Guideline for Electricity,Gas, Steam and Air Conditioning Supply Sector

1. Introduction

1.1 About Zakat
1.2 Levy of Zakat
1.3 Application of Zakat Levy in Saudi Arabia
1.4 General Authority for Zakat & Tax
1.5 Functions of the General Authority of Zakat & Tax
1.6 Overview of the General Zakat Guide

2. Zakat Concepts, Terminology and Calculation Methods

3. Identify Zakat Base for Zakat Payer Maintaining Commercial Books

3.1 Components of Zakat Base (Additions)
3.2 Items of Zakat Base (Deductibles)

4. Adjustment to the Result of Business

4.1 Expenses that may be deducted
4.2 Non-deductible Expenses

5. Wholesale, Retail and Repair of Motor Vehicles and Motorcycles Sector

5.1 Sector definitions
5.2 Practical Examples

6. Appendix: Frequently Asked Questions (FAQ)

This guideline was issued by the Zakat, Tax and Customs Authority («ZATCA» or «Authority») to elucidate certain treatments regarding the implementation of the statutory provisions in effect as of the date of publication of this guideline. The content of this guideline may not be construed as an amendmentto any of the laws and regulations applicable in the Kingdom.

Additionally, it should be noted that the indicative treatments outlined in this guideline will be carried out by the Authority in accordance with the applicable regulations. Where any Clarification, explanation, or information given in this guideline is modified but the regulation remains the same, the updated indicative treatment shall then be applicable prospectively to transactions completed after the publication date of the guideline on the Authority's website.

Introduction

About Zakat

Zakat is the third pillar of Islam, an essential financial worship in life of every Muslim, as quoted in the Holy Quran. Allah Almighty equated Zakat with Prayers in more than eighty verses, which is one of the most important pillars that distinguishes the Muslim community from others. It is a manifestation of the supremacy of Islamic legislation; as it represents a defining element in fighting poverty and alleviate the suffering of the poor. A vital element in achieving social solidarity.

Levy of Zakat

As an indication of the great status of Zakat in Islam; the government is entrusted with administering and supervising the collection of Zakat on declared funds and its distribution to its beneficiaries. The government is authorized to collect the Zakat on the declared funds and distribute it to the eligible beneficiaries, by entrusting some workers (employees engaged for zakat collection purposes) to go through the owners of funds, throughout the country, and calculate the amount of Zakat, and then collect it from them, and oversee the disbursement and distribution to eligible persons.

The General Authority of Zakat & Tax (the Authority) is responsible for levying and collection of Zakat. All procedures relating to the Zakat account of the Zakat payer, from the registration of the Zakat payer, to the process of calculating the amount of Zakat, which includes supervising the submission of Zakat declarations, payment procedures, examination of data provided, and verification by the Authority's staff, until issuance of the final Zakat certificate, including the investigation of any objections that may be raised by the Zakat payer with regard to the Authority's assessment.

Application of Zakat Levy in Saudi Arabia

The collection and disbursement of Zakat to the beneficiaries is one of the basic tasks of the state as stipulated in the Basic Law of Governance, and stated in Article (21): (Zakat shall be collected and spent as prescribed by the Islamic Shariah). Article (7) thereof indicated that the state shall oversee of Islamic Shariah obligations in general, which includes levying of Zakat and its disbursement to the designed beneficiaries, where it states: (Governance in the Kingdom of Saudi Arabia derives its authority from the Holy Quran as revealed by the God Most High and the Sunnah of his Messenger (peace and blessings be upon him), both of which govern this Law and all the laws of the State).

To confirm this, Royal Decree No. (178634/28/2/) dated 291370/6/H (corresponding to 6 April 1951) was issued during the reign of the founder King Abdul Aziz (may God rest his soul), which included the order for the levying of Zakat. This was emphasized in many subsequent royal decrees, implementing ministerial decisions and interpreting regulations and circulars, including Royal Decree No. (M/40), dated 21405/7/H and its Implementing Regulations for levy of Zakat issued under Ministerial Decree No. (2082) dated 11438 6/H (28 February 2017) and the Implementing Regulations for Zakat Levy issued under Ministerial Decree No. (2216) dated 71440/7/H corresponding to (14 March 2019), which shall apply to the Zakat years starting from 1 January 2019 for all Zakat payers, except those who are accounted for on deemed basis in accordance with section 4 of 5 Zakat Guideline for Professional, Scientific and Technical Activities Sector Version 1 the Regulations whose declarations shall be subject to the regulations after 31 December 2019. Therefore, the Implementing Regulation for Zakat Levy issued on 71440/7/H [14 March 2019] shall not apply to financial years prior to this date. Prior years are to be assessed in accordance with the regulations and instructions preceded that date.

The Implementing Regulations for Zakat levy have specifically focused on the Zakat collection regulations in the commercial activities apart from other Zakatable funds together with the requirements for filing Zakat declaration, the procedures of assessment, examination and payment, and their time periods.

The Zakat collected by The General Authority of Zakat & Tax shall be deposited in the Social Security Account, which shall distribute this to the poor and needy in accordance with Royal Decree No. 161/5/ dated 51383/1/H (28 May 1963). Paragraph (1) thereof stated 'Zakat shall be collected in full from all joint stock companies and others and individuals subject to Zakat'. In paragraph (2): 'All the amounts collected shall be given to the Social Security Fund'.

General Authority for Zakat & Tax

The General Authority of Zakat & Tax is the agency authorized to collect Zakat in the Kingdom of Saudi Arabia, whichis entrusted with levying of Zakat in accordance with the Royal Decree No (178634/28/2/), dated 291370/6/, which provides for levying of Zakat from those who hold Saudi citizenship.
Established by Ministerial Resolution No. (394), dated 71370/8/H, as one of the government bodies under the Ministry of Finance, and was entrusted with the task of the levying of Zakat.
Royal Decree No. (61) dated 51383/1/H was issued, which ordered the levying of Zakat in full and transferring or paying it to the Social Security Organization.
A number of royal decrees and ministerial resolutions regulating Zakat collection activities were issued thereafter, including Royal Decree No. (M/40) dated 21405/7/H, which included the order to collect Zakat in full from all companies, institutions and others and individuals who are subject to Zakat. Then, the Implementing Regulation of the Royal Decree (M/40) was issued under Ministerial Resolution No. (2082) dated 11438/6/H.
On 201438/7/H, The General Authority of Zakat & Tax was formed pursuant to the Council of Ministers Resolution No. (465) adopting the Authority's law and organization.

Functions of the General Authority of Zakat & Tax

The General Authority of Zakat & Tax functions defined in Article (3) thereof includes the following:

Collect Zakat and taxes from the Zakat payer in accordance with the relevant regulations, rules and instructions.
Provide high quality services to the Zakat payer to help zakat payers fulfill their duties.
Follow up the Zakat payer and take the necessary actions to ensure levying of the payable amounts.
Work to raise awareness of the Zakat payer and strengthen the degree of voluntary commitment and ensure his compliance with the instructions and guidelines issued by the Authority in its jurisdiction.
Cooperate andexchange expertise with regional and international bodies and organizations, and specialized expertise organizations inside and outside the Kingdom, within the limits of the Authority's jurisdiction.
Represent the Kingdom at regional and international organizations, bodies, forums and conferences that are related to the Authority's jurisdiction.

Overview of the General Zakat Guide

The guide provides guidance and basic information on the requirements of Zakat levy, the procedures of its application and the obligations of persons subject to Zakat (Zakat payers) of other sectors except financing activities and insurance companies sectors where the Authority has issued special guidelines for both of them. This guide sheds light and provides guidelines on the practical application of Zakat levy in Saudi Arabia.

This guide represents the concept and interpretation of the Authority on how to apply the Implementing Regulations for levy of Zakat issued on 71440/7/H. It is worth mentioning that this guide is not a legal document, and its content are for offering instructions only. It is not intended to include all the relevant provisions of the Zakat Levy Implementing Regulations. Although these guidelines are not binding to the Authority or any other body in respect of any performed transaction, they provide general guidance on how the Authority treats Zakat-related procedures in practice.

For instructions on any specific transaction, you can visit the official website of the Authority (zatca.gov.sa), which offers a wide range of tools and information tailored to assist Zakat payers, including visual guidance materials and all relevant data, as well as FAQs.

Zakat Concepts, Terminology and Calculation Methods

The Regulations

The Implementing Regulation for Zakat levy issued under Ministerial Resolution No. (2216), dated 71440/7/H.

