Article 32 of the Saudi Income Tax Law
المادة 32 من نظام ضريبة الدخل · الفصل السابع: قواعد إضافية لتحديد الوعاء الضريبي
The article provides that compensation amounts received by the taxpayer take the character of what they compensate for in the tax treatment.
Official text (Arabic)
This article has not been amended since the law was issued.
تأخذ مبالغ التعويض المستلمة صفة المعوض عنه.
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 32 explained in plain English
This article sets a short but influential rule: compensation amounts received take the character of what is compensated for.
This means compensation is not treated for tax purposes as an independent kind of income, but one looks at what the compensation came in place of, and the amount is given the same tax treatment that thing would have received.
For example, if the compensation is in place of income that would have entered taxable income, it takes the character of that income. So the first practical step is to identify the thing the compensation came in place of.
This rule is linked to Article 33, which provides that if the taxpayer recovers an expense, loss or bad debt previously allowed as a deduction, the recovered amount is counted in total income in the year of recovery and takes the character of income relating to the expense. It is also linked to Article 31, which includes in total income payments from which the taxpayer benefits directly or indirectly.
The text does not detail the kinds of compensation, so what counts is identifying what was compensated for in each case. To characterize a particular compensation, it is advisable to consult a lawyer specialized in tax and commercial matters.
Practical example
A factory in Dammam stopped production because of a supplier's error and obtained compensation from it for the profits it lost during the stoppage. Under this article the compensation takes the character of the profits it came in place of, and is treated for tax like them.
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 32 of the Saudi Income Tax Law
How is compensation received treated for income tax?
Compensation amounts received take the character of what is compensated for, so they are treated for tax like the thing they came in place of.
Is compensation for lost profits income?
Under the rule, compensation takes the character of what is compensated for, so compensation for profits takes the character of those profits.
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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.