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.

No DTAT

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.

DTAT with FOA rule

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

Azerbaijan

Bangladesh

Ethopia

Georgia

Jordan

Kazakhstan

Mexico

Macedonia

Tunisia

Ukraine

United Arab Emirates

Uzbekistan

Venezuela

Vietnam

 

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.

DTAT without FOA rule

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

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 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.

Implications for businesses

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.

Get in Touch

Riyadh Office

Wadih Abu Nasr

Head of Tax, Saudi Levant Cluster

E: wabunasr@kpmg.com

Nick Soverall

Senior Director, Head of Indirect Tax

E: nsoverall@kpmg.com

Peter Bourke

Senior Director, M&A/ Int’l Tax

E: peterbourke@kpmg.com

Mohamed Araji

Senior Director, FS/ Tax Reimagined

E: maraji@kpmg.com

Ali Sainudheen

Senior Director, Domestic Tax

E: asainudheen@kpmg.com

Stefan El Khouri

Senior Director, Head of Transfer Pricing

E: selkhouri@kpmg.com

Raza Qadir

Senior Director,

Corporate Tax and Advisory lead

GCMS and inbound compliance lead

E: razaqadir@kpmg.com

Oleg Shmal

Director, Indirect Tax

E: oshmal@kpmg.com

Faisal Tanvir

Director, Domestic Tax

E: FTanvir@kpmg.com

Saber Al Zawaideh

Director,  Domestic Tax

E: salzawaideh@kpmg.com

   

Jeddah Office

Mohamed ElSwefy

Senior Director, Family Office & Private Clients

E: mohamedelswefy@kpmg.com

Salam Eido

Director, Indirect Tax

E: seido@kpmg.com

Muhammad Masood

Director, Domestic Tax

E: muhammadmasood@kpmg.com

Khobar Office

Tareq Al Sunaid

Partner, Head of Domestic Tax

E: talsunaid@kpmg.com

Mohammad Kamran Sial

Senior Director, Domestic Tax

E: ksial@kpmg.com

Anil Bahl

Director, Indirect Tax

E: anilbahl@kpmg.com

Mohamed Gouda

Director, Domestic Tax

E: mohamedgouda@kpmg.com