Collection of Zakat

The State shall calculate the Zakat of funds subject to the Zakat, collect such funds from the Zakat payers subject to it, and transfer to the Social Security Agency for disbursement to the beneficiaries of social security.

Zakat collection is the state's mission. The Prophet (peace and blessings of Allah be upon him) used to send messengers every year to collect Zakat from all Muslims. At this time, it is carried out by The General Authority of Zakat & Tax on behalf of the state, in accordance with the relevant laws, regulations and rules. The Authority has issued regulations and rules governing Zakat levy and has provided high-quality services to the Zakat payers to help them fulfill their duties.

Zakat payer

A natural or legal person who carries out an activity subject to levy of Zakat under the Regulation, whether it is a Sole proprietorship, a company, or whoever carries out business activity under a license issued by a competent authority.

Zakat payer not subject to Zakat

A Zakat payer that acquires a certificate not to be subject to levy of Zakat, in accordance with the Authority procedures.

Resident

A natural or legal person to whom the residency requirements specified in Article (3) of the Regulation apply.

Non-resident

Any person who does not qualify as a resident.

Zakat Year

The fiscal year of the Zakat payer, whether Hijri or Gregorian, short or long, at the beginning or end of activity.

Example (1)

A company was incorporated on 10/12/2018 (the date of issuance of the Commercial Registration). According to Articles of Association, the first financial year of the company starts from the date of issuance of the Commercial Registration and ends on 31/12/2019G.

Hence, the first financial year of the company will be from 10/12/2018 to 31/12/2019

Zakatable year (Al Hawl)

Twelve lunar months (354 days) should have passed since the Zakatable fund. It is a condition for Zakat and payment it in full. Prophet (peace and blessings of Allah be upon him) said: 'There is no Zakat on funds until they have completed Al Hawl' If the Zakat year is different than the Hijri year, Zakat payer should pay the due Zakat in proportion with the number of days of the year, according to the following method: Divide two and a half percent (2.5%) by the number of days of the Hijri year (354), and multiply by the number of actual days of the Zakat year for the Zakat payer.

The number of actual days of the Zakat year for the Zakat payer x 2.5%Number of Hijri year days

The reason for accounting based on a daily basis is the inability to complete one Hijri year for every Zakatable fund, the difficulty of tracking the internal operations (transactions) of the entity, and inability to oblige the entity to issue financial statements for Zakat purposes only.

Completing Al-Hawl (one Hijri year) is not a condition for the profits generated during the year, as their Hawl (year) is related to their asset, where profits are subject to the full percentage of Zakat (2.5%), and the previous formula shall not apply to them.

How to calculate completion of the Hijiri year
Functions of the General Authority of Zakat & Tax

Example (2)

The financial year of the company (S) for grains starts on 1/1/2019 and ends on 31/12/2019 in the same year (Gregorian year). The Zakat base of the Company for the year was SAR 2,500,000, including an adjusted profit for Zakat of SAR 900,000.

How to calculate the Zakat base of the company?

Zakat is calculated based on the Zakat base in the following manner

2.5 %	x	Number of actual days of the Zakat year for Zakat payer	x	Value of Base excluding the adjusted profit	=	****
Number of Hijri days	x	Number of actual days of the Zakat year for Zakat payer	x	Value of Base excluding the adjusted profit	=	****
354 ÷ 2.5%	x	365	x	1,600,000	=	41,242.9
Zakat Profit	x	2.5%	x	900,000	=	22,500
Total				2,500,000		63,742.9

Business activities

All forms of business, whether commercial, service, or other works intended to generate profit. Commercial activities include real estate, commodity trading, provision of service, securities, finance, insurance and all banking activities. The Shariah imposes Zakat on all forms of commercial activities according to the Hadeeth of Jabir bin Samra - may Allah be pleased with him- who narrated (The Messenger of Allah - peace be upon him - ordered us to pay Zakat against what we prepare for sale).

Terms of obligations and their impact on Zakat

Zakat-related obligations are divided into two parts:

Obligations by Zakat payer.

They include loans, creditors, notes payable, government and commercial finance,etc. and the like. In general, Zakat payer's obligations reduces Zakat base of the Zakat payer, by not adding them to the base, according to the method adopted by the Authority. However, there is a difference in the accounting treatment between short-term and long-term liabilities.

Short-term liabilities that have financed a deductible asset will be added to the Zakat base components, unlike those that have not financed a deductible asset, which will not be added to the base. Long-term obligations are added to the components of the base, provided that the total obligations shall not exceed the amount of the deductible assets. This is adopted in order to ensure that the Zakat funds shall not be utilized in debt. The debts are secured by fixed assets and equivalent deductible assets even if it did not finance such assets to fulfill balance and justice and to avoid double deduction. Accordingly, the long-term obligations reduce the Zakat base of the excess amount.

Zakat Payer's Obligations

They include accounts receivable, notes receivables, advances, and so on. Zakat is paid on what is funded by an internal source of funding.

Zakat Declaration

A form issued by The General Authority of Zakat & Tax , which contains a number of elements and items, must be filled out and submitted by each Zakat payer. The purpose of the declaration and its submission is to indicate the amount of Zakat base of the entity and enable the Authority to make the assessment in accordance with the declaration data. The types of declaration are:

Type I: A declaration of the Zakat payer who maintains commercial books and statutory accounts, and issues financial statements consistent with statutory requirements.
Type II: A declaration of the Zakat payer who is accounted for on deemed basis and does not maintain commercial books and statutory accounts.
Type III: Information Declaration for the Zakat payers exempted from levy of Zakat, or a subsidiary that was consolidated (consolidated) and zakat was paid per the holding company's consolidated declaration, or consortium consortia. Such Zakat payer must provide a declaration that includes the disclosure of its data.

Assessment

A decision by the Authority indicating its acceptance or amendment of the declaration, in accordance with the information available to it at the time.

Commercial Books

A set of commercial books maintained by the Zakat payer, which record all commercial transactions, as described by the commercial books law issued by Royal Decree No. (M/61) dated 171409/12/H, and it's implementing regulations and any amendments thereto.

Methods of Zakat Calculation for Companies

Zakat for existing companies is calculated in one of two methods:

Direct method (net of Zakat able assets method).
Indirect method (sources of funds method).

The procedures of each the methods differ and the items used for the purposes of calculating Zakat as well, but both match in the result (Zakat base). Both methods reach the same result if they are applied correctly and use the same standards and criteria. Following is a Summary of the two methods:

Direct method (net of Zakatable assets method):

This method is based on two basic procedures:

Addition of all Zakatable assets of the entity, including accounts receivables for the Zakat payer.
Deduction of the value of the obligations that funded the Zakat assets. The result of this formulais the Zakat base of the Zakat payer.
Zakat base = All Zakatable assets - All obligations that funded them

Indirect method (sources of funds method):

This method is based on two basic procedures:

Add:

Sources of external funds utilized for the component deductible from the base, which include long-term liabilities and obligations that are known to have financed deductible assets. Such liabilities are added to the limit without exceeding the deductible assets
Allsources of internal funds of the entity (capital, retained earnings,).
Adjusted net profit for the year subject to the audit.

Deduct:

The value of non-Zakatable assets of the entity to be deducted in accordance with the conditions of the Regulations.
The value of the Zakatable assets in other entities, such as: (investment in the shares of Saudi companies).

The result of this formula is the Zakat base for the Zakat payer. This method is followed by the General Authority of Zakat and Tax

Zakat base = All sources of internal funds (equity, provisions and adjusted net profit for the year) + external sources of funds not exceeding deductible assets (long-term liabilities and liabilities that are financing deductible assets) - or - non-Zakatable assets - Zakatable assets, or adjusted net profit for the year, whichever is greater.

Example (3)

The following data is for a company as at the end of the fiscal year:

Statement of Financial Position
Assets		Liabilities and Equity
SAR		SAR
Current Assets	9,000	Current Liabilities	6,000
Long-Term Assets (Property and Equipment)	8,000	Long-Term Liabilities	7,000
		Equity	4,000
Total	17,000	Total	17,000

(A) Indirect calculation of the Base:

Item	SAR
Long-Term Liabilities	7,000
Equity	4,000
Less: Long-term assets	(8,000)
Zakat Base	3,000

External sources of funding are added to the base first to meet them with deductions, not exceeding the total value of the deductions and then internal sources of funding are added. Therefore, in the example above, long-term liabilities for the entire base were added because they are less than the deductions, and then equity was added.

