Zakat Base and the Non-Collectible Receivable
Riyadh Industrial Co. is a Saudi closed joint-stock company, 100% Saudi-owned, subject to Zakat. For the year ended 31 December 20X5 it reports accounting profit of SAR 4,000,000 after charging: a doubtful debt provision of SAR 300,000 (of which SAR 120,000 relates to a customer that has been formally declared bankrupt by a court and is considered definitively uncollectible); depreciation of SAR 900,000 (tax depreciation per the ZATCA rules is SAR 1,100,000); and a donation to a non-approved entity of SAR 50,000. The company also holds a long-term investment in a Saudi listed subsidiary of SAR 2,000,000. Zakat rate is 2.5% on the Zakat base. The Zakat base before adjustments is SAR 12,000,000.
1. Determine the adjustments to arrive at the Zakat base and compute the Zakat due.
Read the worked answer
Starting point: accounting profit SAR 4,000,000, then adjust to the Zakat base.
Adjustments:
- Doubtful debt provision: the general provision of SAR 180,000 (300,000 − 120,000) is not deductible, so add back SAR 180,000. The SAR 120,000 relating to the court-declared bankrupt customer is a definitively uncollectible debt and is deductible, so no add-back.
- Depreciation: accounting depreciation SAR 900,000 is replaced by the permitted tax depreciation of SAR 1,100,000. Add back 900,000 and deduct 1,100,000 → net deduction SAR 200,000.
- Donation to a non-approved entity: not deductible, add back SAR 50,000.
- Investment in a Saudi listed subsidiary: under the Zakat regulations, investments in entities subject to Zakat (e.g. a Saudi listed subsidiary) are generally excluded from the Zakat base to avoid double taxation. Deduct SAR 2,000,000, subject to verifying the subsidiary is itself within the Zakat net and the investment is held as a long-term investment.
Adjusted Zakat base: 4,000,000 + 180,000 − 200,000 + 50,000 − 2,000,000 = SAR 2,030,000.
Zakat due = 2,030,000 × 2.5% = SAR 50,750.
(If the SAR 2,000,000 investment deduction is disallowed on review, the base would be SAR 4,030,000 and Zakat SAR 100,750 - a material difference that must be resolved before filing.)
2. The company is 100% Saudi-owned. Explain how the Zakat base approach differs from the mixed-ownership case, and identify two documentation risks.
Read the worked answer
Ownership effect:
- A 100% Saudi/GCC-owned entity is subject to Zakat on the Saudi share only, computed on the Zakat base (roughly: sources of funds less deductible assets, adjusted).
- A mixed entity (Saudi and non-Saudi owners) is subject to both Zakat (on the Saudi share) and Corporate Income Tax (on the non-Saudi share) under the ZATCA rules. The tax is computed on taxable income, while Zakat is computed on the Zakat base. The two computations run in parallel and must be reconciled.
- The Zakat base is not simply accounting profit; it is built from equity/sources of funds less certain long-term assets, with add-backs. This is why the base (SAR 12,000,000 before adjustments) differs so much from profit (SAR 4,000,000).
Documentation risks:
- Evidence for the SAR 120,000 bad debt: without the court bankruptcy judgment and proof that all reasonable recovery steps were taken, ZATCA may reject the deduction and add back the full SAR 300,000.
- Evidence for the SAR 2,000,000 investment: the subsidiary's Zakat status and the investment classification must be documented; if the subsidiary is not Zakat-subject or the investment is short-term, the exclusion fails.
- Depreciation schedule must reconcile to the ZATCA-approved rates and the asset register.
Practical step: prepare a Zakat reconciliation schedule tying accounting profit to the Zakat base, retain the bankruptcy judgment, the donation agreement, and the subsidiary's Zakat certificate, and file within the statutory deadline to avoid late-filing penalties.