Zakat or Income Tax? How a Mixed Saudi and Foreign Owned Company Is Taxed

A worked example of a company with Saudi and foreign partners, showing how profit and the Zakat base are split and why the two charges move differently.

In a company with both Saudi and foreign shareholders, the foreign share of taxable profit pays income tax and the Saudi share pays Zakat on its portion of the Zakat base. The published headline rates are 20 per cent for income tax and 2.5 per cent for Zakat, both to be confirmed with ZATCA for the specific company. Because the two charges use different bases, a joint venture's total bill depends on its balance sheet as much as on its profit.

The situation

A foreign engineering group and a Saudi partner form a limited liability company, with the foreign group holding 60 per cent and the Saudi partner 40 per cent. In its third year the company is profitable, and the partners want to know what the combined tax and Zakat charge looks like and how it would change if the split moved.

Assumptions (illustrative)

• Ownership: 60 per cent foreign (non-GCC), 40 per cent Saudi.
• Assumed taxable profit after tax adjustments: SAR 10,000,000.
• Assumed Zakat base for the year (equity, certain liabilities and profit, less deductible assets): SAR 30,000,000.
• Income tax at the published headline rate of 20 per cent, applied to the foreign share only.
• Zakat at the published headline rate of 2.5 per cent, applied to the Saudi share of the Zakat base only.
• No losses brought forward and no withholding tax considered in this example.

Step 1: Split taxable profit by ownership

SAR 10,000,000 multiplied by 60 per cent equals SAR 6,000,000 attributable to the foreign partner.

Only this slice of profit enters the income tax computation. The Saudi partner's 40 per cent of profit is not taxed as income; it feeds into the Zakat calculation instead.

Step 2: Income tax on the foreign share

SAR 6,000,000 multiplied by 20 per cent equals SAR 1,200,000.

This is the income tax charge. It rises and falls with profit, so a bad year reduces it sharply and a loss year removes it.

Step 3: Split the Zakat base by ownership

SAR 30,000,000 multiplied by 40 per cent equals SAR 12,000,000 attributable to the Saudi partner.

The Zakat base is built mainly from the balance sheet. A company that has accumulated equity and long-term funding has a large base even in a modest profit year.

Step 4: Zakat on the Saudi share

SAR 12,000,000 multiplied by 2.5 per cent equals SAR 300,000.

Zakat is lower here than income tax, but it does not disappear in a loss year, because the base does not depend only on profit.

Step 5: Combined charge

SAR 1,200,000 plus SAR 300,000 equals SAR 1,500,000.

Measured against total taxable profit of SAR 10,000,000, the combined charge is 15 per cent. That blended figure is specific to this ownership split and this balance sheet.

Step 6: Test a different split

At 30 per cent foreign and 70 per cent Saudi: SAR 10,000,000 times 30 per cent times 20 per cent equals SAR 600,000; SAR 30,000,000 times 70 per cent times 2.5 per cent equals SAR 525,000; together SAR 1,125,000.

The combined charge falls, but the Zakat part almost doubles. Partners negotiating a shareholding should model both elements rather than assuming Zakat is always the cheaper side.

What changes the answer

• If profit halves to SAR 5,000,000 at the original split, income tax drops to SAR 600,000 while Zakat stays near SAR 300,000, so the blended rate rises to 18 per cent.
• A larger Zakat base, for example after retained earnings build up, raises the Saudi side of the charge even if profit is flat.
• Indirect ownership, such as a Saudi-registered holding company owned by foreigners, can change which share counts as Saudi, so trace ownership to the ultimate holders.
• Where the financial year does not follow the Hijri calendar, base-period adjustments can apply to Zakat; ask your adviser how ZATCA treats your year.
• Zakat rules were reissued in recent years, so the list of items added to and deducted from the base should be checked against the current regulations.

What the numbers tell you

• Income tax follows profit; Zakat follows the balance sheet, so the two respond to different decisions.
• The shareholders agreement should say how the tax and Zakat cost of each partner is borne, because the company pays both but the burden arises from different owners.
• Model at least three years, including a weak year, before agreeing an ownership split on tax grounds.
• A licensed adviser should prepare the Zakat base calculation, since the additions and deductions are technical and change with the regulations.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira works with foreign investors on the property side of entering Saudi Arabia: finding land or premises, due diligence, design, construction and asset management. For licensing, tax and legal steps, work with a licensed adviser; we coordinate with yours so the property decision fits the structure you choose.