Step-by-Step Method for Calculating Zakat Tax for Enterprises in Saudi Arabia

As a business owner in Saudi Arabia, you need to know how to calculate Zakat tax, not only to abide by Saudi law, but to do the right thing from a religious point of view. Businesses are a part of Five Pillars of Islam, among your Zakat there is a section to put your wealth to use among those who need it, to promote social welfare, and community support. For example, in Saudi Arabia, the Zakat Tax system is managed by Zakat, Tax and Customs Authority (ZATCA), so that businesses err in assessing their Zakat and payment. Financial operations for any enterprise, big or small, is a crucial part of.

In this blog, we’ll guide you through a simple, step by step process to help you calculate your Zakat tax and understand the key terms like Zakat base, and how recent changes such as E-invoicing in Saudi Arabia (and specifically E-invoicing in Riyadh) are changing how businesses manage Zakat payments. If you are new to this or just want a refresher, we have you covered with practical tips to make sure your business remains compliant and contributes to the welfare of society.

What is the Zakat Tax for Businesses in Saudi Arabia?

Zakat for businessmen in the kingdom of Saudi Arabia is a compulsory financial contribution that businessmen should make from what is diverted into business and secondly, they are the religious responsibility for purification of wealth and the development of society. This means calculating 2.5% of the company’s Zakat base (its net worth as defined according to Islamic guidelines). The cash, the receivables, the inventory, the investments, and minus any liabilities or debts make up this base. Reading and following these guidelines will keep your business’s impact on the overall welfare of the society, and also reduce the economic disparity.

Zakat is applicable on the entire share of the business for businesses owned by Saudi citizens or citizens of Gulf Cooperation Council (GCC)countries. Yet, for companies with mixed ownership (i.e. Saudi and non-Saudi), only the Saudi portion of ownership is subject to Zakat, and the non-Saudi portion is usually subject to income tax. Through this distinction, the Zakat system conforms to the laws of the local countries and to international business practices.

What is the Zakat Tax Rate in Saudi Arabia?

The Zakat tax rate in Saudi Arabia is 2.5% flat rate on the Zakat base of the business which is the business’ net worth. It is the sum of what you own minus what you owe. This includes things like cash, receivables and inventory, but subtracting liabilities. Zakat is different from other taxes like the regular income tax, which is by religion for the equivalent dissemination of abundance and to help the welfare of the social order.

Who is liable to pay Zakat?

Here’s a breakdown of who is liable to pay Zakat in Saudi Arabia, including exemptions:

1. Resident Businesses Owned by Saudi or GCC Nationals:

• Zakat is applicable on the share of the business owned by Saudi or GCC nationals irrespective of the company’s ownership structure.

2. Mixed Ownership Companies (Saudi/GCC Nationals and Non-Saudis):

• The Zakat of Saudi portions of the business is applicable.
• Business income tax is payable by non-Saudi portions of the business at a rate of 20% on net adjusted profits.

3. Exemptions:

• Shares in listed companies purchased by non-Saudi investors for speculative trading in the Saudi stock market are not subject to Zakat, but rather income tax.
• Zakat is higher than the tax rates applied on oil and hydrocarbon production businesses.
• Natural gas investment entities are subject to the general income tax provisions instead of Zakat.

This structure guarantees that businesses in Saudi Arabia comply with the tax laws and at the same time encourage fairness and social welfare through Zakat.

Calculation of Zakat for Enterprises

Step 1: Identify Zakatable Assets

First, businesses need to identify assets that are required to be paid Zakat. These typically include:

• Cash and Bank Balances: Cash is always zakatable.
• Trade Receivables: Goods or services sold to customers that are outstanding invoices.
• Inventory: Goods or stock held for resale, at current retail prices.
• Investments: The Zakat base includes shares or securities that are to be resold.

This calculation does not include non-zakatable assets such as fixed assets, property and operational equipment.

Step 2: Deduct Liabilities

Once zakatable assets are identified, businesses can subtract liabilities that directly impact the Zakat base, including:

• Short term debts due within 12 lunar months.
• The outstanding invoices from customers.
• Things that you have to pay in the near future, such as utility bills and taxes.

Generally, long term liabilities or future expenses are non-deductible unless they are due within the next 12 months.

Step 3: Calculate the Zakat Base

To find the Zakat base, use the formula:

• Zakat Base = Zakatable Assets – Zakatable Liabilities

The net worth used for calculating Zakat due is calculated by this.

Step 4: Apply the Zakat Rate

Finally, the Zakat payable is calculated by applying the standard rate of 2.5% to the Zakat base:

• Zakat Base = Zakat Payable / 2.5%

The Zakat due from the enterprise to support social welfare and community development is this amount.

Zakat Calculation for Businesses Examples

Here’s a breakdown of the Zakat calculation for the retail company:

1. Zakatable Assets:

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

2. Liabilities:

• Outstanding Payables: SAR 100,000

3. Zakat Base Calculation:

• Zakat Base = Assets – Liabilities that are Zakatable
• Zakat Base = SAR 500,000 + SAR 300,000 + SAR 200,000 – SAR 100,000 = SAR 900,000

4. Zakat Payable Calculation:

• Zakat Base × 2.5% = Zakat Payable
• SAR 900,000 × 2.5% = SAR 22,500

For the fiscal year, the Zakat would be SAR 22,500 for the business.

How Do You Pay Zakat Tax?

Here’s a breakdown of how to pay Zakat tax in Saudi Arabia:

1.Furnish Zakat Return:

Businesses are obligated to submit their Zakat return within 120 days after the end of Zakat year. This helps businesses to meet how Zakat tax have to be calculated, as per the specified tax regulations.

2.Generate SADAD Invoice:

When the return is submitted it generates a SADAD invoice with a unique SADAD number. This invoice is the reference for the Zakat payment and it is to make sure the payment is processed correctly and allocated.

3.Pay Zakat Tax Online:

Zakat payments can be made in an easy way through online banking or ATMs through SADAD payment system. With this system, businesses can now pay electronically and make their payments without having to visit payment centers physically.

4. Use the 020 Code:

Businesses must use the 020 code when making the Zakat payment under the SADAD system, which has been specifically allocated for Zakat payments. This helps make sure the payment is getting categorized properly and tracked in the right tax code.

Conclusion:

In conclusion, the Zakat tax in Saudi Arabia is a clear and structured procedure that is managed by the Zakat Tax and Customs Authority (ZATCA). To remain compliant with Saudi regulations, businesses can follow the necessary steps submit a return, generate the SADAD invoice and make the payment through online banking or ATM. step by step process to help you calculate your Zakat tax and understand the key terms like Zakat base, and how recent changes such as E-invoicing in Saudi Arabia and specifically E-invoicing in Riyadh are changing how businesses manage Zakat payments. The 020 code used for Zakat payments makes the entire process easier and more accurate.

Learning that you must fulfill the tax obligation known as Zakat is not simply a matter that businesses operating in Saudi Arabia must do, but it’s also a vital act of charity that helps the well-being of society. With this, businesses can keep themselves informed and organized with Zakat tax payments and contribute to the well-being of their communities.