Implementing Regulations of

Income Tax Law issued by Royal

Decree No. (M/1), dated 15/01/1425 H

Basic Provisions

Article 1

1. The provisions of Income Tax Law (The Law) apply to resident capital companies on shares of non-Saudi persons, natural or corporate, resident or non-resident. Shares of non-Saudi persons in Saudi joint companies that have shares in resident capital companies are not considered Saudi shares for the purpose of this Law.

The provisions of the Law also apply to non-resident persons, natural or corporate, Saudi or non-Saudi, who conduct business in the Kingdom through a permanent establishment located in the Kingdom or who derive income from a source in the Kingdom.

2. A non-resident person with no permanent establishment in the Kingdom who derives income from a source in the Kingdom is subject to tax as follows:

a.      Income stipulated under Article 68 of the Law is subject to withholding provisions of that Article.

b.     A capital gain derived from disposal of fixed and traded assets, or from disposal of shares in a resident company is subject to tax under general provisions of the Law.

Article 2

Taxable activity is all activities of any type, such as commercial, industrial, agricultural, service, banking, and insurance activities; investments of all types; transportation operations; leasing movable, immovable tangible and intangible property. It also includes professional and trade activity, or any other similar activity that is for profit, such as agencies and brokerage and other similar activities.  Taxable activity does not include opening bank accounts of any type (current, for a period or saving), and trading in shares of companies listed in the Kingdom’s Stock Market by a natural resident person.

Article 3

1. A natural person is resident in the Kingdom during a taxable year if he has a permanent place of abode (residence) in the Kingdom and is present in the Kingdom during a period not less than 30 days, continuous or in aggregate, during the tax year.

A natural person is also resident in the Kingdom if he is present in the Kingdom during not less than 183 days, continuous or in aggregate, in the tax year even if he has no permanent abode in the Kingdom.

2. “A permanent place of abode” means an abode the taxpayer owns or leases for long time, for not less than one year, during the taxable year. It could also be an abode provided to the natural person by any party during the tax year for a period not less than one year.

3. Nationality (citizenship) is not considered to determine place of residence of a person. A natural or corporate person, notwithstanding its nationality, is not resident in the Kingdom unless the residency provisions of the Law and of these Regulations apply.

Article 4

1.  An agent referred to in Article 4 of the Law is a dependent agent who has any of the following authorities:

a.      negotiate on behalf of a non-resident,

b.     conclude contracts on behalf of a non-resident,

c.     has a stock of goods, owned by a non-resident, on hand in the Kingdom to supply the clients’ demands on behalf of the non-resident.

2. A place from which a non-resident carries out insurance and/or reinsurance activity in the Kingdom through an agent is considered a permanent establishment of the non-resident even though the agent is not authorized to negotiate and conclude contracts on behalf of the non-resident.

Source of Income

Article 5

The following types of income are considered derived from an activity occurring in the Kingdom and are therefore from a source in the Kingdom:

1. Loan charge (proceeds) to a non-resident in any of the following cases:

a.      the debt is secured by movable or immovable property located in the Kingdom,

b.     the borrower is a resident of the Kingdom,

c.     the loan is related to an activity carried out in the Kingdom.

“Loan charge (proceeds/interest)" means an amount paid for the use of money. This includes income realized from loan transactions of any type, whether secured by guarantees or not, or by giving rights to participate in the profits of the debited person or not; it also includes income realized from governmental and non-governmental bonds.

2. Insurance/reinsurance premiums in any of the following:

a.      insured asset is located in the Kingdom,

b.     the insurer is a resident of the Kingdom,

c.     insurance of activities or risks related to activities carried out in the Kingdom.

3. Income derived from technical or consulting services in any of the following:

a.      the service is given to a person resident in the Kingdom,

b.     the service is related to an activity carried out in the Kingdom.

4. Income derived by a capital company resident in the Kingdom from its operations and of its branches inside and outside the Kingdom.

5. Income derived from movable or immovable property attributed or related to activities in the Kingdom carried out by a person resident in the Kingdom.

