Article 41 of the Saudi Income Tax Law
المادة 41 من نظام ضريبة الدخل · الفصل الثامن: قواعد الضرائب على شركات الأشخاص
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.
Official text (Arabic)
This article has not been amended since the law was issued.
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 تاريخ النقل .
ب - يأخذ الشريك أساس التكلفة للأصل بما يعادل قيمة الأصل بالسوق .
ج - يعد الشريك مستلما توزيعا للربح من الشركة بقيمة تعادل سعر السوق للأصل المنقول ملكيته إليه دون تسديد قيمته ، ويعامل الشريك على أنه تخلص من جزء أو كل حصته في شركة الأشخاص إذا كان التوزيع المقدر يتجاوز أساس تكلفة الشريك في شركة الأشخاص ، وإذا كان التوزيع تخلصا كاملا من حصة الشريك وهو أقل من أساس التكلفة لهذا الشريك ، يجوز حسم الفرق بين أساس تكلفته والتوزيع على أنه خسارة نتجت عن تخلصه من حصته .
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 41 explained in plain English
This article covers the opposite case to Article 40: the transfer of a non-cash asset from a partnership to one of its partners, including on liquidation of the partner's share.
(a) Effect of the transfer on the partnership: The transfer is treated as a disposal of the asset by the partnership, so the partnership recognizes the gain or loss on the date of the transfer, as if it had sold the asset.
(b) The partner's cost basis in the asset: The partner takes a cost basis in the asset equal to its market value.
(c) Effect of the transfer on the partner's share:
- The partner is treated as having received a distribution of profit from the partnership equal to the market price of the asset transferred to him, without paying for it.
- If this estimated distribution exceeds the partner's cost basis in the partnership, it is treated as a disposal of part or all of his share.
- If the distribution is a complete disposal of his share and is less than his cost basis, he may deduct the difference between his cost basis and the distribution as a loss resulting from the disposal of his share.
These provisions are linked to Article 42, which deals with changes of partners and the reconstitution of the partnership. To assess the effect in an actual exit, it is advisable to consult a lawyer specializing in tax and zakat.
Practical example
On the liquidation of Majed's share in a general partnership in Riyadh, the partnership transferred to him a truck with a market value of SAR 120,000 and a cost basis of SAR 70,000 in the partnership's books. The partnership recognizes a gain of SAR 50,000 on the date of the transfer, and Majed takes the truck with a cost basis of SAR 120,000. If the cost basis of his share is SAR 150,000, he may deduct SAR 30,000 as a loss from the disposal of his share.
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 41 of the Saudi Income Tax Law
Does the partnership realize a gain when it transfers an asset to a partner?
Yes, it may realize a gain or a loss, because the transfer is treated as a disposal of the asset by the partnership, with the gain or loss recognized on the date of the transfer.
At what value does the partner record the asset received from the partnership?
The partner takes a cost basis in the asset equal to its market value.
Can the partner deduct a loss on the complete liquidation of his share?
Yes. If the distribution is a complete disposal of his share and is less than his cost basis, the difference may be deducted as a loss.
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 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 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.