Author: Team

Zakat in Saudi Arabia is an obligation on Zakat payers — but the Regulations carve out a specific exemption for entities that exist to serve the public good rather than to generate returns for owners. This exemption is not automatic. It requires an annual application, compliance with strict disbursement conditions, and ZATCA’s formal approval.

The legal basis for the Zakat exemption is Article 7 of the Zakat Implementing Regulations 2024. It provides that Zakat payers who carry out public benefit activities may be exempted from Zakat collection by submitting an annual request to ZATCA within 120 days of the end of the Zakat year.

The exemption covers four main categories of entity: charitable associations and their fully owned establishments, non-government organizations (NGOs) and their fully owned establishments, training units, and Awqaf (Islamic endowments) along with the foundations and companies they own. A separate provision under Article 7(3) extends the exemption to non-profit companies and their fully owned entities — subject to similar conditions.

Article 7 identifies three main categories of entity eligible to apply for the Zakat exemption, along with their fully owned establishments and subsidiaries. The common thread across all categories is the same: the entity must carry out public benefit activities, and its returns must flow to public or charitable purposes — not to specific individuals in a manner inconsistent with its mission.

ZATCA also has the authority to specifically name additional persons who are exempted from Zakat collection by issuing a decision to that effect (Article 7(4)). This is a residual discretionary power that allows case-by-case recognition.

For charitable associations and NGOs, the central test is whether returns are disbursed to public charity purposes or to society — rather than to a specific person. The Regulations define “disbursement to a specific person” broadly: it includes all disbursements that cannot be described as public charity purposes or society benefit.

NGOs benefit from a practical relief: if less than 10% of the NGO’s net profit is distributed to a specific person, it is still eligible for the exemption. However, two conditions apply. First, any disbursement to a specific person must be expressly identified in the association’s objectives, articles, or deed of association — it cannot simply be claimed as general remuneration. Second, “disbursement to a specific person” captures everything that falls outside genuine public charity purposes, including salaries for services where those services are primarily for the entity rather than for the public.

Where more than one Zakat payer owns the same association, the percentage of disbursement to a specific person is calculated proportionately across those Zakat payers — not on an entity-by-entity basis.

Licensing and documentation requirements are also prescribed: the entity must be licensed and legally documented by the competent authority in Saudi Arabia, and financial statements must be audited by a licensed chartered accountant in the Kingdom, or supported by a report from such an accountant.

Awqaf (الأوقاف) — Islamic endowments established to generate income for charitable or specified purposes — have their own specific provisions within the exemption framework.

For an Awqaf and its owned foundations and companies to qualify, the endowment document must state either that all Waqf disbursements are for general charity (not to a specific person), or that any specific-person disbursements do not exceed 10% of the total Waqf yield for the year. The “Waqf yield” is broadly defined: it includes all annual revenues, asset income, investment profits, income from companies, donations, and similar returns attributable to the endowment.

Where multiple Awqaf jointly own a single Zakat payer, the calculation of the specific-person disbursement percentage is done proportionately across the Awqaf — not applied independently to each one. Evidence of the percentage must come from the endowment document or through audited financial statements and a licensed chartered accountant’s report.

Non-profit companies established under the Companies Law and its Implementing Regulations have a separate exemption pathway under Article 7(3). The conditions are similar in spirit but calibrated to the corporate structure.

The disbursements of the non-profit company — as stipulated in its Bylaws and Articles of Association — must cover only the fields and disbursements of the non-profit public company. Specific-person disbursements, including board member benefits, owner benefits, bonuses, and salaries or compensation for services provided to the company, must not exceed 10% of the company’s revenues.

Note that the 10% limit here applies to revenues — not net profit — which makes it a tighter restriction in practice for non-profit companies than for NGOs. The evidence requirement is the same: audited financial statements by a licensed chartered accountant, or other ZATCA-accepted documentation.

The Zakat exemption is not a one-time grant. It must be renewed annually. The Regulations require the eligible entity to submit an annual request to ZATCA within 120 days of the end of the Zakat year. Missing this deadline means the exemption is unavailable for that year, even if all substantive conditions are met.

What the Submission Must Include

While the Regulations do not prescribe a detailed checklist in Article 7, the documentary requirements that emerge from the conditions include:

• Audited financial statements reflecting the Zakat year, prepared and certified by a licensed chartered accountant in the Kingdom
• A report from a licensed chartered accountant confirming the percentage of disbursements to specific persons (where applicable)
• A copy of the entity’s licence from the competent Saudi authority and its constitutive documents (bylaws, Articles of Association, Waqf deed, or equivalent)
• For NGOs and non-profit companies: documentation identifying any specific-person disbursements and confirming they are identified in the entity’s objectives or charter

ZATCA will review the submission and issue a decision confirming the exemption (or declining it) for the relevant year. Under Article 7(4), a specific decision is required to formally exempt the entity — so the submission should be treated as a formal application, not a routine notification.

Article 8 of the Regulations gives ZATCA the power to cancel an exemption decision where the Zakat payer provides incorrect information or fails to comply with the conditions of the exemption. The revocation process requires that ZATCA notify the Zakat payer of the reasons for cancellation before issuing the decision.

