Saudi Arabia: Zakat treatment of related-party transactions; thresholds for transfer pricing documentation

Guidelines on Zakat treatment of transactions between related parties and also specified thresholds for maintaining transfer pricing documentation

Treatment of related-party transactions; thresholds for transfer pricing documentation

Article Posted date 18 December 2023

The Zakat, Tax, and Customs Authority (ZATCA) on 26 November 2023 issued guidelines on the Zakat treatment of transactions between related parties and also specified thresholds for maintaining transfer pricing documentation for Zakat payers.

Zakat treatment of related-party transactions

ZATCA provided examples of common transactions between related parties, divided into three categories: commercial transactions, indirect financing (expenses paid on behalf of related parties), and direct financial transactions (non-banking). The treatment of these transactions is as follows:

  • Commercial transactions: Transactions not at arm's length price will be treated as per Paragraph No. 6 of Article No. 9 of the Zakat Regulations. Expenses exceeding the market price will be disallowed when calculating Zakat-adjusted profits.
  • Indirect financing: No adjustment is required to the Zakat base for payments made on behalf of related parties. However, any outstanding balances at year-end will be treated as debts as per the Zakat regulations.
  • Direct financial transactions (non-banking): ZATCA provided a table illustrating the Zakat treatment of various types of financial transactions.
  • Financial transactions classified as loan or equity: ZATCA also provided a table specifying the debt or equity treatment of certain financing transactions.
  • In-kind contribution by shareholders: In-kind contributions to the company’s equity are deductible from the Zakat base, and the corresponding equity contribution must be added to the Zakat base.
  • Compensation to board members: Compensation paid to board members is deductible, provided it is fair and at arm's length.
  • Partners’ salaries: Salaries and allowances for partners registered with General Organization for Social Insurance (GOSI) are deductible expenses, given the existence of an employment contract and disclosure with GOSI.
  • Assets recognized in financial statements, but legally owned by the shareholder: Such assets are deductible from the Zakat base, provided certain conditions are met.

Transfer pricing documentation for Zakat payers

Zakat payers must disclose related-party transactions without any threshold from 1 January 2024. They are also required to maintain transfer pricing documentation in two phases, with different thresholds for each phase. Phase 1 applies to fiscal years starting 1 January 2024 to 1 January 2026, and Phase 2 applies to fiscal years starting 1 January 2027 onward.



For more information, contact the Global Leader of KPMG Global Transfer Pricing Services:

Burcin Nee | bnee@kpmg.com

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