Tax Alert: GAZT Circular on FOA Rule

The General Authority of Zakat and Tax (GAZT) has released a circular which provides guidance on how the Force of Attraction (FOA) rule applies in relation to permanent establishments (PE) for income tax purposes. In particular, the circular addresses the application of FOA in relation to PEs in Saudi Arabia of residents of countries that:

• do not have a double tax avoidance treaty (DTAT) with Saudi Arabia;
• have a DTAT with a FOA rule; and
• have a DTAT without a FOA rule.

The circular lists all DTATs currently in force and indicates whether each has a FOA rule and what profits may be taxed by Saudi Arabia.

The FOA rule in paragraph 5 of Article 10 of the Income Tax Law applies in relation to PEs of residents of countries that do not have a DTAT with Saudi Arabia. The FOA provides that a non-resident that has a PE in Saudi Arabia will be subject to Saudi Arabian income tax not only on income directly attributable to the PE, but also on:

• income from sales in Saudi Arabia of goods of the same or similar kind as those sold through the PE; and
• income from rendering services or carrying out another activity in Saudi Arabia of the same or similar nature as an activity performed through the PE.

There are 14 DTATs with Saudi Arabia that include a FOA rule. These DTATs are with the following countries:

In general, these DTATs follow paragraph 1 of Article 7 of the UN Model Double Taxation Convention such that a resident of one of the above-noted counties who conducts business through a PE in Saudi Arabia will be subject to Saudi Arabian income tax on the following:

• profits directly attributable to the PE;
• sales in Saudi Arabia of goods or merchandise of the same or similar kind as those sold through the PE; and
• other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment.

There are 38 DTATs with Saudi Arabia that do not include a FOA rule. These DTATs are with the following countries:

Under these DTATs, only profits directly attributable to the PE may be taxed in Saudi Arabia, which encompasses the income derived from the sole activity of the PE in Saudi Arabia.

We recommend businesses review their current transactions to verify which scenario applies and whether the positions taken are consistent with the circular or whether amendments are required.

We shall keep you up to date on any further developments. In the meantime, our teams are available to discuss the guidelines and the impact of FOA on your business.