Deductibility of Start-Up Expenses in Saudi Arabia: Full Expense vs. Amortisation

📌 Introduction

Setting up a business in Saudi Arabia involves various start-up expenses—from licensing fees and market research to employee training and office setup. The Zakat, Tax and Customs Authority (ZATCA) provides specific guidelines on whether such costs can be deducted entirely in the year they are incurred or must be amortised over a period of years. Understanding these rules is essential for optimising tax positions and avoiding compliance risks.

🏢 What Are Start-Up Expenses?

Start-up expenses are costs incurred before a business begins its regular operations. Common examples include:

• Legal and professional fees for company formation.
• Business licensing and registration costs.
• Market surveys and feasibility studies.
• Pre-operational employee recruitment and training expenses.
• Leasehold improvements and equipment installation.

These costs are distinct from regular operating expenses, which occur after the business starts trading.

✅ Deduction Options: Full Expense vs. Amortisation

Under Saudi tax rules, start-up expenses can be treated in two ways:

1. Full Expense in the Year Incurred

Certain start-up costs may be deducted in full in the first year of operations if they meet the criteria of being ordinary, necessary, and directly related to generating taxable income. This approach provides immediate tax relief but reduces future-year deductions.

2. Amortisation Over Multiple Years

Other start-up costs, especially those resulting in long-term benefits (such as leasehold improvements or major pre-opening marketing campaigns), must be capitalised and amortised over a reasonable period—typically three to five years, depending on ZATCA’s acceptance.

📑 ZATCA Guidelines on Start-Up Expense Deductibility

• Expenses must be supported by original invoices, contracts, and payment proof.
• Only expenses incurred before revenue generation qualify as start-up costs.
• Capital-intensive start-up assets (machinery, IT systems) are subject to depreciation rules, not immediate expensing.
• Any expense not clearly linked to future taxable income may be disallowed.

Corporate taxpayers should seek written clarification from ZATCA for high-value or unusual start-up expenses to avoid disputes during audits.

📊 Example Scenario

A Saudi logistics company spends SAR 300,000 on licensing, legal fees, and initial employee training before starting operations in 2024. Of this, SAR 150,000 is immediately deductible as ordinary business expenses (full expense), while SAR 150,000 relating to facility setup is capitalised and amortised over three years (SAR 50,000 per year).

⚠️ Common Mistakes Leading to Disallowance

• Claiming personal or unrelated expenses as start-up costs.
• Failing to retain sufficient supporting documentation.
• Deducting capital asset costs as expenses instead of depreciating them.
• Overstating start-up costs to accelerate deductions.

💡 Best Practices for Corporate Taxpayers

• Maintain a separate ledger for start-up expenses.
• Engage a tax advisor during the pre-operational phase.
• Review ZATCA’s official rulings for industry-specific guidance.
• Align expense classification with International Financial Reporting Standards (IFRS) where applicable.

✅ Conclusion

The deductibility of start-up expenses in Saudi Arabia depends on their nature, documentation, and alignment with ZATCA’s rules. Choosing between full expensing and amortisation can significantly impact a company’s tax position. Corporate taxpayers should carefully evaluate each start-up cost, maintain comprehensive records, and seek professional guidance to maximise allowable deductions while remaining compliant.