6. Income derived from sale of goods or merchandises manufactured or produced in the Kingdom.

7. A Contract of delivery of goods to the Kingdom, including the contracts for freight and insurance of these goods, is not considered to be derived from an activity in the Kingdom unless it includes associated work performed in the Kingdom, such as domestic transportation, installation, training or other similar work. In such case, only associated work is considered to be derived from an activity in the Kingdom.

Article 6

The following services are considered performed in the Kingdom in any of the following:

1. Work required for a service is carried out in full or in part in the Kingdom even though the service is remotely executed (performed). The physical presence of a service provider is not required.

2. Work performed on board of an airplane or ship that works for a person carrying out an activity in the Kingdom.

Exempt Income

Article 7

A Capital gain realized from disposal of securities traded in the Stock Market in the Kingdom is exempt income if it meets the following:

1. The sale transaction is performed in accordance with the regulations of the Stock Market in the Kingdom.

2. The disposed investment did not exist before the effective date of the Law as stipulated in Article 74 of these Regulations.

Gains and losses on disposal of assets

Article 8

No gain or loss is taken into account on disposal of an asset that is depreciable under the Law. The result of disposal of such assets is dealt with under deprecation method stipulated by the Law.

Deductible Expenses in DeterminingTaxable Income

Article 9

Deductible expenses in determining taxable income are as follows:

1. All expenses that are necessary and normal to the business, paid or accrued, are allowed deductions provided they meet the following:

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

b.     Related to earning taxable income.

c.     Related to the subject tax year.

d.     Of non-capital nature.

2. Loan Charges (proceeds)) incurred during the tax year if related to income subject to tax, or the resultant of the following formula which ever is less: The taxpayer’s total income from loan charges, plus 50 percent of  ( a - b).

“a” =  income subject to tax other than income from loan charges.

“b” = expenses allowed under the Law other than loan charge expenses.

Banks are not subject to this formula.

3. Bad Debts provided they meet the following conditions:

a.       Bad debt was previously declared in the proper year’s income.

b.      Debt was resulted from sale of goods or services.

c.      Having a certificate by the taxpayer’s certified public accountant certifying the writing off of the debt from the taxpayer’s books and records based on a decision by the taxpayer’s proper authority.

d.     Serious efforts have been exerted by the taxpayer to collect the debt with no success; and inability of debtor to pay is proved based on a judicial ruling or bankruptcy.

e.      Debt is not on a related party.

f.       Commitment by the taxpayer to reinstate as income any written off debt whenever collected.

4. Depreciation deduction under the following limitations as stipulated by Article 17 of the Law:

a.      The asset is not intended for resale; it is to be used, in full or in part, for the entity’s purposes.

b.     The asset is of depreciable nature that loses value because of use or because of wear and tear and obsolescence and which has a value extending beyond the end of the taxable year. 

c.     The asset is owned by the business as per ownership document for buildings, and contracts and invoices for other assets.

d.     The asset depreciation is allowed even if the asset becomes in-operational during the tax year.

5. Allocations and reserves formed during the year as follows:

a.      Bank allocations to a reserve fund for doubtful debts. A bank must submit a certificate from Saudi Arabian Monetary Agency (SAMA), stating amount of doubtful debts, amount of doubtful debts collected during the year that should be reinstated in the tax base of the year of collection. 

b.     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 part of  premiums amount collected or stated in books that covers risks related to up-coming tax year(s). A reserve for unexpired risks means amount of compensation claimed or reported but payment process falls short of completion during the tax year.

6. A taxpayer may reduce its book profit by the amount of a reserve used during the year that had been readjusted when it had been made to increase income/decrease expenses in the year of formation. Examples of such reserves are end-of-service award, doubtful debt, and drop in prices. Such amount is allowed provided the following conditions are met:

a.      The used amount was paid or accrued during the year and it is supported by proving documents.

b.     The reserve had been adjusted in the year of formation to increase tax base.

7. School fees paid by taxpayers for their employees’ children are deductible expenses provided they meet the following conditions:

a.      They are paid to a local licensed school.

b.     This benefit is stated in the employment contract.

