Learn about the ZATCA rule capping deductible insurance commissions at 3%, its impact on corporate taxpayers in Saudi Arabia, and how to ensure compliance while avoiding disallowances during audits.
📌 Introduction
In Saudi Arabia, the Zakat, Tax and Customs Authority (ZATCA) imposes specific limits on deductible expenses for tax purposes, including commissions paid on insurance contracts. As per Saudi tax regulations, commissions exceeding 3% of the total insurance premium are disallowed as deductible expenses. This rule is aimed at preventing inflated commission structures that reduce taxable income without direct economic justification.
📖 Understanding the 3% Commission Cap
The regulation applies to insurance commissions paid by policyholders to agents, brokers, or intermediaries related to business insurance policies. The deductible portion is limited to a maximum of 3% of the total premium value, and any excess amount will be disallowed in tax calculations.
- Applicable to corporate insurance policies such as property, liability, vehicle fleet, marine, and employee health insurance.
- Applies to both resident and non-resident insurance agents/brokers.
- Impacts both corporate income tax and Zakat payers where applicable.
💼 Example of Deductible vs. Disallowed Commission
| Insurance Premium | Commission Paid | Deductible Amount (3%) | Disallowed Amount |
|---|---|---|---|
| SAR 1,000,000 | SAR 60,000 | SAR 30,000 | SAR 30,000 |
| SAR 500,000 | SAR 15,000 | SAR 15,000 | SAR 0 |
In the first example, only SAR 30,000 is deductible, while the remaining SAR 30,000 is added back to taxable income.
📑 ZATCA’s Compliance Requirements
- Maintain detailed records of insurance policies, premium amounts, and commission structures.
- Ensure all commission payments are supported by contracts and invoices.
- Adjust accounting entries to disallow amounts exceeding the 3% cap before filing the tax return.
- Apply the cap consistently across all insurance contracts to avoid selective compliance issues.
⚠️ Common Audit Risks
- Failing to adjust for excess commission before filing the return.
- Classifying non-commission payments as commissions to bypass the cap.
- Lack of proper documentation for commission transactions.
- Inaccurate allocation of commission costs in multi-policy arrangements.
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💡 Best Practices for Corporate Taxpayers
- Negotiate commission rates within the allowable 3% limit.
- Work with insurance brokers who understand ZATCA’s tax rules.
- Implement internal controls to flag commission rates exceeding the limit.
- Review commission payments quarterly to ensure compliance before year-end.
- Seek advance tax advice for large or complex insurance arrangements.
📊 Real-World Scenario
A Saudi construction company purchased a SAR 2 million marine insurance policy with a 4% commission fee (SAR 80,000). Under ZATCA rules, only SAR 60,000 (3%) was deductible, and the SAR 20,000 excess was added back to taxable income, resulting in higher corporate tax payable.
✅ Conclusion
The 3% cap on deductible insurance commissions in Saudi Arabia is a critical compliance area for corporate taxpayers. Businesses must closely monitor their insurance agreements, ensure accurate accounting adjustments, and maintain robust documentation to avoid disallowances during ZATCA audits. Adhering to this rule not only prevents additional tax liabilities but also demonstrates strong governance in expense management.
