Saudi–India Treaty PE: Projects, Agents and Attributable Profits

A Saudi–India contract needs more than a count of visiting employees. The Convention has separate fixed-place, project, service, agency and insurance routes to a permanent establishment. Its original Protocol also limits how merchandise exports and offshore project work enter the profit calculation. Later MLI provisions must be matched to the actual notifications of both countries.

The distinction matters commercially. A PE conclusion determines whether enterprise profits can be taxed under Article 7; it does not justify taxing the whole contract receipt or assuming an unsupported branch margin.

Start with the fixed place and the Protocol’s additional locations

Article 5(1) requires a fixed place of business through which the enterprise’s business is wholly or partly carried on. Article 5(2) identifies management locations, branches, offices, factories, workshops and extraction locations. Original Protocol 5 adds sales outlets and farms, plantations and other places carrying on agricultural, forestry or related activities. These additions should not disappear behind a generic office-and-branch summary.

The place, its business use and the relevant exclusion must be examined together. Calling a location a liaison office does not establish that its actual function is auxiliary. Article 5(8) also says that corporate control alone does not make either company a PE of the other; it does not immunise the subsidiary’s actual activities from the other tests.

References: Convention Article 5(1)–(2) and (8); original Protocol 5.

Construction and services use more than 182 days

Article 5(3)(a) covers a building site, construction, assembly or installation project, and connected supervisory activities, where the site, project or activities continue for more than 182 days. Do not replace that wording with six months or import another treaty’s 183-day threshold.

Article 5(3)(b) covers furnishing services, including consultancy, through employees or other personnel engaged for that purpose, where activities of that nature continue within the country for the same or a connected project for periods aggregating more than 182 days in any twelve-month period. The rolling period is different from a calendar or financial year. Changing personnel does not, by itself, establish a different project.

Dariba original illustration: 100 days followed by 83 non-overlapping days of the same connected service project within a twelve-month window total 183 days, exceeding 182. A period of exactly 182 days does not satisfy this particular duration limb. That result does not dispose of a separate fixed-place or agency PE. This illustration assumes actual relevant activity days and does not prescribe a universal rule for counting concurrent personnel, travel or interruptions.

The Protocol’s residence extension for an Indian national present in Saudi Arabia for at least 183 days concerns a different person, test and fiscal-year period. It should not be used as a substitute for the enterprise service test.

References: Convention Article 5(3)(a)–(b); original Protocol 4(b).

Agency PE includes stock delivery and habitual orders

Original Article 5(5)(a) concerns habitual exercise of authority to conclude contracts in the enterprise’s name. Both deposited positions identify this provision for MLI Article 12(1). The effective modification broadens the enquiry to habitual contract conclusion or the habitual principal role leading to contracts routinely concluded without material modification, for the specified enterprise-name, property or service contracts. Its activity exception and independent-agent conditions must also be considered.

That modification does not erase Article 5(5)(b), which addresses habitual maintenance of stock from which goods are regularly delivered on the enterprise’s behalf, even without contract authority. Nor does it erase Article 5(5)(c), concerning habitual obtaining of orders wholly or almost wholly for the enterprise itself. Each route needs its own fact finding. An offshore signature is therefore insufficient evidence of no agency PE.

For example, a local person who cannot sign contracts may still require review because of the actual order-generation role or stock-delivery arrangements. This is Dariba analysis of the separate treaty limbs, not a new official safe harbour or an assertion that every distributor constitutes a PE.

References: Convention Article 5(5)(a)–(c); MLI Article 12(1), (3)(a) and (5); Indian and Saudi deposited notifications.

Preserve the independent-agent notification uncertainty

The original independent-agent provision is Article 5(7): the agent must be independent and act in the ordinary course of its business; activities devoted wholly or almost wholly on behalf of that enterprise defeat the stated independence treatment. Insurance is separately addressed in Article 5(6).

There is a material mismatch in the deposited MLI Article 12(6) notifications reviewed. India identifies Article 5(7), while Saudi Arabia’s entry identifies Article 5(6). MLI Article 12(6) conditions the replacement independent-agent provision on notifications by all contracting jurisdictions with respect to the provision. The published references should not silently be treated as identical or corrected by an author.

Accordingly, this guide does not present replacement of original Article 5(7) as an unqualified settled result. The original ordinary-course and dependence conditions should be addressed, together with the MLI Article 12(2) independent-agent language relevant to its expanded agency test. If the commercial conclusion turns on the difference—particularly the closely-related-enterprise limitation—obtain competent-authority clarification of the notification interaction. A convenient reading of the broader agency rule is not a reason to ignore its paragraph 2 qualification.

References: Convention Article 5(6)–(7); MLI Article 12(2), (3)(b) and (6); Saudi deposited position, India entry under Article 12(6); Indian deposited corresponding entry.

Storage and purchasing exclusions need the effective MLI qualifications

Original Article 5(4) lists storage or display, stock maintained for those purposes, stock for processing by another enterprise, purchasing or information collection, other preparatory or auxiliary activity, and qualifying combinations. The storage/display words do not expressly include delivery. The separate habitual stock-delivery limb must therefore remain in the review.