(B) Direct recalculation of the Base:

Item	SAR
Current Assets	9,000
Less: Current Liabilities	(6,000)
Zakat Base	3,000

Deemed Calculation

A method used by the Authority to account for the Zakat payer who does not maintain commercial books and statutory accounts. This is because the origin of the Zakat base of the Zakat payer is that it is based on its statutory records containing the data through which the base can be identified. When this is not achieved, the Authority shall form a Zakat base according to the available information, so that the Zakat base can be estimated as closely as possible.

The Authority resorts to the deemed method when the Zakat payer does not comply with the deadlines set for filing the declaration, or there are problems related to the confidence of the Authority in the accuracy of the data provided by the Zakat payer, according to the zakat payer records, in order to approach as close as possible to his correct base.

The Basis of Zakat Calculation

The calculation of Zakat of existing companies is generally based on the overall accounting principles and standards, as the concepts of the accounting standards applicable to Zakat can be applied to companies that prepare financial statements according to the accounting principles observed in Saudi Arabia, while verifying that the Zakat payer complies with the standard of presentation and disclosure and accuracy of such disclosures, such as the distinction between fixed assets and current assets, with the addition of certain requirements relating to increased disclosure of the entity, such as the type of investments owned by the entity, and whether or not they are subject to Zakat, as they do not appear in the financial statements, but they are necessary for the purpose of forming the Zakat base

Identify Zakat Base for Zakat Payer Maintaining Commercial Books

The Zakat base for the Zakat payer who maintains commercial books shall be determined according to the method of the Authority in collecting Zakat which is explained in Section 2 of this guide^[1]. According to this method, the internal sources of the Zakat payers funds and the part of his external sources of funds utilized in financing deductible assets shall be added to Zakat base (additions), whereas the Non-Zakatable assets are deducted from Zakat base (deductions)^[2].

Components of Zakat Base (Additions)

Additions to the Zakat base for the Zakat payer who maintains business books, consists of internal sources of funds (equity) and external sources of funds that have financed deductible assets^[3].

Reasons for adding to the Zakat base:

Offsetting the deductible assets against the obligations thereto.
Determine Zakatable assets financed from internal sources of funds.

Example (4)

The following data is for a company as at the end of the fiscal year:

Statement of Financial Position
Assets		Liabilities and Equity
SAR		SAR
Current Assets	10,000	Current Liabilities	8,000
	5,000	Long-term liabilities	2,000
Long-Term Assets (Property and Equipment)		Equity	5,000
Total	15,000	Total	15,000

(A) Calculation of the Base:

Item	SAR
Long-Term Liabilities	2,000
Equity	5,000
Less: Long-term assets	(5,000)
Zakat Base	2,000

External sources of funding are added to the base first, to meet them with deduction, and then internal sources of funding are added. In the above example, long-term liabilities for the entire base were added, and then equity is added.

Reasons for inclusion in additions to the Zakat Base

Concepts Related to Additions

The Authority's method of calculating Zakat base is based on identifying all sources of internal funds and what has financed deductible assets from the sources of external funds.

Zakat base calculation:

When building Zakat base, the obligations of the Zakat payer (external sources of finance) should be added initially, assuming their priority in financing the deductible items before the internal sources of funding, in the following order:

Sources of external funds (maximum limit is the value of deductible assets):

Obligations that are known to have financed deductible assets, such as: loans for the purchase of a fixed asset.
Long-term liabilities (given debt term), such as (loans with a term longer than 354 days).

Example (5)

The following data is for a company as at the end of the fiscal year:

Statement of Financial Position
Assets		Liabilities and Equity
SAR		SAR
Current Assets	8,000	Current Liabilities	3,000
	6,000	Long-Term Liabilities	7,000
Long-Term Assets (Property and Equipment)		Equity	4,000
Total	14,000	Total	14,000

(A) Indirect calculation of the Base

Item	SAR
Long-Term Liabilities (not to exceed deductions)	6,000
Equity	4,000
Less: Long-term assets	(6,000)
Zakat Base	4,000

External sources of financing are added to the base first, but not exceed the total value of deductible assets, and then internal sources of funding are added. In the above example, long-term liabilities for the base were added up to the value of deductible assets, and then equity is added.

Internal sources of funds:

Equity, such as (capital, reserves, retained earnings).
Accumulated provisions after deduction of what was used during the year, such as: (end of service provision after deduction of what was used during the year).

What Is added to the Zakat Base

Below are examples of items to be added to the Zakat base with some guidelines mentioned in the next section, and some examples for further clarification:

Group	Item	Amount
Equity and equivalents	Increase in capital during the year	XX
	Reserves carried forward from previous years	XX
	Retained earnings from previous years	XX
	Adjusted net profit for Zakat collection purposes	XX
	Change in fair value resulting from revaluation	XX
Obligations of the Zakat payer classified as long - term and equivalent	Creditors	XX
	Notes payable	XX
	Loans + current installment of the loan	XX
	Partner or Owners' Loans	XX
	Retained amounts from contractors (performance bond)	XX
	Amounts due to related parties	XX
	Profits under distribution	XX
	Deferred long-term tax liability	XX
Provisions	Opening provisions after deducting the used part during the year	XX

Items to be excluded from Zakat Base

The following are examples of items that are not to be added to the Zakat Base:

Group	Item	Amount
Obligations of the Zakat payer classified as short-term and equivalent unless it is known that they were used for financing deductible assets	Loans	XX
	Creditors	XX
	Accrued expenses	XX
	Notes payable	XX
	Overdraft account	XX
	Retention payable	XX
	Amount due to related parties	XX

Guidelines for Addition to Zakat Base

The capital shall be added to the Zakat base according to the following guidelines:

The opening balance shall be added.
The increase in the capital during the year shall be added in full if its source is internal (equity).
The capital increase during the whole year shall be added if it finances any of the deductible items from the Zakat base.
The increase in capital shall be added if it is not financed a deductible asset from the base in proportion with the number of days of the Zakatable year. It shall be treated as a finance source referred to in Article 4, paragraph (3/a) of the implementing regulations

Example (6)

A company increased its capital during the year by SR 10,000,000 as of 1/7/20XXG as follows:

SAR 3,000,000 transfer from the general reserve.
SAR 7,000,000 Increment in capital contributed by one of the partner, of which SAR 5,000,000 was used to purchase anew production line and SAR 2,000,000 to finance the purchase of goods and raw materials.

What is the amount that should be added to the Zakat base?

The amount of SR 3,000,000, which is the increase taken from the general reserve shall be added to the Zakat base as it is an internal transfer from an element of the equity.
The amount of SR 5,000,000, which is the increase made to finance the purchase of a new production line shall be added to the Zakat base because it financed deductible asset.

The amount of the increase made to finance the purchase of goods and raw materials (SAR 2,000,000) shall be added by the number of days, as it is a Source of other financing sources. It is treated as an obligation of the Zakat payer. Consequently, an amount of SAR 1,000,000 is added as calculated below with the obligations not exceeding the deductibles amount from the base as follows:

Number of Days remaining until the end of the Fiscal Year	×	The increase value	=	****
Number of the Year days 365

183	×	2,000,000	=	1,000,000
365

Reserves:

They are added to the opening balance of the period if the balance remains until the end of the year; However, if the balance was disposed of during the year by cash distributions, for example, it may not be added to the base.
If the reserves are transferred to an equity account, they shall be added to the base for the full term within the equity.

Example (7)

A company has a general reserve balance of SAR 10,000,000, of which SAR 5,000,000 has been used for capital increase and SAR 2,000,000 has been used. How much should be added to the base?

SAR 5,000,000 of the reserves used to increase the capital shall be added to the base, in addition to the remaining balance of the reserves, after deducting the withdrawn from the reserve balance as follows:

Opening balance of the year less the withdrawn from the reserve balance during the year:
5,000,000 + 3,000,000 (5,000,000 - 2,000,000) = 8,000,000 Saudi Riyals

Guidelines for adding reserves to the Zakat Base

a. To add to the base reserve at the beginning of the period, if the balance exists at the year end.

b. If reserves are transferred to one of the equity accounts, they shall be added to the base for the whole period within equity.

c. If the balance is disposed by year end it will not be added to the base

Retained earnings

They shall be added to the Zakat base at the opening balance of the period less dividends paid during the Zakat year.
Distributions not claimed by owners and have been provided in separate bank accounts, will be considered as dividends paid to partners.
Dividends from the current year are considered among the negative additions in the Zakat base if they exceed the balance of the retained earnings.

