Zakat and Income in the Saudi Financial Market: Regulations and Impacts 2024-2025

The Zakat, Tax and Customs Authority (ZATCA) plays a central role in the Saudi financial system by managing and collecting zakat and income tax. Zakat is a religious obligation imposed on Saudi shareholders in companies, calculated at 2.5% of net profits or zakat-eligible net assets. Income tax is imposed on the profits of foreign investors at a rate of 20%. The importance of this system lies in its role as a regulatory framework that defines the obligations of both listed and unlisted companies in the Saudi financial market. The authority oversees and coordinates with the Ministry of Finance and the Capital Market Authority (CMA), requiring all listed companies in Tadawul to fully disclose their zakat and tax obligations in their annual and quarterly financial reports. These disclosures are fundamental to building trust with investors and are a crucial factor in evaluating companies and their financial credibility.

Saudi joint-stock companies apply two main methods for calculating zakat: the first is the net assets method, where zakat is calculated on the total capital, reserves, and provisions after excluding non-eligible assets and some liabilities. The second is the net profits method, often used in sole proprietorships or small companies, where zakat is calculated on the annual profit after accounting adjustments. Income tax is imposed at a rate of 20% on the net profits of foreign investors, with a minimum effective rate of 15% for some low-profit companies. Mixed companies are subject to dual calculation, where zakat applies to the Saudi share and income tax to the foreign share. Companies are required to submit annual declarations within 120 days of the end of the financial year and must disclose zakat and tax amounts in their financial statements, while complying with International Financial Reporting Standards (IFRS) and the authority's specific zakat adjustments.

Data from the Kingdom's budget for 2024 and 2025 indicate a significant increase in zakat and tax revenues, with total tax revenues (including zakat, income tax, and value-added tax) exceeding 67 billion riyals, accounting for approximately 20% of total government revenues. This growth reflects the expansion of the base of companies subject to zakat and income tax, due to an increase in the number of listed companies and enhanced oversight of tax compliance. Sectorally, banks, insurance companies, and real estate funds achieved profit growth rates ranging from 9% to 16% in the first quarter of 2025, contributing to an increase in zakat and tax liabilities. This trend aligns with the objectives of Vision 2030 to diversify government revenue sources and reduce reliance on oil revenues.

Zakat and income play a vital role in determining the net profits available for distribution to shareholders, thus directly affecting stock valuation metrics such as the price-to-earnings (P/E) ratio and dividend yield. As zakat and tax obligations increase, the net earnings per share decrease, leading to a higher P/E ratio if the market price remains constant. Dividends are subject to deduction after zakat calculation, reducing the final yield for Saudi investors. Additionally, disclosing the size of zakat and tax obligations in financial reports reflects the company's financial governance level and serves as an indicator of the company's commitment to regulatory systems, which impacts investors' decisions regarding investing in its shares.

The Capital Market Authority (CMA) requires all listed companies in Tadawul to fully disclose their zakat and tax obligations in their annual and quarterly financial statements. This includes specifying the amount of zakat and tax due, the calculation method, and any settlements or arrears from previous years. The level of transparency in disclosure is viewed as a sign of the quality of corporate governance, as the accuracy of disclosure affects investor confidence and the assessments of credit rating agencies regarding the company. The authority also requires that zakat provisions be included in the expense list, with reference to any settlement agreements with the authority in case of arrears. Major companies, especially banks, insurance companies, and real estate funds, ensure detailed disclosure to avoid regulatory penalties or loss of market confidence.

As of the end of 2025, there have been no significant changes to zakat or income tax rates, remaining at 2.5% for zakat and 20% for foreign income tax. However, the authority has issued technical clarifications regarding the calculation of certain accounting items, excluding credit loss provisions (IFRS 9) from the zakat base. Additionally, oversight measures have been tightened for companies with delayed payments, with announcements of inspection campaigns and settlements of arrears amounting to 17.76 billion riyals for 27 listed companies over three years. The authority has launched incentive packages in collaboration with Tadawul and CMA to encourage early disclosure and compliance, especially for listed small and medium-sized enterprises. The authority continues to develop digital infrastructure to facilitate electronic filing and payment.

