Tax Alert Saudi Minister of finance approves new Zakat

8 min read

On 22 March 2024, the Zakat, Tax and Customs Authority (ZATCA) announced the issuance of a new Zakat Implementing Regulation, through the Ministerial Resolution (MR) No.1007 dated 29 February 2024, which was electronically published in the Official Gazette (Umm Al-Qura) on 21 March 2024. The new Zakat regulation is replacing the current regulation issued through MR No. 2216 dated 14 March 2019. The new Zakat regulation is currently available in Arabic on ZATCA's website.

In summary

Compared with the previous regulation, the new regulation introduces the following among its 128 articles:

Compiles Zakat treatments for different sectors, previously issued through separate MRs, with limited exceptions.
Different approach/methodology to calculate the Zakat due, when compared to the current Zakat regulation.
Rules for amending the Zakat return, treatment for mergers and acquisitions, cessation of activities.
Treatments related to conversion to International Financial Reporting Standards (IFRS) from local standards.

In detail

Application to financial years

New regulation applies to financial years starting on or after 1 January 2024.
Zakat payer may opt to apply new Zakat regulation to financial years prior to 1 January 2024, subject to ZATCA’s approval. Zakat payer has to file an application request to ZATCA, within certain time frame and meet certain conditions given in the MR.

Key changes

1- General Zakat rules:

Permanent establishment of non-resident Saudi/GCC person is no more subject to Zakat. (Art. 5)
Charities, trusts, and non-for-profit organizations/companies, providing public benefit services, are exempted from Zakat under certain conditions. (Art. 7)
Zakat rules for permanent / temporary cessation of activities. (Art. 11-12)
Zakat is determined at the year end, based on the Saudi/GCC ownership percentage, without considering the change in ownership during the year, or change in the Zakat payer’s legal form. (Art. 13)
When a merger of two or more Zakat payers results in establishment of a new entity, Zakat will be calculated under certain rules for short / long financial periods. (Art. 14)
Zakat rate is calculated at 2.5% of the Zakat base, for Zakat payers following Hijri financial year and approx. 2.57% for Zakat payers following Gregorian financial year. (Art. 15)
For the Zakat payer opting to file a consolidated Zakat return along with its subsidiaries, the holding company cannot convert to Zakat return filing on stand-alone basis without ZATCA’s prior approval. (Art. 16)

2- New methodology for Zakat base calculation:

Year-end closing balances as per financial statements should be used to determine the Zakat additions and deductible items. (Art. 17)
Matching assets and liabilities as a base for Zakat treatments under the new regulation. (Art. 20)
Zakat base is calculated by adding Zakat items and deducting non-Zakat items, as referred to respectively in Art. 23 and Art. 26 of the new regulation. (Art. 21)
Proportion of liabilities to be added when deducting a current asset or to be deducted when not deducting a non-current asset, according to certain calculation. (Art. 25)
Introduce a new concept of maximum and minimum limit of Zakat base. (Art. 27-28)
In applying the above rules, total liabilities additions shall not exceed total deductions of the Zakat base.

3- Treatment of major Zakat base additions:

New regulation is limiting the addition items to certain major items, under which all addition items can be classified, as follows: (Art. 23)

1- Equity and the like, added to the Zakat base using closing balances with no limitation.

2- Non-current liabilities, limited to the deductible assets.

3- The difference between adjusted Zakat profits/loss and the accounting profits/loss (after Zakat and tax).

Equity and the like: (Art. 24, Art. 30, Art. 36-41)

The new regulation provides that the below items be treated as equity for Zakat calculation purposes:
- Provisions, except End of Service Benefits (EOSB), statutory vacation provisions and the like.
- Shareholders credit loans, with the exception for listed companies, when conditions of Art. 30 are not met and owners credit loans in a single shareholder/sole proprietorship company.
- Authorized profits for distribution, which are not yet transferred to the shareholders accounts.
- Distributable profits, including profits of the year, shall not be added to the Zakat base, unless it is proven to ZATCA that the distribution was made for the purpose of reducing the Zakat base.
- Realized and unrealized profits, irrespective of presentation in Zakat payer’s financial statements.
- Carried forward losses/treasury stocks year-end closing balances, reduce the equity.
- Treasury stocks for employee stock option plan, reduce the equity, if certain conditions are met.

