Saudi Arabia runs two systems side by side for companies: Zakat and corporate income tax. Both are administered by the Zakat, Tax and Customs Authority (ZATCA), both are filed annually, and both start from the financial statements. But they measure different things, apply to different owners and need different information from the ledger. A company that understands only one of them usually discovers the other at the worst moment, during an assessment.
Who pays Zakat and who pays income tax?
The dividing line is ownership. As a general rule:
- The share of a company owned by Saudi nationals, and by GCC nationals treated as Saudi for this purpose, is subject to Zakat.
- The share owned by non-Saudi shareholders is subject to corporate income tax.
- A company with mixed ownership files a combined position: Zakat on the Saudi and GCC share, income tax on the foreign share, both computed from the same accounts.
- Certain sectors, such as oil and hydrocarbons, have their own regimes and rates that this note does not cover.
Where shareholders are themselves companies, their treatment needs a careful reading of the regulations, so confirm how corporate shareholders are treated with your adviser. When the shareholder register changes during the year, the split changes with it.
What does each one actually measure?
Corporate income tax is a tax on profit. The starting point is accounting profit, adjusted for items the tax rules treat differently: expenses that are not deductible, provisions that are deductible only when they are used, depreciation computed under the tax rules rather than the accounting policy, and so on. The standard rate is 20% of the taxable profit attributable to the foreign share.
Zakat is a levy on wealth, not on profit. It is charged at 2.5% of the zakat base, which is built broadly from the company’s sources of funds, such as equity, retained earnings, certain provisions and long-term financing, less the assets the regulations allow to be deducted, such as fixed assets and certain long-term investments. Adjusted net profit for the year also enters the calculation. A loss-making company can therefore still owe Zakat if its base is positive. The regulations defining the base have been revised in recent years, so build your computation on the current ZATCA rules, not on last decade’s template.
Income tax asks what you earned. Zakat asks what you hold. The ledger has to answer both.
What must the ledger support?
Neither return can be prepared well from a trial balance alone. The detail matters, because the classification of a balance often decides whether it is added to the zakat base, deducted from it, or adjusted for income tax.
- A chart of accounts that separates long-term from short-term financing, and related-party balances from third-party ones.
- Provisions in their own accounts, with movements that show amounts charged and amounts used during the year.
- A fixed asset register that reconciles to the ledger, with additions, disposals and depreciation traceable to documents.
- Investments classified by type and holding, with the evidence the deduction rules require.
- A record of ownership percentages by period, so the split between Zakat and income tax can be computed and defended.
- Non-deductible expenses, such as fines and costs without adequate support, tagged as they are posted, not reconstructed at year-end.
How do withholding tax and VAT fit in?
They are separate obligations that run through the year. Payments to non-resident parties may carry withholding tax, and VAT at 15% is filed on its own cycle. Neither replaces Zakat or income tax, but all of them draw on the same vendor and customer master data, so an error in one tends to appear in the others.
How should a finance team prepare during the year?
The annual return is due by the statutory deadline after year-end, and the computation is only as good as the twelve months of postings behind it. Our approach, whether as part of an Odoo implementation or a Virtual CFO engagement, is to design the chart of accounts and analytic tags with both computations in mind, prepare a draft zakat base and income tax computation at each quarter close, and keep a reconciliation from the audited financial statements to every line of the returns. When ZATCA asks a question during an assessment, the answer should already be in the file.