Example (8)

The opening balance of the retained earnings for the period amounted to SAR 5,000,000. The Company distributed cash dividends during the year amounting to SAR 6,000,000.

How much should be added to the base?

The balance of the retained earnings shall be added to the base after deducting the cash dividends distributed during the year as follows:

The opening balance of the year less cash dividends during the year: 5,000,000 - 6,000,000 = (1,000,000) Saudi Riyals

In this case, the amount of cash dividends is more than the balance of the retained earnings during the year, thus the negative amount is added to the base.

The opening balance of the retained earnings for the period amountedto SAR5,000,000. The Company distributed cash dividends during the yearamountingtoSAR 6,000,000.

Obligations of the Zakat payer:

Obligations of the Zakat payer and equivalents referred to in the additions above shall be added to the Zakat base in accordance with the following guidelines:

Obligations of (354) days and more, as well as obligations that are (354) days and overlapping between more than one Zakatable year; shall be added to the base proportionally with the number of days of the Zakat year.
Short-term obligations that financed deductible assets are added.
The hijri year (Al Hawl) shall not be interrupted by the renewal or replacement of obligations by other obligations or sources of financing that finance what have been financed by these obligations, nor by the rescheduling the obligations with the same creditor.
The total amount of the obligations added to the Zakat base as stated in the above items shall not exceed the total deductions from the base.

Note that the obligations on the Zakat payer that are classified as short-term (less than a lunar year), are not added to the Zakat base unless they are to finance the assets deducted from the base
Guidelines for adding the obligations on the Zakat payer

Guidelines for adding the obligations on the Zakat payer

Example (9)
A company has secured a long-term loan amounting to SAR 1,000,000 on 20/ 8/ 2019. The end of the financial year of the company is 31/ 12/ 2019. The company has a short-term six-month loan of SAR 2,000,000 acquired on 1/ 1/ 2019 and rescheduled for another six months. How does it determine what loans to be added to the base?
The long-term loan shall be added to the base based on the number of days of the Zakat year, as follows:
Number of Days remaining until the end of the Fiscal Year	×	Debt amount	=	****
Number of the Year days 365	×	Debt amount	=	****
133	×	1,000,000	=	364,384
365	×	1,000,000	=	364,384
The short-term loan shall be added to the base entirely on the basis that the year is not interrupted by rescheduling the debt with the same creditor. Accordingly, an additional full amount of SAR 2,000,000 is added to the base.

Example (10)
A company acquired a loan of SAR 2,000,000 on 10/ 2/ 2019 which is repayable on 1/2/2020. Knowing that the end of the fiscal year is 31/1/2020, how does it determine what to be added to the base?
The short-term loan shall be added to the base based on the number of days of the Zakat year, as follows:
Number of Days remaining until the end of the Fiscal Year	×	Debt amount	=	****
Number of the Year days 365
335	×	2,000,000	=	1,945,205
365
The short-term loan was added because it lasts more than (354 days) and overlaps with more than one Zakat year, pursuant to paragraph (A/3) of Article (4) of the Implementing Regulations for the collection of Zakat.

Example (11)

A company acquired short-term loans (less than 354 days) as follows:

SAR 3,000,000 used to finance the purchase of a plot of land.
SAR 2,000,000 used to finance the purchase of goods.
SAR 1,000,000 used to meet multiple commitments in the business

What amount should be added to the base in each case?

The amount of SAR 3,000,000 shall be added to the Zakat base where it was used to finance a deductible asset (fixed asset).
The amount of SAR 2,000,000 shall not be added being a short-term loan and has not financed a deductible item (fixed asset).
The amount of SAR1,000,000 shall not be added being a short-term loan and has been used in multiple commitments in the business and does notinclude financing of a deductible item.

Provisions

The provision set a side during the Zakat year shall be (Added to /deducted from) the (profit/loss).
The opening balance shall be added to the base less the used amount during the year.
If the Zakat base is the minimum limit (adjusted profits), the used amount is deducted from the adjusted net profit as a deductible expense, provided that the net profit is compared to the base after the deduction has been made (upon reversing the effect of the used amount on the base provision) and the greater of the two is considered.

Provisions
Guidelines for adding the provisions on the Zakat payer

Example (12)

The table below shows the movement of provisions during the year:

Total	3,000,000	700,000	300,000	3,400,000
Description	Opening balance	Provided during the year	Utilized during the year	Closing balance
	SAR	SAR	SAR	SAR
End-of-Service Benefits	2,000,000	500,000	300,000	2,200,000
Provision for doubtful obligations	1,000,000	200,000	-	1,200,000

What amount should be added to modify activity result?

Item	Amount
Amount of provisions provided during the year	700,000

What amount should be added to the base?

Item	Amount
Opening balance of provisions	3,000,000
The utilized amount of provisions during the year shall be deducted	300,000
Provisions balance which should be added to the base	2,700,000

The change in the fair value calculated in accordance with paragraph (6) of Article VI of the Regulation shall be added to the components of the Zakat base.

Items of Zakat Base (Deductibles)

The deductible items consist of the Zakat base for the Zakat payer who maintains commercial books of non-Zakatable assets, such as fixed assets, assets subject to levy of Zakat in another base such as investments in the capital of companies subject to Zakat in the Kingdom, or which the Zakat payer has paid their Zakat independently, and some other assets specified in the Regulation^[4].

Concepts related to deductions

The Authority's method of calculating Zakat base includes deduction of all non-Zakatable assets, assets which have their Zakat paid independently and certain other items.

The main deductible items consist of the following:

Non-Zakatable assets, including fixed assets, such as buildings, machinery and equipment, furniture, intangible assets, etc.
Zakatable assets, including investment in shares of Saudi companies or foreign companies subjected to Zakat independently in accordance with the rules specified in the Regulations.

Guidelines for adding the deducted assets on the Zakat payer

Items to be deducted from the base

The following table shows examples of items that shall be deducted from the base:

Item	Amount
Net fixed assets and equivalents	(xx)
Capital work in progress	(xx)
Intangible assets	(xx)
Investments in entities inside and outside the Kingdom for non-trading in accordance with the rules mentioned below	(xx)
Net incorporation and pre-operating expenses and equivalent capital expenses	(xx)
Adjusted net loss in the Zakat year adjusted for Zakat purposes	(xx)
Adjusted net accumulated loss for Zakat collection purposes in accordance with the guidelines specified below	(xx)
Net value of properties under development for sale in accordance with the guidelines specified below	(xx)
Statutory deposit of insurance and reinsurance companies	(xx)
Inventories of agricultural inputs purchased for use in production	(xx)
Deferred tax long term asset	(xx)

Guidelines for Deduction from the Zakat Base

Fixed assets and equivalent shall be deducted at net value recognized in the accounts provided that they are used in the Zakat payers activity. The assets include the following:
- Spare parts and materials not intended for sale.
- Payments for the purchase of fixed assets.
- Assets financed for the Lessee in the financing lease contracts in Build-Operate-Transfer (BOT), Build-Own-Operate (BOO), Build-Own-Operate-Transfer Contracts (BOOT) contracts and other similar form of contracts

Example (13)

A company in contract with the General Authority of Civil Aviation to construct an airport in Al- Jouf. The contract was in the form of Build-Own-Operate-Transfer Contracts (BOOT) contracts, so that the company builds and owns the airport for a period of ten years during which the airport is operated in favor of the company. At the end of the contract term (ten years) the ownership will be transferred to the General Authority of Civil Aviation. The company spent in the first year SAR 24,000,000 to build the project.

The company has the right to deduct the cost of the project (SAR 24,000,000) from the Zakat base for this year.

Example (14)

A company in contract with the Electricity Company to establish a power station in the Taif region. The contract was in the form of construct-Build-operate and transfer (BOT). In the first year, the company spent SAR 50,000,000 on the project.

The company has the right to deduct what it spent on the project (SAR 50,000,000) from the Zakat base for this year

Example (15)

A company in contract with the Development Authority to build a hotel in Riyadh. The contract was in the form of build-own and operate (BOO), so that the company builds, owns and operates the hotel in its favor. The company has spent SR 100,000,000 to build the hotel.

The company has the right to deduct the cost of establishing the hotel (SAR 100,000,000) from the Zakat base for this year

Capital constructions and projects underway that are established for use in the business activity and not for sale shall be deducted from the Zakat base.
Long-term non-trading investments in establishments within the Kingdom shall be deducted if they are represented in the shares of companies subject to the provisions of Zakat levy, i.e. they represent Zakat assets with the investees.

