Article 40 of the Saudi Income Tax Law
المادة 40 من نظام ضريبة الدخل · الفصل الثامن: قواعد الضرائب على شركات الأشخاص
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.
Official text (Arabic)
This article has not been amended since the law was issued.
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 قيمة الأصل المنقول منه إلى الشركة وفقا لأسعار السوق والمبلغ المسدد له ، وإذا زاد المبلغ المسدد له عن سعر السوق يعد المبلغ الزائد توزيعا له من الشركة .
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 40 explained in plain English
A partner often contributes to a partnership an asset such as real estate or equipment in place of cash. This article explains the tax effect of that.
(a) No gain and no loss on transfer: no gain or loss is calculated for the partner on transferring ownership of an asset of his to a partnership in exchange for his acquiring a share in that partnership. The transfer in this case is not treated as a sale producing a taxable gain or a deductible loss.
(b) The value of the share and amounts paid:
- The partner is considered to own a share equal to the difference between the asset's market value and the amount paid to him by the partnership for it.
- If the amount paid to the partner exceeds the market price of the asset, the excess amount is treated as a distribution to him from the partnership.
This is connected with Article 39, which makes the asset's cost basis in the partnership's books equal to its cost basis in the hands of the partner who contributed it. A transfer in the opposite direction, from the partnership to the partner, is regulated by Article 41 with different provisions.
Because valuing the asset at market price and determining what counts as a distribution may give rise to dispute, anyone intending to contribute an in-kind share would do well to consult a lawyer specialized in tax and zakat.
Practical example
Fahd transferred a warehouse in Al-Kharj with a market value of SAR 800,000 to a general partnership in exchange for a share in it, and the partnership paid him SAR 200,000 in cash. No gain or loss is calculated for Fahd on the transfer, and he is considered to own a share equal to SAR 600,000. Had the partnership paid him SAR 900,000, the SAR 100,000 above market price would be treated as a distribution to him from the partnership.
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 40 of the Saudi Income Tax Law
Does a partner pay tax on contributing an asset to the partnership in exchange for a share?
No gain or loss is calculated on a partner's transferring ownership of an asset of his to a partnership in exchange for his acquiring a share in it.
How is the value of the partner's share determined when he contributes an asset?
It equals the difference between the asset's value at market prices and the amount paid to him by the partnership.
What if the partnership pays the partner more than the asset's market price?
The amount above market price is treated as a distribution to the partner from the partnership.
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 38
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.
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
- 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 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.