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Middle East: PE formation in KSA: Operating across borders


The Saudi Arabian Department of Zakat and Income Tax (DZIT) has issued internal guidelines to all its branches and divisions for processing withholding tax (WHT) refund claims for non-residents.



Nauman Ahmed

Farhan Farouk

All professional or consultancy services provided by a non-resident to a resident of Saudi Arabia for a period of more than 183 days is now characterised as having formed a permanent establishment (PE), resulting in these providers being subject to WHT under the domestic tax law of the Kingdom of Saudi Arabia (KSA) – a matter we initially discussed in a tax circular in March.

What constitutes the formation of a PE?

Under the guidelines, non-residents shall be considered to have formed a PE for Saudi tax purposes in all cases where the duration of service exceeds 183 days within any twelve-month period, regardless of the place where the service is rendered. The DZIT indicated that their interpretation, and subsequent new guidance to the authorities, is supported by some countries during the latest annual meeting of the UN Committee of Experts on International Cooperation in tax matters. However, if the taxing rights of an activity would be based on the length of a contract, and not where the activity was performed, then this scenario would result in a double taxation – exactly what international tax treaties seek to eliminate.

Economic and administrative impact

Additionally, the guidance states that the substance of the service provided should be investigated irrespective of what is provided in the agreement. This poses some challenges for the tax authorities, as there will be greater administrative burden involved in attempting to impose income tax on the deemed PE or deny a withholding tax refund where a non-resident has no physical presence in the country. Furthermore, if time spent outside of KSA is to be considered, it would be challenging and time-consuming to gain full transparency over the start and end dates of service provision, where the service provision was discrete or distinct in nature, or characterised by multiple changes in personnel – all of which complicates the determining information of who provides what, and for how long.

A wider consideration is the potential impact on the perception and subsequent decision-making process that would have to be considered by non-resident service providers who render offshore services to KSA clients and businesses. Imposing source taxation on income derived from services performed by a non-resident on the basis that these services have exceeded a 183 day threshold may discourage non-residents from entering into such contracts, which could have a knock-on effect on the productivity and growth of local businesses.

In the meantime, non-residents looking to file a WHT refund claim should consider the potential tax liability that may arise if they are deemed to have created a PE applied on the basis of the DZIT guidelines, and how this tax cost should be factored into the pricing of any contracts.

Nauman Ahmed (, Al Khobar and Farhan Farouk (, Jeddah


Tel: +966 (0) 13 887 3937 and +966 (0)265 72725


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