Article 38 of the Saudi Income Tax Law
المادة 38 من نظام ضريبة الدخل · الفصل الثامن: قواعد الضرائب على شركات الأشخاص
The article sets the cost basis of a partner's share in a partnership, what increases it from his share of income and debt, and what reduces it from distributions, losses and expenses.
Official text (Arabic)
This article has not been amended since the law was issued.
أ - يحدد أساس التكلفة لحصة الشريك في شركة الأشخاص بالمبلغ الذي دفعه الشريك مقابل حصته إضافة إلى أساس تكلفة الممتلكات التي قدمها للشركة .
ب - يزداد أساس التكلفة بمقدار حصة الشريك في دخل شركة الأشخاص (بما في ذلك دخلها المعفى) والمشمول في إجمالي دخل الشريك.
ج - ينخفض أساس التكلفة بقيمة التوزيعات من شركة الأشخاص إلى الشريك، لكن ليس إلى أقل من الصفر، وبقيمة حصة الشريك في خسائر ومصروفات الشركة والمصاريف غير الجائز حسمها للشركة باستثناء البنود الرأسمالية .
د - الدين الذي تتحمله شركة الأشخاص - بما في ذلك الدين على ممتلكاتها - يزيد من أساس تكلفة الشريك وفقا لحصته في الشركة ، أما الدين الذي يتحمله شركاء في الشركة بصفتهم الشخصية ، فإنه يزيد من أساس التكلفة لهؤلاء الشركاء فقط .
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 38 explained in plain English
"Cost basis" is an important figure for a partner in a partnership, because it determines, under Article 37, how far the partner can deduct his share of the partnership's losses. This article explains how it is calculated and how it changes.
(a) The starting point: the cost basis is the amount the partner paid for his share, plus the cost basis of the property he contributed to the partnership.
(b) What increases it: the partner's share in the partnership's income (including its exempt income) that is included in the partner's total income.
(c) What reduces it:
- Distributions the partner receives from the partnership, without the cost basis falling below zero.
- The partner's share in the partnership's losses and expenses.
- His share in the partnership's non-deductible expenses, except capital items.
(d) Effect of debts:
- Debt borne by the partnership, including debt on its property, increases each partner's cost basis according to his share in the partnership.
- Debt borne by some partners in their personal capacity increases the cost basis of those partners only.
Article 39 completes these provisions by setting the cost basis of the partnership's own assets. Because the calculation is affected by the details of each partnership, it is wise to consult a lawyer specialized in tax and zakat or a certified accountant when needed.
Practical example
Noura entered a general partnership in Riyadh by paying SAR 200,000 and transferring equipment with a cost basis of SAR 50,000, so her cost basis is SAR 250,000. If her share of the year's income is SAR 40,000, it rises to SAR 290,000, and if she received distributions of SAR 30,000, it falls to SAR 260,000. And if the partnership borrowed an amount of which her share is SAR 20,000, her cost basis increases by that amount.
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 38 of the Saudi Income Tax Law
How is the cost basis of a partner's share calculated at the start?
By the amount the partner paid for his share plus the cost basis of the property he contributed to the partnership.
Can a partner's cost basis become negative because of distributions?
No. Distributions reduce the cost basis but not below zero.
Does the partnership's debt increase a partner's cost basis?
Yes. Debt borne by a partnership increases a partner's cost basis according to his share, while the personal debt of some partners increases only their own cost basis.
More articles on Tax on Partners in Companies
- Article 36
The article imposes tax on the partners in partnerships, not on the partnership, requires the partnership to file an information return and choose its accounting policies, and treats limited partners' shares like capital companies.
أ - تفرض الضريبة على الشركاء في شركات الأشخاص وليس على الشركة ذاتها ، إلا أنه يجب على الشركة تقديم إقرار ضريبي لغرض المعلومات يوضح فيه مقدار الدخل والربح والخسا
- Article 37
The article explains how a partner's share of a partnership's income and loss is included in his tax base, when his loss is suspended, and how this relates to the related-party loss rule in Article 63.
أ - لتحديد الوعاء الضريبي للشريك ، يحتفظ الدخل والحسومات والخسائر والدين الناشئ أو المستحق على شركة الأشخاص كل بصفته من ناحية المصدر الجغرافي ونوع الدخل والمكاس
- Article 39
The article sets the cost basis of property contributed to a partnership, and adjusts the cost basis of its assets up or down when a partner leaves with a gain or loss on disposing of his share.
أ - أساس التكلفة الأولية للممتلكات المقدمة لشركة الأشخاص تساوي أساس التكلفة للشريك الذي قدمها . ب - إذا خرج شريك من شركة أشخاص واستلم توزيعا يجعله يحقق ربحا من
- Article 40
The article provides that no gain or loss is calculated when a partner transfers an asset to a partnership in exchange for a share, sets the value of his share, and treats any amount paid to him above market price as a distribution.
أ - لا يحتسب ربح أو خسارة عن نقل شريك ملكية أصل له إلى شركة أشخاص مقابل تملكه حصة في تلك الشركة . ب - يعد الشريك مالكا لحصة في شركة الأشخاص مساوية للفرق بين قيم
- Article 41
The article treats a transfer of a non-cash asset from a partnership to a partner, even on liquidation of the partner's share, as a disposal by the partnership with a gain or loss, and sets the partner's cost basis and the effect on the partner's share.
أ - يعامل نقل ملكية أصل غير نقدي من شركة أشخاص إلى شريك ، بما في ذلك حالة تصفية حصة الشريك ، على أنه تصرف بالأصل من قبل الشركة مع إقرار بالربح أو الخسارة في تار
- Article 42
The article treats a partnership reconstituted by partners joining or leaving, with a change of more than 50% of its membership, as having transferred all its assets to a new partnership in exchange for shares in it.
أ - عند دخول أو خروج شريك أو شركاء في شركة الأشخاص ونتج عن ذلك إعادة تشكيلها ، تعد جميع أصولها منقولة إلى شركة الأشخاص الجديدة مقابل حصص في هذه الشركة . ب - يقع
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.