Transfer Pricing in Saudi Arabia: The Complete Compliance Guide

Saudi Arabia’s transfer pricing regime is grounded in the Transfer Pricing Bylaws, originally issued pursuant to Board Resolution No. [6-1-19] dated 31 January 2019, and materially amended by ZATCA’s Board Resolution No. (8-2-23) dated 20 March 2023. These are the rules currently in force.

Sitting beneath the Bylaws is the Transfer Pricing Guidelines — now in their third edition, dated June 2024. Where the Bylaws create the obligation, the Guidelines tell you how to meet it. ZATCA has adopted the OECD Transfer Pricing Guidelines as an interpretive reference, but the Saudi Bylaws and ZATCA Guidelines are the controlling authority.

The TP rules sit under the Income Tax Law (Royal Decree No. M/1 dated 1425H). For Zakat payers, they apply through the Zakat Collection Regulation (Ministerial Resolution No. 2216 dated 07/07/1440 AH, as amended). This dual applicability — to both income tax and Zakat — is one of the defining features of Saudi TP. A single ZATCA adjustment can affect both bases simultaneously.

The TP Bylaws apply to every Taxable Person under the Income Tax Law or the Zakat Collection Regulation. There is no minimum size threshold for the arm’s length obligation itself.

The Small Enterprise exemption — entities with total controlled transactions below SAR 6 million per year (CIT/mixed entities) or SAR 48 million (Zakat-only entities) — exempts qualifying entities from the Master File and Local File documentation requirements. The arm’s length standard and the Disclosure Form obligation remain mandatory regardless of size.

The definition of related parties in Article 1 of the Bylaws is broad: it covers ownership of 50%+ of voting rights, capital, or income; effective control over business decisions; persons providing management services; entities with guaranteed loans representing 50%+ of long-term and short-term debt and capital; and guarantors covering 25%+ of total borrowings.

Defined in Articles 1 and 3 of the Bylaws: controlled transactions must be conducted under terms materially similar to those of comparable transactions between independent persons. Any profit that should have accrued to a Saudi entity but did not, because of non-arm’s-length conditions, may be included in that entity’s taxable or Zakatable income.

Comparability is assessed across five factors under Article 5: the characteristics of the property or services; the functional analysis (functions performed, assets used, risks assumed); contractual terms; economic circumstances; and business strategies. The functional analysis is the most consequential — it determines the entity’s risk profile and therefore what arm’s length return looks like.

The arm’s length range is typically expressed as the interquartile range of comparable uncontrolled transaction results. If the tested result falls below the 25th percentile or above the 75th percentile, ZATCA may adjust to the point within the range that best reflects the facts and circumstances of the case.

Saudi Arabia recognises five approved TP methods under Article 7. Unlike earlier OECD formulations, the Saudi Bylaws explicitly state these are not listed in any order of preference. The most appropriate method for the specific transaction must be selected and justified.

The method selection must be documented in the Local File with reasoning — including why alternative methods are less appropriate. Article 8 confirms that where a taxpayer has applied an approved method consistently with the Bylaws, ZATCA’s review will be based on that method.

Saudi Arabia’s documentation framework (Articles 15–18 of the Bylaws) mirrors the OECD BEPS Action 13 approach, with three tiers serving distinct purposes.

Master File (Article 16): A group-level document covering the MNE Group’s organisational structure, business description, intangibles strategy, intercompany financing policies, and consolidated financial statements. Provided on ZATCA request within 30 days minimum.

Local File (Article 17): The detailed transaction-level record for the Saudi entity. Must cover: the taxpayer’s management structure and business strategy; for each controlled transaction category — description, amounts, related party identification, copies of all intercompany agreements, comparability and functional analysis, TP method selection and rationale, benchmarking data, and financial information. Also requires an industry analysis. Provided on ZATCA request within 30 days minimum.

Country-by-Country Report (Article 18): Required for MNE Groups with consolidated revenue exceeding SAR 3.2 billion. Due within 12 months of the group’s year-end. A separate CbCR Notification must be filed within 120 days of year-end by every Saudi Constituent Entity of a qualifying group — even if the CbCR itself is filed by another group entity in another jurisdiction.

The Disclosure Form must be accompanied by an affidavit from a licensed Saudi auditor certifying that the MNE Group’s TP policy is consistently applied by and in relation to the taxpayer. This requirement was introduced by the March 2023 amendments and requires advance coordination with the external auditor.

Under Article 4 of the Bylaws, ZATCA can adjust the tax or Zakat base to include returns that should have accrued at arm’s length. Where documentation is absent or inadequate, the burden of proof on the taxpayer is materially increased — ZATCA may proceed on available information.

The Advance Pricing Agreement (APA) framework was introduced by Article 23 in the March 2023 amendments. Key features: minimum transaction value of SAR 100 million; application must be initiated at least 12 months before the first covered fiscal year; the APA covers a three-year period with annual compliance reports; it applies prospectively only.

TP and CIT: A TP adjustment increases the non-Saudi share of the Saudi entity’s income, subject to 20% CIT.

TP and Zakat: The same adjustment may simultaneously affect the Zakat base on the Saudi ownership share. Both must be assessed together for entities with mixed Saudi/non-Saudi ownership.

TP and WHT: Payments to non-resident related parties — management fees (5% WHT), royalties (15% WHT), interest (5% WHT) — interact directly with TP adjustments. A downward TP adjustment to the fee may also affect the WHT base.

Thin capitalisation: Saudi Arabia’s thin capitalisation rules restrict interest deductibility where related-party debt exceeds prescribed thresholds, independent of whether the interest rate is arm’s length. Both analyses must be conducted separately for the same intercompany loan.

Consolidated Zakat groups: Group companies submitting a consolidated Zakat return are excluded from TP on transactions between themselves, but must still disclose transactions with entities held at less than 100%.

• Not filing the Disclosure Form. Small Enterprise documentation exemption does not extend to the Disclosure Form. All entities with controlled transactions must file.
• Preparing documentation after a ZATCA enquiry. The Bylaws require documentation to be readily accessible. Retrospectively prepared documents carry significantly less weight in any dispute.
• Missing the auditor affidavit. The licensed auditor affidavit is a separate, mandatory component of the Disclosure Form filing. It requires advance preparation with the external auditor.
• Confusing the CbCR Notification with the CbCR itself. These are entirely separate filings with separate deadlines. Filing one does not satisfy the other.
• Ignoring the Zakat dimension. A TP analysis conducted purely through a CIT lens may miss the Zakat implications of the same adjustment.