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ZATCA Circular 2104001 details the application of the Force of Attraction (FOA) rule under KSA domestic law and relevant tax treaties. It explains that the FOA rule allows the Kingdom to tax income from sales or services conducted by a foreign head office if they are of the 'same or similar nature' as activities performed through a local Permanent Establishment (PE). The circular distinguishes between partial and global FOA, noting KSA's adoption of the partial model. It provides a definitive categorization of 14 treaties that include FOA provisions and 38 treaties that explicitly nullify its application.

Force of Attraction rule in the context of permanent establishment

Circular | Publication Number 2104001

April 2021

1. Introduction

2. Situational Context

3. Scope of Application

4. FOA: Absence of a Tax Agreement with KSA

5. FOA: Presence of a Tax Agreement with KSA

5.1. Tax Agreement including FOA provision

5.2. Tax Agreement nullifying the application of the FOA provision

6. Appendix

The Zakat, Tax and Customs Authority ("ZATCA", "Authority") has issued this Tax Circular for the purpose of clarifying certain tax treatments concerning the implementation of the statutory provisions in force as of the Circular's issue date. The content of this Circular shall not be considered as an amendment to any of the provisions of the Laws and Regulations applicable in the Kingdom.

Furthermore, the Authority would like to highlight that the clarifications and indicative tax treatments prescribed in this Circular, where applicable, shall be implemented by the Authority in light of the relevant statutory texts. Where any clarification, interpretation or content provided in this Circular is modified - in relation to unchanged statutory text - the updated indicative tax treatment shall then be applicable prospectively, in respect of transactions made after the publication date of the updated version of the Circular on the Authority's website.

Introduction

This circular provides information and guidance about the Force of Attraction rule ("FOA") and its application in KSA according to the Income Tax Law (the "Law") and double tax avoidance agreements ("DTAT").

For the purposes of this circular, Permanent Establishment (PE) has the meaning assigned by Article 4 of the Law, and in DTATs to refer to a situation where a non-resident company is taxable in a country in which it should not normally be taxable unless it has a PE through which it conducts business. The income derived from this activity should generally be taxed only to the extent that it is 'attributable' to the PE.

Situational Context

The concept of FOA formally provided within the United Nations ("UN") - the Organization for Economic Co-operation and Development ("OECD") tax treaty models do not contain such provision - provides a framework for the determination of profits to be attributed to a PE and the potential disputes that may arise between two jurisdictions.

Contents

Introduction

Situational Context