Tax Alert: Amendments to the Income Tax and Zakat Implementing Regulations

The Minister of Finance in the Kingdom of Saudi Arabia has approved amendments to the income tax and Zakat implementing regulations, through the Ministerial Resolution No. 25, dated 26 July 2023, which was published in the Official Gazette (Umm Al Qura) on 15 September 2023.

In summary, the amendments update and clarify the following income tax and Zakat provisions:

—   Expenses allowable for deduction from taxable income (loan interests and contribution to retirement funds).

—   WHT rates for payments on certain services (technical, consulting, telecommunication at 5%) and payment definitions (airline tickets).

—   Tax appeal procedures.

—   ZATCA’s role in supporting Zakat payers in fulfilling their obligations, and the mandate to follow and apply its guidelines and bulletins.

Amendments to Income Tax Implementing Regulations

Article 9(2) – Interest on loans used to finance capital assets, which was incurred on the assets during the asset establishment period, is excluded from the interest limitation threshold.

Article 9(8)(2) – The amendments have further clarified for capital companies the meaning of unfunded liabilities in relation to the deduction of employer contribution to an authorized retirement fund.

Article 60 – The amendments substitute the appeal procedures described in Article 60 with the provisions of the operating rules of the Tax Disputes Resolution Committees issued vide Royal Decree No. 26040 dated 21/04/1441H and any subsequent amendments thereto.

Articles 61 and 62 – These articles related to the appeals process are deleted.

Article 63(1) – The amendments resulted in a reduction in WHT rate from 15% to 5% on payment to head offices or related parties for technical or consultancy services or international telecommunication services.

Article 63(4) – The amendments refine the definition of payments against airline tickets and air or sea freight from the WHT perspective. With respect to the airline tickets, the amendments clarify that WHT of 5% is applicable on the purchase of international travel tickets departing from the Kingdom of Saudi Arabia.

Article 30 – The added article clarifies that ZATCA intends to issue guidelines or bulletins to spread awareness among Zakat payers and strengthen their commitment to their Zakat obligations. In addition, ZATCA retains the right of issuance of public and solicited rulings in accordance with the specified procedures. The interpretations issued in the guidelines, bulletins, or rulings will be binding prospectively from the date of issuance, except in the following situations:

—   Actual facts, activities, and transactions are different than those stated in the application for ruling.

—   Omission or misrepresentation of material facts.

—   Transactions that do not meet assumptions or requirements set out in guideline and rulings.

These amendments clarify how taxable income is to be determined, as well as reduce the WHT impact on payments made to the head offices or related parties for technical, consultancy, and international telecommunication services. The appeal procedures will be based on the provisions contained in the operating rules of the Tax Disputes Resolution Committees, thus removing any risk of inconsistencies in procedural matters.

For detailed discussions on how the proposed amendments can affect your business, please contact our tax team: