Article 12: Expenses Related to Earning Income

         All regular and necessary expenses of earning taxable income, paid or accrued, incurred by the taxpayer during the taxable year are deductible in determining the tax base, with the exception of outlays of a capital nature and other nondeductible expenses according to Article Thirteen of this Law and other provisions of this Chapter.

Article 13: Nondeductible Expenses

         No deduction is allowed for the following:

(a)    Expenses not connected with the earning of taxable income.

(b)    Any amounts paid or benefits offered to a shareholder, a partner or any of their relatives which constitute salaries, wages, awards or the like, or those which do not satisfy the conditions for transactions among independent parties against properties or services.

(c)    Recreation expenses.

(d)    Expenses of a natural person for personal consumption.

(e)    Income tax paid in the Kingdom or in another country.

(f)     Fines and financial penalties paid or payable to any party in the Kingdom, excluding those paid for breach of contractual conditions and obligations.

(g)    Any bribe or similar amounts considered a criminal offense under the laws of the Kingdom, even if paid abroad.

Article 14: Bad Debts

(a)    A taxpayer may deduct bad debts arising from sales of goods or services that have been previously declared as a taxable income of the taxpayer.

(b)    A bad debt may be deducted when stricken off the taxpayer’s books when there is suitable evidence proving the impossibility of collecting it, as specified in the Regulations.

Article 15: Reserves and Allocations

         No reserves or allocations may be deducted except allocations of doubtful debts for banks. The Regulations shall determine the rules and restrictions specifying such allocations.

Article 16: Research and Development Expenses

         Research and development expenses connected with the earning of taxable income may be deducted. Expenses for purchase of land or equipment used for research may not be deducted. Such equipment shall be subject to depreciation under Article Seventeen of this Law.

Article 17: Depreciation

(a)          Except for land, a depreciation may be deducted for a taxpayer's depreciable tangible or intangible assets which lose value because of wear and tear or obsolescence and which are wholly or partly used in the generation of taxable income, and remain to have a value after the end of the taxable year.

(b)          Depreciable assets are classified into groups and depreciation rates as follows:

(1)   Stationary buildings: five percent (5%).

(2)   Movable industrial and agricultural buildings: ten percent (10%).

(3)   Factories, machines, engines, hardware and software (computer software) and equipment, including passenger and cargo vehicles: twenty five percent (25%).

(4)   Expenses for geological surveying, drilling, exploration, and other preliminary work to exploit natural resources and develop their fields: twenty percent (20%).

(5)   All other tangible and intangible depreciable assets not included in pervious categories, such as furniture, planes, ships, trains and goodwill: ten percent (10%).

(c)          The depreciation deduction for each group is determined in accordance to paragraphs (d) to (l) of this Article.

(d)          The depreciation deduction for each group is calculated by applying its depreciation rate determined in accordance with paragraph (b) of this Article against the balance of the value of such group at the end of the taxable year.

(e)          The balance of the value of each group at the end of the taxable year is the total of the balance of the value of the group at the end of the previous taxable year after the depreciation deduction in accordance with this Article for the previous taxable year, and fifty percent (50%) of the cost base of assets in use added to the group in the current and previous taxable years after the deduction of fifty percent (50%) of the compensation received from the assets disposed of during the current and previous taxable years, provided that the balance does not become in the negative.

(f)           If the taxpayer converts its assets to personal use or if the asset ceases to be used in the generation of taxable income, this action by the taxpayer is deemed to be a disposal of the asset for its market value.

(g)          When fifty percent (50%) of the compensation of the assets disposed of during the current and previous taxable years exceeds the balance of the value of the group at the end of the taxable year, regardless of the amount of such compensation, the value of the group shall be reduced to zero and the excess is included in the taxpayer's taxable income.

(h)          If the balance of the value of the group at the end of the year, after allowing for the deduction in accordance with paragraph (d), is less than one thousand (1,000) riyals, the amount of the balance may be deducted.

(i)            Where all the assets in a group are disposed of, the balance of the group may be deducted at the end of the year.

(j)            Where a land is bought or sold with constructions thereon, the value shall be reasonably apportioned to arrive at a separate value of the construction.

(k)          In case a part of the assets is used for the generation of taxable income, a depreciation deduction is allowed for a part of the asset value against the part of the asset used in the generation of the taxable income.

(l)            As an exception to the provisions of the previous paragraphs, assets under Build, Operate and Transfer (BOT) or Build, Own, Operate and Transfer (BOOT) contracts may be depreciated over the contract period or over the remaining period of the contract, if acquired or renewed during that period.

Article 18: Expenses of Asset Repair and Improvement

(a)         Expenses incurred by the taxpayer for the repair or improvement of depreciable assets in each group may be deducted.

(b)         The amount of expenses deductible in accordance with paragraph (a) of this Article for each year shall not exceed four percent (4%) of the balance of the value of the group at the end of that year.

(c)          The amount exceeding the limit stated in paragraph (b) of this Article shall be added to the balance of the value of the group.

Article 19:    Expenses for Geological Surveying and Preliminary Work for the Extraction of Natural Resources

(a)         Expenditures for geological surveying and preliminary work for the extraction of natural resources are deducted in the form of amortization expenses at the depreciation rate determined in paragraph (b) of Article Seventeen of this Law, where these expenses constitute an independent group.

(b)         This Article also applies to expenses of intangible assets incurred by the taxpayer in acquisition of rights to geological surveying and the processing and exploitation of natural resources.

Article 20: Contributions to Authorized Retirement Funds

(a)         An employer’s contributions to an authorized retirement fund established in accordance with the laws of the Kingdom may be deducted in favor of the employee.

(b)         The deduction allowed under paragraph (a) of this Article in respect of each employee shall not exceed twenty five percent (25%) of each employee’s income, prior to calculating the employer’s contributions.

(c)          The employee’s contributions to an authorized retirement fund may not be deducted.

Article 21: Carrying Forward of Losses

(a)          A net operating loss may be carried forward to the taxable year following the year in which the loss is incurred. The carried-forward loss shall be deducted from the tax base of the following taxable years until the cumulative loss is fully offset. The Regulations shall specify the maximum limits allowed to be annually deducted.

(b)          A net operating loss is the deductions allowed under this Chapter which are in excess of the taxable income for the taxable year.

(c)          To calculate the net operating loss for a natural person, the deductions and income for activity only shall be taken into consideration.