Additionally, if a reassessment is conducted on the basis of information available to ZATCA — and that information conflicts with the basis on which the exemption was granted — ZATCA may cancel the exemption accordingly.

• Providing incorrect information in the exemption application. If the audited financial statements or the chartered accountant’s report contains errors or misrepresentations regarding specific-person disbursements, ZATCA can cancel the exemption and reassess Zakat accordingly.
• Failing to maintain compliance year-on-year. Because the exemption is annual, an entity that qualified in Year 1 is not automatically exempt in Year 2. If the disbursement profile changes — for example, board remuneration increases above 10% of revenues — the exemption will be unavailable for that year.
• Distributing to unidentified specific persons. If an NGO or non-profit company makes disbursements to a specific person that are not identified in its charter or bylaws, those disbursements cannot be treated as qualifying specific-person payments — they are simply non-compliant distributions that count fully against the 10% limit.

• Missing the 120-day filing deadline. The exemption application must be submitted annually. Many charitable entities treat this as a set-and-forget status, only to find that the 120-day window has passed with no application on file. Build this into your year-end compliance calendar — the deadline is firm.
• Undocumented charter provisions on specific-person disbursements. The Regulations require that any disbursement to a specific person be expressly identified in the association’s objectives, articles, or deed of association. Ad hoc payments that were not contemplated in the founding documents will not qualify — and may jeopardise the entire exemption application.
• Revenues from non-public-benefit activities within the same entity. If an exempt entity also engages in commercial activities — for example, renting out property or operating a revenue-generating service — those revenues are captured in the disbursement percentage calculation and may push the entity above the relevant threshold.
• Awqaf document not updated to reflect modern structures. Older Waqf documents may predate current ZATCA requirements and not clearly address the specific-person disbursement test. If the endowment document cannot demonstrate compliance with Article 7’s conditions, the exemption application will fail — even if the Awqaf genuinely serves charitable purposes.

Not every business in Saudi Arabia maintains formal financial statements. For those that don’t, ZATCA doesn’t simply waive the Zakat obligation — it estimates it. The result is a separate Zakat regime called ZP-AA: Zakat Assessment on an Arbitrary Basis.

ZP-AA is the mechanism ZATCA uses to calculate Zakat for businesses that are not obligated to maintain, or do not in practice maintain, financial statements that reflect the reality of their activity. Instead of computing a Zakat base from audited accounts, ZATCA applies a formula based on the business’s estimated sales volume to derive a proxy for capital, and charges 2.5% of that amount.

The regime is defined in Chapter 3 of the Zakat Implementing Regulations 2024, spanning Articles 82 through 91. It applies to a significant proportion of sole establishments, small businesses, and entities that operate without formal accounting — and to any larger business that fails to maintain statutory accounts when it should.

Under the Regulations, a ZP-AA is any Zakat payer that either does not maintain financial statements reflecting its actual activity, or is not legally obligated to do so under applicable Saudi laws and regulations.

In practice, this typically includes sole proprietorships and family businesses that operate without audited accounts, small commercial establishments, and any entity — regardless of its licensing status — that has not fulfilled its obligation to produce financial statements over a sustained period.

ZP-AA entities are treated based on their Tax Identification Number (TIN), regardless of how many commercial records or licences are listed under that number (Article 87). This means a single TIN holder with multiple activities or branches is assessed as one ZP-AA entity.

The Zakat base for a ZP-AA is not derived from equity, non-current liabilities, or additions and deductions in the conventional sense. Instead, it is computed using a proxy formula that estimates the capital aligned with the business’s activity volume. The formula is:

This formula attempts to derive an implied capital figure from sales. Dividing sales by 8 produces a rough equivalent to assets-to-revenue ratio benchmarks, while the 15% component reflects an estimated profit or working capital element. The resulting Zakat base is then multiplied by the standard 2.5% Zakat rate (Article 84).

Let’s break this down with an example.

Notice what this means in practice: the ZP-AA formula does not care whether the business made a profit. Unlike the standard account-based regime — where a loss-making company with low equity can have a small or zero Zakat base — the ZP-AA formula produces a liability as long as there are sales. A business running at a loss can still owe significant Zakat under ZP-AA.

The formula only works if ZATCA can establish a reliable sales figure. The Regulations are explicit about the hierarchy of data sources and the minimum floor that applies.

Under Article 89(2), the sales figure used in the ZP-AA formula must be no less than the higher of: (a) sales disclosed in the entity’s VAT return (including zero-rated and exempt sales), or (b) data from Real Estate Transaction Tax (RETT) filings for the closest tax year matching the Zakat year. This means ZATCA cross-references multiple government databases to arrive at the most conservative (highest) sales figure for the entity.

Where no VAT sales are registered, ZATCA assesses sales using whichever of the above standards produces the highest result (Article 89(3)). This is not a gentle approach — ZATCA will use the most aggressive data point available.

There is also a final adjustment mechanism: if the VAT or RETT data for the relevant year is adjusted upward or downward after the Zakat assessment, ZATCA must correspondingly adjust the ZP-AA’s Zakat — whether that means an increase or a decrease (Article 89(5)).

