Global Tax Alert | 16 February 2016

Saudi Arabian Government clarifies Service PE concept

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Executive summary

A Global EY Tax Alert previously reported about the changes in the interpretation of the “service PE” concept by the Saudi Arabia (KSA) Tax Authorities in July 2015.1 However, recently further clarifications were obtained. In response to a formal request from an international government organization, the Government, via a ministerial authority, has clarified when a nonresident service provider is considered as having established a service PE in the KSA. Although many business and tax professionals were aware of the Government’s unofficial position, this is the first time the Saudi tax authorities have formally communicated this position.

This Alert summarizes the reasoning set forth in the official letter.

Detailed discussion

The Government’s letter confirms that a nonresident should be taxed according to the provisions of double taxation agreements (DTAs) concluded by Saudi Arabia and no tax should be applied in contradiction to the provisions of such agreements. This statement is of itself important and a positive development for foreign investors as there has been some uncertainty in the past as to the application of DTAs by local tax authorities.

The letter then sets forth the definition of a “service PE” as detailed in Article 5(3)(b) of the United Nations Model Convention 2011 (UN MTC), which forms the basis of the majority of DTAs entered into by the KSA. Article 5(3)(b), defining a “service PE,” states that:

“The term “permanent establishment” also encompasses: (…) (b) The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than 183 days in any 12-month period commencing or ending in the fiscal year concerned.”

The KSA official clarification interprets the above provision to mean that a PE arises if the period of provision of services to a customer in the KSA lasts for 183 days or more in a calendar year or a 12-month period. Further, it provides that the activity and the profits from the contract then become taxable in the KSA, and subject to all related tax filing requirements.

The official letter then goes on to state that in most cases the conduct of cross-border services does not require physical presence in the KSA, as the services can be largely performed remotely. Most importantly, the letter indicates that the tax authorities believe that the text of the UN MTC Article 5(3)(b), cited above, does not require any physical presence as a criterion for establishing a PE in the KSA with respect to the provision of cross-border services. Moreover, as the standard to be applied, it is the duration (continuation) of the provision of services “inside the KSA,” that should be the triggering factor for a PE of a nonresident service provider.

The official clarification also includes reference to important discussions held under the auspices of the UN Committee of Experts in Tax Cooperation during the 10th Session in October 2014 and during the 11th Session in October 2015. The question of interpretation of Article 5(3)(b) was raised in the consultation papers produced by the Committee following both sessions.2 During these sessions a number of Committee’s members from developing countries put forward an argument that a service PE arises even if the duration of services does not continue in a jurisdiction for the stated period (183 days) under Article 5(3)(b).

The Committee papers clearly record a disagreement between the “minority” and the “majority” Committee members on this issue: “…services furnished within the source country without the physical presence of personnel or employees in that country are covered by that provision if the furnishing of services within the country lasts more than 183 days. During the discussion, a large majority of those speaking considered, however, that a physical presence is required by Article 5(3)(b) of the UN MTC. The UN Commentary should clarify this issue.”

The UN consultation papers further state that “… The Committee has agreed that the traditional interpretation of the current provision of subparagraph b) requires the physical presence in the source State of individuals, being an employee or personnel of the enterprise furnishing services, in order for a permanent establishment to exist in that State.” The papers also suggests that the countries which believe that no physical presence is required for a PE to take place under Article 5(3)(b) of the UN MTC, should “clarify this diverging interpretation in a general mutual agreement concluded under paragraph 3 of Article 25 (Mutual Agreement Procedure) that would be made publicly available.” Thus, the majority view of the UN international tax experts is that a physical presence is required for a service PE to arise, and any divergent interpretation should be reflected by the contracting states in writing and they should make it clear to the public through some international law instruments.

Finally, another point included in the KSA clarification letter is a reference to the Mutual Agreement Procedure (MAP) of the tax treaties concluded by the KSA. The MAP is a dispute resolution mechanism provided in tax treaties, so a nonresident can submit a request to the tax authority of the country of their residence (not to the KSA tax authorities directly). The foreign tax authority then may decide to activate the MAP vis-à-vis the KSA competent tax authorities.


Taxation of cross-border services without regard to physical presence in a country has become, as the official letter suggests, “the subject of disagreements between countries.” The advancement in communications technology and electronic commerce, make it possible for a large range of cross-border services, such as design, engineering, financial consultancy, advertising, and others to be performed from remote locations.

This also indicates that the traditional “service PE” concept as stated in Article 5(3)(b) of the UN MTC may have become obsolete. That could be the reason why the KSA tax authorities have suggested the use of the duration of services and not the physical presence test, as a threshold condition for determining the existence of a PE for cross-border services.

Multinational enterprises doing business in the KSA should closely monitor the position of the KSA tax authorities and consider their contracts and activities in the KSA accordingly.


1. See EY Global Tax Alert, Saudi Arabian tax authorities introduce Virtual Service PE concept, dated 30 July 2015.

2. United Nations. Committee of Experts on International Cooperation in Tax Matters. Tenth Session. Geneva, 27-31 October 2014 Agenda item 3 (a) (ii) (a) “The meaning of “connected projects” ” (E/C.18/2014/CRP.11); Eleventh Session. Geneva, 19-23 October 2015. Agenda item 3 (a) (ii) Article 5 (Permanent establishment): The meaning of “connected projects” (E/C.18/2015/CRP.9).

For additional information with respect to this Alert, please contact the following:

Ernst & Young & Co (Public Accountants), Riyadh
  • Asim Sheikh
    +966 11 2159 876
  • Vladimir Gidirim
    +966 11 2159 455
  • Ahmed Abdullah
    +966 11 2159 439
  • Nitesh Jain
    +966 11 2159 842
  • Imran Iqbal
    +966 11 2159 807
  • Franz-Josef Epping
    +966 11 2159 478
Ernst & Young & Co (Public Accountants), Al-Khobar
  • Naveed Ahmed Jeddy
    +966 13 8499 503
  • Syed Farhan Zubair
    +966 13 8499 522
Ernst & Young & Co (Public Accountants), Jeddah
  • Craig McAree
    +966 12 2218 501
  • Irfan Alladin
    +966 12 2218 510

EYG no. CM6247