8. Employer's contributions to employees' pension funds or saving funds established under the Kingdom’s rules and regulations, provided that such contribution, one payment or in aggregate, is not in excess of 25 percent of the employee’s income before the employer’s contributions and that the fund meets the following:

a.      The Fund is established according to special provisions that clearly stipulate conditions of subscription and rights of subscribers.

b.     Such obligation is stated in the employment contract or in the Articles of Association of the establishment.

c.     The Fund has a character independent of the establishment and has separate accounts audited by an independent certified public accountant.

9. A deduction is allowed for research and development expenditures incurred during the tax year and connected with the earning of income subject to tax. These expenditures mean research and development, experiments on technical, scientific and engineering aspects, computer systems or similar aspects. This provision does not allow for acquisition of land and facilities on it, or of equipment used for research, such facilities and equipment being subject to depreciation under Article 17 of the Law.

Non-deductible Expenses

Article 10

The following expenses are non-deductible:

1.     Wages, salaries and whatever deemed so, in cash or in kind, paid to an owner, partner or shareholder, or to a member of their families: a parent, spouse, sons/daughters and brothers/sisters. This provision does not apply to stockholders in a stock company.

2.     Compensation in cash or in kind paid to a partner, shareholder, or to a member of their families: a parent, spouse, sons/daughters and brothers/sisters 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.

3.     Entertainment expenses incurred for events such as parties, sport competitions, entertainment trips and activities, etc.

4.     Expenses of a natural person for personal consumption, such as personal withdrawals, dependents’ cost of living or education.

5.     Income tax and related fines and penalties paid or payable to the Kingdom or to other countries.

6.     Financial fines or penalties paid or payable to any party in the Kingdom, such as traffic fines, or fines for causing damage to public utilities.

This does not include fines or penalties paid for breach of contractual obligations, such as fines on delayed or defaulted completion of contracts, such fines are deductible provided they are documented by the contracting party and the income from such penalties reported in the year of recovery. 

7.     Any bribe or similar payment that is considered an illegal practice in the Kingdom, even if paid abroad.

8.     Insurance Commission in excess of 3 percent of total premiums collected in the Kingdom through the agent or others and whether the agent is a partner or not.

9.     Payments by employers of their employees contributions to a legal pension fund, social insurance or saving funds.

10. Payments made to head-offices abroad by fully owned local subsidiaries for:

a.      royalties or commissions;

b.     loan charges ( proceeds) or any other financial fees;

c.     indirect administrative and general expenses allocated on estimated basis.

11.  Value of goods or services delivered to the taxpayer by related parties to the extent that it is in excess of an arm's length value.

Loss Carry-Forward

Article 11

1.     A taxpayer may carry forward operational losses as adjusted, in accordance with controls as stipulated in the Law and these Regulations, 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 percent of the year’s profit as reported in the taxpayer’s return.

2.     The provision of paragraph (1) above shall not apply to (the taxpayer can not carry forward) operational losses incurred before the entry into force of the Council of Minister’s resolution Number 3, dated 5/01/1421 H., corresponding to 10/04/2000, operational losses incurred during a tax holiday, or operational losses incurred from an exempt activity under the Income Tax Law- in case the taxpayer has both taxable and exempt activities.

3.     Losses not determined based on legal accounts audited by a certified public accountant licensed in the Kingdom can not be carried forward.

4.     Losses that meet the provisions of loss carry-forward but incurred by a capital company that has been a subject of change of 50 percent or more in its underlying ownership or control can not be carried over to tax years following the year of change.

5.     A natural person’s operational loss is the difference between business income and related deductions only.

Currency Conversion

Article 12

Subject to currency conversion provisions of Article 30 of the Law, currency conversion profits or losses resulted from reevaluation for tax purposes are not taken into account.

Compensation Receipts

Article 13

Compensation payments received take the character of the thing that is compensated as far as being subject to tax or not.  Compensation receipts for damage in goods (trading stock) are deemed to be income subject to tax, but compensation receipts for assets are dealt with in accordance with Article 9 of the Law.

Financial Leasing

Article 14

1.     If a lessee leases an asset from a lessor under a financial leasing contract, the lessee is considered, for tax purposes, the owner of the asset and the lease payments represent loan repayments by the lessee.

