Overview
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.
The Complete Deductions List Under Article 26
| # | Deductible Item | Governing Article | Key Condition |
|---|---|---|---|
| 1 | Investment in an enterprise within the Kingdom | Article 43 | Non-trading purpose |
| 2 | Investment in a facility outside the Kingdom | Article 44 | Non-trading purpose |
| 3 | Investment in investment funds within the Kingdom | Article 45 | Non-trading purpose |
| 4 | Net fixed assets and equivalents | Articles 49 & 51 | Held for use, not for sale |
| 5 | Intangible assets | Article 50 | Non-trading purpose |
| 6 | Materials not intended for sale and raw materials | Article 52 | Spare parts / production inputs not for sale |
| 7 | Direct and indirect financing funds registered with ZATCA | Chapter 2, Section 7 | ZATCA-registered funds only |
| 8 | Investment in deeds and bonds treated as capital for the issuer | Article 55 | Must meet Article 55 conditions |
| 9 | Statutory deposits and equivalents | Article 56 | Deposited with competent authority; no return paid |
| 10 | Deferred tax assets | Article 26(10) | Per financial statements |
Net Fixed Assets: The Largest Deduction
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(1)(a), non-current assets are deductible only if acquired for the purpose of using them — not for reselling them. A property developer’s inventory of land held for sale is not deductible. The same land held as the company’s operational headquarters is deductible.
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.
Intangible Assets
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: The Most Complex Deduction Category
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:
| Indicator | Means the investment IS trading (not deductible) |
|---|---|
| Nature of activity | The Zakat payer’s business is investment trading per its financial statements or legal documents |
| Third-party management with trade authority | Managed by a non-affiliated person who has authority to make buy/sell decisions |
| Current assets classification | Classified as current assets in the financial statements |
| Listed investment with recent trade activity | Listed investment where the payer bought, then sold, then bought again in the same year |
| Announced disposal intention | Proven or announced intent to dispose within a specified price or period less than one year |
| Liquidity-based classification without long-term indication | Classified on liquidity basis with no indication of holding beyond 365 days from year end |
The value of investment in deeds and bonds is deductible only where, for the issuer, those instruments are treated as capital for Zakat purposes. This is a specific condition that must be verified — it applies to sukuk and similar instruments where the issuer’s Zakat treatment qualifies the instrument as capital. Where this condition is not met, bonds and deeds are not deductible.
Statutory Deposits
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.
What Is NOT Deductible: Common Misconceptions
| Item | Why It Is NOT Deductible |
|---|---|
| Inventory / goods for sale | Article 52: inventory is not a deductible element unless special provisions for spare parts or raw materials apply |
| Trade receivables | Current asset — not within any deduction category |
| Cash and bank balances | Current asset — liquid capital is the very thing Zakat is levied on |
| Investments classified as current assets | Article 42(3): current-asset investments are treated as trading investments and are not deductible |
| Deposits that earn a return | Article 56: statutory deposits are only deductible where no return is received |
| Assets not owned by the company (unless Art. 48(2) conditions met) | Article 48: general rule is that ownership must exist, with limited exceptions |
Worked Example: Deductions in Practice
Makkah Contracting & Trading Co. is a Saudi-owned contracting business. Balance sheet items (SAR millions) and their deductibility:
| Asset | Amount | Deductible? | Reason |
|---|---|---|---|
| Net PP&E (machinery, vehicles) | SAR 18M | Yes | Fixed assets held for use in activity |
| Capital projects under construction | SAR 3M | Yes | For own use, not for sale |
| Investment in subsidiary (non-trading) | SAR 6M | Yes | Long-term, non-trading, non-current |
| Intangible assets (software licences) | SAR 1.5M | Yes | Non-current, held for use |
| Regulatory deposit (no return) | SAR 0.5M | Yes | Statutory deposit, no return received |
| Deferred tax asset | SAR 0.3M | Yes | Explicitly deductible under Art. 26(10) |
| Inventory (construction materials) | SAR 4M | No | Inventory not deductible (Art. 52) |
| Listed investment (trading portfolio) | SAR 2M | No | Trading intent — current asset classification |
| Trade receivables | SAR 7M | No | Current asset — not in any deduction category |
Total Deductions: SAR 18M + 3M + 6M + 1.5M + 0.5M + 0.3M = SAR 29.3M
- Deductions are available for fixed assets, intangibles, non-trading investments, statutory deposits, and deferred tax assets — ten categories in total under Article 26.
- The non-trading condition is the most critical requirement for investment deductions. Trading-portfolio investments are never deductible, regardless of their balance sheet classification.
- Inventory, trade receivables, and cash are not deductible — they represent the liquid wealth on which Zakat is designed to be levied.
- Assets not registered in the company’s name can still be deductible in four specific circumstances under Article 48(2).
- Statutory deposits are only deductible where no return is received. Even nominal interest disqualifies the deduction.
This article is for informational purposes only and does not constitute legal or tax advice. Regulations referenced are based on ZATCA publications current at time of writing. Always verify with a qualified Saudi tax professional for your specific circumstances.