In Saudi Arabia, corporate taxpayers can carry forward Net Operating Losses (NOLs) to reduce taxable income in future years. However, under ZATCA’s tax rules, the offset is limited to 25% of annual taxable profit for each year. This blog explains the NOL carryforward rules, calculation methods, strategic uses, and compliance requirements for businesses operating in the Kingdom.
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What are Net Operating Losses?
A Net Operating Loss occurs when a company’s allowable tax deductions exceed its taxable income in a given year. In Saudi Arabia, NOLs cannot be carried back to prior years but can be carried forward indefinitely, subject to a 25% profit offset cap.
The 25% Profit Offset Rule
For each future year in which a company earns taxable profits, only up to 25% of that year’s taxable profit can be reduced by carried-forward NOLs. This rule ensures that companies continue to contribute to tax revenues even if they have significant accumulated losses.
Example Calculation
| Year | Taxable Profit (SAR) | Max NOL Offset (25%) | Remaining NOL Balance |
|---|---|---|---|
| 2025 | 8,000,000 | 2,000,000 | 18,000,000 |
| 2026 | 12,000,000 | 3,000,000 | 15,000,000 |
Key Compliance Requirements
- Track NOL balances accurately year by year.
- Maintain supporting documents for the original loss years.
- Apply the 25% cap strictly to avoid penalties from ZATCA.
- Declare NOL application in the annual corporate income tax return.
Strategic Use of NOLs
- Plan the timing of asset disposals and major income events to maximize NOL utilization.
- Consider group restructuring or mergers to potentially leverage NOLs across related entities (subject to ZATCA rules).
- Review contracts for long-term projects to match profit recognition with available NOLs.
Common Pitfalls
- Failing to keep adequate proof of losses in the original year.
- Applying offsets to more than 25% of taxable profits, triggering reassessment.
- Overlooking NOL expiration risks when laws change.
Understanding and applying the 25% profit offset limit is essential for Saudi corporate taxpayers aiming to optimize tax efficiency while remaining compliant. Proper tracking, strategic planning, and professional advice can ensure NOLs remain a valuable long-term tax asset.