The impact of zakat and income varies across sectors. In the banking sector, zakat is calculated on net capital and shareholders' equity, affecting the amount of distributable profits. Insurance companies face challenges in determining the zakat base due to the complexity of revenue sources, while real estate funds are subject to zakat on their distributed net profits. In the industrial and services sectors, zakat is often calculated on net assets. The importance of tax and zakat planning in these sectors is highlighted to ensure compliance and reduce the impact of obligations on profits. The authority organizes specialized workshops to explain calculation methods in different sectors and develops educational content in collaboration with Saudi universities to enhance accounting knowledge among financial staff.

Although zakat is a unique system in Saudi Arabia from a legislative and religious perspective, there are similarities in the income tax system with some Gulf countries. The Kingdom maintains a fixed zakat rate (2.5%) based on Islamic law, while the UAE relies on a different commercial tax system (Federal Tax Authority), and Kuwait applies zakat through the Kuwaiti Zakat House. Income tax in Saudi Arabia is the highest among Gulf countries (20%), while it varies in Qatar, Bahrain, and Oman. The collection and disclosure mechanisms differ, with Saudi Arabia focusing on transparency and periodic disclosure, while some Gulf countries rely on less detailed annual settlement systems. The Saudi experience is considered an advanced model in combining religious and regulatory frameworks within a unified legislative context.

The Zakat, Tax and Customs Authority is responsible for imposing and collecting zakat and taxes, reviewing companies' declarations and financial transactions. The authority is committed to applying laws and executive regulations and works to raise awareness about the importance of tax and zakat compliance through educational programs and workshops for listed companies. The authority also relies on technology to provide its services, having launched electronic platforms for filing declarations and paying dues. It coordinates with the Ministry of Finance and the Capital Market Authority to ensure integration in managing financial disclosures and participates in developing legislation in line with the objectives of Vision 2030. Companies' compliance with the authority is part of the good governance requirements in the Saudi market.

Many companies face challenges in complying with zakat and income, primarily the difficulty of calculating the zakat base, the multiplicity of revenue sources, and the overlap of accounting items between eligible and non-eligible assets. Small and medium-sized enterprises may also face difficulties in accurately preparing declarations, leading to delays in payment or penalties. Proposed solutions include engaging a licensed financial consultant or certified accounting office, staying updated on the authority's updates and technical guidelines, and using digital accounting systems that meet disclosure requirements. The Zakat and Tax Authority provides support and incentive programs for new companies and allows for the settlement of arrears under flexible payment plans. The authority also recommends that companies document all financial transactions and maintain records to ensure easy review of declarations when needed.

The regulatory risks of zakat and income include the possibility of changes in tax rates or amendments to calculation mechanisms, which may affect the profitability of listed companies and dividend distributions. Any delay in disclosure or payment may lead to financial penalties or regulatory sanctions, such as service suspension or referral of the company to judicial authorities. Investors pay particular attention to monitoring updates from the authority and the financial disclosures of companies, as these are indicators of financial management quality and operational sustainability. Market experience shows that companies that manage their zakat and tax obligations transparently and with good planning enjoy investor confidence and achieve better long-term performance.

Zakat and income play a pivotal role in achieving the objectives of Vision 2030, particularly in diversifying government revenue sources and reducing reliance on oil. The government aims to enhance tax and zakat compliance and develop collection mechanisms to provide sustainable financing for national projects. The authority works to align legislation with international standards, improve digital collection efficiency, and offer incentives for compliant companies. The importance of zakat as a legitimate and social component supporting solidarity and community development, alongside the role of income tax in financing public services and infrastructure, is highlighted. The commitment of the private sector to zakat and income is an indicator of the success of economic reforms and the robustness of the Saudi financial system.

Most frequently asked questions revolve around the mechanisms for calculating zakat and tax, the differences between them, declaration deadlines, their impact on profits and distributions, and procedures in case of arrears. Investors are also interested in knowing about recent legislative amendments, available exemptions or incentives, and how to deal with specific sectors such as real estate funds and insurance companies. The authority provides official sources to answer these questions through its website and awareness programs and specialized workshops. It is always important to consult a licensed financial advisor or official entity for accurate and updated information on zakat and income.