April 30, 2021 Saudi Arabia clarifies permanent establishment force of attraction rules Executive summary The Saudi Arabian General Authority for Zakat and Tax (GAZT), in April 2021, published Circular No. 2104001, entitled Force of Attraction rule in the context of permanent establishment. The Circular confirms the GAZT’s approach to applying the force of attraction principle under the Income Tax Law and several of Saudi Arabia’s tax treaties. The GAZT has affirmed that when a treaty does not contain a force of attraction rule, only the profits that are directly attributable to a permanent establishment (PE) should be taxed in Saudi Arabia. The Circular continues the GAZT’s focus on PE taxation in Saudi Arabia. Nonresidents investing into Saudi Arabia without operating through a Saudi legal entity should review the PE rules and confirm that they are applying the PE rules and income determination principles correctly. Detailed discussion Income Tax Law Under the Income Tax Law, a nonresident person that has a PE in Saudi Arabia is required to pay 20% corporate income tax (CIT) on the profits attributable to that PE. In addition, a force of attraction principle requires the PE to also pay CIT on income from:
For example, if a nonresident person established a PE in Saudi Arabia to sell electronic goods, and also made online sales to Saudi Arabian customers through a website that is entirely managed and operated outside Saudi Arabia, income from the online sales could also be taxed in Saudi Arabia under the force of attraction rule. Tax treaty relief Saudi Arabian tax treaties can provide relief from taxation imposed under the Income Tax Law. Currently, Saudi Arabia has 52 such treaties in force. The Circular notes that 14 Saudi Arabian treaties, namely those with Azerbaijan, Bangladesh, Ethiopia, Georgia, Jordan, Kazakhstan, Mexico, Macedonia, Tunisia, Ukraine, United Arab Emirates, Uzbekistan, Venezuela and Vietnam, contain a similar force of attraction rule for determining the income of a PE as is found in the Income Tax Law. Consequently, residents from those countries would determine the taxable profits of their PE in the same manner as under the Income Tax Law. For the other 38 countries,1 the Circular notes that the treaties do not contain the force of attraction rule, so the PE should pay tax only on the profits directly attributable to the activities of the PE. This means that even if a nonresident has a PE in Saudi Arabia, the treaty should relieve business profits from CIT if the profits are not connected with the PE and do not relate to an activity that creates a separate PE in its own right. Implications The Circular restates the position set out in the Income Tax Law and Saudi tax treaties. The Circular also provides a clear public position on the determination of profits for a PE when a treaty does not contain a force of attraction rule. The Circular continues the GAZT’s focus on PE taxation in Saudi Arabia. Nonresidents investing into Saudi Arabia without operating through a Saudi legal entity should review the PE rules and confirm that they are applying the PE rules and income determination principles correctly. _________________________________________ For additional information with respect to this Alert, please contact the following: Ernst & Young & Co (Certified Public Accountants), Riyadh
Ernst & Young & Co (Certified Public Accountants), Jeddah
Ernst & Young & Co (Certified Public Accountants), Al-Khobar
Ernst & Young LLP (United States), Middle East Tax Desk, New York
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