Article 42 of the Saudi Income Tax Law
المادة 42 من نظام ضريبة الدخل · الفصل الثامن: قواعد الضرائب على شركات الأشخاص
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.
Official text (Arabic)
This article has not been amended since the law was issued.
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 إعادة التشكيل لشركة الأشخاص عندما ينتج عن دخول أو خروج شريك أو شركاء تغيير يزيد عن نسبة خمسين بالمائة (50%) في عضوية الشركة عن تشكيلها في السنة السابقة للتغيير.
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 42 explained in plain English
This article deals with the effect of a change of partners on a partnership for income tax purposes.
(b) When does a "reconstitution" occur? It occurs when the entry or exit of a partner or partners results in a change of more than fifty percent (50%) in the membership of the partnership, compared with its composition in the year preceding the change. A change equal to or less than 50% is not a reconstitution under this provision.
(a) Effect of the reconstitution: If a reconstitution occurs, all the partnership's assets are treated as transferred to the new partnership in exchange for shares in that partnership. In other words, the Law treats the reconstituted partnership as a new partnership that has received the assets.
This article is linked to Article 41, which treats the transfer of a non-cash asset from the partnership to a partner as a disposal of the asset with a gain or loss recognized. The provision does not detail how the percentage change in membership is calculated, and does not state the effect on the tax year or on returns.
Therefore, before admitting new partners or when a large number of partners leave, partners are advised to consult a lawyer specializing in tax and zakat to assess whether the change will reach the level of a reconstitution.
Practical example
A general partnership in Taif had four partners last year. This year three of them left and two new partners joined, so the partnership's membership changed by more than 50% compared with its composition in the preceding year. The partnership is treated as reconstituted, and all its assets are treated as transferred to a new partnership in exchange for shares in it.
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 42 of the Saudi Income Tax Law
When is a partnership treated as reconstituted for tax purposes?
When the entry or exit of a partner or partners results in a change of more than 50% in the partnership's membership compared with its composition in the year preceding the change.
What is the effect of reconstituting a partnership?
All its assets are treated as transferred to the new partnership in exchange for shares in that partnership.
Does one partner leaving a partnership of five reconstitute it?
Not under the text, because the change does not exceed 50% of the membership unless it is accompanied by other changes that go beyond that percentage.
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 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
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.