Overview: The Zakat Exemption Framework
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.
There is an important distinction in the Regulations between entities that are not subject to Zakat at all (Article 6) and entities that are subject to Zakat but may be exempted (Article 7). The entities covered in this article fall into the second category. They are technically Zakat payers — they just qualify to have that obligation waived each year if they satisfy the conditions and apply in time.
Who Can Claim the Exemption?
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.
| Entity Category | Key Condition | Specific Rules |
|---|---|---|
| Charitable associations and their fully owned establishments | Returns disbursed to public charity purposes or to society — not to specific persons | Plus licensing and audited financials requirements |
| Non-Government Organizations (NGOs) and their fully owned establishments | Same as above, with a 10% carve-out for specific-person disbursements if identified in the association’s objectives/deed | Disbursement to a specific person must be defined in objectives; all non-public disbursements count toward the 10% limit |
| Training units (non-profit) | Must hold a final non-profit training licence | Revenues include all assets, income, investment profits, donations, and endowments |
| Awqaf (endowments) and their owned foundations and companies | Endowment document must state all Waqf disbursements are for general charity — or that specific-person disbursements are below 10% of Waqf yield | Endower and descendants are treated as specific persons; proportionate calculation applies where multiple Awqaf own the same entity |
| Non-profit companies and their fully owned entities (Article 7(3)) | Disbursements stipulated in bylaws and Articles must cover only non-profit public fields; specific-person disbursements (including board benefits, owner benefits, bonuses, salaries for provided services) must not exceed 10% of revenues | Evidenced by audited financial statements and a licensed chartered accountant’s report |
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.
Charitable Associations and NGOs: The Key Conditions in Practice
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.
Riyad Community Development Association is a registered NGO. Its annual net profit is SAR 500,000. It distributes SAR 45,000 as compensation to its executive director — a specific person arrangement identified in its charter.
SAR 45,000 ÷ SAR 500,000 = 9% — below the 10% threshold.
The NGO qualifies for the exemption provided the executive director payment is identified in the charter and the association submits its annual exemption request to ZATCA within 120 days of the Zakat year end, supported by audited financial statements and a licensed chartered accountant’s report.
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: The Special Rules for Islamic Endowments
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.
This is a point that many Awqaf administrators overlook. Under the Regulations, the endower (waqif) and their descendants are classified as “specific persons” for the purposes of the disbursement test. Distributions to the endower’s family — even if this was the original stated purpose of the Waqf — count toward the 10% specific-person limit. Reviewing the Waqf document against this classification is essential before applying for the exemption.
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: The Article 7(3) Regime
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 Application Process: What to File and When
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.
There is no provision in the Regulations for late applications or retrospective exemptions. If the 120-day window is missed, the entity is subject to Zakat for that year. Given that the deadline runs from the end of the Zakat year — which may differ from the Gregorian calendar year — entities should build the exemption application into their annual compliance calendar well in advance.
Revocation of the Exemption (Article 8)
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.
Compliance Risks for Exempt Entities
- 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.
- The Zakat exemption under Article 7 applies to charitable associations, NGOs, training units, Awqaf, and non-profit companies — all must apply annually to ZATCA within 120 days of the Zakat year end.
- The core condition is that returns are disbursed to public charity or society — not to specific persons. NGOs and non-profit companies may disburse up to 10% of net profit (NGOs) or revenues (non-profit companies) to specific persons and still qualify.
- For the 10% carve-out to apply, disbursements to specific persons must be expressly identified in the entity’s constitutive documents — charter, bylaws, or deed of association. Undocumented payments do not qualify.
- For Awqaf, the endower and their descendants are treated as specific persons. The 10% limit applies to disbursements to these persons as a share of total Waqf yield.
- ZATCA may revoke an exemption where incorrect information is provided or where a reassessment reveals that the conditions were not actually met.
- The exemption is not automatic or permanent — it must be earned, documented, and applied for every year. Missing the 120-day deadline means Zakat is due for that year regardless of substantive compliance.
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.