For corporate taxpayers in Saudi Arabia, understanding non-deductible expenses is critical to ensure compliance with the Zakat, Tax and Customs Authority (ZATCA) regulations. This guide outlines the types of costs that cannot be deducted when calculating taxable profits — including wages, bribes, entertainment expenses, and other disallowed items — and how to avoid compliance pitfalls.
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Understanding Non-Deductible Expenses
In Saudi corporate tax law, expenses must be wholly, exclusively, and necessarily incurred for the generation of taxable income to qualify as deductible. Certain expenditures are explicitly disallowed by law, even if they relate to business operations.
Knowing these categories helps companies avoid tax reassessments, penalties, and reputational risks.
Common Non-Deductible Expenses
1. Wages to Non-Registered Employees
Payments to employees who are not registered with the General Organization for Social Insurance (GOSI) or undocumented workers are not deductible. All salary expenses should be backed by proper payroll records and GOSI compliance.
2. Bribes and Illegal Payments
Any payment in violation of Saudi law or international anti-bribery agreements is non-deductible. This includes:
- Bribes to government officials
- Kickbacks to secure contracts
- Facilitation payments
3. Entertainment and Hospitality Expenses
Costs for entertainment, leisure, and hospitality that are not directly related to generating taxable income are disallowed. This includes extravagant client dinners, luxury event sponsorships, or leisure trips.
4. Personal Expenses of Owners and Executives
Personal travel, housing, or other benefits provided to shareholders or executives without a clear business purpose cannot be deducted.
5. Fines and Penalties
Payments made to settle penalties for law violations — including tax, customs, labor, or environmental infractions — are explicitly disallowed.
6. Non-Business Related Costs
Any expense not tied to the taxable business activity, such as charitable donations (unless approved under specific tax rules), political contributions, or private investments, is non-deductible.
Impact on Corporate Tax Calculation
Non-deductible expenses are added back to taxable income during ZATCA audits or return reviews. This increases the taxable base and, in turn, the tax liability. In some cases, it may also lead to back taxes, penalties, and interest charges.
Best Practices to Avoid Issues
- Maintain detailed documentation for every expense claimed as deductible.
- Verify compliance with GOSI and other labor laws for all employee wages.
- Implement internal controls to prevent illegal or personal expenses from being recorded as business costs.
- Regularly review expense policies to align with ZATCA’s latest guidelines.
- Train finance staff on tax compliance and expense classification rules.
ZATCA Audit Focus Areas
ZATCA auditors often scrutinize:
- High-value “miscellaneous” or “general” expense entries
- Entertainment and travel costs
- Cash withdrawals or payments to related parties
- Salaries without GOSI evidence
Transparent and well-documented accounting records are the best defense during a tax audit.
Key Takeaways for Saudi Corporate Taxpayers
- Not all business-related payments are tax-deductible.
- Improper deductions can lead to higher taxes and penalties.
- Compliance requires proactive policy management and accurate documentation.
