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ZATCA Circular 2303001 provides critical guidance on the creation of a Service Permanent Establishment (PE) under Article 5.3(b) of Double Taxation Agreements (DTAs). It clarifies that a PE is deemed to exist when a non-resident entity furnishes services through employees physically present in KSA for more than 183 days within a 12-month period. Once a PE is established, the entity is subject to KSA income tax on a net basis. The circular emphasizes the 'Within' test, requiring physical ground presence, and notes specific treaty exceptions where technical services may be classified as royalties subject to withholding tax.

Taxation of Permanent Establishments in the context of Double Taxation Agreements

Circular | Publication Number 2303001

May 17, 2023

1. Introduction

2. Situational Context

3. Key concepts relating to the existence of a Service PE

3.1. Instances where a Service PE is created
1. 3.1.1. Technical interpretation
2. 3.1.2. Tax treatment in the Kingdom
3. 3.1.3. Examples of application
3.2. Instance where a Service PE not created
1. 3.2.1. Technical interpretation
2. 3.2.2. Tax treatment in the Kingdom
3. 3.2.3. Examples of application

The Zakat, Tax and Customs Authority ("ZATCA", "Authority") has issued this 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 Guide 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

1.1.This circular serves to provide information and guidance regarding the Permanent Establishment ("PE") relating to the performance of services determination and tax implications in the Kingdom of Saudi Arabia ("KSA" or "the Kingdom") according to the Double Taxation Agreements ("DTA") signed with foreign jurisdictions.

1.2.For the purposes of this circular, the tax treatment is based on the provisions of DTAs. References to the KSA Law are however made to clarify the domestic treatment in case a PE is deemed to be triggered. The term Law refers together to the Income Tax Law issued by Royal Decree No. (M/1) dated 15/1/1425H, and its related amendments as well as its Regulations issued by Ministerial Decision No. (1535) dated 11/6/1425H and its related amendments.

Contents

Introduction