Saudi Arabia Corporate Tax, Tax Base, Deductible and Non Deductible Expenses

• Tax base for corporate income tax: The tax base for non-resident entities with a PE in Saudi Arabia is the income derived from the PE's commercial activities less allowable expenses. This means that the taxable profit is the difference between the revenues and the costs that are related to the PE's operations in the Kingdom. Applicable tax rate in Saudi Arabia is 20% on taxable income in addition to the WHT 5% applies on any dividend which are separately taxed.

  
  

• Disallowable expenses: Some expenses are not deductible for tax purposes, such as those not related to the earning of taxable income, those paid to shareholders, partners, or relatives, those that are recreation, income tax, fines, penalties, bribes, or commissions, and those that are the employee's share in retirement funds. These expenses are either considered as distributions of profit, personal benefits, or illegal payments, or they are not connected to the generation of income subject to tax.

  
  

• Special disallowable expenses for branches: Branches of foreign companies can not deduct payments made to their head offices abroad for royalty, commission, loan proceeds, financial fees, or indirect administrative expenses They also can not deduct the costs of materials or services provided by related parties in excess of arm's length prices. These expenses are either considered as profit transfers to the head office or related parties, or they are not supported by sufficient documentation or evidence.

  
  

• Disallowable provisions and reserves: Provisions or reserves created during the year for employee terminal benefits, bad and doubtful debts, future losses, damaged or obsolete stocks, contingencies or warranties, and loan loss (except for banks) are not deductible. These provisions or reserves are either considered as contingent liabilities, which are not certain or fixed, or they are subject to special rules and conditions.

  
  

• Depreciation method: Depreciation is calculated for each group of fixed assets by applying the prescribed depreciation rates to the remaining value of each group at the fiscal year-end, after deducting 50% of the cost of assets added or disposed during the current and previous year. This method ensures that the depreciation expense reflects the actual use and wear and tear of the assets and that the assets are not over or under-depreciated.

  
  

• Depreciation rates: The depreciation rates vary from 0% for land to 25% for factories. equipment, machinery, software, and exploration expenses. Other assets have rates of 596. 10%, or 20%, depending on their nature. These rates are stipulated in the Income Tax Law and are based on the expected useful life and economic value of the assets.

  
  

• Other disallowable depreciation expenses: Depreciation expenses that are not deductible include accounting depreciation ju excess of GAZT's prescribed rates, repair and improvement expenses in excess of 49% of the balance of each fixed asset group. and contributions to an authorized retirement fund in excess of 25% of the employee's income. These expenses are either considered as excessive, unreasonable, or unrelated to the earning of taxable income, or they are subject to specific limitations or conditions.