Calculation of Zakat Tax for Enterprises in KSA: Step-by-Step Method

Zakat, one of the Five Pillars of Islam, is a mandatory almsgiving obligation with profound spiritual and economic significance. For Saudi Arabia (KSA) businesses, Zakat transcends individual charity and becomes an essential financial obligation. Governed by the Zakat, Tax, and Customs Authority (ZATCA), Zakat ensures equitable wealth distribution and societal upliftment in adherence to Sharia law.

This article will provide details about Zakat calculation for businesses in Saudi Arabia, tax rate, liability, calculations, and distinctions between income tax and Zakat for individuals.

What is the Zakat Tax for Businesses in Saudi Arabia?

Zakat for businesses involves a mandatory contribution of 2.5% of the business's "Zakat base," aimed at purifying wealth and aiding societal development. In Saudi Arabia (KSA), Zakat is also imposed on enterprises owned by Saudi citizens or citizens of Gulf Cooperation Council (GCC) countries (treated as Saudi citizens for tax purposes). 

It is calculated at 2.5% of the company’s Zakat base, representing its net worth determined under specific Islamic guidelines. Zakat aims to purify wealth and ensure equitable redistribution for societal welfare.

For companies with mixed ownership (Saudi and non-Saudi stakeholders), the Saudi share is subject to Zakat, while the non-Saudi share is liable for income tax.

What is the Zakat Tax Rate in Saudi Arabia?

Zakat is an additional tax in addition to the regular income tax. For enterprises, zakat is calculated at a flat rate of 2.5% on the organization’s zakat base, which is based on the business enterprise’s net worth. 

Who is liable to pay Zakat?

The following businesses in Saudi Arabia are liable to pay Zakat:

1. Resident Businesses Owned by Saudi or GCC Nationals: Zakat applies to the Saudi or GCC national share of companies, regardless of ownership structure.
2. Mixed Ownership Companies: For companies owned by both Saudi/GCC nationals and non-Saudi investors:

• Saudi portions are subject to Zakat.
• Non-Saudi portions are subject to income tax (20% of net adjusted profits).

Exemptions

1. Shares in listed companies acquired for speculative trading in the Saudi stock market by non-Saudi investors are excluded from Zakat and subject to income tax instead.
2. Persons engaged in oil and hydrocarbon production are taxed at rates higher than Zakat.
3. Natural gas investment entities are taxed under general income tax provisions instead of Zakat.

Key Differences Between Individual Zakat and Business Zakat

Calculating Zakat for individual and Businesses is different as both of these hold different type of assets, liabilities and calculation base.

Calculation of Zakat for Enterprises 

Zakat is calculated at a flat rate of 2.5% on an entity’s Zakat Bases which includes eligible assets which include liquid assets cash, gold, silver and other investments and excludes any short term liabilities. Further, the step-by-step procedure to calculate the zakat tax on the zakat base is as follows:

Step 1: Identify Zakatable Assets

These include:

• Cash and Bank Balances: Liquid assets are always zakatable.
• Trade Receivables: Outstanding invoices for goods or services sold.
• Inventory: Stock valued at current retail prices.
• Investments: Shares intended for resale.

Non-zakatable assets include fixed assets, property, and equipment used in operations like plants and machinery, as these are not classified as "productive" under Sharia law.

Step 2. Deduct Liabilities

Liabilities directly affecting the Zakat base can be deducted, such as:

• Payables due within 12 lunar months.
• Arrears and outstanding invoices.
• Current utility bills and taxes.

Long-term liabilities and future expenses are generally non-deductible unless their repayments fall within the upcoming 12 months.

Step 3. Calculate the Zakat Base

The Zakat base is computed using: 

Zakat Base=Zakatable Assets−Deductible Liabilities

Step 4. Apply the Zakat Rate

Finally, Zakat payable is calculated as:

Zakat Payable=Zakat Base×2.5%

Examples of Zakat Calculation for Businesses

A retail company operating in Saudi Arabia wants to calculate its Zakat for the fiscal year. Below are its financial details:

Zakatable Assets:

• Cash: SAR 500,000
• Inventory (at retail value): SAR 300,000
• Trade Receivables: SAR 200,000

Liabilities:

• Outstanding Payables: SAR 100,000

Calculation:

1. Zakat Base = SAR (500,000 + 300,000 + 200,000 - 100,000) = SAR 900,000
2. Zakat Payable = SAR 900,000 × 2.5% = SAR 22,500

How Do You Pay Zakat Tax?

Paying Zakat taxes in KSA is straightforward, as the Zakat, Tax and Customs Authority (ZATCA) manages it. Here is how businesses can pay Zakat Tax in KSA

• After the end of the Zakat year, zakat payers must furnish a return no later than 120 days after the end of the year. 
• After the return is furnished, a SADAD invoice with a SADAD number is generated. 
• The ZAKAT tax payment can be made online via ATM or online banking using the SADAD payment system.
• All the Zakat payments will be made under the 020 code. 

Conclusion 

Zakat serves as a critical component of Islamic finance, fostering equitable wealth distribution and promoting societal welfare. 

Zakat for businesses in Saudi Arabia is calculated at 2.5% of the Zakat base, which represents net zakatable assets. This base excludes fixed assets that are not active sources of income and considers only short-term liabilities due within one year. As Saudi Arabia does not impose income tax on its citizens, Saudi and GCC nationals are required to fulfill their Zakat obligations as part of their religious and financial duties.