Non-current liabilities to the limit of the deductible assets: (Art. 29-30)

Non-current liabilities as per the regulation include:
- Non-current liabilities in accordance with the year-end closing balance, whether from previous years or added during the year, this includes advances from customers, issued bonds/sukuk.
- Provisions that represent a confirmed debt to non-shareholders.
- Deferred tax liability, contract liability, and negative derivatives.
Current liabilities shall not be added to the Zakat base, except if a current asset is deducted and on a proportion basis as Art. 25, or if ZATCA proves that a current liability is non-current in nature. Shareholder credit loans in partnership and capital companies, except for listed companies, are classified as liability under certain conditions.

4- Treatment of major Zakat base deductions:

Deferred tax asset is deductible from the Zakat base (Art. 26).
Shareholder debit loans in capital and partnership companies, except for listed companies, or where debtors are not subject to Zakat, are considered as Zakat deductible, under certain conditions. (Art. 31, Art. 33)
Government debts are deductible under certain conditions. (Art. 32)
Investments in funds are deductible under certain conditions. (Art. 45)
Alternative method when the Zakat payer is unable to calculate the Zakat due on the foreign investments as stipulated under Art. 44. (Art. 46)
Investment in companies not subject to Zakat is deductible under certain conditions. (Art. 47)
Non-current properties and the like, which are not registered under the Zakat payer’s name, are deductible under certain conditions. (Art. 48)
Raw materials are deductible under certain conditions. (Art. 52)
Houses owned by the Zakat payer for the use of his employees, and housing loans paid to the employees through the Employees Housing Support Program, are deductible under certain conditions. (Art. 53-54)
Non-governmental sukuk and bonds are deductible under certain conditions. (Art. 42, Art. 55)
Real estate project under development classified as non-current asset, that will be sold after completion, unless available for sale on its condition, or its cost of sale exceeds 25% of its annual value in the financial statements (i.e., to be calculated on each single project), earlier this was 25% of its sales and advances.
Build, Operate and Transfer projects (i.e., BOT/BOOT/BOO/AOT) and the like are deductible for the lessor, under certain conditions. (Art. 74)
The unit holder in investment funds may claim his investment under certain conditions. (Art. 77)

5- Major Zakat adjustments to the accounting net profits:

Capital expenditure, provisions formed, Zakat and tax paid are considered as deductible expense. (Art. 63)
A CPA certificate is no longer required as a condition to accept bad debts write off, if the written off debt is not exceeding 1% of the Zakat payer’s revenues, or in final bankruptcy cases. (Art. 65)
Treatment of importation differences rules, under Art. 9(7) of the previous Zakat regulation, were cancelled.

6- Key changes in Zakat procedures:

Documents to be accepted by ZATCA shall be submitted by an authorized person. (Art. 99)
Amending the Zakat return in case of discovering an error, after obtaining ZATCA’s approval and submitting acceptable documentation. The statute of limitation is extended from the date of amending the return. (Art. 103-104)
Statute of limitation may be extended to 10 years, in the case of non-submission of the Zakat return. (Art.106)
New treatment when declared revenues are less than revenues as per ZATCA’s available information, or when declared expenses are higher than ZATCA’s available information. (Art. 60-61)
Books and records’ retention period is extended to 10 years. (Art. 110)
ZATCA has the right to assume a Zakat base or any of its components, under certain conditions. (Art. 114)

The takeaway

As the new regulation is introducing a new approach/methodology to calculate the Zakat due, it is recommended for the Zakat payers to study its impact on the Zakat liability for the financial year starting on or after 1 January 2024, and to maintain the required documentation to comply with the new regulation treatments.

The Zakat payers may evaluate the benefit of requesting to apply the new regulation on the years before 1 January 2024, as well, on the years under dispute, either at ZATCA or the tax committee levels, where the dispute is not officially resolved.