Zakat vs corporate income tax in the Kingdom of Saudi Arabia is primarily related to the company’s ownership, the nature of the partners, and the type of base on which the dues are calculated.
Zakat is applied to the shares subject to Zakat in accordance with the applicable regulations, while income tax is applied to the categories specified in the Income Tax Law, most notably the shares of non-Saudi partners in resident capital companies and non-resident establishments carrying on an activity in the Kingdom in accordance with the statutory conditions.
In today’s article, we review with you Zakat vs corporate income tax, in addition to the services provided by CLA.
Zakat vs corporate income tax
Zakat vs corporate income tax can be clarified through several aspects, the most important of which are the entity subject to the obligation, the basis of calculation, the type of base, and the due rate.
Saudi or Gulf establishments to which the conditions for being subject to Zakat apply are subject to the provisions of Zakat collection, while non-Saudi shares in resident capital companies are subject to income tax in accordance with the Income Tax Law.
As for non-resident establishments that carry on an activity in the Kingdom through a permanent establishment or derive income from a source in the Kingdom, they are also subject to the relevant tax provisions.
What is Zakat on companies?
Zakat on companies is a Zakat obligation to which the taxpayer is subject in accordance with the provisions of Zakat collection and the Executive Regulations organizing it.
The amount of Zakat is determined based on the Zakat base after making the additions, deductions, and treatments stipulated by the statutory rules.
This does not mean that Zakat is simply calculated on the company’s net profits; determining the base depends on a set of elements of the financial position and the Zakat treatments specific to each case.
The Zakat, Tax and Customs Authority provides an electronic service for Zakat registration for establishments that carry on a commercial activity and are subject to the Zakat regulations.
What is corporate income tax?
Income tax is a direct tax imposed in accordance with the Saudi Income Tax Law on the categories determined by the Law.
The most prominent of these are the shares of non-Saudi partners in resident capital companies, as well as non-resident persons who carry on an activity in the Kingdom through a permanent establishment or derive income from a source in the Kingdom.
The taxable income and the tax base are determined in accordance with the provisions set out in the Income Tax Law and its Executive Regulations.
The difference between the Zakat base and the tax base
The base is one of the most important aspects of the difference between Zakat and income tax.
The Zakat base
The Zakat base is determined in accordance with the rules of Zakat collection, by treating certain elements in the financial statements by adding or deducting them according to their nature and the applicable statutory provisions.
The tax base
The tax base is determined in accordance with the Income Tax Law, and it usually starts from the accounting result of the activity, then the necessary tax adjustments are made to arrive at the taxable income.
Consequently, the Zakat base and the tax base are not expected to be equal even when the treatment relates to the same company, because each has different rules and provisions.
The difference between Zakat and income tax in terms of the due rate
The rate differs according to the type of obligation and the category subject to it. For Zakat, the basic rate is 2.5% for the Hijri year, with a treatment based on the number of days in the fiscal year when the fiscal year differs from the Hijri year.
As for income tax, it is applied to the tax base in accordance with the rates determined by the Income Tax Law.
For the general categories subject to corporate income tax, the basic rate is 20%, with special provisions and rates for certain activities and sectors. Therefore, the nature of the activity and the legal structure must be determined before determining the tax due.
The difference between Zakat and income tax in terms of being subject
The ownership structure is one of the important factors in determining whether the company is subject to Zakat or income tax.
According to what the Zakat, Tax and Customs Authority clarifies, Saudi or Gulf establishments that meet the conditions are subject to Zakat, while non-Saudi shares in mixed companies are subject to income tax, and Saudi shares may be subject to Zakat.
As for foreign establishments, income tax applies to them in accordance with the relevant statutory provisions, including cases in which they carry on an activity inside the Kingdom or derive income from a Saudi source.
Can a company be subject to both Zakat and income tax?
In mixed companies, the treatment may differ according to the ownership percentage; the Saudi or Gulf share may be subject to Zakat, while the non-Saudi share is subject to income tax in accordance with the rules governing that.
Therefore, it is not enough to look at the company’s name or nationality only; rather, the ownership structure, the nature of the activity, and the statutory status of the partners should be reviewed.
A simplified example of the difference between Zakat and income tax
If there is a mixed company that includes Saudi and non-Saudi partners, the dues are not necessarily calculated on the entire company in the same way.
The Saudi share may be subject to Zakat in accordance with the rules of the Zakat base, while the non-Saudi share is subject to income tax in accordance with the Income Tax Law.
This example is for clarification only; the actual calculation requires reviewing the financial statements, the ownership structure, the financial period, and all relevant statutory treatments.
Companies’ obligations towards the Zakat, Tax and Customs Authority
Establishments subject to Zakat or income tax are obligated to register, submit declarations, and pay the due amounts in accordance with the deadlines specified for each type of obligation.
The Zakat, Tax and Customs Authority clarifies that Zakat and income tax declarations for foreign establishments are submitted within a period not exceeding 120 days from the end of the year represented by the declaration, in accordance with the relevant statutory provisions.
The Authority also provides electronic services for registration, submitting declarations, payment, and obtaining certificates related to Zakat and tax.
The importance of accurate accounting in calculating Zakat and tax
Accurate accounting helps determine the elements that enter into the Zakat or tax base and apply the correct treatments to them.
It also contributes to preparing declarations more accurately and reducing the risks of errors when submitting data to the Zakat, Tax and Customs Authority.
The importance of specialized review increases for companies that include partners of different nationalities, carry on multiple activities, or have transactions with related parties or entities outside the Kingdom.
CLA Services
- Tax and Zakat compliance: Preparing, reviewing, and submitting declarations in accordance with the regulations and specified deadlines.
- Tax and Zakat planning: Legal solutions to improve financial planning and manage obligations efficiently.
- Indirect taxes: Managing VAT and customs duties and supporting compliance.
- Tax disputes: Preparing objections, representing clients, and following up on dispute and appeal procedures.
- Transfer pricing: Preparing transfer pricing policies in accordance with regulatory requirements and the arm’s length principle.
- Tax technology: Automating tax processes and improving data management and reporting.
- Tax audit: Reviewing records and transactions to detect risks and enhance compliance.
- International tax and Zakat: Analyzing cross-border transactions and supporting compliance with international requirements.
- Tax and Zakat consultations: Providing specialized solutions to manage obligations and address tax and Zakat risks.
Frequently Asked Questions about Zakat vs corporate income tax
What is the basic difference between Zakat and income tax?
Zakat is calculated in accordance with the rules of the Zakat base on the categories subject to the provisions of Zakat collection, while income tax is imposed on the categories specified in the Income Tax Law, including the shares of non-Saudi partners in resident capital companies and non-resident establishments subject to the Law.
Does a Saudi company pay income tax?
Not merely because it is a Saudi company; being subject to income tax is linked to the nature of ownership, the statutory status, and the activity. The shares of non-Saudi partners in resident capital companies are subject to income tax in accordance with the Law.
What is the Zakat rate on companies?
The basic Zakat rate is 2.5% for the Hijri year, taking into account the rules for determining the Zakat base, the length of the fiscal year, and the relevant statutory treatments.
What is the corporate income tax rate in Saudi Arabia?
The general income tax rate is 20% for the categories subject to it, with special provisions and rates for certain activities and sectors.
Are mixed companies subject to both Zakat and tax?
Saudi shares may be subject to Zakat and non-Saudi shares to income tax, in accordance with the ownership structure and the applicable statutory rules.
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