The Saudi General Authority of Zakat and Tax (GAZT) has issued Circular No. 2104001 on Force of Attraction rule in the context of permanent establishment. The circular provides information and guidance, including examples, on the Force of Attraction (FOA) rule and its application in Saudi Arabia according to the Income Tax Law and double tax avoidance agreements (DTAs) in the following contexts:

• FOA application under the Law in Saudi Arabia in the absence of a DTA between Saudi Arabia and the country of residence of the PE's headquarters; and
• FOA application in the context of DTAs between Saudi Arabia and the country of residence of the PE's headquarters:
  • DTAs including FOA rules; and
  • DTAs nullifying the application of FOA rules.

Absence of a DTA with Saudi Arabia

Paragraph 10 of Article 5 of the Income Tax Law provides that income attributable to a PE of a non-resident located in Saudi Arabia should include income from sales in Saudi Arabia of goods of the same or similar kind as those sold through such a PE, and income from rendering services or carrying out another activity in Saudi Arabia of the same or similar nature as an activity performed by a non-resident through a PE.

The domestic provision refers to the concept of a partial application of FOA, whereby the income derived by a non-resident company having a PE in Saudi Arabia would be brought into the scope of Saudi Arabia taxation regardless of whether the income is directly attributed to the PE or facilitated by the PE. However, the condition of similarity of activity exists to restrict the FOA application only to a specific category of income.

DTAs including FOA Rules

Saudi Arabia has signed 14 DTAs that contain FOA rules, including the DTAs with Azerbaijan, Bangladesh, Ethiopia, Georgia, Jordan, Kazakhstan, Mexico, Macedonia, Tunisia, Ukraine, United Arab Emirates, Uzbekistan, Venezuela, and Vietnam.

In general, these DTAs follow the generic provision of the UN treaty model stating a condition of similarity of activity or sale to allow the allocation of income even if not directly derived by the PE. Therefore, in principle, a company incorporated in a jurisdiction containing an FOA provision under its DTA with Saudi Arabia, and deemed to have created a PE in Saudi Arabia, should see the following types of income be brought within the scope of tax in Saudi Arabia:

• The profits directly attributable to the PE;
• Sales in the Saudi Arabia of goods or merchandise of the same or similar kind as those sold through the PE; or
• Other business activities carried on in Saudi Arabia of the same or similar kind as those effected through the PE.

DTAs nullifying the application of FOA rules

Saudi Arabia has signed 38 DTAs that do not include FOA rules, including the DTAs with Albania, Algeria, Austria, Belarus, Bulgaria, China, Cyprus, Czech Republic, 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, and the United Kingdom.

Under these DTAs, only the profits directly attributable to the PE may be taxed in Saudi Arabia. Profits directly attributable to the PE encompass the income derived from the sole activity of the PE in Saudi Arabia.