The Zakat, Tax and Customs Authority (ZATCA) in Saudi Arabia adopts an indirect method—commonly known as the Sources of Funds Method—for Calculating the Zakat Base. This method is built upon two primary steps:

1. Additions: Representing external sources equivalent to deductible assets.

2. Deductions: Representing the value of non-Zakatable and Zakatable assets.

The formula for Calculating the Zakat Base is:

Zakat Base = Additions – Deductions

Reasons for Additions to the Zakat Base

To ensure accurate Calculating the Zakat Base, ZATCA requires the inclusion of external funding sources (obligations) based on the assumption that they are prioritized to finance repaid items before internal sources of funding. The order is:

1. External sources of funds (up to the value of repaid assets)

2. Internal sources of funds

The Additions include:

• Capital

• Revenue and advance payments

• First-year reserves

• Adjusted net profit / Net fixed assets

• Any item acquired at a discounted rate

• Retained earnings

• First-year provisions

• Profits pending distribution

• Changes in fair value

• Long-term liabilities (up to the deductible limit from the Zakat base)

Deductions in Calculating the Zakat Base

The deductible items that are excluded when Calculating the Zakat Base include:

• Net fixed assets

• Capital under construction

• Intangible assets

• Zakat investments / investments in entities inside and outside the Kingdom not held for trading, as per applicable rules

• Net real estate under development

• Net incorporation expenses

• Statutory deposit for insurance and reinsurance companies

• Adjusted net loss or carried-forward loss or loss as per financial statements, whichever is lower

• Agricultural inputs

For more detailed guidance on Calculating the Zakat Base, visit the official website of the Zakat, Tax and Customs Authority (ZATCA) here:

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