Saudi Arabia

The income tax rules in Saudi Arabia do not allow for consolidation or grouping of taxpayers. For Zakat purposes, the concept of consolidation is acceptable and relief may be obtained for wholly owned subsidiaries by Saudi/GCC companies that are subject to Zakat.

Note that an entity operating in Saudi Arabia that has undertaken more than one project under the same commercial registration is required to consolidate the results of such projects into the financial statements of that entity and subject them to taxation as a single operation.

Transfer pricing

On 15 February 2019, ZATCA published the Transfer Pricing By-Laws (the By-Laws) in final form as well as an accompanying frequently asked questions (FAQs) document.

The By-Laws are effective from their date of publication in the official gazette. It has also been clarified in the FAQs (in question 8) that the By-Laws will apply to the reporting year ended 31 December 2018 and all subsequent reporting years.

On 7 April 2023, ZATCA announced the approval of the proposed amendments to the Transfer Pricing By-Laws to bring the following into effect:

• Extend applicability of the transfer pricing provisions to Zakat payers.
• Introduce Advance Pricing Agreement (APA) provisions for taxpayers and Zakat payers.

The above amendments will be applicable for financial years starting on or after 1 January 2024.

Persons subject to the By-Laws

For financial years starting on or after 1 January 2024, the transfer pricing provisions apply to all tax and Zakat paying entities (initially, besides Country-by-Country [CbC] Reporting, the transfer pricing provisions were only applicable to taxpayers and entities subject to both tax and Zakat).

Scope of the By-Laws: Domestic transactions

Unless expressly exempt in the By-Laws, all related party transactions, regardless of the place of residence, nationality, or domicile of the persons are within the scope of the By-Laws.

Non-arm's-length pricing

In circumstances where the terms, conditions, or remuneration of a controlled transaction are not consistent with the arm's-length principle, ZATCA has the ability to reallocate or disregard the result of the controlled transaction.  

Documentation requirements

Disclosure Form of Controlled Transactions (CTDF)

Article 14 of the By-Laws requires taxpayers to submit a CTDF to ZATCA together with their annual income tax declaration within 120 days of the end of the fiscal year.

Documentation must be readily accessible and available for review by the tax authority at the time of submission of the CTDF and contain information and economic analysis to verify that the conditions of the controlled transactions are at arm’s length.

The CTDF also requires confirmation of whether the taxable person maintains a transfer pricing Master File and Local File. The implied effect of this is therefore to require that Master File and Local File documentation is prepared within 120 days of the end of the fiscal year.

The By-Laws state that 'together with the CTDF, the taxpayer must submit an affidavit from a licensed auditor through which the auditor certifies that the transfer pricing policy of the multinational enterprise (MNE) is consistently applied by and in relation to the taxpayer'.

Note that 'transfer pricing policy' is not defined in the By-Laws.

Article 4, Paragraph A, of the By-Laws requires the taxpayer to make adjustments to their tax base to reflect arm’s-length pricing of controlled transactions and report those adjustments in their annual tax declarations. 

Master File and Local File

The Master File and Local File requirements broadly follow those outlined by the recommendations of Action 13 of the Organisation for Economic Co-operation and Development's (OECD’s) Base Erosion and Profit Shifting (BEPS) Project.

The Master File will need to be provided to ZATCA within a maximum of 30 days from request (or the length of time given in the request if longer). The Local File is also to be provided within 30 days upon request by ZATCA (or the length of time given in the request if longer).

ZATCA has stated on its website, and described further in the FAQs, that it will provide an extension of 60 days to the requirements to submit the Master File and Local File on request for 2019 only. 

Country-by-country (CbC) reporting

The By-Laws set out the circumstances in which the Ultimate Parent Entity of an MNE Group (UPE), or a taxable person in the Kingdom of Saudi Arabia that is not a UPE, will need to submit and file reports and notifications to ZATCA, and state that these will need to be in the language and form that ZATCA may specify.

The requirements are broadly in line with the recommendations of Action 13 of the OECD’s BEPS Project.

The CbC reporting requirements now include Zakat payers as well as taxpayers.

The threshold for companies to be subject to the report filing and notification requirements is a consolidated group revenue exceeding SAR 3.2 billion, and it must be filed with ZATCA within 12 months after the last day of the year to which the report relates.

Thin capitalisation

There is no special legislation governing thin capitalisation for tax purposes. A Saudi company may deduct interest payments to affiliates, but not the head office, provided that the amount of debt and rate of interest are at arm’s length and that the interest deductibility formula is met. A Saudi company may be financed with minimum capital, and there is no limit to the amount of debt that may be used.

Controlled foreign companies (CFCs)

There are no special rules for CFCs in Saudi Arabia. However, as mentioned above, the gross income derived by a capital company resident in Saudi Arabia from its operations and branches outside Saudi Arabia is subject to tax in Saudi Arabia (subject to relevant conditions).

Intra-group transactions relief

Intra-group transfers of cash, shares, financial securities, and other tangible and intangible assets can be carried out tax neutrally, provided the following conditions are met:

• Such companies should be part of a group of capital companies that are wholly owned, directly or indirectly, by one capital company.
• Such assets should not be disposed to a party outside the group before two years passes from the date of the transfer.

The 'cost base' of the relevant intra-group transactions will be net book value to achieve the no gain no loss result. 

It is not yet clear whether non-resident companies or cross-border transactions would also benefit from such relief.