Investments in establishments outside the Kingdom are deducted as follows:

Investments shall be in non-trading companies' shares
The Zakat payer shall pay the Zakat of these investments to the Authority according as certified by a public accountant registered in the Kingdom.
The minimum Zakat base for these investments shall equal, at least, Zakat payer's share of accounting profit reported in the financial statements.

The net accumulated loss under the Authority's assessment after adding back the lower of provisions utilized previously to reduce the loss for the year during which the provisions have been created and accumulated loss per Zakat payer's accounting books, whichever is less.

Note that accumulated losses and losses for the year should be accounted for as negative additions to the elements of equity due to their nature and not within the deduction items from the base

Guidelines for deducting investments from the Zakat base

Example (16)

The following data are for a company as of 31/12/20XX

Share Capital; SAR 2,000,000.

Statutory reserve: SAR 500,000.

Accumulated losses according to the assessment: SAR 900,000.

Accumulated losses as per books: SAR 750,000.

Adjusted loss for the year: SAR 450,000.

Fixed Assets: SAR 800,000

How to add the above items to the Zakat base?

Item	Amount
Additions
Capital	2,000,000
Statutory reserve	500,000
Accumulated losses	(750,000)
Adjusted loss for the year	(450,000)
Total additions to the base	1,300,000
Deductions
Fixed assets	800,000
Total Deductions	800,000
Zakat base	500,000

Properties under development for sale are deducted according to the following:
1. They shall be classified as non-current assets in the financial statements.
2. They shall be intended for sale once development is completed.
3. They shall not be available for sale as is.
4. The total sale amount and customers advances received out of it exceeds twenty five percent (25%) of their value reflected in the financial statements for the year of respective declaration. The calculation involves evaluating the disposals at cost (Sales) against the overall value of the project as presented in the financial statements. The Authority may revise such percentage depending on the market condition, taking into account that the 25% is for each project separately, and not for the total item reflected in the financial statement.

Guidelines for deducting properties under development from the base

Guidelines for deducting properties under development from the Zakat base

Example (17)

A company operating in the field of real estate investment, where the balance of projects under development classified under non-current assets amounted to SAR 1,000,000, and the value of sales excluded at cost from the balance of properties under development was equivalent to 20% of the balance of real estate projects under development.

Due to the fact that the projects are classified as non-current assets and the value of sales excluded at cost made from the projects during the year is less than 25%, therefore, the total amount of SAR 1,000,000 shall be deducted from the Zakat base..

Agricultural inputs (in stock) purchased for use in production purposes shall be deducted, as they are subject to Zakat in agricultural activities

Items that are not deducted from the Zakat base

Below are examples of items that are not deductible from the Zakat Base:

Group	Items that are not deductible from the Zakat Base	Amount
Not deductible assets	Cash and cash equivalents	(xx)
	Inventory	(xx)
	Obligations of the Zakat payer, whatever their duration or nature	(xx)
	Investments in Sukuk and Bonds	(xx)
	Investments in companies outside the Kingdom unless Zakat is paid	(xx)
	Investments in properties under development that do not meet the conditions specified in the Regulations	(xx)
	Spare parts held for sale	(xx)
	Intangible assets purchased for trading	(xx)
	Investment in deposits or forward transactions	(xx)
	Statutory deposits excluding statutory deposits of insurance and reinsurance companies	(xx)
	Investments for trading	(xx)

Items that are not deducted from the Zakat base

The Zakat payer's obligations include:

Other general guidelines regarding Zakat base

Zakat base shall not be less than the net profit adjusted for the purpose of Zakat levy^[5].

Example (18)

Zakat base of one of the Zakat payers was SAR 1,000,000 and the adjusted profit was SAR 1,100,000 for the period from 1/1/20XX to 31/12/20XX of the same year.

What is the Zakat Base of the Company?

Since Zakat is less than the adjusted profit, Zakat should be calculated based on the adjusted profit.

Adjusted profit x 2.5% = Zakat amount due 1,100,000 x 2.5% = SAR 27,500

The Zakat payer shall be held accountable for Zakat of the entire Zakat year in which one of the partners died or waived his share and the entry of others to replace him, whether heirs or others, if the Zakat payer continues activity.

Example (19)

A joint venture company whose financial year ends on 31/12/2019. On 1/7/2019, one partner assigned its stake in the company to another partner.

How does the company be accountable for Zakat this year?

As long as the activity continues, the Zakat base is not affected by the entry or exit of a partner. Accordingly, the Company is accountable for the entire Zakat year in accordance with the Regulation and the continuation of business.

A sole proprietorship entity shall be accounted for the Zakat year during which ownership is fully transferred to other owners in proportion to the financial period, whether transfer of ownership was by sale, assignment or otherwise.

Example (20)
A sole proprietorship entity transferred to a new owner on 1/7/2019 noting that the financial year ends on 31/12/2019. How will the entity be charged this year on the assumption that the calculated Zakat base was SAR 10,000,000?
The old owner will be charged proportionally from the beginning of the year until the date of transfer of ownership on (302019/6/). The new owner will be charged proportionally from the date of transfer of ownership (12019/7/) to the end of the year (312019/12/) .
Calculation of the Zakat base for both the old and the new owners:
Number of days before and after ownership transfer	×	Zakat base	=	****
Days of the year 365

183	×	10,000,000	=	5,000,000
365

In the event that the Zakat payer is converted from one legal form to another in any way, the accounting shall not be applied in a pro rata basis other than what is mentioned in paragraph (3) above.

The table below shows the Zakat treatment in cases of conversion from one legal entity to another as follows:

Conversion of the legal entity		Zakat Transaction
From	To	Zakat Transaction
Finance Company/ Persons	Sole proprietorship	Zakat transaction is not affected
Sole proprietorship	Finance Company/ Persons	Zakat transaction is not affected
Finance Company/ Persons	Finance Company/ Persons	Zakat transaction is not affected
Sole proprietorship	Sole proprietorship	The period between the old owner and the new owner is divided in pro rata basis and is charged accordingly

There shall be no clearing or settlement between the payable balances of owners or partners (including their current accounts) and debits to other owners or partners (including their current accounts) clearing or settlement may be made between the balances of owner and the same owner (or the balances of the partner or the same partner).
For Zakat purposes, the revaluation results are taken into account in accordance with the fair value shown in the financial statements.

Example (21)

Al Bahr Company owns shares in Al Salam Company (a Saudi joint stock company listed on the Exchange) and is classified as long-term investment.

The fair value of investments in Al Salam Company amounted to SAR 1,000,000 at the beginning of the Zakat year. However, the fair value increased to SAR 1,500,000 at the end of the year. The increase in fair value (SAR 500,000) is included in the other overall income statement.

How the investment in Al Salam Company is treated in the Zakat Declaration?

Item	Amount (SAR)
Value of the investment deducted from the Zakat base	1,500,000
Change in fair value added to Zakat base	500,000

Practical Examples

The data below are for a company as at 31/12/2019. Zakat calculation is required accordingly.

Balance Sheet (Statement of Financial Position)

As of December 31, 2019

(Amounts in SAR)

Assets	2019	2018
	SAR	SAR
Assets
Current Assets
Cash in hand and at banks	400,000	350,000
Investments recognized at fair value through profit or loss	2,000,000	1,600,000
Trade and other receivables	2,000,000	2,300,000
Inventory	6,100,000	6,200,000
Prepaid expenses and other receivables	500,000	650,000
Total current assets	11,000,000	11,100,000
Non-current assets
Receivable from Related Parties	4,000,000	3,800,000
Projects under construction	3,000,000	2,400,000
Investments in subsidiaries	5,500,000	5,300,000
Real estate investments	5,000,000	5,000,000
Property, plant and equipment	9,000,000	8,700,000
Goodwill and intangible assets	4,000,000	4,000,000
Other long-term assets	1,000,000	1,000,000
Total non-current assets	31,500,000	30,200,000
Total assets	42,500,000	41,300,000
Liabilities and Shareholders' Equity
Current liabilities	SAR	SAR
Due to banks	500,000	700,000
Accounts payable	500,000	600,000
Accrued expenses and other credit balances	800,000	700,000
Deferred revenue	1,500,000	1,200,000
Advances from customers	1,300,000	1,800,000
Dividend payable	3,500,000	-
Provision for Zakat	225,000	-
Obligations under a capital lease	500,000	600,000
Current portion of term loan	400,000	500,000
Total Current Liabilities	9,225,000	6,100,000
Non - current liabilities
Provision for end of service benefits	2,000,000	1,800,000
Term loan	3,400,000	-
Due from related parties	6,100,000	10,500,000
Obligations under a capital lease	3,000,000	3,100,000
Total Liabilities	23,725,000	21,500,000
Shareholders' equity
Capital	10,000,000	10,000,000
Statutory reserve	5,000,000	5,000,000
Retained earnings	3,775,000	4,800,000
Total shareholders' equity	18,775,000	19,800,000
Total liabilities and shareholders' equity	42,500,000	41,300,000

