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Get the discount nowDo you feel confused when determining the elements included in calculating the zakat base?
You’re not alone. In Saudi Arabia’s dynamic and ever-evolving business and financial landscape, complying with zakat and tax regulations is a challenge that demands precision and deep knowledge. A simple error in calculation may not only cost the company financial penalties, but could also affect its reputation and financial stability.
The zakat base will be calculated by identifying the total zakatable assets and deducting allowable liabilities from them in accordance with the Zakat, Tax and Customs Authority (ZATCA) regulations. This definition, simple as it seems, opens the door to precise and complex details that are at the core of your daily work as an accountant or finance manager.
This guide is not just an article—it’s a comprehensive roadmap and a core reference designed specifically for you. We will take you by the hand step by step to unpack the complexities of the zakat and tax system in the Kingdom.
What you will learn in this guide:
How to calculate the zakat base: We will provide you with a detailed, practical explanation, supported by real-world examples, to calculate your company’s zakat base accurately and confidently.
Understanding Value Added Tax (VAT) in Saudi Arabia: We will clarify how VAT works, how to calculate it, and the importance of e-invoicing in achieving full compliance.
Steps for accurate zakat filing: You will learn the optimal way to prepare and submit the zakat return through electronic platforms, protecting you from the risk of fines and penalties.
To understand the financial landscape in the Kingdom, we must first clearly distinguish between the concepts of zakat and tax—they are the cornerstone of any successful accounting system in Saudi Arabia.
Zakat is not merely a financial obligation—it is one of the Five Pillars of Islam and a mandatory financial act of worship. It is defined in Sharia as “an obligatory right in a specific wealth for a specific group at a specific time.” From an accounting perspective, it is an annual obligation imposed on the net assets of companies and institutions owned by Saudi or GCC nationals, at a rate of 2.5%. The primary purpose of zakat is to achieve social solidarity, purify wealth, and bring blessing to it.
Although both represent a financial outflow from an economic entity to a regulatory body, the differences between them are fundamental:
| Basis of Comparison | Zakat | Tax |
|---|---|---|
| Nature | A financial act of worship and a pillar of Islam. | A civil obligation imposed by the state. |
| Foundation | Fixed Sharia texts (Qur’an and Sunnah). | Enacted laws and regulations subject to change. |
| Rate | Fixed (2.5% lunar year, or 2.5775% solar year). | Variable depending on the tax type and activity. |
| Subjects | Muslims (Saudis and GCC nationals in the context of companies). | All non-Saudi residents (income tax) or specific transactions (VAT). |
| Uses | Sharia-specified recipients (the poor, needy, etc.). | Used to fund public expenditures (infrastructure, healthcare, education). |
Tax is a monetary amount imposed by the state on individuals and companies to finance public expenditures and achieve economic policy objectives. In Saudi Arabia, there are several types of taxes, most notably:
Corporate income tax on foreign shareholders: Imposed on the shares of non-Saudi partners in companies resident in the Kingdom.
Value Added Tax (VAT): An indirect tax imposed on most goods and services bought and sold.
Withholding Tax: Imposed on amounts paid from a source in the Kingdom to a non-resident entity.
The relationship appears clearly in companies with mixed ownership (Saudi and foreign). In this case, the base subject to financial obligations is divided according to ownership percentages:
Shares of Saudi (and GCC) partners: Subject to zakat.
Shares of foreign partners: Subject to income tax.
Zakat goes beyond being just a year-end accounting entry. It directly affects:
Financial planning: The zakat obligation must be considered when preparing budgets and cash flows.
Investment decisions: The structure of investments may affect the size of the zakat base, making understanding the regulations critical.
Risk management: Any error in calculating zakat or filing the return may expose the company to financial penalties and sanctions that affect its stability.
As a finance manager or accountant, you are not just a recorder of numbers—you are the guardian of the company’s financial assets and the primary advisor in achieving full compliance.
This is the heart of the zakat accounting process. Accurate calculation of the zakat base is what separates smooth compliance from regulatory risk.
Calculating the zakat base relies on a basic equation that appears simple but requires deep understanding of its components:
Zakat Base = Total Sources of Funding − Fixed Assets and equivalents
Or: Zakat Base = (Zakatable Assets) − (Allowable Liabilities)
Let’s break down these components:
These are assets expected to generate income or growth during the year. They mainly include:
Cash and cash equivalents: Funds in banks and cash on hand.
Inventory: Whether raw materials, work in progress, or finished goods (valued at cost or market value, whichever is lower).
Accounts receivable (customers): Debts due from customers that are expected to be collected.
Short-term investments: Investments held for trading.
