Ultimate guide on GCC Taxation

“Payments received for use of or the right to use intellectual rights, including, but not limited to, copyright, patents, designs, industrial secrets, trademarks and trade names, know-how, trade secrets, business, goodwill, and payments received against the use of information related to industrial, commercial, or scientific expertise, or against granting the right to exploit natural and mineral resources.”

IMPORTS AND SUPPLY CONTRACTS

Saudi tax law provides that no profit will be considered to arise from a contract for the supply of goods to Saudi Arabia, provided delivery of the goods is either free on board (FOB) or cost, insurance, and freight (CIF) to a Saudi port. However, should the contract provide for the delivery and/or installation of materials at a point inside Saudi Arabia, the supplier may be considered to be carrying on business within Saudi Arabia, and, as a consequence, the contract may be subject to Saudi income taxation as follows:

● If the material cost was identified in the supply contract separately from the cost of work performed in Saudi Arabia, then, in the absence of a PE, a WHT on the work that will be performed in Saudi Arabia may be assessed, based on the type of services. However, if the contract qualifies the supplier to have a PE in Saudi Arabia, then income tax will be applied according to the Saudi tax regulations as for a normal taxpayer.

● If the supply contract indicates a total cost without segregation in the value of supply and the value of the other activities in Saudi Arabia, then the work performed in Saudi Arabia will be assigned a value equal to 10 % of the contract value for each type of activity.

FOREIGN INCOME

The gross income derived by a capital company resident in Saudi Arabia from its operations and of its branches inside and outside Saudi Arabia is subject to tax in Saudi Arabia. However, in order to avoid double taxation on the same income, the following exceptions and clarifications are to be considered:

● With respect to the income realised from investments in other resident capital companies and foreign capital companies (foreign dividends applicable from 1 January 2018) and in order to avoid double taxation, such income is to be excluded from being subject to tax under the following conditions:

○ The percentage of ownership in the company invested in is not less than 10 %.

○ The period of ownership of shares is not less than one year.

Previously (up to 31 December 2017), foreign dividends were taxable unless a DTT provided relief.

There are no restrictions on repatriation of profits, fees, capital, salaries, or other monies.

CORPORATE – DEDUCTIONS

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 entity’s 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:

The declining-balance method of depreciation, according to the above rates, should be followed for tax purposes. However, straight-line depreciation is allowed for Zakat payers as per Zakat regulations.

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.

From 1 January 2018, the cost base of assets transferred or distributed between companies that are part of the same group should be set at the net book value.

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 in the first financial year or can be capitalised and 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 taxpayer’s 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 year’s income.

● The debt resulted from sale of goods or services.

● The company holds a certificate from the taxpayer’s certified public accountant (CPA) certifying that the debt has been written off in the taxpayer’s 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.