1. Executive Summary
This report offers an in-depth examination of the Zakat on the treatment of investments in the Zakat base based on new Zakat regulation and recent guide released by Zakat, Tax and Customs Authority’s (ZATCA) in 2025. The analysis reflects the provisions of the new Zakat Executive Regulations (effective 1 January 2024) and interprets how accounting standards such as IFRS 9, IFRS 10, and IAS 28 interact with zakat calculation mechanisms. By contextualizing definitions, treatment methodologies, and practical scenarios, this report equips zakat-subjected entities in Saudi Arabia with the tools to apply the latest regulatory expectations in a compliant and effective manner.

2. Legislative and Regulatory Context
2.1 Legal Basis
The Zakat system in Saudi Arabia derives its authority from Islamic law and royal decrees, including Royal Decree No. M/40 and Ministerial Resolution No. 1007 dated 19 Sha’ban 1445H (29 February 2024). The 2024 Executive Regulations integrate modern accounting principles and elaborate zakat base calculation mechanisms for diverse business structures.

The Relevance of the Anti-Fragmentation Rule for GCC Countries
The anti-fragmentation rule holds particular importance for GCC countries, where tax regimes are evolving in response to a growing need for revenue diversification and alignment with global standards. Traditionally, many GCC countries relied heavily on oil revenues and maintained tax-friendly regimes to attract foreign investment. However, with the shift toward diversified economies, tax frameworks are becoming more structured.

2.2 ZATCA’s 2025 Investment Guide
The 2025 guide focuses on clarifying:

• Classification of investment types.
• Accounting standards and their application in zakat base determination.
• Conditions for deductibility.
• Impact of investment performance on zakat thresholds.

3. Framework for Zakat Base Calculation
3.1 Minimum Zakat Base
Defined under Article 27 of the Executive Regulations:

• Based on adjusted net profit.
• Adjustments include non-deductible expenses, unrealized gains (if fair value through
  profit/loss).

3.2 Maximum Zakat Base
As per Article 28:

• Based on equity and equity-like items.
• Includes retained earnings, comprehensive income (OCI), and other reserves.

The zakat due is calculated on the lower of the two bases.

4. Investment Classifications and Treatment
4.1 By Control and Influence

5. