Saudi Arabia: Force of attraction rules in relation to permanent establishments

Guidance on how force of attraction rule applies in relation to permanent establishments for income tax purposes

Guidance on how force of attraction rule applies in relation to PE for income tax purposes

The General Authority of Zakat and Tax (GAZT) released a circular that provides guidance on how the force of attraction (FOA) rule applies in relation to permanent establishments (PE) for income tax purposes. 

The circular addresses the application of FOA in relation to PEs in Saudi Arabia of residents of countries that:

  • Do not have an income tax treaty with Saudi Arabia
  • Have an income tax treaty with an FOA rule
  • Have an income tax treaty without an FOA rule

The circular lists all income tax treaties currently in force and indicates whether each has an FOA rule and what profits may be taxed by Saudi Arabia.

No income tax treaty

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 an income tax treaty 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
  • Income from rendering services or conducting another activity in Saudi Arabia of the same or similar nature as an activity performed through the PE

Income tax treaties with FOA rule

There are 14 income tax treaties in the Saudi Arabia network of treaties that include an FOA rule:

Azerbaijan

Bangladesh

Ethiopia

Georgia

Jordan

Kazakhstan

Mexico

Macedonia

Tunisia

Ukraine

United Arab Emirates

Uzbekistan

Venezuela

Vietnam

 


In general, these income tax treaties follow paragraph 1 of Article 7 of the UN Model Double Taxation Convention such that a resident of one of the above-listed counties that 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
  • Other business activities carried on in that other country of the same or similar kind as those effected through that permanent establishment

Income tax treaties without FOA rule

There are 38 income tax treaties between Saudi Arabia and another country that do not include an FOA rule:

Albania

Algeria

Austria

Belarus

Bulgaria

China

Cyprus

Czech

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

 

 

Under these income tax treaties, 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.


For more information, contact KPMG’s Global Head of International Tax:

Rodney Lawrence | +1 (312) 665 5137 | rlawrence@kpmg.com

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