Saudi Arabia applies a force of attraction (FOA) rule for the taxation of non-resident taxpayers. The FOA rule basically extends the scope of taxable income of a permanent establishment of a non-resident in the country in which the permanent establishment exists to cover all or only specified income earned in the country other than through the permanent establishment.

The Saudi Zakat, Tax, and Customs Authority (‘ZATCA’) issued a Circular (No. 2104001) on ‘FOA rule in the context of permanent establishment’. The circular provides guidance on the FOA rule and its application in Saudi Arabia according to the domestic tax laws and Saudi Arabia’s double tax treaties in the following configurations:

• FOA application under the tax laws of Saudi Arabia in the absence of a tax treaty between Saudi Arabia and the country of residence of the non-resident having a permanent establishment in Saudi Arabia; and
• FOA application in the context of a tax treaty between Saudi Arabia and the non-resident having a permanent establishment in Saudi Arabia in situations where:
  • the relevant tax treaty permits the application of the FOA rules; and
  • the relevant treaty prevents Saudi Arabia from applying its FOA rules.

Absence of tax treaty with Saudi Arabia

In the absence of a tax treaty, Saudi domestic tax laws provide that the non-resident company is taxable in Saudi Arabia not only on income directly attributable to the permanent establishment in Saudi Arabia, but also on:

• Income from sales in Saudi Arabia of goods of the same or similar kind as those sold through the permanent establishment; 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 permanent establishment.

Domestic tax laws basically refer to the partial FOA rule with the condition of similar activities or similar goods being sold which further restricts the application of FOA rule to a specific category of income.

Treaties Permitting the Application of the FOA Rules

Where the treaty permits the application of the FOA rules, an enterprise of the relevant contracting party with a permanent establishment in Saudi Arabia is taxable on the following income in Saudi Arabia:

• The profits directly attributable to the permanent establishment;
• Profits derived from the sale of goods or the rendering of services of the same or similar kind as those sold or rendered through the permanent establishment; and
• Profits from other business activities carried on in Saudi Arabia of the same or similar kind as those effected through the permanent establishment.

Saudi Arabia has signed 14 tax treaties which permit the application of the FOA rules, including those with Azerbaijan, Bangladesh, Ethiopia, Georgia, Jordan, Kazakhstan, Mexico, Macedonia, Tunisia, Ukraine, United Arab Emirates, Uzbekistan, Venezuela, and Vietnam.

Treaties Preventing the Application of the FOA Rules

The treaties concluded by Saudi Arabia with a number of countries do not include language permitting the use of the FOA rules. These include the treaties 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, the Netherlands, Pakistan, Poland, Portugal, Romania, Russia, Singapore, South Africa, Spain, Sweden, Syria, Tajikistan, Turkey, Turkmenistan, and the United Kingdom. In situations covered by such treaties, only income directly attributable to the assets or business activities of the permanent establishment is taxable in Saudi Arabia.