Understanding the Rules for Calculating Zakat on Financing Activities in Saudi Arabia

In the Kingdom of Saudi Arabia, Zakat is an essential pillar of Islamic finance, providing a framework for the equitable distribution of wealth. The General Authority of Zakat & Tax (GAZT) has established rules to calculate Zakat specifically for financing activities, as outlined in Ministerial Resolution No. (2215) Dated: 07/07/1440 H (14/03/2019 G). This article provides an overview of the key provisions and implications of these rules for Zakat payers engaged in financing activities.

Definitions and Scope

Article One: Key Terminology

The rules for calculating Zakat on financing activities introduce specific definitions essential for understanding the regulatory framework:

• Rules: Refers to the guidelines for calculating Zakat for financing activities.
• Regulations: Indicates the Implementing Regulation of Zakat, issued under the Minister of Finance’s Resolution No. (2216).
• Financing Activities: Encompasses banks and financing companies licensed by the Saudi Arabian Monetary Authority (SAMA).

Article Two: Applicability of the Rules

Zakat payers engaged in financing activities must adhere to the provisions of these rules and the accompanying regulations, with some exceptions. The following topics are exempt:

1. Funds Subject to Zakat (Article 4 of the Regulations)
2. Deductions from the Zakat Base (Article 5, unless specified in the rules)
3. Methods and Conditions for Calculating the Zakat Base (Article 6, with certain exceptions)
4. Amendment of Activity Results (Chapter 3)

Calculating the Zakat Base

Article Three: Formula for Calculation

The Zakat base for financing activities is defined as the sources of funds utilized in Zakat assets. The calculation follows this formula:

Zakat Base=Sources of Funds×(Zakat AssetsTotal Assets)\text{Zakat Base} = \text{Sources of Funds} \times \left(\frac{\text{Zakat Assets}}{\text{Total Assets}}\right)Zakat Base=Sources of Funds×(Total AssetsZakat Assets​)

This formula emphasizes the importance of accurately determining both Zakat assets and total assets for an accurate Zakat obligation.

Identifying Sources of Funds

Article Four: Components of Sources of Funds

The sources of funds subject to Zakat for financing activities include:

1. Ownership Rights (Equity): Increases in the Zakat payer’s capital during the Zakat year from external sources are treated proportionally to the period before the capital increase.
2. Debt Payable After One Year: This includes all forms of financing, such as:
   • Conventional borrowing
   • Murabaha
   • Financial leasing
   • Debt instruments like stocks and bonds issued by the Zakat payer.
3. Negative Fair Value of Derivatives: This applies when payable after one year or more.

Determining Zakat Assets

Article Five: Exclusions from Zakat Assets

To ascertain the Zakat assets, non-Zakat assets must be deducted from total assets. Non-Zakat assets include:

1. Net Fixed Assets: As per Paragraph (1) of Article (5) of the Regulations.
2. Real Estate: Title held by the Zakat payer from executing a mortgage in their favor.
3. Investments in Zakatable Entities: Ownership interests within the Kingdom subject to Zakat.
4. Investments Abroad: Provided that Zakat has been independently paid.
5. Debt Payable After One Year: Similar classifications as outlined in sources of funds.
6. Government Securities: Where Zakat is assumed by the state.
7. Positive Fair Value of Derivatives: Payable after one year.
8. Statutory Deposits: Held at SAMA.

Conclusion

Understanding the rules for calculating Zakat on financing activities is crucial for banks and financing companies in Saudi Arabia. Compliance with these guidelines not only ensures adherence to Islamic financial principles but also facilitates transparency and accountability within the financial sector. As Zakat payers navigate these rules, it is essential to maintain accurate records and consult with financial advisors to ensure the correct calculation and timely payment of Zakat, fulfilling their obligations and contributing to the welfare of the community.

summary

The General Authority of Zakat & Tax (GAZT) in Saudi Arabia has established specific rules for calculating Zakat on financing activities under Ministerial Resolution No. (2215). These rules define key terms, including “financing activities” as those conducted by banks and licensed financing companies. Zakat payers must adhere to these rules, with some exceptions related to funds subject to Zakat and methods of calculation.

The Zakat base is determined using a formula that calculates the sources of funds used in Zakat assets. These sources include ownership rights, long-term debts, and the negative fair value of derivatives. To calculate Zakat assets, non-Zakat assets must be deducted from total assets, encompassing fixed assets, real estate, and certain investments.

Disclaimer:  The Content offers general guidance and should not be considered legal, financial, or tax advice. Consult qualified professionals for personalized guidance. While efforts have been made to ensure accuracy, no guarantee is provided for completeness or applicability to individual situations. Users are responsible for their interpretation and actions based on this information, at their own risk.  

For understanding more about VAT Updates, Transfer Pricing, Corporate Tax Law and Registration reach out to us on: contact@acme-group.me | +971 52 740 1169