For businesses operating in Saudi Arabia, Zakat and Corporate Income Tax are often discussed together, but they are not the same obligation. The treatment of a business depends on several factors, particularly its legal status, ownership structure, and the nature of its activities and income.
This distinction becomes especially important when a company has both Saudi and non-Saudi ownership. In that case, the business may need to account for both Zakat and Corporate Income Tax rather than treating the entire company under one framework.
Understanding how Zakat Tax Saudi Arabia works helps businesses identify the obligations that apply to them, organize their financial records, and prepare accurate filings.
How Does the Zakat and Tax Framework Work in Saudi Arabia?
The Zakat, Tax and Customs Authority (ZATCA) administers Zakat and different tax obligations in Saudi Arabia.
For businesses, the applicable treatment is not determined simply by whether the company operates in the Kingdom. Ownership is an important factor, particularly for resident capital companies.
In general, Zakat rules apply to entities and ownership interests that fall within the scope of the Zakat regulations, while Corporate Income Tax applies to resident capital companies with respect to shares owned by non-Saudi partners. Income Tax can also apply to non-residents who conduct business through a permanent establishment in Saudi Arabia or derive income from sources within the Kingdom.
This is why identifying the company’s ownership and tax position should come before calculating its liability.
What Is the Difference Between Zakat and Corporate Income Tax?
Although both affect a company’s financial compliance, Zakat and Corporate Income Tax have different bases and rules.
| Comparison | Zakat | Corporate Income Tax |
| Framework | Governed by the applicable Zakat collection regulations | Governed by the Saudi Income Tax Law and its Implementing Regulations |
| Who is generally affected? | Entities and ownership interests falling within the scope of the Zakat regulations | Resident capital companies in relation to non-Saudi ownership shares, as well as other taxpayers covered by the Income Tax Law |
| Assessment | Based on the Zakat base determined under the applicable regulations | Based on taxable income determined under the Income Tax Law |
| Compliance | Requires calculation, filing, supporting records, and payment where due | Requires tax registration, returns, supporting records, and payment where due |
The distinction matters because a company should not calculate Zakat and Corporate Income Tax using the same base or assume that one automatically replaces the other.
Who Is Generally Subject to Zakat in Saudi Arabia?
Zakat liability for businesses is determined according to the applicable Zakat regulations and the status and ownership of the entity.
The calculation is based on the Zakat base determined under those regulations rather than simply applying a percentage to accounting profit.
For this reason, companies need reliable financial statements and clear classifications of the items that affect the Zakat base.
The current Implementing Regulation for Zakat Collection applies to financial years beginning after January 1, 2024, making it important for businesses to use the rules applicable to the relevant financial period when preparing their Zakat position.
Who Is Subject to Corporate Income Tax in Saudi Arabia?
Corporate Income Tax applies to resident capital companies with respect to shares owned by non-Saudi partners, subject to the provisions and exceptions of the Income Tax Law.
The Income Tax framework also covers certain non-residents, including those conducting business in Saudi Arabia through a permanent establishment or deriving income from sources within the Kingdom.
This means foreign ownership can directly affect the tax treatment of a resident company. However, the company’s full position should be assessed based on its ownership, activities, income, and the applicable tax rules rather than ownership alone.
What Happens When a Company Has Saudi and Non-Saudi Ownership?
Mixed ownership is one of the situations where the distinction between Zakat and Corporate Income Tax becomes particularly important.
A resident capital company with Saudi and non-Saudi ownership should not automatically treat its entire financial position as subject only to Zakat or only to Corporate Income Tax.
The treatment may differ according to the ownership shares and the rules applicable to each portion. Therefore, the company needs accurate ownership records and financial information that allow its Zakat and tax position to be determined correctly.
Changes in ownership should also be reviewed because they may affect how the company’s obligations are treated.
How Are Zakat and Corporate Income Tax Determined?
The two obligations should be calculated separately under their respective rules.
For Zakat, the starting point is the company’s financial information, which is adjusted and treated according to the applicable Zakat regulations to determine the Zakat base.
