Article 26 of the Saudi Income Tax Law
المادة 26 من نظام ضريبة الدخل · الفصل السادس: قواعد المحاسبة الضريبية
The article provides that, for a person using the accrual basis, income and expenses of long-term contracts are calculated by the proportion of work completed during the year, and defines a long-term contract.
Official text (Arabic)
This article has not been amended since the law was issued.
أ - يحتسب الدخل والمصاريف المتعلقة بعقد طويل الأجل للمكلف الذي يستخدم مبدأ الاستحقاق على أساس نسبة العمل المنجز خلال السنة الضريبية .
ب - تحدد نسبة العمل المنجز بمقارنة تكاليف العقد المتكبدة خلال السنة الضريبية مع إجمالي التكلفة المقدرة للعقد .
ج - لأغراض هذه المادة يعني مصطلح " عقد طويل الأجل " عقد تصنيع أو تركيب أو إنشاء أو أداء خدمات متعلقة بها والذي لم يكتمل تنفيذه خلال السنة التي بدأ فيها التنفيذ ، باستثناء العقد المتوقع اكتماله خلال ستة أشهر من تاريخ البدء الفعلي للعمل الوارد في العقد .
This is the official Arabic wording, the only legally binding version. We do not translate the law itself; the explanation below is ours. Official source: Bureau of Experts at the Council of Ministers
Article 26 explained in plain English
This article deals with how income is calculated in long-term contracts, such as contracting and installation contracts whose performance is not completed within the year in which it began.
What is a long-term contract? Under paragraph (c): a contract for manufacturing, installation or construction, or for performing services connected with them, whose performance is not completed within the year in which performance began. A contract expected to be completed within six months of the actual start of the work in it is excluded.
Method of calculation:
- It applies to a taxpayer who uses the accrual basis.
- Income and expenses are calculated on the basis of the proportion of work completed during the tax year, not on delivery of the whole project.
- The percentage of completion is determined by comparing the contract costs incurred during the year with the total estimated cost of the contract.
This method is consistent with the accrual basis in Article 25, under which income and expenses are recorded when they fall due, as the contract's profits are distributed over the years according to the progress of the work in it.
Estimating the total expected cost is a technical matter that affects tax every year, so contracting companies are advised to consult a lawyer specialized in tax and commercial matters when applying this article.
Practical example
A contracting company in Riyadh using the accrual basis signed a contract to build a building worth SAR 10 million, with an estimated cost of SAR 8 million, and it was not completed in the year it started. It incurred SAR 2 million in costs in the first year, so the percentage of completion is 25%, and the year's income and expenses are calculated on the basis of this percentage.
Translated from our Arabic explanation with machine assistance. For guidance only; it does not replace advice from a lawyer on your situation.
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Frequently asked questions about Article 26 of the Saudi Income Tax Law
How is income from long-term contracting contracts calculated for tax?
For a person using the accrual basis, income and expenses are calculated on the basis of the proportion of work completed during the tax year.
How is the percentage of completion determined?
By comparing the contract costs incurred during the tax year with the total estimated cost of the contract.
Is a contract completed within four months a long-term contract?
No. A contract expected to be completed within six months of the actual start of the work is excluded.
More articles on Tax Accounting Rules
- Article 22
The article sets the tax year as the State's fiscal year, allows using another twelve-month period under the Regulations, and deals with changing the year and with groups of related companies.
أ - السنة الضريبية هي السنة المالية للدولة . ب - يجوز للمكلف استخدام فترة اثني عشر شهرا مختلفة عما ورد في الفقرة (أ) من هذه المادة كسنة ضريبية وفقا للضوابط التي
- Article 23
The article requires the taxpayer to use an accounting method that shows his income clearly, states when the cash or accrual basis is used, and requires the Authority's approval to change accounting policy.
أ - يجب أن تبين طريقة المحاسبة التي يتبعها المكلف دخله بوضوح . ب - يحدد إجمالي الدخل والمصاريف للشركة المقيمة ولأي مكلف يحتفظ أو ملزم نظاما بالاحتفاظ بالدفاتر ا
- Article 24
The article provides that a person using the cash basis records income when it is received or when it is ready to be received, and expenses when they are paid.
يدون المكلف الذي يستخدم الأساس النقدي في دفاتره وسجلاته الدخل المستلم عند استلامه أو عندما يكون جاهزا للاستلام ، والمصاريف المسددة عند دفعها.
- Article 25
The article provides that a person using the accrual basis records income and expenses when they fall due, and sets when an amount becomes payable to or by the taxpayer.
أ - يدون المكلف الذي يستخدم مبدأ الاستحقاق الدخل والمصاريف عند استحقاقها . ب - يصبح المبلغ واجب الدفع إلى المكلف إذا حق للمكلف استلامه حتى لو تأجل التسديد أو تم
- Article 27
The article requires anyone holding inventory to keep stocktaking records, allows deducting the cost of goods sold, and sets how it is calculated and how closing stock is valued at the lower of cost or market.
أ - على المكلف الذي يحتفظ بمخزون ، فتح سجلات جرد له والاحتفاظ بتلك السجلات. ب - تحسم تكلفة البضاعة المباعة خلال السنة الضريبية . ج - تتحدد تكلفة البضاعة المباعة
- Article 28
The article provides that income and expenses relating to jointly owned property are allocated among the partners in accordance with their ownership shares in it.
يوزع الدخل أو المصاريف المتعلقة بممتلكات مشتركة على الشركاء وفقا لحصص الملكية فيها.
The texts are reproduced from the official website of the Bureau of Experts at the Council of Ministers for reference; where they differ, the officially published Arabic text prevails. This content is not legal advice.