2.     A lease of an asset is considered financial leasing if any of the following conditions is met:

a.      The lease provides for transfer of ownership at the end of the lease period.

b.     The lease period exceeds 75 percent of the leased asset’s production life.

c.     The asset’s remaining value at the end of the lease period is less than 20 percent of the asset’s fair market value at the beginning of the lease period.

d.     The current value of the minimum lease payments is equal to or exceeds 90 percent of the asset’s market value at the beginning of the lease period. This provision does not apply to a lease that commences during the last quarter of the asset’s production life.

e.      The asset was custom-made for the lessee, which will be of no value or of little value to others at the end of the lease period.

3.     For the purpose of this Article, the discount rate used to determine the current value of lease payment is in accordance with Saudi Arabian Monetary Agency’s rate.

4.     For the purpose of this Article, the lease period includes any additional period that is renewable.

5.     Where the lessor was the owner of the asset before commencement of the financial lease, then in addition to the loan treatment specified under paragraph (1) of this Article, the transaction is treated as a sale by the lessor and a purchase by the lessee.

6.     A financial lease transaction is considered a purchase by the lessee with a loan from the lessor. Therefore, and since lease payments represent repayments of the loan, they shall not be considered book expenses for the tax year.

7.     Since the lessee will be treated for tax purposes as the owner of the leased asset, the following should be observed:

a.      The lessee, not the lessor, is entitled a deduction for depreciation for that asset.

b.     A lease payment is divided into two components: Principal and loan charge. The principal at the commencement of the lease is the present value of the minimum payments to be made under the lease.

c.     The principal component of each payment is treated as a repayment of the loan, and for tax purposes is not an expense deduction for the lessee. The loan charge (proceeds) component is treated as income to the lessor and expense to the lessee.

d.     If the lessor owns the asset before the commencement of financial lease, and subject to the provisions of this Article, the financial lease transaction is considered a sale by the lessor and a purchase by the lessee and taking into account tax consequences of sale and purchase transactions by the lessor and lessee.

Insurance Companies

Article 15

1.     The tax base of a resident or non-resident insurance company that is engaged in general insurance business in the Kingdom is determined in accordance with provisions of the Income Tax Law.

2.     The tax base of a non-resident insurance company that is engaged in general insurance business in the Kingdom through a permanent establishment is determined as follows:

a.     Gross income consists of the following:

1.     Gross premiums received or receivable from contracts for insurance risks in the Kingdom, less any premiums returned (cancelled) and less any premiums paid for reinsurance.

2.     Reserve for unearned premiums and unexpired risks formed at the end of the previous fiscal year as allowed under Article 9 (5/b) of these Regulations.

3.     Investment income attributable to contracts for insurance risks in the Kingdom, and it is determined as follows: The proportion of worldwide investment income, which the total local premiums bear to the total worldwide premiums.

4.     Any other income attributable to the permanent establishment.

b.     Total expenses are as follows:

1.     Payments paid under property and risks insurance policies in the Kingdom, less any such amounts that were covered by re-insurance.

2.     A reserve for unearned and for unexpired risks formed at the end of the current fiscal year as allowed under 9(5/b) of these Regulations.

3.     Allowed expenses incurred by the permanent establishment in the Kingdom.

4.     A subsidiary’s share in the general administrative expenses of the head-office of the company determined as follows: The proportion of the Gross Head-Office general and administrative expenses, which the total local premiums bear to the total worldwide premiums.

c.     The tax-base of the insurance company under this Article(2) should not be less than the proportion of worldwide pre-tax net income from general insurance, which the income from local premiums bears to income from worldwide premiums (in accordance with consolidated worldwide financial statements).

3.     The tax base of an insurance company that is engaged in life (saving) insurance in the Kingdom is determined as follows:

a.      Resident insurance company: Income from investment, minus administrative expenses related to investment income.

b.     Nonresident insurance company that carries out its activities through a permanent establishment in the Kingdom: The proportion of worldwide gross income from investment, which the total local premiums  bear to total worldwide premiums,

Minus:

1.     the subsidiary’s share in worldwide management expenses related to investment income which is  the proportion of worldwide management expenses related to  investment, which the total local premiums  bear to total worldwide premiums;

2.     a proportion of head-office general and administrative expenses according to the following formula: the proportion of total head-office administrative and general expenses, which the total local premiums  bear to total worldwide premiums.

