A Saudi-resident company that is not a bank is financing general working-capital operations, not the construction of a capital asset, using a mix of related-party and third-party loans. Under the Saudi Income Tax Law's interest expense (loan charge) deduction limitation, deductible loan charges for the tax year are capped at the lower of which two amounts?
- The company's total loan-charge income for the year, or 50% of its total revenue before any expense deductions, whichever is higher
- The actual loan charges incurred for the year, or the company's total income from loan charges plus 50% of its taxable income computed before including loan-charge income and loan-charge expenses, whichever is lower
- A flat cap equal to 30% of EBITDA, mirroring the OECD BEPS Action 4 fixed-ratio approach, regardless of the company's actual loan-charge income
- The full amount of actual loan charges incurred, with no upper limit at all, because Saudi Arabia applies no interest deduction limitation to any company outside the banking sector
Why B? And why not the others?
Correct answer: B. The actual loan charges incurred for the year, or the company's total income from loan charges plus 50% of its taxable income computed before including loan-charge income and loan-charge expenses, whichever is lower
The Income Tax Law's interest limitation caps deductible loan charges at whichever is lower of the actual loan charges incurred, or the company's own loan-charge income plus half of its taxable income calculated before counting either loan-charge income or loan-charge expenses; this bespoke lower-of test, not a fixed-ratio rule, is what actually governs, and it does not apply to banks or to interest capitalized during a capital asset's construction phase. The option using total revenue before expenses, and taking the higher rather than lower figure, misstates both the base of the 50% add-on and the direction of the comparison. The option importing a flat 30%-of-EBITDA cap wrongly assumes Saudi Arabia adopted the OECD BEPS Action 4 fixed-ratio model, when the actual rule is this country-specific formula tied to the taxpayer's own loan-charge income and taxable income. The option claiming no limitation applies outside banking is wrong because the formula is exactly what applies to non-bank companies like the one described; banks are the group it does not apply to, not the reverse.
Source: Saudi Income Tax Law and its Implementing Regulations (Bylaws), interest expense (loan charge) deduction limitation formula (zatca.gov.sa)