Worldwide T ax Summarie

Saudi Arabia
Corporate - Deductions

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All expenses that are necessary and normal to the business, paid or accrued, are allowable deductions, provided the
expense meets the following conditions:

It is an actual expense, supported by a verifiable document or other qualifying evidence.

It is related to the generation of taxable income.
It is related to the subject tax year.
It is of a non-capital nature.

Depreciation
A depreciation deduction is allowed under the following limitations as stipulated by the law:

The asset is not intended for resale and is to be used, in full or in part, for the entitys purposes.
The asset is of a depreciable nature that loses value because of use or because of wear and tear and
obsolescence and has a value extending beyond the end of the taxable year.
The asset is owned by the business, as per the ownership document for buildings and contracts and invoices for
other assets.
The asset depreciation is allowed even if the asset becomes inactive during the tax year.

Depreciation for tax purposes is calculated as follows, based on the following five categories of depreciable tangible or
intangible assets, other than land:

Asset category Depreciation rate (%)

Fixed buildings 5

Industrial and agricultural mov able buildings 10

Factories, machines and equipment, computer application programs, passenger cars, and cargo v ehicles 25

Expenditures f or geological surv ey ing, drilling, exploration, and other preliminary work to exploit and dev elop
20
natural resources and their f ields

All other tangible or intangible assets not included in prev ious categories, such as f urniture, planes, ships and
10
trains, and goodwill

The declining-balance method of depreciation, according to the above rates, should be followed for tax purposes.
However, straight-line depreciation is allowed for Zak at payers as of 7 April 2013.

There are also rules for depreciation relating to assets either acquired or disposed of. Essentially, 50% of the allowable
acquisition price or disposal proceeds is added to or subtracted from the asset pool in the first year, and the remaining
50% in the following year.
Assets under build, own, and transfer (BOT) and build, own, operate, and transfer (BOOT) are allowed to be depreciated
over the contract period. This presumes, although it is not clear, that assets under the BOT and BOOT schemes
actually will have a separate grouping in addition to the above prescribed groups.

Start-up expenses
Tax treatment of start-up expenses depend on how they were treated under Saudi generally accepted accounting
principles (GAAP). Generally, they can be fully expensed at the first financial year or can be amortised.

Loan charges (interest expenses)

An interest deduction is limited to the lower of the loan charge incurred during the tax year, if related to income that is
subject to tax, or the result of the following formula, whichever is less.

The taxpayers total income from loan charges, plus 50% of (A minus B) as below:

A = income subject to tax other than income from loan charges.

B = expenses allowed under the law other than loan charge expenses.

Note that banks are not subject to this formula.

Bad debt
Bad debts are deductible, provided they meet all of the following conditions:

The bad debt was previously declared in the appropriate years income.
The debt resulted from sale of goods or services.
The company holds a certificate from the taxpayers certified public accountant (CPA) certifying that the debt has
been written off in the taxpayers books and records, based on a decision by the taxpayer at the appropriate
management level.
Serious efforts have been exerted by the taxpayer to collect the debt with no success and the inability of the
debtor to pay has been proved based on a judicial ruling or bankruptcy.
The debt is not from a related party.
There is a commitment by the taxpayer to reinstate, as income, any written-off debt whenever collected.

Charitable contributions
In determining the tax base of each taxpayer, a deduction is allowed for donations paid during the taxable year to public
agencies or philanthropic societies licensed in Saudi Arabia, which are non-profit organisations and are allowed to
receive donations.

Allocations and reserves

Allocations and reserves formed during the year are deductible as follows:

Bank allocations to a reserve fund for doubtful debts are allowable deductions. However, a bank must submit a
certificate from the SAMA stating the amount of doubtful debts and the amount of doubtful debts collected during
the year that should be reinstated in the tax base of the year of collection.
Insurance/reinsurance companies may deduct, based on industry standards, a reserve for unearned premiums
and for unexpired risks, provided that it is reported in the tax base of the following year.