The Rate

Article 84 confirms that the Zakat percentage for ZP-AA is 2.5% of the Zakat base — the same rate as for account-holding Zakat payers. The only difference is that the base itself is estimated using the Article 89 formula rather than derived from audited financial statements.

Minimum Zakat: SAR 500

Under Article 86, the minimum Zakat for any ZP-AA is SAR 500. If the formula produces a lower result — for example, for a very low-revenue business — Zakat is still assessed at SAR 500. This floor ensures that even the smallest ZP-AA entity contributes to Zakat collection.

Short Financial Period Exemption

Article 85 provides a carve-out for the beginning or end of a business’s activity if the financial period is a short-term one. The activity will not be subject to Zakat collection unless the period was 354 days or more. This mirrors the standard Zakat rule that short commencement and cessation periods below this threshold are excluded from collection.

A ZP-AA is not necessarily locked into that status indefinitely. Article 88 provides a voluntary transfer mechanism: a ZP-AA may submit a request to ZATCA — before the end of the Zakat year — to be reclassified as an account-holding Zakat payer.

ZATCA must issue a resolution on this request within 30 days of the date the request is completed. If the transfer is approved, the entity moves to the standard accounts-based Zakat regime for subsequent years. Critically, once transferred, the entity cannot revert to ZP-AA status — unless ZATCA approves the reversal on the basis of submitted reasons.

The request must be submitted before the year end — not retrospectively. Planning this transition requires knowing your likely Zakat base under both methods and filing the request within the Zakat year in which the change should take effect.

• Assuming ZP-AA means no Zakat obligation. Some business owners assume that because they have no formal accounts, they have no Zakat liability. This is incorrect. ZP-AA entities have a full Zakat obligation — ZATCA will assess them using available data sources, and the minimum is SAR 500 per year.
• Under-declaring VAT sales. Since VAT return sales are the primary floor for the ZP-AA base formula, under-declaring VAT sales directly reduces the Zakat base in the short term but creates exposure to a higher reassessment later — plus separate VAT penalties.
• Unregistered activity. ZATCA can identify ZP-AA entities through GOSI records, customs data, Etimad, and civil contracts even without a VAT registration. Operating without registration does not shield a business from Zakat — it simply shifts the data source ZATCA uses.
• Financial statements that ZATCA finds anyway. If a ZP-AA entity has financial statements that it never disclosed to ZATCA, Article 83 allows ZATCA to reclassify it as an account-holder. The reclassification can apply retroactively to years covered by those statements.
• Missing the transfer request window. The request to move from ZP-AA to account-holder status must be submitted before the end of the Zakat year. Missing this deadline locks the entity into ZP-AA for that year — the transfer cannot be made retroactively.

Filing a Zakat return is not the end of the compliance obligation — it’s the beginning of ZATCA’s review process. Understanding how ZATCA examines, reassesses, and disputes Zakat returns is essential for any business that wants to defend its Zakat position.

ZATCA has broad examination and reassessment powers under the Zakat Implementing Regulations. It can examine returns at its own premises, at the Zakat payer’s premises, or at any ZATCA-designated location. It can request documents, conduct field examinations, and issue assessments that differ significantly from the filed return — all within prescribed limitation periods.

The key principles to understand are: how long ZATCA has to reassess, what triggers an extended window, and what the dispute process looks like when you disagree with an assessment.

Under Article 105, ZATCA may examine a Zakat return at its own premises, the Zakat payer’s premises, or another designated location. During examination, ZATCA can:

Request necessary documents and clarifications within the scope of the examination; authorise its employees to attend the Zakat payer’s premises; and issue a field examination report signed by both ZATCA’s representative and the Zakat payer’s authorised representative. If the payer’s representative refuses to sign or is absent, this is noted in the report — and the report constitutes evidence against the payer in any event.

Under Article 57 (as cross-referenced from the Regulations), the burden of proving the correctness of a Zakat return rests with the Zakat payer. If a payer cannot prove a claim, ZATCA may disallow a deduction or make an estimated assessment based on its assessment of the relevant circumstances and available information.

Note that arithmetic or clerical errors in the return can also be corrected by ZATCA within 10 years — even without invalidating the original return (Article 106(4)).

Under Article 57 of the Regulations, where ZATCA detects a significant discrepancy in the information provided in a Zakat return, it may conduct a reassessment. The Regulations set out specific rules for how discrepancies are remedied depending on which part of the base they affect.

If a discrepancy affects equity elements: the discrepancy is added to the Zakat base. If it affects non-current liabilities: the remedy depends on whether the liabilities exceed or fall short of the total deduction elements. If it affects deduction elements: only the amount confirmed by ZATCA’s information is deductible, unless the payer can prove otherwise.

ZATCA cross-references Zakat returns against VAT returns, RETT filings, Etimad platform data, customs records, and other government databases. Discrepancies between, for example, the revenue declared in the VAT return and the revenue shown in the Zakat workpapers will trigger scrutiny.

If a Zakat payer disagrees with a ZATCA assessment, the Regulations provide a structured dispute resolution path. This process flows from internal objection → internal committee → dispute resolution departments → appellate departments.

