Zakat is a due owed on wealth under specific conditions and paid to defined recipients. In a business it is computed on growing wealth, not on everything the business owns.
1 The conditions that make zakat due on wealth
Full ownership
The wealth is owned outright and settled
Growth
It grows or is capable of growth
Reaching the nisab
It reaches the prescribed minimum
The passing of a year
A full year elapses on the wealth
Freedom from debt
According to the scholars’ views on the effect of debt
The second condition — growth — is the key to understanding the entire zakat base
Why is no zakat due on buildings and machinery?
Because they are assets held for use in the activity and are not intended for direct growth through sale. Goods held for sale, cash and receivables are growing wealth and enter the base. Grasp that distinction and most of the deduction rules that follow become clear.
2 Zakat on trade goods
Trade goods are everything held for sale with the intention of profit. Their zakat is computed on their value at the end of the year, not necessarily on historical cost, plus cash and receivables, less the liabilities set against them under the applicable rules.
3 Who is subject to zakat under the law?
| Case | The prevailing treatment in the Kingdom |
|---|---|
| A business owned by Saudis | Zakat on the whole zakat base |
| A business owned by GCC nationals | Treated as Saudis for zakat |
| A business owned by non-Saudis and non-GCC nationals | Income tax, not zakat |
| A mixed business | Zakat on the subject group’s share and tax on the other share |
The Zakat, Tax and Customs Authority collects zakat in the Kingdom under published regulations and rules; returns are filed for it and certificates are issued that many dealings require to be produced.
4 Zakat and tax: complementary, not alike
| Zakat | Income tax | |
|---|---|---|
| Basis | A religious obligation | A legal obligation |
| What is measured | The zakat base (growing wealth) | Taxable net profit |
| Effect of a loss | A base may still be due despite a loss | Generally no tax without profit |
| Where it goes | The prescribed recipients of zakat | The public treasury |
An idea that surprises many
A business can make an accounting loss and still owe zakat, because zakat is computed on the growing wealth it owns, not on the result for the year. A business holding large inventory and cash that lost money in operations still has its growing wealth intact.
Lesson summary
- Zakat is a due on wealth under conditions: full ownership, growth, nisab and the passing of a year.
- The growth condition is why assets held for use are excluded from the base.
- Trade goods, cash and receivables are growing wealth and enter the base.
- Saudis and GCC nationals are subject to zakat, others to income tax, and mixed entities are split.
- Zakat may be due despite an accounting loss.
5 Test yourself
Three quick questions
Choose the answer you think is correct — the result appears immediately.
1. A building the business uses as its head office. Does it enter the zakat base?
The growth condition takes assets held for use out of the base, unlike property held for sale.
2. A business made an operating loss this year. Is zakat due?
Zakat attaches to the growing wealth owned, and a base can exist despite a loss for the year.
3. A company owned half by a GCC national and half by a foreign investor. The closest treatment:
GCC nationals are treated as Saudis for zakat, and the remainder is subject to income tax.