Deductibility of Expenses under the Saudi Income Tax System: An Analytical Study of the Legal Framework

Determining deductible business expenses is a fundamental aspect of regulating corporate tax obligations, allowing companies to manage their tax liabilities effectively under the tax law. In Saudi Arabia, while the legal framework outlines general principles for deductibility, further clarification through practice and interpretation continues to evolve due to variations in the interpretation of provisions. This study analyzes relevant statutory provisions and extrapolates principles derived from judicial decisions related to zakat and tax disputes to determine the legal controls for deducting expenses under the Saudi tax system. The study finds that expenses incurred for the purpose of generating taxable income are, in principle, deductible, consistent with the broader objectives of Saudi tax law and aligned with international best practices. Based on a review of tax committee decisions, proper record-keeping emerges as the key requirement for establishing deductibility. The study also suggests that incorporating elements like the Cohan Rule and publishing guiding judicial principles could further support consistency in application, enhance transparency, and contribute to a more investor-friendly tax environment in the Kingdom.