Overview
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.
Trading vs. Non-Trading: The Central Test
Under Article 42, an investment is for trading purposes — and therefore NOT deductible — if any of the following indicators apply:
| Indicator | Effect |
|---|---|
| The nature of the Zakat payer’s activity is investment trading (per financial statements or legal documents) | Trading — not deductible |
| The investment is managed by a non-affiliated third party with authority to make buy/sell decisions (unless that party is a licensed fund manager) | Trading — not deductible |
| The investment is classified as a current asset in the financial statements | Trading — not deductible |
| The Zakat payer made a sale then purchase then sale (or reverse) in the same listed investment within the same year | Trading — not deductible |
| There is a proven or announced intent to dispose of the investment within a specific price or within one year | Trading — not deductible |
| The investment was classified on a liquidity basis with no indication it will be held beyond 365 days from year end | Trading — not deductible |
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.
Investments in Subsidiaries and Associates Within the Kingdom
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.
When a Saudi parent company deducts its investment in a Saudi subsidiary from its Zakat base, it is because the subsidiary’s own Zakat base already captures that capital. If the subsidiary is not separately paying Zakat (for example, because it is exempt or not registered), the parent company should obtain confirmation of the subsidiary’s Zakat status before claiming the deduction.
Investments in Facilities Outside the Kingdom
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.
Investment Funds Within the Kingdom
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.
Bonds and Deeds (Sukuk): A Conditional Deduction
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.
Minimum Base for Investment Deductions
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.
Worked Scenarios
Al-Hamdan Holding Co. (100% Saudi-owned) holds a SAR 20M equity-method investment in its subsidiary, Al-Hamdan Manufacturing Ltd (also Saudi-based), classified as a non-current asset. The investment is managed as a long-term strategic holding with no disposition plans.
Result: The SAR 20M investment meets the non-trading test — long-term, non-current, no trading activity, not managed by a third party with trade authority. Deductible from Zakat base.
Al-Rashid Securities Co., a Saudi investment company, holds a SAR 15M portfolio of listed Saudi Exchange equities, classified as current assets (FVTPL — fair value through profit or loss). During the year, it sold and repurchased several positions.
Result: The portfolio is classified as current assets, the company’s nature is trading in investments, and there is active buy-sell activity. Not deductible from Zakat base. The SAR 15M remains in the Zakat base as undeducted capital.
- Investments are only deductible if held for non-trading purposes. The non-trading condition is assessed by substance — not just the balance sheet label.
- Six indicators in Article 42 can deem an investment as trading and therefore non-deductible. Any one of them is sufficient.
- Investments in Saudi subsidiaries are deductible because the subsidiary’s Zakat base already captures that capital. The deduction prevents double-counting across the corporate structure.
- Bonds and sukuk are deductible only where the issuer treats the instrument as capital for Zakat purposes — not as debt.
- Investment deductions are subject to the minimum base provisions. They cannot reduce the Zakat base below the Article 27 floor in profitable years.
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.