Effective 13 Jumah II 1425 (July 30, 2004)
The English version of this document is for guidance only.
The Arabic version is the governing text.
Article 1: Definitions
Wherever they appear in this Law, each of the following words or terms will carry the meaning beside it unless the context indicates otherwise.
Any word or phrase with no specific definition in this Chapter shall have the same definition it has in other Laws applicable in the Kingdom provided that such definition is not inconsistent with the provisions of this Law.
Article 2 : Persons subject to taxation
Article 3 : Concept of Residency
(a) A natural person is considered a resident in the Kingdom for a taxable year if he meets any of the following conditions:
For the purpose of this paragraph, residence in the Kingdom for part of a day is considered residence for the whole day, except in the case of a person in transit between two points outside the Kingdom.
(b) A company is considered resident in the Kingdom during the taxable year if it meets any of the following conditions:
Article 4 : Permanent Establishment
(a) A permanent establishment of a non-resident in the Kingdom, unless otherwise stated in this Article, consists of the permanent place of the non-resident's activity through which it carries out business, in full or in part, including business carried out through its agent.
(b) The following are considered a permanent establishment:
(c) A place is not considered a permanent establishment of a non-resident in the Kingdom if it is used in the Kingdom only for the following purposes:
(d) A non-resident partner in a resident partnership is considered an owner of a permanent establishment in the Kingdom in the form of an interest in a partnership.
Article 5 : Source of Income
(a) Income is considered accrued in the Kingdom in any of the following cases:
(b) The place of payment of the income shall not be taken into account in determining its source.
(c) For purposes of this Article, a payment made by a permanent establishment of a non-resident in the Kingdom is considered as if paid by a resident company.
Tax Base and Tax Rates
Article 6 : Tax Base
(a) The tax base of a resident capital company is the shares of non-Saudi partners in its taxable income from any activity from sources within the Kingdom, minus expenses permitted under this Law.
(b) The tax base of a resident non-Saudi natural person is his taxable income from any activity from sources within the Kingdom, minus expenses permitted under this Law.
(c) The tax base of a non-resident who performs an activity within the Kingdom through a permanent establishment is his taxable income arising from or related to the activity of such establishment, minus expenses permitted under this Law.
(d) The tax base of each natural person is determined separately.
(e) The tax base of a capital company is determined separately of its shareholders or partners.
Article 7 : Tax Rates
(a) The tax rate of the tax base is twenty (20) percent for each of the following:
(b) The tax rate of the tax base for a taxpayer engaged only in natural gas investment activities is thirty (30) percent.
(c) The tax rate of the tax base for a taxpayer engaged in the production of oil and hydrocarbon materials is eighty-five (85) percent.
(d) Withholding tax rates are those specified under Article 68 of this Law.
Article 8 : Income Subject To Tax
Taxable income is the gross income including all revenues, profits, and gains of any type and of any form of payment resulted from carrying out an activity, including capital gains and any incidental revenues, minus exempted income.
Article 9 : Gains and Losses on Disposal of Assets
(a) The gain or loss from the disposal of an asset is the difference between the compensation received and its cost base.
(b) No gain or loss on disposal of a depreciable asset is taken into account other than what is stated in Article 17 of this Law.
(c) In determining taxable income, a natural person may not take into account gain or loss on disposal of an asset that is not for use in the activity.
(d) The cost base of an asset purchased, produced, manufactured, or constructed by the taxpayer is the amount paid or incurred by the taxpayer in cash or in kind in the process of acquiring the asset.
(e) Where a taxpayer disposes of a part of an asset, the cost base of the asset is apportioned between the part retained and the part disposed of in accordance with their market value at the time of purchase of the asset.
(f) Expenses incurred to alter or improve a non-depreciable asset are added to the cost base of the asset.
(g) The compensation value for disposal of an asset against assets in kind is based on the market value of those assets in kind, including exemption from debt on the asset.
(h) Where a taxpayer disposes of an asset by way of gift or inheritance, the disposer is treated as having received compensation equal to the market value of the asset at the time of disposal, unless paragraph (i) of this Article is applicable.
(i) If the asset disposed of is encumbered by debt exceeding its market value, the taxpayer disposing of the asset is treated as having received compensation equal to the value of such debt.
(j) In determining the tax base, no gain or loss is taken into account on an involuntary disposal of an asset, to the extent that the compensation value is used in purchasing an asset of the same kind within one year of the involuntary disposal.
(k) The cost base of a replacement asset described in paragraph (j) of this Article is determined with reference to the cost base of the replaced asset.
(l) Where an asset owned by a taxpayer is converted to personal use or otherwise ceases to be used in the generation of income, the taxpayer is deemed to have disposed of the asset for its market value, with the recognition of the resulting gain but not the loss.
Article 10 : Exempt income
The following types of income are exempt from income tax:
(a) capital gains realized from disposal of securities traded in the Stock Market in the Kingdom in accordance with restrictions specified in the Regulations.
(b) gains resulting from disposal of property other than assets used in the activity.
Article 11 : Donations
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 the Kingdom which are nonprofit organizations and are allowed to receive these donations.
Expenses of earning income
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 expenses according to Article 13 of this Law and other provisions of this Chapter.
Article 13 : Non-deductible 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 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 sountry.
(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 17 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:
(c) The depreciation deduction for each group is determined in accordance twith 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 included in the taxpayer's taxable.
(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 riyals (SR1,000), 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 Cuild, 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 deductedin the form of amortization expenses at the depreciation rate determined in paragraph (b) of Article 17 of this Law; where these expenditures 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 or exploitation of natural resources.
Article 20 : Contributions to an 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 equal to the excess of 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.