4.     The term “life insurance” means issuance of insurance policies whose proceeds become due at the end of the contract or upon death of the insured person.

Estimated Tax

Article 16

1. In addition to estimated taxation provisions stipulated under Article 34(a) of the Law, the Department may apply estimated taxation to some other activities related to world-wide expenses; this is when the world-wide expenses and local expenses are so interrelated that it is difficult to separate local expenses and so to file separate accounts for local activities.

2. The Department may apply estimated taxation to small activities of limited income that are not required to keep books and records at a rate of 15 percent net profit of gross income.

3. In order to enforce compliance with statutory requirements and fight tax evasion, the Department may use estimated taxation based on taxpayer’s relevant facts and circumstances in the following cases:

a.      Non-filing of the return during the legally prescribed time. In case of late filing of a return based on statutory books and records before the Department has issued its estimated assessment, the Department has the right to accept and consider it according to standing procedures and being subject to legal penalties.

b.     Failure to keep in the Kingdom accurate books and records that truly reflect the taxpayer’s financial position.

c.     Subject to Article 57(3) of these Regulations, taxpayer's failure to prove correctness of the return by supporting documents.

d.     Failure to comply with format, form and manner of books and records as required by the Commercial Books Regulations.

e.      Failure to translate books and records kept in a language other than Arabic into Arabic within a set time after being notified to do so by the Department.

4. Estimated net profit rate shall be determined based on facts, evidences and indicators relevant to taxpayer’s activity, its nature and circumstances. It shall be, under no circumstances, less than the following rates of the taxpayer's income:

5. Under estimated assessment, no deduction from gross income, such as for sub-contractors, Shall be allowed.

6. In case of delivery contracts from abroad with in-the-Kingdom associated work whose value is not separately specified in the contract, each associated work income shall be estimated at 10 percent of the total gross value of the contract.

7. Capital gains from disposal of an asset in the absence of taxpayer's (seller's) legal accounts shall be determined as follows:

a. In case of disposal of financial papers, such as shares and bonds, that are not traded in the Financial Market, the sale value of such assets shall be the contract value or the market value, which ever is higher. The sale value is compared with the cost base to determine the capital gain.

b. In case of disposal of an interest in a capital company, the sale value of such assets shall be the contract value, the market value or the book value in the company's books, which ever is higher. The sale value is compared with the cost base to determine the capital gain.

c. In case of disposal of an interest in a partnership, the sale value of such assets shall be the contract value or the market value, which ever is higher. The sale value is compared with the cost base to determine the capital gain.

d. In other cases, the sale value shall be the contract value or the market value, which ever is higher. The sale value is compared with the cost base to determine the capital gain, which should not be less than 15 percent of cost base. 

e. The disposing partner should inform the Department of the sale and pay due tax on the pre-sale period profits and on the resulted capital gains within 60 days of sale transaction. The company and the purchaser are jointly liable with the seller to pay any amounts that become due to the Department as a result of this transaction.

Principles of Taxation for Partnerships

Article 17  

1.  Failure of a partnership to file its required information return within the legally prescribed time, or to comply with the required return form, will make it subject to the non-filing penalty. This penalty shall be calculated at 1 percent of the company’s gross income, but not to exceed SR. 20.000 in accordance with 76(a) of the Law.

2.  The partnership income is not subject to tax. It is distributed to partners who are individually subject to tax and each partner is personally required to file its returns within the legally prescribed periods stating all its income subject to tax including income from the partnership.

3.  In determining the tax base of a partner in a partnership, the partnership's income from sources outside the Kingdom and its exempt income under the Law shall retain its character, and that includes gains, deductions, losses or debts.

4. A loss in excess of the partner’s cost base is not taken into account (is suspended) until the partner acquires sufficient cost base to offset the loss or until the partner’s interest is terminated.

5.  Partnership obligations apply to consortiums of companies, particularly in regard to registration with the Department, filing information return, and relevant penalties.