Introduction
In a major legislative move aimed at modernizing the fiscal framework in line with Vision 2030, the Kingdom of Saudi Arabia has issued an updated version of the Zakat Executive Regulations. These regulations, published through the Ministerial Decision No. 1248 dated 11/10/1446H, represent a comprehensive restructuring of the previous regulatory environment. The new version integrates prior rules, incorporates recent policy changes, and reflects international best practices. The update not only broadens the Zakat payer base but also redefines Zakat calculation, introduces clear mechanisms for consolidated filings, and outlines enhanced compliance measures.

1. Expanded Scope of Zakat-Paying Entities
The updated regulations significantly clarify and expand the range of entities subject to Zakat in Saudi Arabia. Previously, there was uncertainty about taxability of foreign-owned businesses, mixed-ownership structures, and passive investors. The new version explicitly confirms that any Saudi or GCC national (individual or legal entity) engaged in commercial, industrial, professional, or investment activities is within scope.

This includes:

• Sole proprietorships and companies operating under a Saudi commercial license;
• Businesses where Saudi/GCC persons hold any portion of ownership, directly or indirectly;
• Individuals, being shareholders in local entities, even if held through complex foreign vehicles

Example:
A UAE-based holding company owns 70% of a Saudi LLC, and a Saudi national owns the remaining 30%. The Saudi partner’s share is subject to Zakat, while the non-GCC portion is typically subject to corporate income tax. If there are additional GCC investors upstream in the structure, further allocations to Zakat could apply.

2. Unified Zakat Returns and Group Consolidation
A key development is the formalization of unified zakat filing for corporate groups. A parent company may elect to file a single Zakat return covering its wholly owned subsidiaries, which helps to reduce administrative burdens and creates potential efficiencies in tax base planning.

Conditions include:

• Full ownership (100%) directly or indirectly through other subsidiaries;
• Compliance with SOCPA accounting standards across the group;
• Pre-approval by ZATCA and annual declarations.

Example:
A Saudi holding company owns multiple subsidiaries in the logistics, retail, and manufacturing sectors. With all companies preparing SOCPA-based accounts and under 100% ownership, the group can file a unified zakat return, simplifying consolidation of intercompany transactions and possibly lowering the combined zakat base.

3. Revised Zakat Base Calculation Rules
The updated regulations tighten and standardize how the zakat base is calculated. The foundation remains the 2.5% rate on zakatable assets, but the rules introduce greater reliance on audited financial statements and alignment with accounting standards.

Key elements include:

• Use of net assets from SOCPA-compliant financial statements;
• Adjustments for reserves, fair value changes, and non-operating income;
• Treatment of deferred tax liabilities and owner loans based on substance-over-form analysis.

Example:
If a company has SAR 15 million in assets, SAR 10 million in liabilities, and SAR 5 million in equity, but holds SAR 2 million in unrealized fair value gains and SAR 1 million in shareholder loans classified as equity-like, the adjusted zakat base may be SAR 8 million, resulting in a zakat due of SAR 200,000.

4. Real Estate and Construction Project Adjustments
Real estate developers and contractors face notable updates under the new regulations. The classification of real estate assets—as trading stock or long-term investment—now directly affects zakat deductibility.

Guidelines include:

• Real estate held for sale is generally non-deductible;
• Projects where 25% or more of units are sold before delivery are considered trading by default;
• BOT and off-plan sales have special reporting requirements.

Example:
A developer with a residential compound under construction sells 30% of units during the financial year. Despite the intent to lease the remaining units, the sales trigger a reclassification. This reduces deductible assets and increases the zakat base.

5. Exemptions for Public Benefit Entities and Waqf
The updated regulation outlines clear conditions for zakat exemption for non-profit entities, charitable organizations, and religious endowments (waqf). The aim is to support public good while ensuring financial discipline and transparency.

Conditions include:

• At least 90% of revenue must be used for public benefit purposes;
• Limits on spending for private beneficiaries (not more than 10%);
• Audited financials and license renewal on an annual basis.

Example:
An endowment-owned school applies for exemption. If 92% of its funds are used for education and community welfare, with no undue benefits to private parties, it can retain exempt status, subject to filing with ZATCA.

6. Short Tax Periods and Business Changes
The regulations now formally codify the exclusion of very short financial periods from zakat liability. If an entity begins or ceases operations within a window of less than 54 days, zakat is not applicable for that period. Additionally, ownership changes, restructuring, or mergers do not erase zakat liability.

Example:
A business registers in December and starts operations mid-month. With only 20 operational days in the year, the entity is exempt from zakat for that short period but must account for full zakat in the next cycle.

7. Compliance Enforcement and Anti-Avoidance
ZATCA’s audit and enforcement capabilities are strengthened. It may re-calculate zakat, initiate asset reassessments, and penalize non-cooperative taxpayers. The definition of zakat evasion now includes misleading disclosures and deliberate misclassification of transactions.

Example:
If a company reports a shareholder advance as a loan to reduce zakat exposure but cannot provide formal loan terms or repayment schedules, ZATCA may reclassify it as equity, increasing the zakat base and potentially triggering penalties.

8. Treatment of Financial Investments
Investments in financial instruments and private funds are addressed with new precision. While sukuk and bonds may be deducted from the zakat base if declared as equity instruments, short-term trading assets are not deductible. Investor intent, fund classification, and audit status all influence zakat treatment.

Example:
A company invests SAR 10 million in a Sharia-compliant fund structured as a long-term equity vehicle. If the fund provides audited accounts and declares capital status, the investor may deduct the full amount from their zakat base.

Conclusion
Saudi Arabia’s updated Zakat Executive Regulations for 1446H offer businesses a more predictable, comprehensive, and accountable framework in alignment with global tax practices. These changes reflect the government’s desire to modernize zakat collection, align with economic substance principles, and create consistency across sectors. Tax leaders must work proactively with finance and compliance teams to assess the impact of group structures, real estate holdings, and financing arrangements under the new rules. Proper documentation, governance, and disclosures will be critical to reducing risk and maintaining compliance.