Saudi Arabia issues new Executive Regulations for Zakat Collection

Executive summary

On 21 March 2024, Saudi Arabia's Minister of Finance approved the new Executive Regulations for Zakat Collection (Bylaws) under Ministerial Resolution No. 1007.

The Bylaws (pdf), published by the Zakat, Tax and Customs Authority (ZATCA) on 22 March 2024, aim to clarify the zakat regulations and compliance requirements, particularly on zakat calculation methods. They also aim to consolidate all other zakat regulations previously issued for specific sectors, such as financing, insurance and investment funds.

The Bylaws apply to fiscal years starting on or after 1 January 2024. However, they can also be applied to fiscal years that began before 1 January 2024, provided that a zakat payer submits an application within 60 days from the date of publishing the Bylaws. For fiscal years in which a tax audit has not begun, the 60-day window starts from the date of receiving a tax audit notice.

In addition, the ZATCA published the "Guidelines for major amendments and treatments that came in the Zakat collection bylaws issued 1445H (pdf)."

Detailed discussion

Background

On 17 September 2023, the ZATCA released a set of proposed Zakat Bylaws (Draft Bylaws) for public consultation. See EY Global Tax Alert, Saudi Arabia releases new draft Zakat Bylaws for public consultation, dated 28 September 2023.

Following the public consultation and collecting views on the draft regulations from various stakeholders, the new Bylaws have now been released.

Highlights of the new zakat Bylaws*

• The Bylaws clarify key zakat concepts such as zakat residency, trading investments and development properties.

• The Bylaws introduce certain changes in the computation of the zakat base, including:
  • The zakat base calculation will align with a company's financial statements' closing balances for additions and deductions.
  • Net adjustments to profit/loss will be calculated separately and added to/deducted from the zakat base.
  • Noncurrent payables and equivalents will be considered as financing noncurrent assets, irrespective of which one comes first.
  • The zakat base will include ending balances of payables and equivalents, equity elements and provisions.
  • The rules for classifying shareholder loans as debt or equity for zakat purposes will be stricter.
  • Provisions will be treated differently for zakat purposes (e.g., employee benefits and vacation provisions are considered long-term debts).
  • The calculation of the zakat base includes adding amounts of current liabilities against deductible current assets to the zakat base.
  • The calculation deducts amounts of noncurrent liabilities against nondeductible noncurrent assets.
  • If the value of the current liabilities is higher than that of the current assets, the difference is added to the zakat base.
  • Provision charges will be recognized as allowable business expenses.
  • Taxes and zakat paid to the Government will be considered as allowable expenses.
  • New zakat-deductible items, including raw materials, statutory deposits and treasury bills in employee savings plans, are introduced under specific conditions.
  • Government receivables may be deducted from the zakat base under certain circumstances.
  • Updated minimum and maximum limits for the zakat base are established.
• Alternative methods for calculating zakat on foreign investments and funds are provided.

• Zakat assessment will be based on shareholders and their shareholding percentages at the end of the fiscal year, regardless of ownership changes during the year.
  
  * Please note that certain provisions within these Bylaws may require further clarification. Guidance on practical application may be necessary in some instances.

Implications

Zakat payers should assess the implications of the new regulations and consider whether it would be beneficial for them to opt to apply the new regulations to prior years, i.e., fiscal years that began prior to 1 January 2024.

Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young Professional Services (Professional LLC), Riyadh

• Asim Sheikh, Saudi Arabia Tax Market Segment Leader

• Ahmed H Akeel, Business Tax Services

• Amr Farouk, Global Compliance & Reporting

• Atif Khan, Global Compliance & Reporting

• Esraa Albuti, Business Tax Services

• Hosam Abdulkareem, Business Tax Services

• Imran Iqbal, Global Compliance & Reporting

• Mirza Ashraf, Global Compliance & Reporting

• Babar Ali, Business Tax Services

• Wissam Merhej, Business Tax Services

• Carl Suchtelen, Global Compliance & Reporting

• Rula Dajani, Business Tax Services

• Suleiman Mohammed, Global Compliance & Reporting

• Billy Thorne, International Tax and Transaction Services

• Carsten Kuhlmann, International Tax and Transaction Services

• Ricardo M. Cruz, KSA ITTS and Transfer Pricing Leader

Ernst & Young Professional Services (Professional LLC), Jeddah

• Ayman Abu El lzz, Global Compliance & Reporting

• Hussain Asiri, Business Tax Services

• Amro El Fadly, Business Tax Advisory

• Ahmed Mubarak, Business Tax Services

• Dana D. Dandashi, Global Compliance & Reporting

• Khalid Feroze, Business Tax Services

• Asem Habis, Business Tax Services

• Suleman Mulla, International Tax and Transaction Services

Ernst & Young Professional Services (Professional LLC), Al Khobar

• Syed Farhan Zubair, Global Compliance & Reporting

• Ali K. Khamis, Business Tax Services

• Bilal Mian, Global Compliance & Reporting

• Javed Aziz, Global Compliance & Reporting

• Haytham Hassan, Global Compliance & Reporting

• Waqas Khan, Business Tax Services

Ernst & Young — Middle East, Bahrain

• Miranda Bass, International Tax and Transaction Services

• David J. Macklin, International Tax and Transaction Services

• Patrick Oparah, International Tax and Transaction Tax — Transfer Pricing

Ernst & Young LLP (United States), Middle East Tax Desk, New York

• Asmaa Ali

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.