The expenses that are deductible in determining taxable income are as follows:

1. All ordinary and necessary expenses, whether paid or accrued, provided the following conditions are met:

   1. The expense is an actual expense, supported by documentary or other evidence that enables the Authority to verify its validity.

   2. The expense is related to earning taxable income.

   3. The expense is related to the subject tax year.

   4. The expense is not capital in nature.

   1. The sale transaction is performed in accordance with the regulations of the Stock Market in the Kingdom.

   2. The disposed investments did not exist before the effective date of the Income Tax Law as stipulated in Article 74 of these Regulations."

2. Loan returns incurred during the tax year if related to income subject to tax, or the result of the following formula whichever is less:

   The taxpayer's total loan returns, plus 50 percent of (A- B).

   "A" = Taxpayer's taxable income excluding loan returns.

   "B" = Deductible expenses under the Income Tax Law excluding loan returns.

   Banks are not subject to this formula.

3. Bad Debts, provided the following conditions are met:

   1. The bad debts were previously declared as income in the taxpayer's revenue during the year of its accrual.

   2. The bad debts resulted from the sale of goods or provision of services.

   3. The taxpayer must submit a certificate from their certified public accountant confirming the writing off of the debt from the taxpayer's books and records under an authorised decision.

   4. All legal procedures for debt collection must have been taken, and it must be proven that collection is not possible, with convincing evidence (a court judgement or debtor's bankruptcy).

   5. The debt must not be owed by related parties.

   6. The taxpayer must declare any written off debt as income, whenever collected.

4. Depreciation of fixed assets as per the provisions of Article 17 of the Income Tax Law, subject to the following condition:

   1. The asset must not be intended for resale; it is to be used, in full or in part, for business operations.

   2. The asset must be of a depreciable nature, losing value due to use, wear and tear or obsolescence, and which has a value extending beyond the end of the taxable year.

   3. The asset must be owned by the taxpayer as per ownership documents for buildings, and contracts and invoices for other assets.

   4. Depreciation must be recorded even if business operations cease during the tax year.

5. Provisions and reserves formed during the year, as follows:

   1. Bank allocations to a reserve fund for doubtful debts, provided that the bank submits a certificate from the Saudi Arabian Monetary Agency (SAMA) stating the amount of doubtful debts and the amounts recovered during the year that should be reinstated in the tax base in the year of collection.

   2. Insurance/reinsurance companies may, based on industry standards, deduct a reserve for unearned premiums and unexpired risks provided that it is reported in the tax base of the following tax year.

      The reserve for unearned premiums refers to the portion of collected or recorded premiums that cover risks related to the future tax year(s).

      The reserve for unexpired risks refers to compensation claimed or reported, for which disbursement procedures have not been completed during the tax year.

6. A taxpayer may reduce its book profit by the provisions utilised during the year, or the amounts reversed into income, or the reversal of expenses recorded previously. This includes, but is not limited to, provisions for end-of-service gratuity, doubtful debt, and inventory write downs, provided the following conditions are met:

   1. The utilised portion of the provisions relates to amounts paid or incurred during the tax period, supported by appropriate documentary evidence.

   2. The provisions must have been previously added back to the taxable base in the year it was originally created.

7. School fees paid by taxpayers for their employees' children, provided the following conditions are met:

   1. The school fees are paid to a local licensed school.

   2. This benefit is stated in the employment contract.

8. [An employer's contributions (excluding capital companies) in favor of the employee to an authorized retirement fund established in accordance with the laws of the Kingdom which do not exceed, individually or collectively, 25% of the employee's income, without accounting for the employer's contributions, provided that:

   1. The fund is established in accordance with a special regulation specifying the conditions and rights of its contributors;

   2. This contribution should be mentioned in the employment contract or the Company's Articles of Association.

   3. The fund should have a legal identity independent of the Company, with separate accounts audited by an independent certified accountant.

      In respect of capital companies, their contributions to retirement funds, social insurance funds and any other fund established for providing end-of-service benefits or compensating for employee's medical expenses, shall be deductible, subject to the following:

      1. The funds should have an independent legal identity, whether established inside or outside the Kingdom, and should maintain independent accounts audited by independent certified accountant.

      2. The deduction should not exceed the value of the unfunded liabilities of these funds that have not been paid, from the beginning of the fiscal year in which the deduction is made.

         "Unfunded liabilities" refer to the employer's liabilities in respect of contributions to these funds accrued during the year of deduction but unpaid by the end of the fiscal year.

      3. The aforesaid unfunded liabilities should be clearly disclosed in the financial statements of the capital company, audited by a licensed certified accountant in the Kingdom.

      4. The employment contracts of the employees for whom such contributions are paid must explicitly state this benefit.

      5. The Authority must be provided with information on these funds, including the following:

         1. The Articles of Association of the fund (whether the articles of incorporation of any other document) outlining its objectives, terms of participation, participant's rights and sources of funding.

         2. The Fund's final accounts, audited by an independent certified auditor, at the end of each year.

         3. The names of the beneficiaries of the fund each year and the amounts paid to them, upon request by the Authority.

      In all cases, contributions by an employee to the authorized retirement fund are not deductible.]^[10]

9. Research and development expenses incurred in the Kingdome during the tax year that is linked to generating taxable income. This includes expenses on research and development, experiments on technical, scientific or engineering fields, computer systems or the like.

This excludes expenses for purchasing land or buildings thereon, or equipment used for research, as such facilities and equipment are subject to depreciation under Article 17 of the Law.