that is entirely managed and operated outside Saudi Arabia, income from the online sales could also be taxed in Saudi Arabia under the force of attraction rule.

Tax treaty relief

Saudi Arabian tax treaties can provide relief from taxation imposed under the Income Tax Law. Currently, Saudi Arabia has 52 such treaties in force.

The Circular notes that 14 Saudi Arabian treaties, namely those with Azerbaijan, Bangladesh, Ethiopia, Georgia, Jordan, Kazakhstan, Mexico, Macedonia, Tunisia, Ukraine, United Arab Emirates, Uzbekistan, Venezuela and Vietnam, contain a similar force of attraction rule for determining the income of a PE as is found in the Income Tax Law. Consequently, residents from those countries would determine the taxable profits of their PE in the same manner as under the Income Tax Law.

For the other 38 countries,1 the Circular notes that the treaties do not contain the force of attraction rule, so the PE should pay tax only on the profits directly attributable to the activities of the PE. This means that even if a nonresident has a PE in Saudi Arabia, the treaty should relieve business profits from CIT if the profits are not connected with the PE and do not relate to an activity that creates a separate PE in its own right.

Implications

The Circular restates the position set out in the Income Tax Law and Saudi tax treaties. The Circular also provides a clear public position on the determination of profits for a PE when a treaty does not contain a force of attraction rule.

The Circular continues the GAZT’s focus on PE taxation in Saudi Arabia. Nonresidents investing into Saudi Arabia without operating through a Saudi legal entity should review the PE rules and confirm that they are applying the PE rules and income determination principles correctly.

_________________________________________

For additional information with respect to this Alert, please contact the following:

Ernst & Young & Co (Certified Public Accountants), Riyadh

Ernst & Young & Co (Certified Public Accountants), Jeddah

Ernst & Young & Co (Certified Public Accountants), Al-Khobar

Ernst & Young LLP (United States), Middle East Tax Desk, New York

Endnotes

  1. Albania, Algeria, Austria, Belarus, Bulgaria, China, Cyprus, Czech Republic, Egypt, France, Greece, Hong Kong, Hungary, India, Ireland, Italy, Japan, Korea, Kosovo, Kyrgyzstan, Luxembourg, Malaysia, Malta, Netherlands, Pakistan, Poland, Portugal, Romania, Russia, Singapore, South Africa, Spain, Sweden, Syria, Tajikistan, Turkey, Turkmenistan, United Kingdom.
 
 

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

 

Copyright © 2024, Ernst & Young LLP.

 

All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.

 

Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

 

"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

 

Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct Opt out of all email from EY Global Limited.

 


Cookie Settings

This site uses cookies to provide you with a personalized browsing experience and allows us to understand more about you. More information on the cookies we use can be found here. By clicking 'Yes, I accept' you agree and consent to our use of cookies. More information on what these cookies are and how we use them, including how you can manage them, is outlined in our Privacy Notice. Please note that your decision to decline the use of cookies is limited to this site only, and not in relation to other EY sites or ey.com. Please refer to the privacy notice/policy on these sites for more information.


Yes, I accept         Find out more