Saudi CIT Loan Charges and Financing-Cost Limit

Business financing needs more than an interest invoice

Regulations Article 9(2) limits the deduction for loan charges connected with taxable income. First establish the actual charge, business use and general deduction conditions in Article 9(1). Then apply the particular financing restriction and any related-party or head-office rule. A lender’s invoice does not establish that every component reduces the Saudi tax base.

ZATCA’s Guideline on the Conditions of Deductible Expenses, second version May 2026, section 2.3, Example 2, concerns a resident company paying a non-resident partner in a country without a Saudi tax treaty. It retains business use, arm’s-length pricing and Article 9(2), while addressing withholding separately.

Use the statutory inputs for the ceiling

Article 9(2), as amended by Ministerial Decision 25, compares actual qualifying loan charges with the following amount: the taxpayer’s loan-charge income plus 50% of A minus B. A is taxable income excluding loan-charge income. B is expenses deductible under the Income Tax Law excluding loan-charge expense. The lower amount governs the deduction under this provision.

The relevant calculation is therefore:

Ceiling = loan-charge income + 50% × (A − B).

Do not substitute a generic interest-to-EBITDA percentage. The definition of B does not direct the taxpayer to remove all depreciation or amortisation from allowable expenses. An accounting performance measure can therefore produce a different ceiling from the statutory inputs.

A Dariba illustration shows the restriction

Assume loan-charge income of SAR 100,000, A of SAR 4 million, B of SAR 3 million and actual otherwise qualifying loan charges of SAR 800,000. A minus B is SAR 1 million. Half is SAR 500,000; adding loan-charge income produces a SAR 600,000 ceiling. The permitted amount under the formula is SAR 600,000, with SAR 200,000 above that ceiling.

These are Dariba assumptions to illustrate arithmetic, not ZATCA’s Example 2 amounts. The calculation does not establish the business connection or pricing of a real loan. If actual eligible charges were SAR 400,000 with the same ceiling, the amount under this test would be SAR 400,000 rather than SAR 600,000.

The exception does not create an immediate deduction

The current Article 9(2) excludes banks and loan charges used to finance capital assets that are loaded into the asset’s cost during construction from the formula. Confirm the actual payer, asset and construction-period capitalisation. A commercial company borrowing from a bank is not itself a bank for this purpose.

Capitalised construction financing is dealt with through the relevant asset treatment; exclusion from this ceiling does not permit both capitalisation and an immediate expense deduction. Nor does the wording automatically extend the construction exception to all charges after the asset enters service. Preserve the period and actual capitalisation evidence.

Related-party pricing remains a separate limitation

In the guideline’s section 2.3, Example 2, the loan must support the economic activity and the charge must follow the arm’s-length principle. A charge failing those requirements does not become deductible merely because it falls below the arithmetic ceiling. Regulations Article 10(11) also restricts excessive controlled-transaction pricing.

Dariba’s practical recommendation is to retain the agreement, funding drawdowns, use of proceeds, pricing support and charge schedule together. A benchmark alone does not prove that a debt funded taxable activity. Conversely, a genuine use of funds does not establish that the charged rate and other conditions reflect an independent-party transaction.

Branch payments to a head office have another rule

Article 10(10)(b) restricts head-office loan charges and other financial fees for wholly owned Saudi branches, with the stated foreign-bank branch exception. Passing the Article 9(2) calculation does not override an expense that is separately disallowed under that rule.

The guideline, section 3.1.3, Example 2, distinguishes a foreign-bank branch’s qualifying head-office financing from estimated group overhead. Section 3.2.1 separately confirms that the Article 9(2) formula does not apply to banks. Use the head-office guide to establish the correct route before calculating an ordinary commercial company’s ceiling.

Withholding is not a deduction certificate

Section 2.3, Example 2, retains withholding even where the charge fails the expense conditions. The payment classification, source, any specific statutory exception and actual treaty must be reviewed independently. An add-back to the CIT base does not automatically cancel the lender-payment withholding obligation.

Likewise, do not assume that an amount above the Article 9(2) ceiling is an operating loss that can simply be carried into the next year’s financing deduction. The provision reviewed here does not establish a general carry-forward mechanism for that excess. A claim requires an express applicable basis, not an analogy to the separate operating-loss rules.

Build the financing review into the closing process

Reconcile loan-charge income, A, B, actual financing expense, capitalised amounts, related-party adjustments and restricted branch payments. Keep each adjustment visible so the same amount is not disallowed twice or deducted in both an asset and an expense schedule. Review unusual negative-input cases on their facts rather than inventing a negative deduction or refund from a simplified illustration.

This calculation should be available before the final tax provision is approved. It explains why a commercially necessary borrowing can still generate an add-back and why financing decisions need tax modelling alongside their cash cost. The main deductions guide places the result within the complete annual reconciliation.