Definition

Zakat Declaration is the mandatory annual tax return filed by Saudi and GCC-owned businesses to the Zakat, Tax and Customs Authority (ZATCA), calculating and reporting zakat obligations at 2.5% of the company's zakat base. This Islamic wealth tax serves as both a religious obligation and legal requirement under Saudi tax law, governed by the Executive Regulations for Zakat Collection that became effective for fiscal years starting January 1, 2024.

Key Features/Components

• Zakat Base Calculation: Determination of zakatable assets including cash, receivables, inventory, and other liquid assets, while excluding fixed assets and long-term liabilities

• Annual Filing Requirement: Submission of zakat returns within 120 days from the end of the fiscal year through ZATCA's digital portal

• Rate Application: Standard zakat rate of 2.5% applied to the calculated zakat base after determining modified profit and funding sources

• Supporting Documentation: Required submission of audited financial statements approved by a chartered accountant licensed in Saudi Arabia, along with related party transaction records

Application in KSA

Zakat Declaration applies to all business entities owned by Saudi nationals or GCC citizens that meet specific residency requirements and exceed the nisab threshold. For mixed ownership companies, the Saudi/GCC portion is subject to zakat while the non-Saudi share faces income tax obligations. ZATCA, formerly known as GAZT, oversees the collection process and aims to achieve the highest degree of compliance through best practices and efficient procedures.

Compliance Requirements

Businesses must register with ZATCA before their first fiscal year and maintain accurate classification of assets and liabilities for zakat calculations. The new Executive Regulations require alignment with financial statement closing balances and separate calculation of net profit adjustments. Companies must submit their declaration electronically through ZATCA's portal, including all mandatory attachments and supporting documentation. Payment is processed through SADAD invoice numbers via online banking, ATMs, or authorized bank branches.

Common Challenges

Asset Classification Complexity: Businesses often struggle with correctly categorizing zakatable versus non-zakatable assets, particularly when distinguishing between trading investments and long-term holdings under the updated regulations.

Documentation Preparation: Compiling comprehensive financial records, ensuring Arabic language compliance, and maintaining audit-ready documentation can be time-intensive for businesses, especially those without established internal processes.

Best Practices

Leverage Technology: Cloud accounting platforms like Mezan provide comprehensive financial analysis tools that help streamline Zakat declaration preparation and efficiently manage financial data throughout the year.

Early Preparation: Begin zakat calculations and documentation compilation well before the 120-day filing deadline, allowing sufficient time for review and correction of any discrepancies with certified professionals.

For expert guidance on Zakat Declaration filing and compliance, consider consulting with qualified tax and business advisors.