ZATCA clarifies position on services Permanent Establishments under Double Tax Treaties

On 17 May 2023, the Zakat, Tax and Customs Authority (ZATCA) issued a clarification on the recognition of services Permanent Establishments (PEs) in the KSA in Double Tax Treaty (DTT) situations.

In 2015, ZATCA (called DZIT at the time) issued an internal circular, instructing ZATCA auditors to establish a services PE in the KSA of a foreign company, where (i) the foreign company contracted with a KSA customer for the provision of services, and (ii) such contract had a term of six months or more.

Where the foreign company was resident in a jurisdiction that concluded a DTT with the KSA, and the provision of services did not involve the physical presence of employees in the KSA, or only for a short term (i.e., below the relevant DTT threshold of usually 183 days), establishment of a services PE by ZATCA was not in accordance with the respective DTT. In practice though, ZATCA often pursued its (domestic) position, disregarding the DTT, and many services PE cases have ended up before the KSA tax committees.

ZATCA’s recent Circular has now provided clarification that where a foreign company can rely on a DTT, it will only be considered having a services PE in the KSA if it:

1. Furnishes services to a KSA customer;
2. By means of employees who are physically present in the KSA; and
3. Their presence in the KSA lasts longer than 183 days in any 12-month period.

It should be noted that this helpful clarification from ZATCA only covers foreign service providers which are resident in a jurisdiction that has a DTT in place with the KSA. Foreign companies based in a country without such DTT (such as the United States) are essentially left with the domestic approach to PEs. Without being formally confirmed, the current market understanding is that ZATCA would in practice not establish a services PE, to the extent the KSA customer applies and remits withholding tax on the services fee payments.

Foreign companies providing services to KSA customers will welcome the DTT aligned approach to a potential services PE in the KSA, provided a DTT is in place.