Both countries choose MLI Article 13 Option A and notify Article 5(4). For the effective modified exclusion, the listed activity—or the overall combination—must be preparatory or auxiliary. A warehousing function central to the enterprise’s business cannot be accepted merely because “storage” appears in the original list.

Article 13(4) also prevents fragmentation of complementary functions forming a cohesive business operation where the specified same-place or other-place enterprise/group conditions are met and there is an existing PE or the combined activity is not preparatory or auxiliary. This does not aggregate every activity of every group company automatically. Identify the places, enterprises, functions and actual relationship before drawing the conclusion.

References: Convention Article 5(4); MLI Article 13(2), (4), (7) and (8); both deposited positions.

Connected project contracts cannot be reviewed in isolation

Neither deposited position reviewed reserves out MLI Article 14. Its project-splitting rule addresses an enterprise carrying on specified site/project or connected supervisory/consultancy activities for periods aggregating more than 30 days, without exceeding the treaty threshold, together with connected activities by closely related enterprises at the same qualifying site or project during different periods, each exceeding 30 days.

Where those conditions are met, the different periods are added for the threshold enquiry. Dariba original illustration: assume one enterprise works 100 days and a closely related enterprise carries on connected work at the same qualifying construction project for a different 90-day period. Each period exceeds 30 days; their 190-day aggregate exceeds the treaty’s 182 days. The example assumes all Article 14 conditions, including the project connection, rather than deriving aggregation from common ownership alone.

MLI Article 15 uses actual control and, in any event, specified direct or indirect interests of more than 50%. Exactly 50% is not the automatic numerical limb, although the facts may still establish control. Do not use Article 14 as a blanket aggregation formula for every unrelated consultancy engagement; its place/project and activity conditions matter.

References: MLI Articles 14–15; Convention Article 5(3); deposited positions.

Insurance has a separate treaty rule

Article 5(6) deems an insurance enterprise to have a PE where it collects premiums in the other state or insures risks situated there through a person other than an independent agent to whom paragraph 7 applies. The original Protocol clarifies that the person can be an individual or a company and need not be resident or have a place of business in the state where it acts.

This route cannot be excluded solely by showing that the intermediary is incorporated abroad. Equally, the exact premium, risk, agency and independence conditions cannot be replaced with a statement that all cross-border insurance automatically produces a PE. The independent-agent notification issue discussed above needs particular attention if it is decisive to the result.

References: Convention Article 5(6)–(7); original Protocol 6.

Distinguish exports and offshore work from attributable PE profits

Article 7(1) permits taxation only of profits attributable to the PE. Original Protocol 8(i) expressly protects profits from merchandise exports to the other state, whether sales occur through a PE or otherwise. Other activities through the PE require attribution to those activities; the wording also excludes the portion executed outside Saudi Arabia from Saudi PE profits.

Protocol 8(ii) addresses survey, construction and installation contracts. Profit is determined by the part effectively carried out by the PE in the state where it is situated, rather than the total contract amount; the portion executed outside that state is excluded under the Protocol. These provisions warrant a contract-scope and performance-location analysis, not an arbitrary percentage split of the invoice.

Dariba original illustration: assume the properly supported Saudi PE portion generates SAR 3 million revenue and SAR 2.4 million allowable expenses. Its illustrated profit is SAR 600,000. That calculation does not validate either input, an offshore allocation or a 20% benchmark margin. Functions, assets, risks, performance records and the actual expense restrictions must establish the amounts first.

References: Convention Article 7(1)–(2); original Protocol 8(i)–(ii).

Apply the expense restrictions and preserve the conclusion’s limits

Article 7(3) allows expenses incurred for the PE business, including executive and general administrative expenses incurred locally or elsewhere. It restricts specified internal royalties, rights charges, service or management commissions and debt-income charges, with actual-expense reimbursement and the banking financing exception stated in the provision. The corresponding restriction also applies in the reverse direction to amounts charged by the PE to head office or another office. An internal invoice is not itself proof of deductible actual expense.

Protocol 9 subjects the deductions to domestic-law limitations. Its promise to review the issue if India removes the restriction in a later treaty is not an automatic most-favoured-nation deduction override. Article 7(4) attributes no profit merely from purchasing goods for the enterprise; paragraph 5 requires year-to-year consistency absent good and sufficient reason; paragraph 6 preserves separately governed income articles.

Use the India withholding guide for residence, commencement, anti-abuse, payment classification and relief administration. For Saudi application, the ordinary MLI other-tax commencement concerns taxable periods beginning on or after 1 November 2020; withholding has its separate 1 January 2021 date. A project file should identify the applicable period and wording, all plausible PE routes, evidence supporting any exclusion, and an attributable-profit bridge. VAT, withholding administration and domestic dispute deadlines require their own review. None is settled by a single no-PE assertion.

References: Convention Article 7(3)–(6); original Protocol 9; MLI Articles 7 and 35.