1. Overview of the Amendments to the Zakat Collection Regulations for 1445 AH
Legislative developments related to zakat collection in Saudi Arabia continue to evolve rapidly, aligning with changes in other laws such as corporate regulations, investment laws, accounting standards, and tax legislation.
This article provides an overview of the key updates introduced by Ministerial Decision No. 1007, dated 19 Shaaban 1445 AH (referred to as “Zakat Regulations 1445 AH” or “the New Regulations”).
2. Understanding Zakat
Zakat is a broad concept meaning growth and purification. It encompasses different types, including zakat of the soul, body, and wealth. This article focuses on zakat on wealth, which is a religious obligation governed by specific rules regarding eligibility, assessment, and distribution. Unlike income tax, zakat is strictly allocated to charitable purposes and collected from designated funds.
For those working in Saudi or Gulf-based companies, or firms with mixed Saudi and foreign ownership, this article serves as a practical guide to the New Regulations. However, as zakat regulations can be complex and case-specific, professional advice may be required for detailed compliance and tax planning.
3. Key Provisions of the New Regulations
The New Regulations introduce significant changes aimed at improving zakat compliance and aligning practices with Islamic principles. The updates reflect a thorough review of prior legislation, stakeholder consultations, and Sharia committee evaluations. Some of the most notable amendments include:
- New Methodology for Calculating Zakat
Previously, zakat calculations involved analyzing historical transactions and tracing the relationship between funding sources and asset utilization. The New Regulations adopt a more straightforward approach, basing calculations on financial statement values and aligning assets and liabilities within the zakat base.
- Standardized Definitions and Concepts
To enhance clarity and consistency, the New Regulations establish uniform definitions for key terms, including zakat declarations and information disclosures. This reduces ambiguity and ensures taxpayer interpretations align with the practices of the Zakat, Tax, and Customs Authority (ZATCA).
- Reclassification of Allocations
The New Regulations redefine how provisions (allocations) are treated:
- Certain non-current provisions are treated as liabilities and deducted within defined limits.
- Other provisions are classified as equity and included in the zakat base. These changes help resolve prior disputes between taxpayers and ZATCA regarding the classification of allocations.
- Unified Zakat Calculation Methodology
The standard zakat rate of 2.5% remains unchanged. However, the New Regulations unify the calculation method by applying time-weighted adjustments consistently across both net profit and zakat base elements, considering the number of days in the fiscal year (Hijri or Gregorian).
- Treatment of Distributed Profits
Companies can now deduct distributed profits from the zakat base, provided they were distributed within the same fiscal year and credited to shareholders’ accounts. This ensures that distributed profits are not counted as part of zakat funds.
- Asset-Liability Matching Principle
The updated methodology ensures that:
- Long-term assets correspond to non-current liabilities.
- Short-term assets are offset by current liabilities.
- Adjustments are made when current assets are deducted or non-current assets are not deducted, ensuring a balanced zakat base calculation.
- Shareholder Financing Treatment
The classification of shareholder financing depends on the type of company:
- Listed companies: Financing is treated according to financial statements.
- Unlisted capital companies: Financing is classified as liabilities (subject to specific conditions) or as equity if conditions are not met.
- One-person companies or sole proprietorships: All shareholder financing is treated as equity.
- Tax Treatment of Foreign Investments
The New Regulations introduce clearer provisions for calculating zakat on foreign investments. Instead of rejecting foreign investment balances outright, ZATCA now assesses them based on financial statement disclosures, reducing disputes and increasing transparency.
- Minimum Zakat Base Threshold
- If a company incurs a net loss and has a negative zakat base, it is exempt from zakat.
- If the zakat base is positive despite no net profit, zakat is payable on the base.
- If the company is profitable, zakat is calculated on the higher of total assets or adjusted profit.
- Maximum Zakat Base Limit
To prevent excessive zakat liabilities, the zakat base is capped at equity plus the difference between adjusted and book profit/loss. This prevents over-taxation when the zakat base appears disproportionately high.
- Expanded Deductible Expenses
Wage expenses exceeding the General Organization for Social Insurance (GOSI) cap can now be deducted under certain conditions. Additionally, zakat and tax payments may also be considered deductible expenses.
- Bad Debt Write-Offs
The conditions for deducting bad debts remain largely the same, but minor exemptions apply. For example, taxpayers no longer need a certified accountant’s verification for bad debts under 1% of total revenue or in cases where a final court ruling declares a debtor bankrupt.
4. Applying the New Regulations to Previous Years
Taxpayers may choose to apply the New Regulations retrospectively, subject to ZATCA’s conditions. Businesses should evaluate the impact of these changes, compare them with previous regulations, and determine the most favorable approach. It is crucial to be mindful of deadlines for such applications.
5. How We Can Help
Our team of zakat and tax experts has extensive experience in Saudi regulations and legislative frameworks. We assist businesses with:
- Evaluating the impact of the New Regulations on their zakat obligations.
- Advising on retroactive application options.
- Representing clients in disputes before zakat, tax, and customs committees.
- Ensuring compliance with ZATCA’s evolving interpretations.
By leveraging deep industry knowledge and practical expertise, we help businesses navigate Saudi Arabia’s evolving zakat landscape with confidence and strategic foresight.