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The new executive bylaws for zakat collections aim to outline who is liable for zakat, who is not, and who is exempt. The rules (check them out in pdf form here) provide details about how to calculate zakat dues for those who are liable, including investors in funds, leaving no room for individual interpretations of what can be deducted from zakat and what can’t be.
The rules go into effect on Monday, 1 April 2024, replacing the old rules. Public consultations ran for 30 days ending last October.
Zakat vs. tax 101: Zakat amounts to 2.5% of the net worth of Saudi and GCC individuals and / or business entities with activities in Saudi Arabia at the end of the financial year specified by the law, while income tax applies on non-Saudi and non-GCC business entities operating in the Kingdom. The income tax rate is 20% of net adjusted profits, while withholding tax (WHT) rates ranging between 5% and 20%. Oil and hydrocarbon activities are subject to a tax rate ranging from 50% to 85%.
Quick facts: Salaries are not subject to income tax. Also, regional headquarters of multinational companies that relocate to the Kingdom will enjoy a 30-year exemption from income tax and WHT on their administrative and strategic activities based on the new rules rolled out on 15 December 2023. Meanwhile, all other revenue-generating business activities of the RHQ within the Kingdom will be taxed.
What’s new: The key amendments include the enhancement of the minimum threshold for zakat eligibility and the establishment of a maximum threshold, aimed at safeguarding zakat payers’ rights against escalating zakat costs. The amendments clarify the treatment of overdue government receivables, regulatory deposits, and the zakat implications of treasury shares. They also address situations where zakat payers are unable to calculate zakat on investments outside the Kingdom. They also include the option to make amendments to the zakat declaration.’
There are two ways to calculate the minimum threshold for zakat based on the proportionate size of net adjusted profit to net assets plus the difference between adjusted net profit and book net profit (Article 27):
- (a) If adjusted net profit is bigger: Zakat base should be calculated as net assets plus the difference between the adjusted net profit and the book net profit;
- (b) If adjusted net profit is smaller, then the zakat base accounts for only the adjusted net profit.
The maximum zakat base (Article 28) is determined by looking at the ownership rights and assets listed in the financial statement at the end of the zakat year. This includes considering any changes in the value of these assets throughout the year. Additionally, it involves adding the difference between the adjusted net profit and the book net profit for the year— or net losses for that matter.
A unified zakat notice template: The new bylaws have specified a template for notifying zakat payers of their zakat obligations. This template includes the basis for calculating zakat liabilities, the amount owed, the payment date, and the payer’s right to object to the zakat assessment.
Investments + assets that aren’t liable for zakat (outside the scope of the zakat base):
- Investment in facilities within and outside the Kingdom;
- Investment in investment funds within the Kingdom;
- Net fixed assets and their equivalents;
- Intangible assets;
- Materials not intended for sale and raw materials;
- Investment in direct and indirect financing funds registered with the Authority;
- Investments in sukuk and bonds;
- Regulatory deposits and their equivalents;
- Deferred tax assets: referring to assets whose tax impact has been deferred to future periods.
What can be deducted from the zakat base:
- Outstanding government debts owed to the zakat payer can be deducted from the zakat base if the zakat payer proves that the delay in receiving payments is to be blamed on the government;
- Partner loans payable of non-listed capital companies and individual establishments can be deductible under a number of conditions. Partner loans receivable in non-listed capital companies and individual establishments are accounted for as liabilities in the zakat assessment under certain conditions.
- Treasury shares and ESOPs are considered a reduction of ownership rights when calculating the maximum threshold for the zakat base
What can’t be deducted from the zakat base:
- Partner loans payable in non-listed companies and of partners that are not liable for Zakat;
- Leased assets, excluding financial leasing companies and construction leasing assets in the form of contracts of build, operate, and transfer (BOT), contracts of build, own, operate, and transfer (BOOT), contracts of build, own, and operate (BOO), and contracts of acquire, operate, and transfer (AOT);
- Dividends payouts to shareholders as long as they weren’t deposited in the shareholders’ accounts by the end of the zakat financial year;
- Realized and unrealized profits.
