Saudi TP for Factoring and Invoice Discounting

Related-party receivables finance can combine funding, collection services and the transfer of customer-credit risk. Those components are not necessarily supplied by the same group entity, and their remuneration cannot be established by calling every amount a factoring fee.

ZATCA’s Arabic Transfer Pricing Guideline, third edition 2024, section 8.4, addresses receivables assignment and borrowing against receivables. Read it with the amended Transfer Pricing Bylaws’ transaction, comparability and method requirements. The English guideline’s section 7.4 provides a corresponding explanation, but its older edition does not replace the current Arabic framework.

Identify whether receivables were sold or used as collateral

Official arrangement described: Arabic Guideline section 8.4 explains an assignment in which receivables are sold below face value, the buyer assumes the relevant risk and collection responsibility, and cannot recover uncollected amounts from the seller. It contrasts this with borrowing against invoices, where the originator retains the receivables and collection responsibility and the financing party has recourse if customers fail to pay.

These are the arrangements described by the guideline. They should not be turned into a claim that every commercial product called factoring is necessarily non-recourse or that every assignment transfers all risk. Read the actual contract and conduct, including guarantees, repurchase obligations, dilution provisions and who absorbs customer default.

Dariba recommendation: draw the legal and cash flows separately. Identify the receivable’s owner, the customer debtor, the funding provider, the collector and each recourse right. If the parties continue to act as though the originator owns the receivable, an assignment heading alone may not explain the economic arrangement.

Determine which functions and risks each party actually undertakes

A receivables purchaser may provide financing, debtor assessment, collection and credit-risk assumption. A service centre that only sends reminders performs a different role from a purchaser that funds the transaction and bears default losses.

Article 5 comparability and the guideline’s functional analysis require attention to the actual functions, assets and risks. For this arrangement, Dariba recommends examining debtor selection, credit limits, approval of advances, collection decisions, dispute handling, losses, funding and the ability to bear the agreed exposure. These are practical questions for the functional analysis, rather than a new statutory checklist.

Where customer default remains with the originator, the lender may still be exposed to that originator’s creditworthiness and the collateral’s effectiveness. The guideline’s distinction about customer non-payment should not be paraphrased as a statement that every secured lender bears no risk of any kind.

Explain the assignment discount before calling it profit

For a related-party assignment, section 8.4 requires the transfer price, fees and related amounts to comply with the arm’s-length principle. The English explanation in section 7.4 identifies the difference between collections and the discounted purchase price as the factoring fee, with remuneration reflecting the activities performed and risks assumed. It also distinguishes separately reported interest, such as late-payment interest.

Dariba original illustration: receivables with a SAR 10 million face value are sold for SAR 9.7 million under an assumed genuine non-recourse assignment. The face-value discount is SAR 300,000. If the purchaser ultimately collects only SAR 9.9 million, the collection-versus-purchase-price difference is SAR 200,000 before its funding, collection and other costs. The initial discount is therefore not necessarily its realised profit.

These figures do not establish an arm’s-length discount or certify a sale for legal or accounting purposes. The receivables’ maturity, debtor quality, expected losses, collection work and actual transfer terms need to be priced. A comparison with an unrelated facility is useful only after its differences are understood.

Price a secured advance on its own terms

Invoice discounting described in the guideline involves borrowing against customer receivables without selling them to the lender. The English section 7.4 explains that the lender may charge for making the facility available and for amounts actually lent, and that its remuneration should reflect those elements.

Dariba original illustration: an originator obtains a SAR 8 million advance against SAR 10 million of receivables and remains responsible for customer collection. Assume it later collects the full SAR 10 million and must repay the advance plus SAR 100,000 of agreed charges. Repayment is SAR 8.1 million, leaving SAR 1.9 million of those collections with the originator. The SAR 100,000 is an assumed contractual amount, not an official rate or accepted pricing result.

Dariba analysis: distinguish the undrawn facility, actual advances, tenor, security, recourse and services. A committed line that is rarely drawn can require a different analysis from continuous financing. Conversely, adding a full non-recourse risk premium to a facility where the originator retains customer losses needs justification.

See the intercompany financing guide for loans, guarantees and financing terms. A group treasury entity’s description should not replace the actual transaction analysis.

Select a method using comparable arrangements

Bylaws Articles 6–9 govern method selection and the conditions for alternative methods. A reliable independent receivables transaction can provide valuable evidence, but the search should compare the actual exposure and service package, rather than just the headline discount.

Dariba recommends comparing debtor concentration and quality, maturity, currency, advance percentage, recourse, collateral, servicing, guarantees and fees. Explain material differences and whether reliable adjustments can be made. A generic unsecured intercompany loan may not price an assignment that also transfers collection duties and customer default risk.

The benchmarking guide explains the Saudi information, comparability and range requirements. No provision reviewed here supplies a universal factoring discount, advance rate or safe-harbour fee.

Document the receivables and reconcile the money movements

Section 8.4 calls for proper documentation through written agreements, functional analysis and economic analysis. The wider Bylaws’ disclosure and documentation provisions remain relevant according to their own scope and thresholds; a financing label is not an exemption.

Dariba recommendation: retain the assigned or pledged receivables schedule, customer balances, maturity and ageing, assignment/financing documents, recourse and guarantee terms, advances, collections, fees, defaults and settlements. Reconcile the schedule to the general ledger, bank movements and the reported related-party transactions.

Where collection remains with the originator after a sale, identify the servicing arrangement and remuneration. Where the group entity purportedly bears default risk but is routinely reimbursed for every loss, explain that conduct before relying on a non-recourse benchmark.

Review the other tax consequences separately

A supportable TP price does not automatically establish expense deductibility, bad-debt treatment, withholding classification, VAT treatment or treaty relief. A sale discount, facility fee, financing return and collection-service charge can raise different questions under those rules.

Do not assume that the face-value discount is automatically a deductible bad debt, or that an amount described as a factoring fee always attracts the same withholding treatment. Use the CIT bad-debt guide for its separate conditions, and the withholding framework and treaty relief procedure where relevant.

A transfer to a special-purpose entity followed by securities issuance also raises the distinct issues in the securitisation guide. The advisory conclusion should identify the actual arrangement, price each relevant function and exposure, and reconcile the legal position with what the parties actually paid and collected.