A reserve for unearned premiums means a part of premium amounts collected or stated in books that covers risks
related to the future tax year(s). A reserve for unexpired risks mean the amount of compensation claimed or
reported, but for which the payment process falls short of completion during the tax year.
A taxpayer may reduce its book profit by the amount of reserves used during the year that had been readjusted
when made to increase income or decrease expenses in the year of formation. Examples of such reserves are
end-of-service awards, doubtful debt, and drops in prices. Such amounts are deductible, provided the following
conditions are met:
The used amount was paid or accrued during the year, and it is supported by documentation.
The reserve had been adjusted in the year of formation to increase the tax base.
School fees
School fees paid by taxpayers for their employees children are deductible expenses, provided they meet the following
conditions:

They are paid to a local licensed school.

This benefit is stated in the employment contract.

Pension fund
Employers contributions to employees pension funds or savings funds established under Saudi Arabias rules and
regulations are deductible, provided that such contribution, one payment or in aggregate, is not in excess of 25% of the
employees income before the employers contributions and that the fund meets the following criteria:

The fund is established according to special provisions that clearly stipulate conditions of subscription and rights
of subscribers.
Such obligation is stated in the employment contract or in the Articles of Association of the establishment.
The fund has a character independent of the establishment and has separate accounts audited by an independent
CPA.

Research and development (R&D)

A deduction is allowed for R&D expenditure incurred during the tax year in connection with the generation of income
that is subject to tax. Such expenditure relates to technical, scientific, and engineering experiments; computer
systems; or similar research. This provision does not apply to the acquisition of land and facilities, or to equipment used
for research. Such facilities and equipment are subject to depreciation under the law.

Fines and penalties

Fines and penalties related to income tax, paid or payable in Saudi Arabia or to other countries, are not deductible.

Financial fines or penalties paid or payable to any party in Saudi Arabia, such as traffic fines or fines for causing
damage to public utilities, are also not deductible.

Fines or penalties paid for breach of contractual obligations, such as fines on delayed or defaulted completion of
contracts, are deductible, provided they are documented by the contracting party and the income from such penalties is
reported in the year of recovery.

Taxes
Income taxes are not deductible.

Non-deductible expenses
The following expenses are non-deductible:

Wages, salaries, and whatever is so deemed, in cash or in kind, paid to an owner, partner, or shareholder, or to a
member of their families, being a parent, spouse, sons/daughters, and siblings (this provision does not apply to
stockholders in a stock company).
Compensation in cash or in kind paid to a partner, shareholder, or to a family member, including a parent, spouse,
sons/daughters, and siblings, for a property or service to the extent that the compensation is higher than the fair
market value of such property or service at time of transaction.
Entertainment expenses incurred for events such as parties, sports competitions, entertainment trips and
activities, etc.
Expenses of a natural person for personal consumption, such as personal withdrawals, dependants cost of living,
or education.
Any bribe or similar payment, which is considered an illegal practice in Saudi Arabia, even if paid abroad.
Insurance commission in excess of 3% of total premiums collected in Saudi Arabia through an agent or others
and regardless of whether or not the agent is a partner.

Net operating losses

 A taxpayer may carry forward operational losses, as adjusted, to the years following the loss year until the cumulative
loss is fully offset. The maximum profit percentage of any year that could be used to offset cumulative losses should not
exceed 25% of the years profit as reported in the taxpayers return. Carryback of losses is not allowed.

Payments to foreign affiliates

Payments made to headquarter offices located abroad by wholly owned local subsidiaries or branches are not
deductible. Such payments include:

royalties or commissions
loan charges (interest expense) or any other financial fees (except loan charges paid by branches of foreign banks
in Saudi Arabia to their non-resident head offices, which are considered as tax deductible expenses), and
indirect administrative and general expenses allocated on an estimated basis.

The value of goods or services delivered to the taxpayer by related parties is not deductible to the extent that it is in
excess of an arms-length value.

Last Reviewed - 30 May 2017

Corporate - Income determination Corporate - Group taxation

Saudi Arabia contacts

Soudki Zawaydeh
Senior Director
+966 11 211 0239 ext. 1020

Mohammed Yaghmour
Zakat and Tax Leader - Saudi Arabia
+966 12 610 4400 ext. 2195

Mohammed Al-Obaidi
Licensed Partner
+966 11 211 0239 ext. 1021

Fayez Aldebs
Senior Director
+966 11 211 0239 ext. 1041

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