On 17 May 2023, ZATCA issued a circular 2303001 (“Circular”) to provide guidance on the treatment of Permanent Establishments (“PE”) in the context of Double Taxation Agreements (“DTA”). This Circular focuses on the concept of the “Service PE” according to Article 5 para 3b of the relevant DTA.

Historically, ZATCA had established the concept of a “Virtual Service PE”, which relied on a specific interpretation of the UN Model Tax Convention, but which was not supported by the OECD Model Tax Convention. The Virtual Service PE could be triggered even without a physical presence of the service provider in Saudi Arabia. Non-resident companies (especially in the service industry) have struggled with this concept, as it was not fully aligned with the international taxation standards and hence led to friction and potentially double taxation for these companies.  

The purpose of this Circular is to clarify which conditions need to be fulfilled to trigger a Service PE according to the relevant provision in the DTA. The Circular does not cover the tax implications once a Service PE has been triggered in Saudi Arabia.

The Service PE concept was introduced with the addition of Article 5 para 3b in the UN Model Tax Convention. The purpose of introducing the Service PE was to establish a (limited) taxation right for the countries where the services have been conducted. Saudi Arabia has included a Service PE provision in 54 out of 57 signed DTAs.

From a tax technical point of view, an activity needs to pass three tests in order to be considered a Service PE:

  1. “Furnishing of services”, which means that the company must be providing the relevant services through its employees;
  2. “Within”, which means that the employees must be physically present in Saudi Arabia when providing these services; and
  3. “More than 183 days in any 12-month period”, which means that the physical presence in the country for a certain period of time to perform the services is vital to determine whether or not the non-resident company is deemed to create a PE in Saudi Arabia.

If a Service PE is created in Saudi Arabia, the non-resident service provider is deemed to be subject to tax according to the applicable DTA and under the terms of the Saudi Arabian tax regulations. In case the activity of the non-resident service provider does not pass all three tests mentioned above, the profits generated from that activity will only be subject to tax in the home country of the service provider. However, in certain cases, the activity of the non-resident service provider could be subject to withholding tax ("WHT") in Saudi Arabia.

In instances where a PE is not established, the income generated by the non-resident in respect of activities performed for the benefit of a Saudi resident would not fall within the scope of income tax in the Kingdom. In certain cases, it may fall within the scope of WHT. KSA has signed multiple DTAs where payments for technical services are classified as Royalty (typically Article 12 of the relevant DTA). Consequently, even if the non-resident service provider did not create a Service PE in Saudi Arabia, the service recipient may be required to apply WHT on the cross-border payment to the service provider where the services are covered under the Royalty clause as per applicable DTAs. 

This Circular provides the much-awaited clarity on the Service PE concept and basically abolishes the Virtual Service PE concept. Such clarification is an important message to foreign companies that have identified Saudi Arabia as an important market and consequently this Circular will add to the economic growth projection of Saudi Arabia with regards to Vision 2030 and beyond.

Get in touch

Riyadh Office

Tariq Al Sunaid

Head of Tax

E: talsunaid@kpmg.com


Ali Sainudheen

Senior Director, Domestic Tax

E: asainudheen@kpmg.com

Salam Eido

Senior Director, Domestic Tax

E: seido@kpmg.com


Oleg Shmal

Director, Head of Indirect Taxes

E: oshmal@kpmg.com

Stefan El Khouri

Senior Director, Head of Transfer Pricing

E: selkhouri@kpmg.com


Amr Alsaleh

Director, Domestic Tax

E: amralsaleh@kpmg.com

Jeddah Office

Faisal Tanvir

Senior Director, Domestic Tax

E: ftanvir@kpmg.com

Muhammad Masood                                

Director, Domestic Tax                                  

E: muhammadmasood@kpmg.com


Fouad Yaman

Director, Domestic Tax

E: fyaman@kpmg.com

Khobar Office

Mohammad Kamran Sial

Senior Director, Domestic Tax

E: ksial@kpmg.com 

Mohamed Gouda

Director, Domestic Tax

E: mohamedgouda@kpmg.com


Anil Bahl

Director, Indirect Tax

E: anilbahl@kpmg.com