Tax Alert: ZAKAT Rules for investments in Investment Funds

The Minister of Finance has approved the Zakat Rules for investing in Investment Funds approved by Capital Market Authority (“CMA”) hereinafter referred to as “Fund” in this alert [Ministerial Resolution No. (29791) dated 09/05/1444H]. These rules apply to the fiscal years starting on or after 01 January 2023. 

The Zakat collection on Fund is applied to the Fund’s unitholder (Natural/ Juridical persons) with the following exception:

1.  Unitholders of Financing Funds
2. A unitholder who owns the entire Fund directly or indirectly and has submitted a consolidated Zakat return including the Fund  

According to this MR, Investment Funds including those operating as Special Purpose Establishments (SPEs) are not subject to Zakat collection provided that they do not perform an activity not included in their Article of Association. However, they are required to comply with the following obligations under these Rules: 

A. Registration with Zakat and Tax, Custom Authority (“ZATCA”) for Zakat proposes:

• The Funds approved by CMA prior to 1 January, 2023 must register with ZATCA before the end of their fiscal year when the decision becomes effective.

Example: A fund with a fiscal year from October 2022 to September 2023, must register with ZATCA before the end of this fiscal year, i.e., before September 2023. However, the year to apply these rules shall be the fiscal year ending September 2024.

• The Funds approved on or after 01 January 2023, must register with ZATCA before the end of their first fiscal year from the date of approval of its incorporation.

B.  Submit Information Return within 120 days from the end of the fiscal year, along with the following:

• Audited Financial statements
• Record of transactions with related parties
• Any additional information/documents required by ZATCA

C.       Other considerations:

• Fund should notify ZATCA within (60) days from the date of its liquidation
• Transfer Pricing Bylaws and any of its amendments shall apply to the transactions between related parties and the Fund

•  Unitholders to consider the fiscal year of the Fund in case of a difference in the fiscal year of the Fund and the unitholder
•  A unitholder may deduct investment in Funds from the Zakat base if the investment is not held for trade and Zakat calculation on funds is certified by licensed charted accountants in the Kingdom; Or
• Zakat calculation on investment in Fund should be included in the financial statements of the unitholder if the Zakat is paid based on its Audited Financial Statements of the Fund

• The rules have provided the following formula in addition to some considerations for Zakat calculation on the Fund:

[Zakat base of the Fund X the unitholder ownership percentage in the fund X the Zakat rate according to Zakat regulations]

• The Fund's investments, not held for trading, in other funds, shall have the same Zakat treatment of foreign investments in accordance with clause (5) of Article (5) of the Zakat Regulation
• The minimum Zakat base for the unitholder shall be its share of the Fund’s adjusted net profit, whether the profit is distributed or not

• The Funds will be required to comply with the requirements of these rules starting from 01 January 2023 and non-compliance may result in adverse consequences with ZATCA.
• The unitholders may have to consider the implications under these rules by reviewing whether they can benefit from the new rules to accept the deductibility of these investments in their returns.
• It is pertinent to evaluate the impact of Transfer Pricing Regulations on Investment Funds and conduct an in-depth review of arrangements with related parties as per KSA Transfer Pricing Bylaws.

Our teams are available to support you in this matter. For any additional information with respect to this alert, please contact our tax team as follows: