Zakat vs Corporate Tax in Saudi Arabia Explained

Zakat and corporate tax: who pays which

In Saudi Arabia, the same company can owe Zakat, corporate income tax, or both, depending on who owns it: Zakat applies at 2.5% to the Saudi- and GCC-national-owned share of a business, and corporate income tax applies at 20% to the non-Saudi, non-GCC-owned share of the same business. It matters because a business does not choose between the two regimes; ownership decides the split, and getting the split wrong misstates both liabilities at once.

GCC nationals are treated the same as Saudi nationals for this purpose, so a company owned by Saudi and Kuwaiti individuals, for example, is fully within the Zakat regime rather than partly within corporate tax. Only ownership by a non-GCC person or entity, wherever incorporated or resident, brings the 20% corporate income tax rate into play.

A wholly Saudi or GCC-owned company

A company wholly owned by Saudi or GCC nationals pays Zakat only, at 2.5% of its Zakat base for the year, with no corporate income tax exposure at all. This is the simplest case and covers most small and medium Saudi trading businesses, where the owners are Saudi individuals or a Saudi-owned holding structure.

The Zakat base is not the same figure as accounting net profit. ZATCA computes it under its own Zakat implementing regulations from the business's financial position for the year, and because the detailed adjustments can move the base away from what net profit alone would suggest, a business should have its Zakat base prepared or reviewed by a Zakat specialist rather than estimate 2.5% of profit and assume that is the liability.

A wholly foreign-owned company

A company wholly owned by non-Saudi, non-GCC shareholders pays corporate income tax only, at 20% of its taxable income for the year, with no Zakat liability. This is the position for most branches and subsidiaries of international groups operating in Saudi Arabia without any Saudi or GCC ownership.

Taxable income for corporate income tax purposes is a different computation from the Zakat base described above: it follows the Income Tax Law's own rules for deductible expenses, allowances and adjustments to accounting profit, not the Zakat regulations' method of arriving at a base. A wholly foreign-owned company therefore needs its taxable income computed under those rules, separately from any Zakat concept even though it has no Zakat to pay.

A common source of confusion is assuming a foreign branch of an international group is somehow outside Saudi tax entirely because its parent is taxed elsewhere. A Saudi branch or subsidiary of a non-GCC group is a Saudi taxpayer in its own right, filing and paying corporate income tax on its own Saudi taxable income regardless of how the wider group is taxed in its home country.

Mixed-ownership companies: the proportional split

Where ownership is mixed, ZATCA taxes the company proportionally: the Saudi- and GCC-owned percentage of the business is subject to 2.5% Zakat, and the non-Saudi, non-GCC-owned percentage is subject to 20% corporate income tax. The two figures each start from their own base, the Zakat base for the Zakat calculation and taxable income for the corporate tax calculation, and only then does the ownership percentage apply.

A worked example makes the mechanics clear. A trading company is 65% owned by Saudi shareholders and 35% owned by a foreign investor. For the year, its Zakat base, as computed under ZATCA's Zakat regulations, is SAR 4,000,000, and its taxable income for corporate income tax, computed separately under the Income Tax Law, is SAR 5,000,000.

• Zakat-liable share: 65% of the SAR 4,000,000 Zakat base = SAR 2,600,000.
• Zakat payable: 2.5% of SAR 2,600,000 = SAR 65,000.
• Tax-liable share: 35% of the SAR 5,000,000 taxable income = SAR 1,750,000.
• Corporate income tax payable: 20% of SAR 1,750,000 = SAR 350,000.
• The company's combined ZATCA liability for the year is SAR 65,000 Zakat plus SAR 350,000 corporate income tax.
• A 50/50 joint venture shows the same logic with an even split. If its Zakat base for the year is SAR 1,800,000 and its taxable income is SAR 2,200,000, the Saudi partner's half of the Zakat base, SAR 900,000, is taxed at 2.5% for SAR 22,500 of Zakat, and the foreign partner's half of the taxable income, SAR 1,100,000, is taxed at 20% for SAR 220,000 of corporate income tax. Neither partner's share is taxed under the other regime, and neither calculation borrows from the other's base.

Registering and filing the annual return

Whether a business owes Zakat, corporate income tax or both, the mechanics of filing are the same: an annual income tax and Zakat return covering both regimes must be filed, and the amount due paid, within 120 days of the end of the business's taxable, or financial, year. A business must first obtain a tax identification number from ZATCA before it can file its first return or access ZATCA's filing system at all.

Because the same return and the same 120-day deadline cover both Zakat and corporate income tax, a mixed-ownership company cannot file one part on time and let the other slip; the return is one filing obligation with two calculations inside it, and missing the deadline exposes the business to ZATCA's general filing and payment penalties on whichever portion, or both, is outstanding.

For a foreign investor setting up a new mixed-ownership company, the tax identification number is only the third step in a longer sequence: a MISA foreign investment licence from the Ministry of Investment of Saudi Arabia comes first, followed by a Commercial Registration from the Ministry of Commerce, then ZATCA registration for Zakat and tax, and finally GOSI employer registration once the company is ready to hire. Getting the ownership structure right at the MISA and Commercial Registration stage is what the Zakat/tax split described above is later calculated from.

Capital gains follow the same ownership split

Capital gains on shares listed on the Saudi stock exchange, Tadawul, are exempt from tax, subject to conditions, regardless of who owns them. Capital gains on unlisted shares are not exempt: they are taxed at 20% to the extent of non-Saudi ownership and at 2.5% Zakat to the extent of Saudi and GCC ownership, following the same proportional logic as ongoing profits.

A change of ownership in an unlisted company must be notified to ZATCA within 60 days of the sale. For a mixed-ownership business this notification matters beyond the immediate capital gains calculation, because a change in the Saudi or foreign ownership percentage part-way through a year can also change the split applied to that year's Zakat base and taxable income.

Regional headquarters: an exception worth knowing

An approved Regional Headquarters under Saudi Arabia's RHQ Program gets 0% corporate income tax and 0% withholding tax on its qualifying RHQ activity for 30 years from licence issuance, renewable. This is a genuine exception to the 20% corporate tax rate described above, but it is narrow.

The RHQ tax holiday does not extend to VAT, at the standard 15% rate, to Zakat, to real-estate transfer tax, or to GOSI social-insurance contributions, all of which continue to apply in the ordinary way. A multinational's approved RHQ entity with Saudi shareholders alongside its foreign parent, for instance, would still owe Zakat on the Saudi-owned share of its Zakat base even while its qualifying activity income is taxed at 0%.

What the books must keep separate

A mixed-ownership company's chart of accounts and supporting schedules need to hold more than one company's worth of ordinary bookkeeping to get this right every year, because two different regulatory calculations are drawing on the same underlying transactions.

None of this changes how a sale, a purchase or a payroll run is recorded day to day; the double entry behind an invoice or a payslip is the same whatever the ownership split is. What changes is the year-end working papers built on top of that ledger, which need the ownership percentage, the two separate bases and any in-year ownership change on hand before the 120-day filing clock runs out.

• The current, up-to-date ownership split between Saudi/GCC and non-Saudi/non-GCC shareholders, since it drives both calculations.
• A Zakat base working paper separate from the corporate income tax taxable-income working paper, because they follow different rules even for the same company.
• A record of any ownership change during the year, with its date, to support a correct split and the 60-day ZATCA notification.
• Capital gains on listed shares kept apart from capital gains on unlisted shares, since only the unlisted ones carry a Zakat or tax charge.
• For an RHQ entity, qualifying RHQ activity income kept apart from any other income that does not benefit from the 0% rate.

Common mistakes with Zakat and corporate tax

Most errors here come from treating Zakat and corporate income tax as interchangeable, or from letting the ownership record fall out of date.

• Applying 2.5% to the whole company when part of it is foreign-owned, instead of applying it only to the Saudi/GCC-owned share.
• Using net accounting profit as a stand-in for the Zakat base, rather than the base ZATCA's own regulations compute.
• Missing an ownership change during the year, which throws off the split applied to that year's Zakat and tax.
• Forgetting that an RHQ's 0% rate does not touch VAT, Zakat, real-estate transfer tax or GOSI.
• Filing corporate income tax on time while letting the Zakat side of the same return slip, when both share the same 120-day deadline.

Doing this in Skyline Nexus ERP

Fiscal Authority, Zakat Returns in Skyline Nexus ERP builds a working paper that pulls account balances from the ledger and moves through draft, ready, submitted, filed and amended statuses, with printable sections covering the cover page, income, adjustments, the Zakat base and the tax base, alongside a balance sheet section, and space to record the ZATCA reference and payment once the return is filed manually on the ZATCA portal.

Keeping the separate Zakat base and tax base sections of that working paper aligned with an up-to-date ownership record is still the finance team's job; the working paper organises and pulls the ledger figures, but the Saudi/GCC and non-Saudi ownership percentages applied to each base, and the return's actual filing on the ZATCA portal, remain a manual step.