Zakat vs Income Tax in Saudi Arabia: What Is the Difference?

Zakat and income tax are two obligations that differ in their basis, their rate and their base, and yet many business owners confuse the two because the body administering them is the same and the regulatory deadline is the same. In this guide you will learn which of the two obligations applies to your business and why, how zakat is calculated against income tax, how mixed companies are divided between the two, and what happens when the books are weak.

The nationality of ownership is the deciding factor, not the type of activity

Many business owners assume that the type of commercial activity is what determines liability to zakat or to income tax, and the reality is otherwise. The criterion applied by the Zakat, Tax and Customs Authority is the nationality of ownership: shares owned by Saudis or by nationals of the Gulf Cooperation Council states are subject to zakat, and shares owned by non-Saudis and non-GCC nationals are subject to income tax. The same rule runs to the sole establishment and not to companies alone: an establishment owned by a Saudi files a zakat declaration on its activity even where it has no articles of association and no partners.

You may find two businesses working in the same field and at the same size, one of them filing a zakat declaration while the other files a tax declaration, and the difference lies in the registered record of owners rather than in what the two of them sell. This is where correct diagnosis begins: from the ownership page rather than from the income statement. And note that the obligation to file stands in a loss making year and where activity has stopped, so long as the registration remains in place, because a loss is dealt with inside the declaration and its carry forward is considered there, not by declining to file it.

Zakat: the rate, the base, and who it covers

Zakat is imposed on the Saudi and GCC shares in a business, and is calculated at 2.5% of the zakat base where the financial year is Hijri, and at a rate of approximately 2.578% where the financial year is Gregorian, because the Gregorian year is longer than the Hijri by around eleven days and the rate is adjusted to match that additional duration.

The point most often overlooked is that zakat is not imposed on profit alone. The zakat base is independent in the way it is built, resting on the long term sources of funding invested in the activity of the business, from which specified items are then deducted in accordance with the applicable rules. In practice this means a business may earn a modest profit while its zakat base remains large, or earn a good profit while its base is smaller than expected.

Income tax at 20%, and 15% is Value Added Tax

The corporate income tax rate in the Kingdom is 20% of the net taxable profit attributable to the non-Saudi and non-GCC share. This point in particular is where circulating content goes wrong most often, quoting 15% as income tax when it is nothing of the kind: 15% is the rate of Value Added Tax applied since the first of July 2020 to taxable supplies.

The difference between the two is substantive rather than formal. Income tax is imposed on the profits of the business itself and bears directly on what is left over for the owners, whereas Value Added Tax passes through the business by collection and remittance and is borne by the final consumer, so it does not count as an expense on it. And there is a third obligation that escapes many: payments to non-residents for services, royalties and distributions carry a withholding obligation independent of the annual income declaration, which is considered with every external contract before it is signed.

Mixed companies: a proportional split, not a choice

Where ownership is mixed between a Saudi or GCC partner and a foreign partner, the business does not choose between the two obligations but is subject to both proportionally. Zakat is calculated on the Saudi and GCC share of the zakat base, and income tax is calculated at 20% on the foreign share of the net taxable profit, and that is filed within the same regulatory window.

A direct accounting consequence follows: ownership percentages must be documented precisely, and the dates of any change in them recorded, because the split is built on them. The books must also be capable of producing both figures together, the zakat base and the net taxable profit, from the same accounting set. That begins with disciplined bookkeeping throughout the year, not with gathering documents at the end of it.

The zakat base against taxable profit

The difference between the two bases is not only in the rate but in what the rate is applied to. Taxable profit starts from net accounting profit and is then adjusted: non deductible expenses are excluded, depreciation differences are treated according to the groups prescribed in the regulations, and the rules on deducting financing costs, provisions, bad debts and loss carry forward are observed.

The zakat base is built from an entirely different angle, and you can trace it on your closed trial balance step by step: begin by adding the balances of equity, from capital, retained earnings and reserves, then add long term loans, provisions and what ranks with them, then subtract net fixed assets, long term investments and their equivalents within the specified rules, then compare the result with the adjusted net profit and take the higher of the two, because the base is not less than it. This is why it is never correct to calculate zakat by multiplying 2.5% by profit alone.

One authority and one deadline: 120 days

Despite the difference in basis between zakat and income tax, the body that administers them is one: the Zakat, Tax and Customs Authority. The channel is one as well: the account of the business on the Authority’s electronic portal, through which the VAT returns and the zakat or tax declaration are filed, and from which obligations, letters and data requests are followed.

The deadline is likewise shared: the zakat or tax declaration is filed within 120 days of the financial year end, and the amount due is paid within the same window. So a business whose financial year ends on 31 December falls due at the end of April of the following year. Count it in days on the calendar rather than in months, because in leap years the deadline falls on 29 April. Regulatory fines escalate the longer the delay runs, so deferring the declaration saves nothing and raises the cost instead.

Deemed assessment when the books are weak

Where the books are incomplete or unsupported by documents, or where the declaration is not filed on time, the matter does not stop at the absence of a figure. The Authority may assess the zakat base or the taxable income on a deemed basis, relying on whatever data is available to it, such as the VAT returns, the electronic invoices and the nature of the activity.

An assessment of that kind does not by its nature account for the particulars of your business, so it may disregard genuine expenses or losses due to be carried forward, and the figure arrives higher than the business actually owes, with the burden of proving otherwise passing to you. The window for objection is stated in the assessment letter itself, and is read from the day the letter arrives rather than from its last day, and the objection is raised with the supporting document for each contested item, item by item. This is where preparing in advance for any examination by the Zakat, Tax and Customs Authority shows its value.

What you prepare in practice before the declaration

Begin by establishing your position precisely: review the ownership percentages in the commercial registration and the articles of association, and determine whether you face a wholly zakat obligation, a wholly tax obligation, or a mixed one split proportionally. Then fix the date of your financial year end and count the 120 day window from it, so that you know when the financial statements must be closed and ready rather than when the declaration must be submitted.

After that comes data quality: reconciled bank balances, an updated fixed asset register, documents supporting the expenses, and agreement between the VAT returns and the revenue recorded in the books. Once the amount due is paid, the Authority issues the zakat certificate required in practice in government tenders and in collecting contract payments. And if you do not have someone following this internally, placing the accounting cycle with an external team through our services prevents gaps accumulating until the declaration deadline.