Saudi PE Profit Attribution and Transfer Pricing

Separate the existence of a PE from the profit attributed to it

Whether a foreign business has a Saudi permanent establishment is one question. How much profit should be attributed to an established PE is another. A conclusion on the first does not establish that all group revenue belongs in Saudi Arabia or that a fixed percentage of sales is the correct taxable profit.

Chapter 12 of ZATCA’s Arabic Transfer Pricing Guideline, third edition 2024, explains the arm’s-length approach to PE dealings. Saudi Income Tax Law Articles 5–6 and the applicable deduction provisions remain relevant. Any treaty position requires a review of the actual treaty, its effective periods and the facts; this guide does not assume one uniform treaty rule.

Understand the separate-enterprise approach

Section 12.1 considers the PE as a distinct and independent enterprise for the attribution analysis, performing the same or similar activities under comparable conditions. This is an analytical approach to profit allocation. It does not transform a branch into a legally separate company for every purpose.

The guideline describes two steps: first establish the PE’s activities and relevant functions, assets and risks; then determine its arm’s-length result through an appropriate comparability analysis. Moving directly from the branch trial balance to a desired margin omits the first step.

Dariba recommendation: identify what is being attributed and the legal basis before choosing a pricing calculation. Keep the enterprise’s legal structure and the tax attribution analysis distinct.

Identify the functions actually performed through the PE

Section 12.1 requires a functional analysis of the PE and the enterprise’s other relevant operations. Examine the activities carried out locally, the people performing them and how those activities connect to the enterprise’s wider business.

Contracts and responsibility charts provide starting evidence. Actual conduct is necessary to test whether the PE performs sales, engineering, project management, procurement or other functions, and whether another location genuinely performs the activities attributed to it.

Dariba recommendation: support the analysis with job responsibilities, decision records, project evidence and the operational allocation of work. Neither a Saudi billing address nor a foreign signature alone proves where all value-creating functions occur.

Connect assets and risks to significant people functions

The guideline emphasises significant people functions when examining the allocation of assets and risks. Identify who takes the relevant business decisions, controls the risks and performs the activities that support their allocation. A contractual description of the PE as low risk is not sufficient if local people actually make the significant decisions.

Dariba illustration: a local project team may be described as providing technical support while, in practice, it approves changes to project scope and manages delivery failures. Those facts require examination before the entire project risk is allocated abroad. This is an original factual illustration, not a ZATCA determination that every project team bears the same risk.

The objective is a supported account of the actual business, rather than allocating profit according only to where costs happen to be booked.

Price the identified dealings with an appropriate method

The second step applies the transfer-pricing framework to the dealings identified through the functional analysis. Choose a method suited to those dealings and reliable comparable evidence. There is no universal branch mark-up or PE profit margin in the reviewed provisions.

Segment material activities where combining them would distort the result. A routine support activity should not automatically determine the return from a separate activity involving significant assets, valuable rights or material risk control.

Dariba recommendation: reconcile the attributed income and expenses to the books and explain the treatment of dealings with the head office. Show why the selected comparison is informative rather than assuming that a result earned by any Saudi subsidiary is suitable for the PE.

Apply specific income-tax restrictions after the attribution analysis

An arm’s-length analysis does not override a specific Saudi deduction rule. Article 10(10) of the Income Tax Implementing Regulations restricts specified payments by wholly owned branches to foreign head offices, including relevant royalties, rents, commissions and estimated indirect administrative allocations, with the stated treatment of financing charges and bank exceptions.

ZATCA’s May 2026 Guideline on the Conditions of Deductible Expenses, section 3.1, distinguishes actual direct branch expenditure from restricted head-office allocations. Its conditions must be considered alongside the pricing analysis.

Dariba analysis: a calculation described as independent-enterprise pricing does not establish that every internal royalty or interest charge is deductible. Equally, those restrictions do not justify denying every actual service or direct expense incurred abroad for the branch.

Check domestic attribution rules and any applicable treaty separately

Income Tax Law Article 5 includes rules relevant to PE exposure and specified related activities, while Article 6 addresses the taxable base. These legal provisions cannot be replaced by a profit-allocation spreadsheet. The scope of taxable income should be established before the economic calculation is finalised.

A treaty can affect the result, but its text, eligibility and application to the period need specific review. Do not assume that a method described in general guidance automatically imports every feature of a particular international attribution model or treaty into Saudi law.

Dariba recommendation: record any treaty-dependent conclusion separately, identifying the actual provision and why the facts satisfy it. A group tax policy is not evidence that a treaty entitlement exists.

Maintain evidence and recognise the limits of future certainty

Keep the functional analysis, relevant agreements, segmented accounts and supporting records consistent with the position disclosed. Review material changes in local functions, project control and assets rather than automatically carrying forward the prior year’s allocation.

ZATCA’s Advance Pricing Agreements Guideline, section 5.1.4, states that its programme does not consider APAs involving attribution of profits to a PE. A business should therefore not assume that the ordinary APA application route will approve this attribution question.

Read the PE scope guide and branch deduction guide alongside this analysis. The supported result requires the exposure, attribution and specific tax adjustments to fit together.