Saudi Arabia: Treatment of service permanent establishments in context of income tax treaties

Circular 2303001 clarifies the conditions that need to be fulfilled to trigger a service PE

Circular 2303001 clarifies conditions that need to be fulfilled to trigger a service PE

The Zakat, Tax and Customs Authority (ZATCA) on 17 May 2023 issued Circular 2303001 to provide guidance on the treatment of service permanent establishments (PEs) in the context of income tax treaties.


Historically, ZATCA had established the concept of a “virtual service PE,” which relied on a specific interpretation of the UN Model Tax Convention but 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. Nonresident companies (especially in the service industry) have struggled with this concept, as it was not fully aligned with the international taxation standards and could lead to friction and potentially double taxation for these companies.  

Circular 2303001

The purpose of Circular 2303001 is to clarify the conditions that need to be fulfilled to trigger a service PE according to the relevant provision in income tax treaties. The circular does not cover the tax implications once a service PE has been found in Saudi Arabia.

An activity needs to pass three tests in order to be considered a service PE:

  • “Furnishing of services,” which means that the company must be providing the relevant services through its employees
  • “Within,” which means that the employees must be physically present in Saudi Arabia when providing these services
  • “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 nonresident company is deemed to create a PE in Saudi Arabia

For more information, contact a KPMG tax professional:

Philippe Stephanny |



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