Deductibility of Bad Debts in Saudi Arabia: Conditions and Documentation Requirements for Corporate Taxpayers

📌 Introduction

In the normal course of business, companies may face situations where customers fail to pay outstanding invoices. Under the Saudi Income Tax Law, such irrecoverable amounts—known as bad debts—may be deductible from taxable income if they meet specific criteria set by the Zakat, Tax and Customs Authority (ZATCA). However, deductibility is subject to strict conditions and comprehensive documentation requirements.

📖 What Are Bad Debts?

Bad debts are amounts owed to a business that have become uncollectible despite reasonable efforts to recover them. They typically arise from credit sales, loans, or contractual obligations that are not honored by customers or debtors.

✅ Conditions for Deductibility

For a bad debt to be deductible under Saudi tax rules, the following conditions must be met:

• The debt must be related to taxable income previously reported in the company’s books.
• It must have been included as income in prior tax periods.
• There should be no reasonable expectation of recovery.
• Reasonable efforts to collect the debt must have been made, such as sending reminders, initiating legal action, or engaging collection agencies.
• The debt should not be owed by a related party unless there is clear evidence of commercial substance and genuine inability to pay.

📑 Required Documentation

ZATCA requires corporate taxpayers to maintain evidence proving that the debt is genuinely uncollectible. Common supporting documents include:

• Original invoices and related contracts.
• Customer correspondence showing repeated payment requests.
• Legal notices or court filings for debt recovery.
• Reports from debt collection agencies.
• Proof of debtor insolvency, bankruptcy, or liquidation.
• Board resolutions approving the write-off of the debt.

Without adequate documentation, ZATCA may disallow the deduction, leading to higher taxable income and additional tax liabilities.

💼 Accounting Treatment

Bad debts should be recorded as an expense in the company’s financial statements for the period in which they are determined to be uncollectible. The write-off must be reflected in both the general ledger and tax computation schedules.

📊 Example Scenario

A Saudi trading company sold goods worth SAR 500,000 to a client on credit in 2023. Despite multiple reminders and legal notices, no payment was received, and the customer was declared bankrupt in 2024. Since the amount was previously included in taxable income and all collection measures were exhausted, the company can claim SAR 500,000 as a bad debt deduction in its 2024 tax return, supported by legal documents and bankruptcy confirmation.

⚠️ Common Mistakes Leading to Disallowance

• Failing to prove that the debt was previously included in taxable income.
• Inadequate documentation of collection efforts.
• Writing off debts owed by related parties without evidence of genuine inability to pay.
• Claiming provisions for doubtful debts instead of actual bad debts.

💡 Best Practices for Corporate Taxpayers

• Maintain a detailed accounts receivable aging report.
• Document all communication with debtors.
• Engage legal and collection agencies early in the process.
• Ensure board approval before writing off significant debts.
• Review ZATCA guidelines regularly for updates on bad debt deductions.

✅ Conclusion

Bad debts can be a legitimate tax-deductible expense in Saudi Arabia, but only when they meet the strict conditions set by ZATCA and are backed by robust documentation. Corporate taxpayers should adopt strong internal controls, maintain clear audit trails, and seek professional tax advice to ensure compliance and maximize allowable deductions.