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May 31, 2023

Saudi Arabia clarifies interpretation of service-PE provisions in its tax treaties

  • The Saudi Arabia Zakat, Tax and Customs Authority has released a circular on the taxation of permanent establishments.
  • The circular clarifies the interpretation of the service permanent establishment provision in the double-tax treaties concluded by Saudi Arabia.
  • Business should consider how this clarification will impact their current or proposed activities in Saudi Arabia.

Executive summary

On 17 May 2023, Saudi Arabia's Zakat, Tax and Customs Authority (ZATCA) published a circular on the Taxation of Permanent Establishments in the context of Double Taxation Agreements (Circular), which aims to clarify and provide guidance on the taxation of nonresidents who provide services in Saudi Arabia where an effective double-tax treaty (DTT) is in place between Saudi Arabia and the relevant jurisdiction.

The clarifications stated in the Circular should provide companies with increased certainty regarding their permanent establishment (PE) position in Saudi Arabia.

Detailed discussion


Saudi Arabia currently has 57 effective DTTs, 54 of which contain a "service PE" provision introduced by paragraph 3(b) of Article 5 of the United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model Taxation Convention or UN MTC). In general, the service PE provision states that a PE is deemed to exist where a service provider furnishes services in a source state for a period or periods aggregating more than the threshold period under the applicable tax treaty.

In 2015, the ZATCA (previously known as the Department of Zakat and Income Tax or DZIT) introduced the concept of a "virtual service PE," changing its approach to the interpretation of the service-PE concept. Under this new approach, a service PE is deemed to exist based solely on the duration of the contract, rather than on the service provider's actual activities in Saudi Arabia. Specifically, a virtual service PE does not consider the physical presence of a nonresident service provider's employees or contractors in establishing nexus to the source country, despite the threshold condition provided in the tax treaties (and in the UN MTC).

The ZATCA expressed the new approach in response to requests for withholding tax (WHT) relief under the applicable DTTs and has retained the approach to date.

Clarification in the Circular

In the Circular, the ZATCA clarified its technical interpretation of paragraph 3(b) of Article 5 of the UN MTC, as explained below.

The ZATCA acknowledged that although the precise wording of paragraph 3(b) of Article 5 of the UN MTC may vary between DTTs, most DTTs signed by Saudi Arabia deem the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise to constitute a PE to the extent the activities are conducted (for the same or a connected project) within a contracting state for a period or periods aggregating more than 183 days in any 12-month period commencing or ending in the fiscal year concerned.

The ZATCA further noted that paragraph 3(b) of Article 5 highlights three main tests to determine whether a service PE is deemed to exist:

  1. "Furnishing of services," which means the enterprise must provide services through its employees
  2. "Within," which means the employees must be physically present in Saudi Arabia
  3. "More than 183 days in any 12-month period," which necessitates being physically present in the country for a certain period to perform the services to determine whether or not the nonresident entity is deemed to create a PE in Saudi Arabia

To illustrate how the above tests apply, the ZATCA provided one example showing that a PE is not deemed to be created where the employees of a nonresident company are based in and residing overseas and, under a 12-month technical service contract, the employees are not required to be present in Saudi Arabia to perform such services.

Another example depicts a consultancy service contract, valid for eight months, under which the employees of the nonresident company are required to work from the premises of the Saudi Arabian resident company for four months. In this instance as well, a PE is not deemed to be created, because the nonresident's employees are present in Saudi Arabia for less than the threshold period provided in the relevant tax treaty.

As such, the ZATCA notes that in instances where a PE is not created, the income that the nonresident generates performing activities for the benefit of a Saudi Arabian resident would not fall within the scope of Saudi Arabian income tax but may fall within the scope of WHT. The ZATCA notes that the tax treatment of payment for certain services can differ under various DTTs. For example, some treaties treat a payment for technical services as a "Royalty" (Article 12) and subject to WHT.


Clarifications provided in the Circular offer more certainty at a time when many businesses are assessing their operations and service delivery across the MENA (Middle East and North Africa) region.

Businesses should consider their existing or proposed activities in Saudi Arabia, taking into account this Circular to understand how this will impact their current or potential tax liability and obligations in Saudi Arabia.

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

Ernst and Young & Co Public Accountant (Professional LLC), Riyadh

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

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor


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