Income Statement

For the period from 1/1/2019 to 31/12/2019

(Amounts in SAR)

	2019
	SAR
Revenues	50,000,000
Cost of Revenues	(45,000,000)
Gross profit	5,000,000
General, administrative and marketing expenses	(2,000,000)
Share in (losses) of subsidiaries	(500,000)
Share in results of invested companies by equity method	800,000
Other loss, net	(300,000)
Income from operations	3,000,000
Finance charges, net	(300,000)
Profit before Zakat and income tax	2,700,000
Zakat	(225,000)
Profit for the year	2,475,000

Movement of the Provision:

Description	Opening Balance	Provided during the year	Utilized during the year	Closing balance
	SAR	SAR	SAR	SAR
End of service benefits	1,800,000	400,000	200,000	2,000,000
Provision for doubtful obligations	300,000	300,000	-	600,000
Total	2,100,000	700,000	200,000	2,600,000

Zakat calculation:

Item	2019
Adjustment to activity result	SAR
Net profit before Zakat	2,700,000
Add: Provision for end of service provided during the year	400,000
Add: Provision for doubtful liabilities provided during the year	300,000
Add: Share in (losses) of companies subject to Zakat	500,000
Excludes: Share in profit of companies subject to Zakat	(800,000)
Total adjusted zakatable profit	3,100,000

Total additions to the base	35,705,206
Additions to the base
Equity	SAR
Capital	10,000,000
Statutory reserve	5,000,000
Retained earnings less dividends	1,300,000
Dividend payable	3,500,000
Provision for doubtful obligations at the beginning of the year	300,000
Total	20,100,000
Obligations on the Zakat payer
Deferred revenue	1,300,000
Advances from customers	1,300,000
Loans (obtained on 1 July 2019) (365/3,800,000 * 183/)	1,905,206
Due from related parties	6,100,000
Obligations under a capital lease	3,500,000
Provision for end of service -Opening balance minus the utilized amount	1,600,000

Deductions from the Zakat base
	SAR
Projects under construction (assets)	3,000,000
Investments in local subsidiaries after excluding shares in profit and loss	5,200,000
Real Estate Investments (residential Compounds for rent)	5,000,000
Property, plant and equipment	9,000,000
Goodwill and intangible assets	4,000,000
Total assets deducted	26,200,000
Zakat base without the adjusted profit for the year	9,505,206
Zakat at 2.578% of the Zakat base without the adjusted profit	245,044
Adjusted profit	3,400,000
Zakat at 2.5% of the adjusted profit	85,000
Total Zakat	330,044

Adjustment to the Result of Business

Adjustment shall be made to the result of business (book profit or book loss) to reach the adjusted net profit for the following purposes^[6].

Item	2018
	SAR
Net book profit or book loss for the year	xx
Add: Non-deductible expenses	xx
Net profit or loss adjusted for the purpose of Zakat	xx

Expenses that may be deducted

The following expenses may be deducted to determine the results of the activity for the purposes of Zakat:

Expenses	Conditions to be met in expenses
Normal and necessary expenses necessary for the business	The expense Shall be actual and supported by documents and evidence accepted by the Authority, and verifiable, even if it relates to previous years. The expenses Shall be related to the business of the Zakat payer and shall not relate to personal expenses or other activities not related to the Zakat payer. They should not be of a capital nature. If capital expenditure is included in the expenses, it shall be adjusted as a result of the business activity and included in the fixed assets and depreciated within the depreciation of the asset.
Salaries and allowances of the owner or the partner	Salaries and allowances paid to the owner and partner may be accepted if the owner or partner is registered at the General Organization for Social Insurance.
Remuneration paid to the Chairman, Deputy Chairman and members of the Board from the owners or partners	May be deducted within the limits of remuneration paid to independent persons.
Bad debt	Should have been previously reported as revenue in the year the revenue had been derived. The Zakat payer shall provide a certificate from a chartered public accountant licensed in the Kingdom confirming that cancellation of such obligations has been made by a decision of the competent authority upon request by the Authority. Obligations shall not be due from related parties. The Zakat payer shall report the debts written off as revenue where such debts are recovered.
Annual installment depreciation on fixed assets	The assets shall be owned. The assets are intended for use in the business, as determined by the Zakat payers business books. The installment depreciation shall be reasonable and not exaggerated
Donations	Donations must be paid to those authorized to receive donations inside the Kingdom and supported by relevant documents.
Provision for unearned premium and the existing risk reserve in the insurance companies (and / or) reinsurance companies (for further details refer to the insurance business manual)	Shall be returned to Zakat base during the following year. Shall be determined in accordance with the professional standards followed for this type of business, and in accordance with the prevailing regulations, bylaws and rules related to this type of business
School expenses paid to the children of the employees of the Zakat payer	Should have paid to an educational institution licensed in the Kingdom. Should be explicitly stated in the contract of employment or company's by-laws. Such expenses Shall be capable of being evidenced by supporting payment documents acceptable to the Authority.

Guidelines of some expenses that may be deducted

Normal and necessary expenses necessary for the business
The expense shall be actual and supported by documents and evidence accepted by the Authority, and verifiable, even if it relates to previous years The expenses shall be related to the business of the Zakat payer and shall not related to personal expenses or other activities not related to the Zakat payer They should not be of a capital nature. If capital expenditure is included in the expenses, it shall be adjusted as a result of the business activity and included in the fixed assets and depreciated within the depreciation of the asset

Normal and necessary expenses necessary for the business

The expense shall be actual and supported by documents and evidence accepted by the Authority, and verifiable, even if it relates to previous years

The expenses shall be related to the business of the Zakat payer and shall not related to personal expenses or other activities not related to the Zakat payer

They should not be of a capital nature. If capital expenditure is included in the expenses, it shall be adjusted as a result of the business activity and included in the fixed assets and depreciated within the depreciation of the asset

Bad Debt

Should have been previously reported as revenue in the year the revenue had been delivered

The Zakat payer shall provide a certificate from a chartered public accountant licensed in the Kingdom confirming that cancellation of such obligations have been made by a decision of the competent authority upon request by the Authority

The Zakat payer shall report the debts written off as revenue where such debts are recovered

Annual installment depreciation on fixed assets

The assets shall be owned.

The assets are intended for use in the business, as determined by the Zakat payer's business books.

The installment depreciation shall be reasonable and not exaggerated.

Donations
Must be paid to those authorized to receive donations inside the Kingdom and supported by relevant documents

Non-deductible Expenses

The following expenses may not be deducted to determine the result of the business for the purposes of Zakat:

Expenses and costs not associated with the Zakat payer business, including the following:
- Entertainment expenses.
- Expenses of capital nature.
- Salaries, wages and equivalent paid to the owner, partner or any member of his family other than what is registered with the social insurance.
- Personal expenses related to partners.
Expenses not supported by other documents or evidence acceptable to the Authority.
Zakat or tax, payable or paid, except for VAT incurred by the Zakat payer.
Contribution of workers in pension and savings funds.
Provisions and reserves formed during the year.
Increase in material/service prices/rates provided/rendered by related parties or otherwise parties having direct/indirect influence on Zakat payer's acts/decisions compared to such prices/rates used by independent parties in accordance with applicable regulations, related by-laws and rules.

Import differences and how to address them:

During the inspection stage, the Authority verifies the value of the import based on the customs declaration and compares the same with the value declared by the taxpayer. This will be done after deducting any imports added to the fixed assets during the Zakat year and any other imports identified by the Authority based on available information. The taxpayer will then be asked to explain any differences that arise. Some of these differences could be attributed to various factors, including differences in timing and registration, currency evaluation, and import through other companies or related companies. In order to resolve these discrepancies, supporting documents will be required for study and verification purposes.

In the event of import differences not supported by documentation, the difference is handled as follows:

If the value of the import declared by the taxpayer is greater than its declared value in the customs declaration, the difference must be added in full to the net profit.
If the value of the import declared by the taxpayer is lower than its declared value in the customs declaration, a profit for this difference shall be calculated in accordance with the procedures established by the Authority. The profit calculated will not be less than the ratio of the total profit of the declaration to the revenues, and the result will be adjusted accordingly.

