Understanding the ZATCA rules on disallowing salaries paid to owners and related parties is crucial for Saudi corporate taxpayers to ensure compliance and avoid unexpected tax liabilities.
📌 Introduction
In Saudi Arabia, the Zakat, Tax and Customs Authority (ZATCA) has clear regulations regarding the treatment of salaries paid to owners, partners, shareholders, and related parties. Under corporate income tax rules, such salaries are generally non-deductible for tax purposes. The intention is to prevent companies from artificially reducing taxable profits by allocating excessive remuneration to individuals with controlling interests or family ties.
📖 What Are “Owner and Related-Party Salaries”?
This category refers to remuneration, allowances, or benefits paid to:
- Company owners (sole proprietors or major shareholders).
- Partners in partnerships.
- Relatives of owners or partners (spouse, children, parents, siblings).
- Entities under common control (group companies).
ZATCA considers these payments as profit distributions rather than genuine employment expenses unless there is evidence of arm’s-length employment relationships.
💼 Why Are These Salaries Disallowed?
The main reasons for disallowance are:
- Preventing manipulation of taxable profits.
- Avoiding disguised dividends paid as salaries.
- Ensuring fairness in tax administration.
- Encouraging transparent profit distribution via dividends, which may be subject to withholding tax in certain cases.
📑 ZATCA’s Position on Related-Party Compensation
While salaries to unrelated employees are deductible, payments to owners or related parties are typically disallowed. However, exceptions may apply if:
- The recipient has a formal employment contract.
- The role is legitimate, with documented duties and working hours.
- The salary is comparable to market rates for similar positions.
- There is evidence of actual work performed (e.g., attendance records, performance reviews).
Even in such cases, ZATCA may still scrutinize and partially disallow amounts deemed excessive.
⚠️ Common Audit Red Flags
- Large salary payments to owners without supporting job descriptions.
- Payments to family members with no clear work responsibilities.
- Salary amounts exceeding industry norms.
- Absence of documented employment agreements.
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📊 Example of Disallowance
| Recipient | Role | Salary Paid (SAR) | Deductible | Disallowed |
|---|---|---|---|---|
| Owner | CEO (No formal contract) | 300,000 | 0 | 300,000 |
| Owner’s Son | Marketing Manager (No evidence of work) | 180,000 | 0 | 180,000 |
| Independent Employee | Operations Manager | 240,000 | 240,000 | 0 |
💡 Best Practices for Corporate Taxpayers
- Clearly separate profit distribution from employment compensation.
- Maintain proper employment contracts for related-party employees.
- Ensure all salaries are supported by proof of work performed.
- Benchmark salaries against industry standards to avoid excessive payments.
- Document performance reviews and deliverables for all employees, including family members.
✅ Conclusion
Disallowance of owner and related-party salaries in Saudi Arabia’s corporate tax regime is designed to prevent abuse and protect the integrity of the tax system. Businesses should adopt strong governance practices, ensure transparency in related-party transactions, and maintain proper documentation to withstand ZATCA audits. By doing so, corporate taxpayers can avoid costly disallowances and demonstrate compliance with Saudi tax regulations.