Under Article 117, Zakat dues become final and payable on the earliest of the following events:

The Zakat payer accepts the assessment; expiry of 60 days from the assessment without an objection being filed; the dismissal of a lawsuit raised against ZATCA before the Dispute Resolution Committees; issuance of a final decision by the Appellate Departments or Dispute Resolution Departments; or, where no lawsuit was filed and no objection raised, 30 days after ZATCA’s rejection of the objection or 90 days after the objection was filed without a solution.

Under Article 107, where a Zakat payer has paid more than was due, the excess is treated as an advance payment for subsequent Zakat years and credited to the payer’s account — unless the payer requests recovery within 5 years of the regular payment date. ZATCA must confirm and complete the recovery within 30 days of establishing the payer’s entitlement.

A refund request will not be processed if there are outstanding unfiled Zakat returns. The payer must be current on all filing obligations before a recovery is possible.

• Maintain a complete Zakat workpaper file for each year, cross-referenced to the audited financial statements
• Retain all supporting documentation for deductions — asset registers, investment schedules, statutory deposit certificates — in Arabic
• Keep a reconciliation between VAT returns and Zakat revenue figures
• Maintain documentation supporting the trading vs. non-trading classification of each investment
• Ensure all related-party transactions are priced at arm’s length and documented under ZATCA’s Transfer Pricing rules
• Keep prior-year Zakat files for at least 10 years (in evasion scenarios, indefinitely)

Knowing how to calculate Zakat is only half the job. Getting the filing and payment right — on time, in the correct format, with the right documentation — is where many companies stumble. ZATCA’s enforcement starts with the filing process.

The Zakat filing obligations are set out in Chapter 5 of the Zakat Implementing Regulations, specifically Articles 98–107. They cover registration, return submission, payment, amendment, and cessation notification. Each has its own deadline and consequence for non-compliance.

The good news is that the process is electronic — everything runs through ZATCA’s E-system. The less good news is that ZATCA’s examination powers are broad, and the five-year (and in some cases ten-year or unlimited) reassessment window means a filing error made today can resurface years later.

Under Article 98(1), every Zakat payer must register with ZATCA before the conclusion of its initial fiscal year. This is a mandatory obligation — it is not triggered by reaching a threshold or by a specific event. Every business that qualifies as a Zakat payer must register from the outset.

Registration commences from the first of: the date of issuing the establishment’s commercial register, the date of acquiring the first required licence, or the date of depositing the capital (Article 10). A Zakat payer may determine a different commencement date by submitting documented proofs acceptable to ZATCA.

For a company with a 31 December fiscal year end, the Zakat return and payment are due by 30 April (120 days). For a 31 March year end, the deadline is 29 July. Finance teams should build this into their year-end close calendar well in advance — the Zakat base calculation cannot be completed until the audited financial statements are available.

1. Complete the audited financial statements. The Zakat base calculation is built from the closing balance sheet and income statement. ZATCA-compliant financial statements under SOCPA/IFRS standards are the starting point.
2. Prepare the Zakat base workpaper. Apply the additions (Article 23) and deductions (Article 26), test against minimum and maximum base provisions (Articles 27–28), apply the profit difference adjustment, and compute the Zakat liability.
3. Prepare supporting documentation. Gather the documents supporting each addition and deduction: asset schedules, investment valuation reports, shareholder loan confirmations, statutory deposit certificates, and the full trial balance.
4. Complete the Zakat Return form in ZATCA’s E-system. Log in to ZATCA’s portal using the company’s Tax Identification Number (TIN). Complete the accounting-books Zakat Payer return form.
5. Attach supporting documents. Upload the required supporting documentation in Arabic (or translated to Arabic). Documents must be presented by an authorised person.
6. Submit the return and pay Zakat dues. Submit electronically via ZATCA’s E-system. Pay Zakat dues via bank transfer through the Sadad system or other ZATCA-accepted payment method.

Under Article 99, all supporting documents and clarifications for the Zakat Return must be provided in Arabic. Documents must be presented by an authorised person (an employee with a valid Power of Attorney or company signatory authority).

ZATCA may request additional documents and clarifications during examination of the return. It must explain the reason for each request, and the request scope is limited to the purpose for which it was made. ZATCA must give the Zakat payer a reasonable timeframe to respond — not less than 10 working days. If the payer fails to respond within 20 working days of the request date, ZATCA may either extend the period or proceed to issue an assessment.

Under Article 103, if an accounting-books Zakat payer finds an error in its submitted Zakat Return, it is entitled to request an amendment from ZATCA. Upon approval, the payer must revise the return within 30 days. If it fails to do so, it must reapply to ZATCA for the amendment.

The amendment request must be submitted through ZATCA’s E-system with acceptable documents and justifications. It must be submitted before ZATCA issues its own assessment, and before the Article 106 limitation period has expired. If the amendment results in additional Zakat due, that amount must be paid promptly.

An important point: when a return is amended, the limitation period for ZATCA’s reassessment (Article 106) is recalculated from the date of the amendment, not from the original filing date. This effectively restarts the clock.

Under Article 11, if a Zakat payer permanently ceases its activity, it must submit a written application to ZATCA within 60 days of the cessation date. If this application is not submitted, Zakat accounting obligations continue until the application is filed.

