Saudi Arabia: ZATCA’s policies and procedures regarding the most debatable Zakat, Tax and VAT

In detail

The guidelines aim to provide insights related to prominent Zakat, Tax and VAT items which are commonly debatable between ZATCA and Zakat / Taxpayers. Currently the guidelines are available only in Arabic language. 

Some of the debatable items and corresponding ZATCA’s policies and procedures are summarised hereunder:

VAT

Transitional “Grandfathering” rule for applying zero rate on supplies related to long term contracts before the introduction of VAT

In addition to the requirements provided in the VAT regulations and available guidelines, ZATCA is of the view that the contract must also be executed prior to the adoption and publication of the GCC VAT Framework dated 12 April 2017.

Input VAT recovery on meals/catering

Taxpayers may claim input VAT related to meal expenses for workers located in remote locations provided that the taxpayer can prove that the meals are required to be provided under the KSA labor law

WHT

WHT on Deemed Dividends resulted from applying income tax on estimated profit 

Deemed Dividends are not subject to WHT except in certain cases which includes the following:

• Actual dividends payment / deemed payment (offset) to a non-resident.
  
• Filing CIT return on a deemed profit basis.
  
• Non-disclosure of revenues or contracts.
  
• Not maintaining accounting records.
  
• Not filing the CIT return.
  
• Not having banks accounts in Kingdom.
  
• Tax evasion or avoidance cases.
• Written approval by the taxpayer or his official representative.

Zakat

Debtors’ loans, support or additional funding 

Zakat assessments up to 2018:

Loans provided to investee are deductible from Zakat base capped to the ownership percentage of the investor in the investee’s capital subject to certain criteria, some of the most important criteria are listed below, all criteria all listed in the guidelines:

• They should be classified as an investment or non-current assets in the investor’s financial statements and classified as equity or long term liabilities in the investees’ financial statements.
• They should not be resulting from commercial transactions between investor and investee.
• It should be an interest free loan not for a commercial or interest earning purposes. 

Zakat assessments from 2019 onwards:

Non-deductible according to the provisions of Article (5 - Para.4) of Zakat By-law, except for those classified within the equity of the investee and subject to Zakat in the investee without cap to the deductibles from the Zakat base.

Investment in BOOT contracts in books of the lessor

• Only the Saudi share of the non-current balance of the net investment in BOOT contracts and its similars is deductible.
• In case the entire investment is classified as current assets according to the accounting standards, only the due amount within the next year is non-deductible.
• In all cases, the entire financing source of this investment should be added to the Zakat base

Real Estate Under Development “REUD” 

Zakat assessments for 2017 and 2018:

• The intention of the Zakat payer regarding the sale of the REUD is determined based on the item movement in the subsequent year.
• Developed RE and rented in the subsequent year are deductible during the period they were REUD.
• Sold REUD in the subsequent year due to urgency or need for liquidity (along with the supporting evidence of not changing the intention) are allowed as deductible item from Zakat base

Zakat assessments from 2019 onwards:

• Deductible from Zakat base subject to the criteria as per Article (5-Para 9) of Zakat By-law.

Investments in investment funds

Investments not held for trading purposes are allowed as deductible items from Zakat base subject to the following criteria:

• The fund should calculate and pay its due Zakat independently.
• The investor should calculate and pay Zakat on his investment in that fund according to the approved calculation mechanism by ZATCA.

Utilised provisions for Zakat purposes

• In case the Zakat base is higher than the net adjusted profit, the amount of the utilised provisions to be deducted from the Zakat base.
• In case the net adjusted profit is higher than the Zakat base, utilised provisions to be deducted from the net adjusted profit , then the net Zakatable profit to be compared with the Zakat base (after eliminating the impact of the utilised provisions on the Zakat base) and whatever is higher will be subject to Zakat

Considering the net adjusted profit as the minimum Zakat base

The net adjusted profit should not be considered as the minimum Zakat base, provided that Zakat due should not be less than the calculated Zakat as per the submitted Zakat returns for the years before 2017.

Dividends from the profit of the year

In case Zakat is calculated on the Zakat base but not of the net adjusted profit, the paid dividends will be deducted from Zakat base even they are more than the opening balance of the retained earnings, provided that they have been actually distributed.

Noting that these dividends should not be part of the Zakatable profit of the dividends’ recipient.