Unless a tax treaty provides otherwise, a non-resident is deemed to have a permanent establishment in Saudi Arabia, if it has a fixed or permanent place in Saudi Arabia through which the business of the non-resident is wholly or partly carried out. A permanent establishment includes the following:
- A fixed base from which a non-resident natural person wholly or partly carries out business activities;
- Construction sites, assembly facilities, and supervisory activities connected therewith;
- Installations, sites, drilling equipment, or ships used for natural resource surveying, and supervisory activities connected therewith; and
- A branch of a non-resident company that is licensed to conduct business in Saudi Arabia.
A fixed or permanent place of a non-resident in Saudi Arabia does not constitute a permanent establishment if it is used for the following activities:
- Use of facilities solely for the purpose of storage, display, or delivery of goods or merchandise belonging to the non-resident;
- Maintenance of a stock of goods or merchandise belonging to the non-resident solely for the purpose of processing by another person;
- Maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the non-resident;
- Maintenance of a fixed place of business solely for the purpose of preparing contracts relating to loans, supply of goods, or provision of technical services for signature;
- Maintenance of a fixed place of business solely for the purpose of carrying on, for the non-resident, any other activities that are preparatory or auxiliary in nature; or
- Maintenance of a fixed place of business solely for any combination of activities mentioned above.
Note that assets located in a special economic zone do not constitute a permanent establishment in Saudi Arabia for the non-resident investor during the tax holiday period (see Sec. 10.2.).
Moreover, a permanent establishment may arise where the non-resident engages in business in Saudi Arabia through a dependent agent who:
- Negotiates or concludes contracts on behalf of the non-resident; or
- Maintains a stock of goods for regular delivery to the non-resident’s clients.
A place from which an agent carries out insurance or reinsurance activities in Saudi Arabia on behalf of a non-resident is considered a permanent establishment of the non-resident, even if the agent is not authorized to negotiate or conclude contracts on behalf of the non-resident.
On 17 May 2023, the Saudi Zakat, Tax, and Customs Authority (ZATCA) issued Circular No. 2303001 providing clarification on the general conditions that must be fulfilled under the tax treaties entered into by Saudi Arabia to constitute a service permanent establishment of a non-resident in Saudi Arabia. The definition of service permanent establishment in most of Saudi tax treaties is based on Art. 5(3)(b) of the UN Model Tax Convention and provides the following conditions:
- Furnishing of services, i.e., the non-resident must provide the services through its employees;
- Within Saudi Arabia, i.e., the employees must be physically present in Saudi Arabia when providing these services; and
- More than 182 days/ 183 days/ 6 months in any 12-month period, i.e., the employees must be physically present in Saudi Arabia for a certain period of time when providing these services.
Note that the Circular clarifies that to constitute a service permanent establishment, the services must be provided by the non-resident through its employees. However as per Art. 5(3)(b), a service permanent establishment may also be constituted if the non-resident provides services in the source state through persons other than its employees (e.g., dependent agents receiving instructions from the non-resident).
Hitherto, the Saudi tax authorities relied on the concept of “Virtual Service PE” and took the position that a service permanent establishment could be triggered even without the physical presence of the employees of the non-resident service provider in Saudi Arabia. In 2015, Saudi Arabia had issued an internal guidance on the interpretation of the service permanent establishment concept. Under the guidance, a non-resident providing services to Saudi residents was deemed to have a permanent establishment in Saudi Arabia, if the following conditions were met:
- The services were provided under a contract with a Saudi entity in connection with such entity’s activities in Saudi; and
- The duration of the contract exceeded the threshold period for a permanent establishment under the applicable tax treaty.
While this position was in line with the concept of service permanent establishment as defined in Art. 5(3)(b) of the UN Model Tax Convention, and included in most Saudi treaties, it was not supported by the OECD Model Tax Convention. Nevertheless, the Saudi tax authorities took the position that due to the increased possibilities for the remote provision of services, actual physical presence in Saudi Arabia is not needed and a service permanent establishment may be triggered even if the services are provided entirely offshore.
The issuance of Circular No. 2303001 essentially abolishes the Virtual Service PE concept and may allow non-resident service providers to avoid the recognition of a service PE in situations where their employees are not physically present in Saudi Arabia.