For fiscal periods of less than 354 days at the conclusion of activity, the short period is not subject to Zakat collection — unless the period is 354 days or more (Article 15(4)).

Upon cessation, the Zakat payer must file a final Zakat return and pay any outstanding dues. Where the owner has died with outstanding Zakat, the dues must be collected before the estate is distributed (Article 121).

• Missing the 120-day deadline. The return and payment are due simultaneously. There is no grace period for the payment following a timely return submission. Filing without paying triggers ZATCA’s late payment demand process.
• Submitting documents in a language other than Arabic. All supporting documents must be in Arabic. Non-Arabic documents that have not been translated are not acceptable to ZATCA and can lead to the disallowance of deductions supported only by those documents.
• Submitting the return without an authorised signatory. Documents must be presented by an authorised person. A return submitted without proper authority confirmation is non-compliant.
• Not reconciling the return to the financial statements. ZATCA’s examination process involves cross-referencing the Zakat return to the financial statements, VAT returns, and other disclosures. Discrepancies trigger reassessment under Article 57.
• Failing to notify ZATCA on cessation. A company that ceases operations but does not notify ZATCA within 60 days continues to accumulate Zakat liability. This is a real and avoidable cost.

Investments are one of the most contested areas in Saudi Zakat — and for good reason. Whether an investment is deductible from the Zakat base can make a difference of hundreds of thousands of riyals in annual Zakat liability for a company with a significant investment portfolio.

The rule itself is simple to state: investments held for non-trading purposes are deductible from the Zakat base. Investments held for trading purposes are not. The complexity lies in determining which category a given investment falls into — and ZATCA’s approach is to look at substance and conduct, not just balance sheet classification.

Three investment types are separately addressed in the Regulations: investments in enterprises within the Kingdom (Article 43), investments in facilities outside the Kingdom (Article 44), and investments in investment funds within the Kingdom (Article 45). Each has its own deductibility framework.

Under Article 42, an investment is for trading purposes — and therefore NOT deductible — if any of the following indicators apply:

Once deemed trading, the entire investment portfolio item becomes non-deductible — not just the portion that was traded. Article 42(2) specifies that if an investment is deemed for trading purposes, that classification applies to the investment portfolio assets included in it, without affecting the investment item shown in the financial statements as a whole.

Under Article 43, investments in enterprises within the Kingdom are deductible from the Zakat base where they are held for non-trading purposes. This covers investments in subsidiaries, associates, and joint ventures incorporated in Saudi Arabia.

The investment is deducted at the value shown in the financial statements — typically the equity method carrying amount for associates, and cost or fair value for subsidiaries depending on the accounting treatment.

A critical point: the invested entity itself will also pay Zakat on its own Zakat base. This means the same underlying business activity is Zakat-assessed at the investee level, and the investment value is deducted at the investor level. There is no double-counting of Zakat — the deduction at the investor level reflects that the investor’s capital is already captured in the investee’s Zakat base.

Under Article 44, investments in a facility outside the Kingdom are deductible from the Zakat base, again subject to the non-trading condition. This covers a Saudi company’s investments in overseas subsidiaries, branches, or joint ventures.

The rationale here is that capital deployed abroad in productive enterprise is not generating Saudi economic activity on which the Zakat logic applies in the same way. The deduction acknowledges that the overseas operation will likely be subject to tax or similar obligations in its own jurisdiction.

The same non-trading tests from Article 42 apply. A holding company that regularly buys and sells overseas subsidiaries would find those investments failing the non-trading test and therefore not deductible.

Under Article 45, investments in investment funds and real estate investment funds established in the Kingdom are deductible from the Zakat base, subject to the non-trading condition.

For unitholders in a fund, the minimum Zakat base for their investment is determined under Article 79, based on whether profits are distributed or not. The minimum base applies regardless of the investment’s carrying value, preventing a scenario where a fund investment with unrealised losses entirely eliminates the Zakat base.

Real estate investment trusts (REITs) listed on the Saudi Exchange have specific Zakat treatment that should be confirmed with ZATCA guidance or a qualified advisor, as the interaction between REIT distributions and Zakat base computations involves additional considerations.

Under Article 26(8) and Article 55, investment in bonds and deeds (including sukuk) is deductible from the Zakat base only where, for the issuer of those instruments, the instruments are treated as capital for Zakat purposes.

This means the deductibility of a sukuk investment at the investor level is conditional on the Zakat treatment of the issuer. If the issuer treats the sukuk proceeds as equity capital for Zakat, then the investor can deduct the investment. If the issuer treats it as debt (non-current liability), the deduction does not apply.

Where the conditions in Article 55 are not fulfilled, bonds and deeds are not deductible — regardless of their classification in the investor’s financial statements.

Under Article 27, the Zakat base minimum provisions ensure that even where a Zakat payer deducts large investments, the base cannot be reduced below certain thresholds linked to the profit results of the activity. Investment deductions are included in the deduction pool tested against the minimum base provisions.

In practice, this means a company cannot use investment deductions to reduce its Zakat base to zero in a profitable year. The minimum base rules cap the benefit of deductions in profitable scenarios.

