Ultimate guide on GCC Taxation. Павел Игоревич Герасимов

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.

      ● 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 a part of premium amounts collected or stated in books that covers risks related to the future tax year(s). A reserve for unexpired risks mean the amount of compensation claimed or reported, but for which the payment process falls short of completion during the tax year.

      ● A taxpayer may reduce its book profit by the amount of reserves used during the year that had been readjusted when made to increase income or decrease expenses in the year of formation. Examples of such reserves are end-of-service awards, doubtful debt, and drops in prices. Such amounts are deductible, provided the following conditions are met:

      ○ The used amount was paid or accrued during the year, and it is supported by documentation.

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

      SCHOOL FEES

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

      ● They are paid to a local licensed school.

      ● This benefit is stated in the employment contract.

      PENSION FUND

      Employers’ contributions to employees’ pension funds or savings funds established under Saudi Arabia’s rules and regulations are deductible, provided that such contribution, one payment or in aggregate, is not in excess of 25 % of the employee’s income before the employer’s contributions and that the fund meets the following criteria:

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

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

      ● The fund has a character independent of the establishment and has separate accounts audited by an independent CPA.

      A capital company is allowed to deduct its contribution to a retirement fund, a social insurance fund, or any other fund established for the purpose of settling employee end-of-service benefits