Example A:

The import value of one of the companies as at 31 December 2019 amounted to SAR 80,000,000 according to the company's books, whereas the import, as per the customs declaration, was SAR 100,000,000, assuming that the percentage established by the Authority not less than the ratio of the total profit of the declaration to the revenues of the activity is 15%.

How to address the difference?

Status of import difference resulting from added fixed assets:
1. In the previous example, the taxpayer submitted a statement of fixed assets added during the Zakat year, while providing the Authority with invoices for asset purchases. The asset additions are verified in the financial statements, and the invoices for purchases are matched with the customs declaration; therefore, import differences are not calculated.
2. In the event that differences are not supported by documentation, this difference (amounting to SAR 20,000,000) shall be refunded, and a profit for this difference shall be calculated in the percentage established by the Authority at a rate not less than the ratio of the total profit of the declaration to the revenues of the activity, and the result of the activity shall be adjusted as follows:
  Import difference x the percentage established by the Authority not less than the ratio of the total profit of the declaration to the revenues of the activity x 2.5% = Zakat value
  20,000,000 x 15% x 2.5% = SAR 75,000
Imports on the items of the financial position or the items of the income statement:
1. In the previous example, the taxpayer matched the balance of the last period of the inventory in the declaration with the financial statements, and it was found that a portion of his purchases is added to the production stages, which appear within the inventory items in the statement of financial position; therefore, no import differences are calculated (with the right of the Authority to request the necessary samples to verify the validity of these differences).
2. In the event that differences are not supported by documentation, this difference (amounting to SAR 20,000,000) shall be refunded, and a profit for this difference shall be calculated in the percentage established by the Authority at a rate not less than the ratio of the total profit of the declaration to the revenues of the activity, and the result of the activity shall be adjusted as follows:
  Import difference x the percentage established by the Authority not less than the ratio of the total profit of the declaration to the revenues of the activity x 2.5% = Zakat value
  20,000,000 x 15% x 2.5% = SAR 75,000
Import on behalf of other companies:
1. In the previous example, after the review, the company submitted a statement of these differences, which is its import to a subsidiary company, which was then requested to provide the Authority with the names of the companies and their endorsements of these balances, and the review and verification are conducted to ensure that these companies included the imports within its statements and declarations.
2. In the event that differences are not supported by documentation, this difference (amounting to SAR 20,000,000) shall be refunded, and a profit for this difference Shall be calculated in the percentage established by the Authority at a rate not less than the ratio of the total profit of the declaration to the revenues of the activity, and the result of the activity shall be adjusted as follows:
  Import difference x the percentage established by the Authority not less than the ratio of the total profit of the declaration to the revenues of the activity x 2.5% = Zakat value
  20,000,000 x 15% x 2.5% = SAR75,000
Timing and Registration Difference:
In the previous example, the taxpayer submitted a statement of imports that were registered at the beginning of the following year with customs and appeared in the company's books for this year, while providing the Authority with invoices and registration restrictions with the books for this year, so the Authority verifies the authenticity of the submitted documents and import differences are not calculated because the invoices for purchases match the customs declaration.

Example B:

The import value of one of the companies as at 31 December 2019 amounted to SAR 100,000,000 according to the company's books, whereas the import according to the customs declaration was SAR 80,000,000.

How to address the difference?

Other companies importing on behalf of the company:
In the previous example, after the review, the company submitted a statement of these differences, which is another company that imports on its behalf, the company is requested to provide the Authority with the names of these companies and their endorsements of these balances, and the review and verification are conducted to ensure that these companies did not include these imports in their statements and declarations.
In the event that there are differences that are not supported by documentation, this difference (amounting to SAR 20,000,000) will be refunded and added to the net profit.
Timing and registration difference:
In the previous example, the taxpayer submitted a statement of imports that were registered at the beginning of the following year with customs and appeared in the company's books for this year, while providing the Authority with invoices and registration restrictions with the books for this year, so the Authority verifies the authenticity of the submitted documents and import differences are not calculated because the invoices for purchases match the customs declaration

Non-deductible Expenses

The following expenses may not be deducted to determine the result of the business for the purposes of Zakat:

Expenses and costs not associated with the Zakat payer business, including the following
1. Expenses of capital nature
2. Entertainment expenses
3. Personal expenses related to partners
4. Salaries, wages and equivalent paid to the owner partner or any member of his family other than what is registered with the social insurance
Expenses not supported by other documents or evidence acceptable to the Authority
Zakat or tax, payable or paid, except for VAT incurred by the Zakat payer
Contribution of workers in pension and savings funds
Provisions and reserves formed during the year
Increase in material/service prices/rates provided/rendered by related parties or otherwise
parties having direct/indirect influence on Zakat payers acts/decisions compared to such prices/rates used by independent parties in accordance with applicable regulations, related by-laws and rule

Example (23)

The net profit of a company as at 3120/12/XXG is SAR 10,000,000. If you know that the net profit includes the following expenses:

Entertainment expenses of SAR 40,000.
Salaries paid to a partner not registered with social insurance SAR 400,000.
Personal expenses related to one of the partners of SAR 30,000,
End of service provision of SAR 100,000.
Zakat amount of SAR50,000.
Commodity was purchased from related party in the amount of SAR 120,000. Note that the market value of this commodity is SAR 100,000.

How is the adjusted profit calculated for Zakat purposes?

The non-deductible expenses are returned to the net profit; to reach the adjusted net profit, as follows:

Item	SAR
Net profit	10,000,000
Add:
Entertainment expenses	40,000
Salaries of partners not subject to social insurance	400,000
Personal expenses related to partners	30,000
Zakat expenses	50,000
Difference in the value of goods from a related party	20,000
Adjusted gross profit	10,660,000

Example (24)

The following table shows the movement of provisions for a company as at 31/12/20XX:

	Opening Balance	Provided during the year	Utilized during the year	Closing balance
	SAR	SAR	SAR	SAR
Provision for end of service	1,000,000	300,000	200,000	1,100,000
Provision for doubtful obligations	2,000,000	500,000	800,000	1,700,000
Provision for obsolete and slow-moving inventory	500,000	100,000	-	600,000
Total	3,500,000	900,000	1,000,000	3,400,000

If you know that the profit for the year amounted to SAR 8,000,000, calculate the adjusted profit for Zakat purposes.

	20XX
	SAR
Net profit for the year	8,000,000
Add:
Provision for end of service component during the year	300,000
Provision for doubtful liabilities component during the year	500,000
Provision for obsolete and slow-moving inventory	100,000
Adjusted net profit	8,900,000

Electricity, Gas, Steam and Air Conditioning Supply Sector

Sector definitions

This sector is defined as the activity related to the connections of electricity, natural gas, steam, hot water, etc. through permanent infrastructure (pipeline network), main connections and pipelines. Distribution of electricity, gas, steam, hot water, etc. in industrial complexes or residential buildings is also included in this sector.

Zakat issues pertaining to the sector

Spare parts

Spare parts that are used for maintenance of machinery and equipment and not intended for sale.

Spare parts are non-Zakatable assets deductible from the base as they are not intended for sale in their current condition according to the Implementing Regulations.

Example (25)

The balance of spare parts shown in the financial statements of an electricity company as at 31 December 2019 is SAR 20,000,000

What is the amount to be deducted from the Zakat base?

The balance of spare parts inventory shown in the financial statements as at 31 December 2019 is deducted in full amounting of SAR 20,000,000 from the Zakat Base, where spare parts are considered non-Zakatable assets as they are not intended for sale in its current condition.

The most important items in the statement of financial position for the electricity, gas, steam and air conditioning sector and their Zakat treatment.