Before calculating a single riyal of Zakat, the first question to answer is: does this entity — or this ownership interest — pay Zakat at all? The answer depends on nationality, residency, and how the business is structured.

The most common mistake in Saudi tax planning is failing to correctly classify entities and ownership interests. A foreign-owned company that believes it pays only CIT may have a Saudi partner whose share is subject to Zakat. A GCC national operating in Saudi Arabia as a sole proprietor pays Zakat, not CIT. These distinctions have significant financial consequences and ZATCA has full visibility of ownership through the commercial registry and shareholder registers.

The legal framework is set out in Articles 3–7 of the Zakat Implementing Regulations, covering who is subject to Zakat, residency rules, and who is excluded from Zakat (or exempt).

Under Article 1 of the Regulations, “Saudi” means a person holding Saudi nationality, or a national of a Gulf Cooperation Council (GCC) member state who is accorded treatment similar to Saudi nationals. The GCC member states are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

This definition is broader than most people assume. A UAE national operating a business in Riyadh is, for Zakat purposes, treated the same as a Saudi national. They are a Zakat payer. Their income from business activities in the Kingdom is subject to Zakat — not to CIT at 20%.

Residency determines whether the Zakat obligation applies. A natural person is considered a Saudi resident during a Zakat year if either of the following conditions is met:

Transit days do not count as days of physical presence — a person physically in the Kingdom while in transit between two foreign destinations cannot count that day towards the 30 or 183-day threshold.

A legal person (company) is resident if it is incorporated under Saudi laws, or if its principal headquarters is in the Kingdom.

The following persons are subject to the Zakat Implementing Regulations (Article 3):

Article 6 explicitly excludes the following from Zakat:

Persons subject to the Income Tax Law and shares directly or indirectly owned by non-Saudis. Non-Saudi, non-GCC investors pay Corporate Income Tax — not Zakat — on their Saudi business income.

Shares in resident capital companies owned indirectly or directly by persons engaged in oil and hydrocarbon production — whether resident or non-resident — are excluded from Zakat (with a carve-out for shares in listed capital companies engaged in hydrocarbons on the Saudi Exchange).

Where a Saudi company has both Saudi/GCC and non-Saudi shareholders, two regimes operate simultaneously on the same legal entity. The split is applied to the Zakat base (for Zakat) and to taxable income (for CIT) in proportion to the respective ownership percentages.

Finance funds licensed by the Capital Market Authority (CMA) are subject to Zakat under Article 3(4). A “Finance Fund” under the Regulations means an investment fund established for direct or indirect funding activity in the Kingdom.

The Zakat payer in a fund context is the unitholder, not just the fund manager. A unitholder owns a unit in the fund — representing a common share in the fund’s net assets — and is accordingly a Zakat payer in respect of their unit. The fund manager has obligations to notify ZATCA upon fund expiration (within 60 days) and to provide the basis for Zakat calculation to unitholders.

The deductions side of the Zakat base is where most disputes with ZATCA begin. Every business wants to maximise deductions. The rules are specific — and ZATCA’s audit approach focuses heavily on whether deductions are properly supported.

Under Article 26 of the Zakat Implementing Regulations, an accounting-books Zakat payer shall deduct ten categories of items from the Zakat base. These deductions are granted because they represent capital that has been converted into long-term productive assets — assets that generate returns in their own right and are not subject to the same Zakat logic as liquid capital.

The critical word in the deduction provisions is non-trading. Almost every deduction category is subject to the condition that the asset is held for use — not for trading. Where an asset is reclassified as trading, or where its management indicates a trading intent, the deduction is lost.

Net fixed assets are typically the largest deduction from the Zakat base — and for good reason. A business that has invested heavily in productive machinery, buildings, and equipment has converted equity capital into physical assets. Those assets generate returns in a different way and are not Zakat-liable in the same manner as liquid capital.

Under Article 49, fixed assets include (but are not limited to):

Net fixed assets (PP&E at net book value after depreciation), payments made for acquiring fixed assets not yet placed in service, spare parts not prepared for sale, assets financed under finance lease contracts (BOT and similar), capital constructions and projects under construction for use in the activity (not for sale), and right-of-use assets classified as non-current under lease contracts.

Under Article 48(2), non-current assets registered in the name of a third party can still be deducted if: there is an impediment preventing transfer of ownership, the asset is used in the company’s activity, it was contributed as an in-kind share of capital, or its revenues and expenses are recognised in the financial statements.

Vital assets (Article 51) — assets essential to the activity — are deductible if classified as non-current assets in the financial statements. If they are current assets, they are not deductible.

Under Article 50, intangible assets held for non-trading purposes are deductible from the Zakat base. This includes goodwill, licences, trademarks, patents, software capitalised as non-current assets, and similar items — provided they are held for use in the business, not for trading or resale.

The non-trading condition is assessed using the same framework as investments (Article 42). If the nature of the Zakat payer’s activity is trading in intangibles, or if the intangibles are managed by a third party with authority to buy and sell them, or if they are classified as current assets, the deduction is disallowed.