Refundable deposits and guarantees.
These are debts and obligations owed by the company to others that were used to finance zakatable assets. Chief among them:
Accounts payable (suppliers): Amounts owed to suppliers.
Short-term loans: Loans due within one fiscal year.
Accrued expenses: Such as salaries and rent due but unpaid.
Retained earnings: Allowed to be deducted as they are part of equity representing sources of financing.
Here are the practical steps you can follow:
Prepare the financial statements: Ensure that the statement of financial position (balance sheet) and the income statement are ready and approved in accordance with the accounting standards adopted in Saudi Arabia (aligned with IFRS).
Classify assets: Review each asset line item in the balance sheet and classify it—Is it a zakatable asset (such as inventory) or a non-zakatable asset (such as fixed assets like machinery and buildings)?
Classify liabilities: Review each liability line item and determine whether it is an allowable deduction or not.
Apply the equation: Sum the value of zakatable assets and deduct the value of allowable liabilities.
Make adjustments: ZATCA regulations may require certain specific adjustments. It is important to stay updated on the latest circulars and updates from the Authority.
Arrive at the final base: The figure you reach after these steps is the zakat base on which zakat will be calculated at 2.5%.
Suppose we have the company “Innovative Trading,” with the following simplified balance sheet at the end of 2025:
| Assets | Amount (SAR) | Liabilities & Equity | Amount (SAR) |
|---|---|---|---|
| Cash at bank | 500,000 | Accounts payable (suppliers) | 700,000 |
| Inventory | 1,200,000 | Short-term loans | 300,000 |
| Accounts receivable | 800,000 | Accrued expenses | 100,000 |
| Fixed assets (net) | 2,500,000 | Share capital | 3,000,000 |
| Total assets | 5,000,000 | Total liabilities & equity | 5,000,000 |
Calculation steps:
Identify zakatable assets:
Cash at bank: SAR 500,000
Inventory: SAR 1,200,000
Accounts receivable: SAR 800,000
Total zakatable assets = SAR 2,500,000
Note: Fixed assets are excluded from the calculation.
Identify allowable liabilities:
Accounts payable: SAR 700,000
Short-term loans: SAR 300,000
Accrued expenses: SAR 100,000
Total allowable liabilities = SAR 1,100,000
Calculate the zakat base:
Zakat base = 2,500,000 − 1,100,000 = SAR 1,400,000
Calculate the zakat due:
Zakat = 1,400,000 × 2.5% = SAR 35,000
This simplified example illustrates the basic mechanism, but reality may be more complex with additional items that require expertise and awareness of updated regulations.
Since its implementation in 2018, VAT has become an integral part of daily financial operations. A deep understanding of it protects your company from risks and ensures smooth processes.
It is an indirect tax imposed at each stage of the supply chain, from producer to end consumer. Businesses registered for VAT collect the tax from their customers (output VAT) and pay it to their suppliers (input VAT). At the end of each tax period, the company remits the difference between output VAT and input VAT to ZATCA.
Cash-flow management: Companies must manage their funds to be able to pay the tax due on time.
Pricing: Companies must factor the tax into the pricing of their products and services.
Accounting obligations: The tax requires a precise system for recording and tracking invoices and taxable transactions.
The standard VAT rate in Saudi Arabia is 15%. The basic formula for calculating VAT due is:
Tax due = Output VAT − Input VAT
Output VAT: The VAT you collect on your sales of taxable goods and services. (Example: If you sell a product for SAR 1,000, output VAT is SAR 150.)
Input VAT: The VAT you pay on your purchases of goods and services used in your business. (Example: If you purchase raw materials for SAR 500, input VAT is SAR 75.)
VAT payable to the Authority = 150 − 75 = SAR 75.
E-invoicing is the cornerstone of the modern tax system in the Kingdom. It is not just a digital invoice—it is an invoice issued and stored in a structured electronic format through an electronic system and contains specific requirements.
Essential requirements: The invoice must include accurate information such as a serial number, issue date, supplier and customer tax numbers, description of goods and services, taxable amount, and tax amount.
Integration (Phase Two): This phase requires integrating companies’ invoicing systems with ZATCA’s “Fatoora” system to share data in real time.
Challenges: Challenges lie in selecting a compliant accounting system, training staff, and ensuring data accuracy to avoid invoice rejection or fines.
Submitting the zakat return correctly and on time crowns all your efforts in calculation and preparation.
Filing is now fully electronic via the ZATCA portal. The general steps include:
Register on the portal: Ensure your company is registered on the Authority’s portal and has an active account.
Complete the return form: The form requires entering financial data extracted from your approved financial statements, such as assets, liabilities, and revenues.
