A Saudi income-tax-paying company, assessed on the basis of audited accounts, incurs a tax loss in one fiscal year. Under the Saudi Income Tax Law's loss carryforward rule as currently in force for the 2026 tax year, how may this loss generally be used in later years?
- The loss must be used entirely against the very next year's taxable profit, or it is permanently forfeited
- The loss can only be carried back to reduce the tax already paid in the year immediately before the loss arose
- The loss may be carried forward indefinitely, but only for a maximum of five subsequent fiscal years, after which any unused balance is forfeited
- The loss may be carried forward indefinitely, but the amount deducted against any single year's profit is capped at 25% of that year's taxable profit before the loss deduction
Why D? And why not the others?
Correct answer: D. The loss may be carried forward indefinitely, but the amount deducted against any single year's profit is capped at 25% of that year's taxable profit before the loss deduction
Under the loss carryforward rule as currently in force, a company assessed on audited accounts may carry an unused tax loss forward without any time limit, but it cannot wipe out an entire year's profit with the loss in one go: the deduction taken in any given year is capped at 25% of that year's taxable profit computed before the loss deduction, so a large loss is absorbed gradually across multiple profitable years. The option requiring the loss to be used entirely in the very next year is wrong because the rule allows an indefinite carryforward, not a one-year use-it-or-lose-it window. The option describing a carryback against the prior year's tax already paid is wrong because Saudi tax loss relief operates only as a carryforward against future profits, not as a carryback against a prior, already-assessed year. The option imposing a five-year cutoff after which any unused loss is forfeited is wrong because the current rule does not impose any fixed number of years on how long the carryforward may run; the only limit is the 25%-per-year cap on how much of it can be used at once.
Source: Saudi Income Tax Law (Royal Decree No. M/1 of 1425H), Article 21 (carryforward of losses)