Investments in enterprises, facilities, and funds are deductible only if held for non-trading purposes. Article 42 sets out the framework for determining whether an investment is held for trading:

Under Article 56, statutory deposits and their equivalents are deductible from the Zakat base, subject to two conditions: they must be deposited with a competent authority in accordance with the relevant laws, and the Zakat payer must not receive any return on them.

Common examples include professional or regulatory security deposits required by government licencing bodies, court-ordered deposits, and similar regulatory requirements. Where a return — even a nominal one — is paid on the deposit, the deduction is disallowed.

The Zakat base additions are the building blocks of the entire Zakat calculation. Get them wrong and you are either over-paying or under-paying — and ZATCA’s assessment team will find the difference.

Under Article 23 of the Zakat Implementing Regulations, three categories of items are added to the Zakat base for accounting-books payers: Property Rights and Equivalents, Property Rights Obligations (within the limits of deducted assets), and the Profit Difference Adjustment. Each has specific rules governing what is included and how it is measured.

The underlying principle is straightforward: the Zakat base captures the capital that the business has available for productive use — the equity invested by owners plus the long-term debt that funds the business. What the business has converted that capital into (fixed assets, long-term investments) is then deducted. The result is a proxy for the liquid or working-capital-style wealth of the business — and it is this figure on which Zakat is levied.

Property Rights — which corresponds to total equity in the financial statements — is the primary and most significant addition. It includes every component of equity in the closing balance sheet:

Under Article 28(2), any clause reclassified under Property Rights also includes profits under distribution treated as liabilities (Article 36), partner loans (Article 30), and allocations (Article 24). This means even items that appear as liabilities on the balance sheet may need to be reclassified as Property Rights for Zakat purposes.

Under Article 29, the following non-current liabilities are added to the Zakat base. The rationale is that long-term funding — whether from owners or creditors — represents capital deployed in the business from which Zakat-bearing wealth is generated.

The addition of liabilities to the Zakat base is not unconditional. Article 25 introduces a correction mechanism: if a non-current asset is deducted and a corresponding liability funded that asset, excluding the liability from the addition (because it funded a deductible asset) would be incorrect. Article 25 therefore requires a proportional adjustment based on the ratio of each deducted or non-deducted asset to total assets.

This liability placement correction is mathematically complex but critically important. Skipping it will either inflate or deflate the base.

This is where many Zakat calculations go wrong. Under Article 30 of the Regulations, loans from partners and shareholders — regardless of whether they come from Saudi or non-Saudi owners — are treated as Property Rights additions to the Zakat base.

The logic: a loan from an owner is economic equity dressed as debt. For Zakat purposes, ZATCA looks through the legal form and treats owner financing as part of the capital base. This prevents businesses from reducing their equity (and therefore their Zakat base) by converting equity contributions into loan structures.

Under Article 23(3), the difference between the amended net profit/loss and the net book profit/loss — after Zakat and tax — is added to the base. This adjustment can be positive or negative.

The “amended net profit” is the profit of the activity as determined under the specific Zakat activity result provisions (Section 6 of Chapter 2 of the Regulations). It reflects Zakat-specific expense adjustments — for example, the treatment of certain expenses that are allowable under SOCPA standards but disallowed for Zakat purposes, or income items treated differently.

In practice, this adjustment requires a parallel profit calculation under Zakat rules alongside the IFRS/SOCPA profit calculation, and then computing the difference. For most businesses, this requires the involvement of a qualified Zakat advisor or external auditor familiar with ZATCA’s methodology.

Under Article 24, allocations and their equivalents are treated as Property Rights additions. Allocations are provisions or reserves set aside from profit — for example, board remuneration reserves, general reserves set aside by management, or bonus provisions.

Specifically: the end-of-service benefit balance and regular vacation provision balance (added to the end-of-term balance) are treated as Property Rights additions — not as non-current liabilities. This classification can surprise companies who assume all long-term provisions are liabilities for Zakat purposes.

The treatment of allocations as Property Rights rather than liabilities means they do not benefit from the liability placement correction under Article 25. They sit fully within the addition side of the base.

• Misclassifying declared dividends as deductible liabilities. Profits approved for distribution are Property Rights under Article 36, not current liabilities for Zakat purposes. Treating them as liabilities reduces the base incorrectly.
• Treating shareholder loans as ordinary debt. Under Article 30, owner loans are Property Rights additions. This is one of the most commonly misapplied rules in practice.
• Omitting the profit difference adjustment. This adjustment requires a Zakat-specific profit calculation. Companies that only use IFRS profit without making Zakat adjustments will miscalculate the base.
• Ignoring the Article 25 liability placement correction. The proportional exclusion of non-current liabilities that funded deductible assets is required. Failing to apply it will result in an inflated or understated base.

The Zakat base is the single most important number in Saudi Zakat compliance — and the most misunderstood. If you get this wrong, everything that follows is wrong. Here is exactly how it works.

Unlike corporate income tax, which starts with accounting profit and makes adjustments, the Zakat base starts with the equity and long-term funding structure of the business. It then adds prescribed items and deducts others. The result is a figure that approximates the capital employed in the business that is subject to Zakat.

The legal basis is Article 21 of the Zakat Implementing Regulations: the Zakat payer holding legal accounts shall calculate the Zakat base by adding the items in Article 23 (additions) and deducting the items in Article 26 (deductions), in accordance with the provisions of the Regulations.

