The Saudi Income Tax Law allows a taxpayer to carry forward net operating losses to subsequent tax years and deduct them from the tax base until the accumulated loss is fully recovered, within the annual ceilings set by the Implementing Regulations.
The Loss Carryforward Rule
Net operating losses may be carried forward to the tax year following the year in which the loss was incurred, and the carried-forward loss is deducted from the tax base for subsequent tax years until the accumulated loss is fully recovered; the Regulations set the annual ceilings allowed to be deducted.
What Is a Net Operating Loss?
A net operating loss means the deductions allowed under the Law's provisions that exceed the taxable income for the tax year. To compute a natural person's net operating loss, only the deductions and revenue related to the activity are considered, to the exclusion of his other sources of income. A natural person may therefore not offset a loss from his business activity against income from other sources unrelated to that activity.
The Effect of a Change in Ownership on Loss Carryforward
If a change occurs in the ownership of a capital company, or in control over it, reaching 50% or more, the non-Saudi partner's share of losses incurred before that change may not be deducted in the tax years following the change.
A Restriction on Losses from Related-Party Transactions
A taxpayer may not deduct a loss resulting from a transfer of property between it and a party related to it; rather, the deduction of such a loss is suspended until the related party disposes of the property to another, unrelated party, unless the Law provides otherwise.
Treatment of a Partner's Losses in Partnerships
A partner's share of a partnership's income, loss, expenses, and debt is taken into account in determining his tax base for the year in which the partnership's tax year ends, but a partner's loss exceeding his cost basis in the partnership is suspended and not deducted until he secures a cost basis covering it, or until he disposes of his entire interest in it.
The Importance of Planning for Loss Carryforward
Loss carryforward allows start-ups or businesses going through an expansion phase to benefit later from their initial losses by reducing their tax base in future years, rather than losing that tax effect entirely. However, the restrictions relating to changes in ownership and related-party transactions require investors to review the expected ownership structure before any acquisition or restructuring, so that the ability to benefit from accumulated losses is not affected.
Legal References
- Income Tax Law, Article Twenty-One, Article Forty-Three, Article Sixty-Three, and Article Thirty-Seven.
For questions about your specific situation, you can ask the Saudi Arabia Tax & Legislation Helper on Helpers, or consult a licensed chartered accountant.