Corporate Income Tax, on the other hand, is determined using taxable income calculated according to the Income Tax Law and its Implementing Regulations.
Accounting profit alone should therefore not be treated as the final Zakat base or taxable income without considering the adjustments required under the relevant framework.
Good accounting records are essential because inaccurate classification of assets, liabilities, income, or expenses can affect the final calculation.
Other Tax Obligations Businesses May Need to Consider
Being subject to Zakat or Corporate Income Tax does not mean these are the only obligations a business may have. Other taxes can apply independently depending on its activities and transactions.
Value Added Tax (VAT)
VAT is an indirect tax applied to taxable supplies of goods and services. Businesses that meet the applicable registration requirements must comply with VAT registration, invoicing, return, and payment obligations.
VAT should not be confused with Zakat or Corporate Income Tax. It is a separate tax with its own rules and compliance requirements.
Withholding Tax
Withholding Tax may apply when a Saudi resident or a permanent establishment makes certain payments from a source in Saudi Arabia to a non-resident.
The applicable treatment and rate depend on the nature of the payment and the relevant rules. Businesses dealing with overseas service providers or other non-resident parties should therefore review the withholding tax implications before processing relevant payments.
What Should Businesses Review for Zakat and Tax Compliance?
Effective compliance starts before the annual return is prepared. Businesses should regularly review:
- Ownership structure: particularly changes involving Saudi and non-Saudi shareholders.
- Accounting records: ensuring transactions are recorded and supported consistently.
- Income and expense classifications: to determine their appropriate treatment.
- Assets and liabilities: because their classification may affect the Zakat calculation.
- Registration and filing obligations: according to the company’s actual Zakat and tax position.
- Transactions with non-residents: to identify potential Withholding Tax implications.
- Supporting documents: including invoices, contracts, financial statements, and other records used in filings.
Reviewing these areas throughout the financial year makes it easier to identify issues before they affect a return or assessment.
Common Zakat and Tax Compliance Issues
Problems often arise from the way financial information is prepared rather than from the filing process itself.
Common issues include incomplete accounting records, incorrect classification of transactions, unsupported figures, late filings, and using the same treatment for transactions that fall under different rules.
Another risk is failing to reassess the company’s position after a change in ownership, business activities, or transaction structure.
A regular review of the Zakat and tax file can help identify these issues before they become part of a submitted return.
How Can DMC Support Zakat and Tax Compliance?
Managing a Zakat and tax file requires a clear understanding of the company’s ownership, financial information, transactions, and the obligations that apply to its circumstances.
Through its Zakat & Tax Services, DMC supports businesses in reviewing their Zakat and tax position, organizing financial information, preparing applicable returns, and identifying issues that may affect compliance or assessments. Review your company’s Zakat and tax position with DMC.
FAQ About Zakat and Tax in Saudi Arabia
Can a company be subject to both Zakat and Corporate Income Tax in Saudi Arabia?
Yes. This can arise in resident capital companies with mixed ownership, where different treatment may apply to Saudi and non-Saudi ownership shares under the relevant Zakat and Income Tax rules.
Does foreign ownership make the entire company subject to Corporate Income Tax?
Not necessarily. For resident capital companies, the Income Tax Law applies in relation to shares owned by non-Saudi partners, subject to the applicable rules and exceptions. The ownership structure therefore needs to be reviewed before determining the company’s treatment.
Is VAT part of the Zakat calculation?
VAT is a separate tax obligation with its own rules. A business may have VAT obligations while also being subject to Zakat, Corporate Income Tax, or both, depending on its circumstances.
Should payments to foreign suppliers or service providers be reviewed for Withholding Tax?
Yes. Certain payments from a Saudi source to non-residents may fall within Withholding Tax rules. The nature of the payment and the applicable provisions should be reviewed before determining whether withholding is required.
Can a change in company ownership affect Zakat and tax treatment?
Yes. Because ownership is relevant to the application of Zakat and Corporate Income Tax, changes in ownership may affect the company’s treatment and should be considered when reviewing its Zakat and tax position.