The calculation begins with the approved financial statements. Under Article 9, the accounting standards endorsed by the Saudi Organization for Chartered Accountants (SOCPA) apply for Zakat collection purposes. For most companies, this means IFRS as adopted in Saudi Arabia.

ZATCA may amend the data in a Zakat payer’s financial statements where that data contradicts SOCPA-endorsed standards regarding classification and indexing. This is an important point: your financial statements set the foundation, but ZATCA is not bound by them if it identifies classification issues. Transfer pricing adjustments also apply to transactions with related persons under ZATCA Board Resolution No. 6-1-19 (January 2019).

The primary addition to the Zakat base is “Property Rights and Equivalents” — which in practical terms means the total equity of the business as shown in the statement of financial position. This includes share capital, retained earnings, statutory and other reserves, and any other equity components.

Under Article 28, the maximum Zakat base is capped at the sum of Property Rights plus the difference between the amended net profit/loss and the net book profit/loss for the year. This ceiling prevents the base from exceeding the actual economic value of the equity plus year-end results.

The additions framework also requires adding certain liabilities — specifically non-current liabilities, which represent long-term funding of the business. The rationale is that long-term funding used in the business (whether equity or debt) represents the capital from which Zakat-liable returns could be generated.

Here is the systematic approach, following Articles 23–26 of the Regulations:

Step 1 — Identify and Add: Property Rights

Start with total equity per the audited balance sheet. This is the primary addition. Equity includes paid-up capital, share premium, statutory reserves, retained earnings, and any other equity reserves.

Under Article 30, partner/shareholder loans (whether from Saudi or non-Saudi partners) are treated as Property Rights additions — they are not deductible as liabilities. This is a critical point. A shareholder loan to the company does not reduce the Zakat base; it increases it.

Step 2 — Add: Non-Current Liabilities

Under Article 29, the following non-current liabilities are added to the base:

The placement of external liabilities into the base also requires a correction for the ratio of deducted vs. non-deducted assets — this ensures only the proportion of liabilities funding non-deductible assets is added (Article 25 liability placement rules).

Step 3 — Add or Deduct: Profit Difference Adjustment

Under Article 23(3), the difference between the amended net profit/loss (after Zakat and tax) and the net book profit/loss is added — positive or negative. This adjustment brings the base into line with the actual taxable result of the activity, as determined under the activity result provisions (Section 6 of the Regulations).

Step 4 — Deduct: Net Fixed Assets

Under Article 26(4) and Article 49, net fixed assets are deducted. This includes property, plant and equipment at net book value, assets under construction (for own use, not for sale), capital projects, finance lease assets, right-of-use assets classified as non-current, and payments for acquiring fixed assets. Spare parts not prepared for sale are also treated as fixed assets.

Step 5 — Deduct: Intangible Assets

Under Article 26(5) and Article 50, intangible assets held for non-trading purposes are deductible. If an intangible is part of a trading portfolio, it is not deductible.

Step 6 — Deduct: Qualifying Investments

Investments in enterprises within the Kingdom (Article 43), facilities outside the Kingdom (Article 44), investment funds within the Kingdom (Article 45), and financing funds registered with ZATCA are deductible — but only if held for non-trading purposes. The trading vs. non-trading distinction is central to investment deductibility and is covered in the dedicated investments article.

Step 7 — Deduct: Statutory Deposits and Deferred Tax Assets

Statutory deposits placed with regulators (on which no return is paid) are deductible. Deferred tax assets are deductible in full.

Step 8 — Apply the Zakat Rate

Once the net Zakat base is determined, apply 2.5% (or the prorated rate for a non-Hijri fiscal year) to arrive at the Zakat due.

The Regulations include specific floor and ceiling rules that prevent the base from being manipulated to near-zero in loss-making scenarios.

Maximum base (Article 28): The Zakat base cannot exceed Property Rights plus the difference between amended net profit and book net profit. This cap means that in high-profit years, the base is bounded by the economic equity of the business plus the year’s results.

Minimum base (Article 27): Where the calculated Zakat base falls below adjusted net profit, specific floor rules apply. If total undeducted assets plus the difference between amended net profit and book net profit is less than the amended net profit, the minimum base equals the total undeducted assets plus that difference. If the amended net profit is negative and no amended net profit is achieved, there is no accountable Zakat base — unless the company achieves a positive result, in which case the result of the base applies.

• Including trading investments in the deductions. Only non-trading investments qualify for deduction. Investments managed as a trading portfolio are not deductible, even if long-term on the balance sheet.
• Treating shareholder loans as deductible liabilities. Partner and shareholder loans are treated as Property Rights additions, not liabilities. Adding them to the deduction side is a common and material error.
• Deducting current assets. Current assets are not deductible. Assets must be non-current and meet the qualifying criteria to be deducted.
• Ignoring Article 25 liability placement corrections. The rules for proportionate liability placement when some assets are deducted and others are not require a mathematical adjustment. Many preparers skip this step.
• Not applying the minimum base check. Completing the base calculation without testing against the Article 27 minimum provisions can result in a return that understates the liability.