Attach documents: You may be required to attach financial statements approved by a licensed auditor.
Review and submit: Carefully review all entered data before clicking the submit button.
Obtain a SADAD bill: After submitting the return, the Authority will issue a SADAD invoice for the amount due.
Pay on time: The amount due must be paid within the specified period to avoid late payment penalties.
Avoiding fines: Late filing or payment, or submitting inaccurate information, exposes the company to substantial financial penalties.
Obtaining the zakat certificate: This certificate is essential for many government transactions, such as renewing licenses, entering government tenders, and obtaining financing.
Building a clean compliance record: Enhances the company’s reputation and credibility with regulators and business partners.
The ZATCA e-portal is the official tool for filing returns. Its features include:
Easy access: Accessible from anywhere, anytime.
Guided process: The portal guides you step by step through data entry.
Record archiving: Keeps a record of all your previous returns and payments.
It is essential to be fully familiar with how to use this portal effectively to ensure smooth, error-free filing.
Theoretical knowledge alone is not enough—practical application is what distinguishes a professional accountant. Here are the most common errors to watch out for.
Error: Including fixed assets among zakatable assets.
How to avoid: Clearly separate fixed assets (buildings, machinery, vehicles) and remember they are excluded from the zakat base.
Error: Incorrectly valuing inventory at period end.
How to avoid: Apply the “cost or market, whichever is lower” principle accurately, and conduct a physical count to verify book figures.
Error: Deducting non-allowable liabilities, such as long-term loans used to finance fixed assets.
How to avoid: Ensure the liabilities you deduct are directly related to financing zakatable assets.
Error: Missing the filing deadline (usually within 120 days from the end of the fiscal year).
How to avoid: Set clear reminders in your calendar and start preparing the return well before the deadline.
Error: Mismatches between figures in the return and the approved financial statements.
How to avoid: Perform a thorough reconciliation between the return and the financial statements before final submission.
Error: Issuing invoices that do not comply with the technical and legal requirements of the “Fatoora” system.
How to avoid: Use an approved invoicing system compliant with ZATCA requirements. Train your team to issue invoices correctly.
Error: Neglecting to store and archive e-invoices for the legally required period.
How to avoid: Rely on secure cloud solutions or electronic archiving systems that ensure data retention and easy retrieval when needed.
You now have the necessary knowledge and a clear roadmap to calculate the zakat base, understand VAT, and avoid common mistakes. You have taken a major step toward full control over your company’s financial obligations.
But, as every professional knows, theoretical knowledge is important—yet practical application under expert supervision is what makes the real difference between merely avoiding risks and achieving excellence. You may read about how to drive a race car, but you won’t master it until you sit behind the wheel with a professional coach.
To turn this knowledge into solid practical skill, the “Applied Zakat and Tax Program” at Bateel Al-Itqan Training Center offers the ideal solution. This qualifying program is specifically designed to take you from theoretical understanding to practical mastery through hands-on workshops and real-life case studies from the Saudi market.
Leave no room for error or guesswork. Invest in your professional future and your company’s financial security.
Join the “Applied Zakat and Tax Program” now and receive specialized, intensive training to apply everything you’ve learned and achieve full compliance with confidence and professionalism. Your seat in the upcoming workshop is waiting.
In this comprehensive guide, we reviewed together the fundamental pillars of the zakat and tax system in the Kingdom of Saudi Arabia for 2025. You have:
Learned how to accurately calculate the zakat base, and the fundamental difference between it and VAT.
Understood the pivotal role that e-invoicing plays in achieving tax compliance.
Discovered the importance of filing returns correctly and on time to avoid penalties.
Acquiring these practical skills doesn’t just make you an accountant who follows rules—it transforms you into a strategic partner in your company’s success. Your ability to apply these laws accurately and efficiently enhances the company’s stability, protects it from risks, and contributes to its growth and prosperity.
Zakat is an Islamic financial act of worship at a fixed rate (2.5%) imposed on the assets of Saudis and GCC nationals for social solidarity. Tax, on the other hand, is a civil obligation imposed by the state at variable rates (such as income tax on foreigners or 15% VAT) to finance public expenditures.
To avoid fines, ensure that the zakat and tax returns are filed accurately and on time (within 120 days from the end of the fiscal year), and pay the amount due before the deadline. Use an accurate accounting system and comply with e-invoicing requirements to avoid data errors.
The e-invoice must contain accurate information such as the supplier’s and customer’s names and tax numbers, issue date, a unique serial number, a detailed description of goods or services, unit and total prices, the taxable amount, and the VAT rate and amount. It must also contain an encrypted QR code.
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