Item	Item Nature	Zakat Treatment	Judgment
Non-current assets
Transmission and distribution network	Represents the fixed assets of the transmission and distribution sector	Deductible assets	Deductible from the Zakat base because they are non-Zakatable assets
Current liability
Recoverable subscribers' insurance	Represent the amounts paid by subscribers	External sources of funds not utilized in financing deductible asset	Not added to the Zakat base unless they mature after more than 354 days
Payments received from subscribers	Represent payments received from subscribers to connect the service	External sources of funds not utilized in financing deductible asset	Not added to the Zakat base unless they mature after more than 354 days
Non-current liability
Government loans	represent grants whereby the government transfers cash to the entity under certain condition	External sources of funds utilized in financing deductible asset	Added to the Zakat base to meet deductible assets
Long-term deferred revenue	Represents balances earned for service performance that are amortized over the average useful lives of used equipment	External sources of funds utilized in financing deductible asset	Added to the Zakat base to meet deductible assets
Provisions for obligations and other fees	Represents provisions and obligations on expropriation cases for the public use	Internal funding sources	Added to the Zakat base to arrive at Zakatable assets

Practical Examples

Balance Sheet (Statement of Financial Position)

As at December 31, 2019

(Amounts in SAR)

Assets	2019	2018
	SAR	SAR
Assets
Current assets
Inventory	1,900,000	1,350,000
Trade receivables	4,000,000	4,600,000
Loans and advances	800,000	950,000
Prepayments	1,500,000	1,700,000
Cash in hand and at banks	2,500,000	2,650,000
Total current assets	10,700,000	11,250,000
Non-current assets
Property, plant and equipment	9,000,000	8,000,000
Transmission and distribution network	8,000,000	6,600,000
Intangible assets	6,000,000	6,400,000
Deferred tax assets	500,000	500,000
Total non-current assets	23,500,000	21,500,000
Total assets	34,200,000	32,750,000

Liabilities and shareholders' equity	2019	2018
	SAR	SAR
Current liabilities
Current portion of medium and long-term loans	500,000	500,000
Trade payables	900,000	750,000
Accruals and other current liabilities	700,000	650,000
Provision for obligations and other fees	200,000	300,000
Refundable subscribers' deposits	100,000	150,000
Government payables	200,000	250,000
Payments from subscribers	550,000	750,000
Short term deferred revenues	850,000	1,000,000
Total Current Liabilities	4,000,000	4,350,000
Non-current liabilities
Long term loans	4,000,000	4,500,000
Sukuk	2,000,000	1,800,000
Provision for end of service benefits	1,000,000	1,100,000
Long term deferred revenues	2,000,000	1,700,000
Government grants	3,000,000	2,300,000
Liabilities relating to disposal of assets	2,500,000	2,400,000
Deferred tax liabilities	2,000,000	1,600,000
Total non-current liabilities	16,500,000	15,400,000
Shareholders' Equity
Capital	5,000,000	5,000,000
Statutory reserve	2,500,000	2,500,000
General reserve	500,000	500,000
Other reserves	200,000	200,000
Retained earnings	5,500,000	4,800,000
Total shareholders' equity	13,700,000	13,000,000
Total liabilities and shareholders' equity	34,200,000	32,750,000

Income Statement

For the period from 1/1/2019 to 31/12/2019

(Amounts in SAR)

	2019
	SAR
Revenues	100,000,000
Cost of Revenues	(80,000,000)
Gross profit	20,000,000
General and administrative expenses	(10,000,000)
Selling and distribution expenses	(4,000,000)
Income from operations	6,000,000
Financing charges	(200,000)
Profit before Zakat and income tax	5,800,000
Zakat	(300,000)
Profit for the year	5,500,000

Movement of the Provision:

Description	Opening Balance	Generated during the year	Utilized during the year	Closing balance
	SAR	SAR	SAR	SAR
Provision for end of service benefits	1,000,000	400,000	(300,000)	1,100,000
Provision for obligations and other fees	300,000	0	(100,000)	200,000
Total	1,300,000	400,000	(400,000)	1,300,000

Zakat calculation:

Item	Amount
Adjustment to activity result
	SAR
Net profit before Zakat	5,800,000
Add: Provision for end of service provided during the year	400,000
Total adjusted zakatable profit	6,200,000

Additions to the base
Equity	SAR
Capital	5,000,000
Statutory reserve	2,500,000
General reserve	500,000
Other reserves	200,000
Retained earnings	4,800,000
Dividends distribution during the year	-4,800,000
Provision for obligations and other fees	200,000
Total	8,400,000
Obligations on the Zakat payer
Long term loans	4,500,000
Sukuk	2,000,000
Deferred revenues	2,000,000
Government grants	3,000,000
Liabilities relating to disposal of assets	2,500,000
Deferred tax liabilities	2,000,000
Provision for end of service (opening balance less amount utilized amount during the year)	700,000
Total external sources of funds subject to Zakat	16,700,000
Total additions to the base	25,100,000

Deduction from Zakat base
	SAR
Property, plant and equipment	9,000,000
Transmission and distribution network	8,000,000
Intangible assets	6,000,000
Deferred tax assets	500,000
Total deductible assets	23,500,000
Zakat base without the adjusted profit for the year	1,600,000
Zakat at 2.578% of the Zakat base without the adjusted profit	41,248
Adjusted profit	6,200,000
Zakat at 2.5% of the adjusted profit	155,000
Total Zakat	196,248

Appendix: Frequently Asked Questions (FAQ)

FAQ pertaining to the Zakat base:

Is it permissible for an entity to deduct the employees' share in the regular pension funds such as the retirement pension, social insurance or saving funds from the Zakat base?
The employees' share in such funds may not be deducted from the Zakat base.
What are the expenses that may be deducted from the Zakat base?
All ordinary and necessary expenses that are needed for the business activity, whether paid or due, are deducted to reach the net result of the business activity provided that the following guidelines are met:
1. They shall be actual expenses evidenced by supporting documents or other evidences to enable the Authority to verify its validity even if they relate to previous years.
2. They shall correspond to the business activity and not related to personal expenses or other activities.
3. They shall not be of capital nature, and in case an expense of a capital nature is included in the expenses, the result of the business activity will be adjusted accordingly, and it will be added to the fixed assets and depreciated in accordance with statutory ratios.
Is it permissible for an entity to deduct bad debts from the Zakat base? What are the guidelines for that?
Bad debts are considered expenses that may be deducted according to the following guidelines:
1. Should have been previously reported as a revenue to the entity in the year they become due.
2. Bad debts should have arisen from engagement in business activities, provided that:
  - The entity shall provide a certificate from a certified public accountant confirming that bad debts had been written off from the books by a competent officer's decision.
  - The debts written off should not be due from related parties to the Zakat payer.
3. The Zakat payer shall report the debts written off as revenue once such debts are recovered.
Is it permissible for the owner of the entity to deduct his salaries and allowances from the Zakat base?
The salaries and allowances of the business owner, whether a sole proprietorship, a capital company or a company of persons, as well as the remuneration paid to the chairman of the board of directors of the entity, his deputy and board members, shall be considered as expenses that may be deducted, provided that the salaries and allowances of the owner of the entity are registered in the social insurance, and that the remunerations should not exceed those paid to independent persons.
How is the capital increase calculated when it is unknown that it financed a deductible asset?
The capital increase, which is unknown to have financed a deductible asset, will be added, according to the number of days, as a source of other funding sources and treated as obligations on the Zakat payer and therefore shall be added not exceeding the amount of deductibles from the base.
How is the Zakat payer accounted for in case the fiscal year is longer than the Hijri year (354 days)?
Zakat is calculated based on the actual number of days in the year, by dividing two and a half percent (2.5%) on the number of days of the Hijri year (354 days) multiplied by the number of actual days of the Zakatable year, except for the adjusted net profit which shall be subject to Zakat at two and a half percent (2.5%) for the year.
2.5% x Number of actual days of the Zakatable year for the Zakat payerThe number of days in the Hijri Year

Electricity,Gas, Steam and Air Conditioning Supply Sector

Zakat, Tax and Customs Authority

First Edition | Dec 2019

Contents

Introduction

About Zakat

Levy of Zakat

Application of Zakat Levy in Saudi Arabia

General Authority for Zakat & Tax

Functions of the General Authority of Zakat & Tax

Overview of the General Zakat Guide

Zakat Concepts, Terminology and Calculation Methods

Identify Zakat Base for Zakat Payer Maintaining Commercial Books

Components of Zakat Base (Additions)

Concepts Related to Additions

What Is added to the Zakat Base

Items to be excluded from Zakat Base

Guidelines for Addition to Zakat Base

Items of Zakat Base (Deductibles)

Concepts related to deductions

Items to be deducted from the base

Guidelines for Deduction from the Zakat Base

Items that are not deducted from the Zakat base

Other general guidelines regarding Zakat base

Practical Examples

Adjustment to the Result of Business

Expenses that may be deducted

Non-deductible Expenses

Electricity, Gas, Steam and Air Conditioning Supply Sector

Sector definitions

Zakat issues pertaining to the sector

Practical Examples

Appendix: Frequently Asked Questions (FAQ)