Zakat and Income: The Fundamental Difference Between Them and Who is Subject to Each?
Zakat and Income Tax: The Core Difference and Who is Subject to Each?
Difference between Zakat and Tax: Who are the subjects of Zakat and who are the subjects of Income Tax? How is the Zakat base and tax base determined, and what documents support your position during an audit?
- The fundamental operational difference between Zakat and Income Tax in Saudi Arabia.
- Criteria for who is subject to Zakat and who is subject to Income Tax (CIT).
- How a company can be “Mixed” (Subject to both paths) and how to handle it accounting-wise.
- Practical comparison of the Zakat base vs. Tax base calculation logic.
- Documentary requirements for both paths to ensure audit readiness.
1) Fundamental Difference: Ownership and Nationality
To understand the difference between Zakat and Tax simply, look at “Who owns the capital?”. In Saudi Arabia, the Zakat, Tax and Customs Authority (ZATCA) uses ownership and nationality as the primary driver for determining the path:
- Zakat: Generally imposed on Saudi and GCC (Gulf Cooperation Council) nationals and companies owned by them.
- Income Tax (CIT): Generally imposed on non-Saudi/non-GCC nationals and entities owned by them (foreign investors) on their share of profits.
2) Who is subject to Zakat and who is subject to Tax?
Determining who is subject to Zakat or Tax requires analyzing the legal structure and ownership.
| Target Group | Path | Core Logic |
|---|---|---|
| Saudi/GCC Nationals | Zakat | Wealth-based Sharia obligation |
| Non-GCC Nationals (Foreigners) | Income Tax | Profit-based investment tax |
| Saudi/GCC Entities | Zakat | Entity owned by GCC nationals |
| Foreign Entities/Branches | Income Tax | Entity performing activity in the country |
| Oil and Gas Activity | Specific Tax | Special regulatory tax regimes |
3) Mixed Companies: Applying both Zakat and Tax
A Mixed Company is one where the capital is shared between Saudi/GCC and non-GCC owners. In this case, the company is not “Zakat-only” or “Tax-only”; it follows a dual path:
3.1 Mixed Path Logic
- The Saudi/GCC share of the Zakat base is subject to Zakat.
- The Foreign share of the taxable profit is subject to Income Tax.
- Shared items (e.g., provisions, depreciation differences) must be allocated per ownership share.
4) Zakat Base vs. Tax Base (Calculation Methodology)
This is where the real difference between Zakat and Tax appears accounting-wise. Each path starts from the same financial statements but heads in a different direction.
Data Mapping Sheet - Source-to-Target Template
5) Reporting and Compliance Cycle per Path
While ZATCA manages both, the deadlines and forms may differ. Generally:
- Annual Return: Submitted within a specific period after the financial year-end (usually 120 days).
- Advance Payments: May apply to the Tax path (CIT) based on the previous year’s liability.
- Audited Statements: Mandatory for many entities above a certain threshold to prove the base.
6) Impact on Financial Statements and IAS 12 (Deferred Tax)
In the Tax path (CIT), accounting profit is rarely the same as taxable profit due to temporary differences (provisions, depreciation rates…). This triggers the need for Deferred Tax per IAS 12.
7) Audit Files: What does ZATCA expect in each path?
Audit readiness is not just “having documents”; it’s having them linked to the return figures.
7.1 Zakat Audit File
- Detailed base schedule linked to TB (Trial Balance).
- Evidence of long-term investments and their classification.
- Loan and credit facility contracts.
- Aging of receivables and payables.
7.2 Income Tax Audit File (CIT)
- Reconciliation: Accounting Profit ↔ Taxable Income.
- Expense ledger with supporting tax invoices.
- Contracts for sensitive expenses (royalties, services, interest).
- Proof of payment/withholding for foreign services (WHT linkage).
8) Operational Checklist to Avoid Errors
Operational Quality Gate
- Review Ownership: Is nationality and percentage 100% matched with official documents?
- Classify Activity: Does the activity fall under standard Zakat/Tax rules or a special regime (e.g., Oil/Gas)?
- Identify Shared Items: In mixed companies, is the allocation logic documented?
- Match TB to Base: Can every figure in the base schedule be traced back to the General Ledger?
- Test Samples: Audit the top 5 largest items in the base before submission.
9) Common Errors and How to Prevent Them
- Wrong Path Selection: Applying Zakat on a foreigner’s share or vice versa.
- Missing Supporting Notes: Recording adjustments in the return without a documented reason/evidence.
- Cut-off Variances: Including assets/liabilities outside the period in the Zakat base.
- Illegal Deduction (Tax Path): Claiming non-deductible expenses (e.g., specific entertainment or unproven provisions).
- Inconsistent Data: Variances between the VAT returns submitted during the year and the annual Zakat/Tax return.
10) Frequently Asked Questions
What is the difference between Zakat and Income Tax?
Zakat is calculated on a ‘Zakat Base’ (linked to net wealth/assets) for Saudi/GCC owners, while Income Tax is calculated on ‘Taxable Income’ (adjusted profit) for non-GCC owners.
Who is subject to Zakat and who is subject to Income Tax?
Saudi/GCC nationals and their owned entities follow the Zakat path. Foreign investors and their shares in entities (or branches) follow the Income Tax path.
What is a Mixed Company?
It is a company with both Saudi/GCC and non-GCC owners. It pays Zakat on the GCC share and Income Tax on the foreigner’s share of profits.
How is the Zakat base different from the Tax base?
The Zakat base focuses on wealth sources and net assets (Balance Sheet focus), while the Tax base focuses on adjusted net profit (Income Statement focus).
11) Conclusion
The difference between Zakat and Tax starts with Ownership and is executed through Base Methodology. By correctly classifying your entity, applying the right calculation path (Zakat/CIT/Mixed), and maintaining an organized audit file, you will ensure compliance, avoid late penalties, and be ready for any ZATCA inquiry.
Action Step Now (20 minutes)
- Update your “Ownership Schedule” based on the latest Commercial Register.
- Determine the path (Zakat/Tax/Mixed) for each partner/share.
- Start a preliminary Base Schedule and link it to your TB (Trial Balance) for the current year.