Zakat on Companies, Income Tax, and Withholding Tax: An Integrated Tax System to Enhance Saudi Arabia’s National Economy

Based on this, let us explore the key information about Zakat on Companies, income tax, and withholding tax in Saudi Arabia:

Zakat on Companies

1. Determining the Hawl (Zakat Year) Hawl refers to the completion of a full Hijri year on the wealth or assets subject to zakat. This date is essential for zakat calculation, serving as a starting point to track the year’s passage.

2. Identifying Zakatable Assets

Zakatable assets include:

• Cash: Funds in hand or in bank accounts.

• Trade goods: Items intended for sale.

• Raw materials: Materials that are yet to be manufactured.

• Finished products: Goods ready for sale.

Excluded from zakatable assets:

• Fixed assets: Buildings, machinery, equipment, and other production-related assets. These are considered long-term investments and are not subject to zakat.

3. Valuing Zakatable Assets Zakatable assets are valued based on their market value at the end of the zakat year. Accurate market knowledge is required to determine a fair and reasonable value.

4. Debt Calculation Debts that the company is obligated to pay within the year are deducted from the zakatable assets. This means zakat is only applied to the net zakatable assets after liabilities are subtracted.

5. Zakat Rate Calculation The fixed zakat rate is 2.5% (a quarter of a tenth) of the net zakatable assets after deducting debts. This constant rate simplifies the calculation process and clarifies the financial obligations of companies.
   Zakat on Companies plays a central role in financial fairness and economic responsibility.

Income Tax in Saudi Arabia

Income tax is levied on the income of individuals and companies in Saudi Arabia. This tax system aims to regulate government revenues and support national economic growth.

Income Tax Basics in Saudi Arabia

1. Scope and Application

• Individuals: Saudi nationals and residents are not subject to income tax.

• Companies: Income tax applies to profits of foreign companies, those owned by foreigners, or those operating in the oil and gas sector. Companies owned by Saudi citizens are fully exempt.

2. Tax Rate

• Foreign companies: 20% tax on net profits.

• Oil & gas sector: Different rates apply depending on revenue:

  • 85% for companies with over SAR 375 billion in revenue.

  • 50% for companies with SAR 187.5 billion to 375 billion.

  • 75% for companies earning less than SAR 187.5 billion.

3. Tax Base The taxable base is the net profit from business activity after deducting all expenses and costs. This ensures the tax applies to actual profits, not gross income.

4. Compliance Procedures

• Registration: Foreign companies and those in oil/gas must register with the General Authority of Zakat and Tax (GAZT).

• Filing: Companies must submit annual tax returns detailing income, profit, and related expenses.

• Payment: Taxes must be paid on time to avoid fines and penalties.

Withholding Tax in Saudi Arabia

Withholding tax is levied on amounts paid to non-residents from within Saudi Arabia. It forms part of the broader income tax system and applies to income earned by non-resident individuals or entities.

Withholding Tax Basics

1. Tax Rates Rates range from 5% to 20% depending on the income type:

• Royalties: 15%

• Technical services: 15%

• Interest: 5%

• Capital gains: 20%

• Dividends: 5%

2. Included Income Includes amounts paid for:

• Administrative or technical fees

• Technical services

• Royalties

• Interest

• Rent

• Dividends

• Capital gains

3. Procedures

• Withholding at source: Tax is deducted before payment to the non-resident.

• Deposit: Tax must be deposited to GAZT within 10 days after the month of payment.

Compliance Steps for Withholding Tax

• Identify the income type to determine the correct tax rate.

• Calculate the correct withholding amount accurately.

• Deduct the tax before payment to the non-resident.

• Deposit the withheld tax to GAZT on time to avoid penalties.

Conclusion

In conclusion, the zakat and tax system in Saudi Arabia is a vital part of the country’s economic strategy. Through Zakat on Companies, income tax, and withholding tax, the government aims to promote social justice, organize government revenue, and stimulate economic growth.
Zakat on Companies contributes to sustainable economic development and aligns with Islamic principles of wealth redistribution.
These systems help build a resilient and sustainable economy capable of meeting future challenges and addressing citizens’ needs.
Companies that properly apply Zakat on Companies can enhance transparency, strengthen corporate responsibility, and gain public trust.
Ultimately, the integration of Zakat on Companies within the broader tax framework plays a key role in Saudi Arabia’s vision for economic sustainability.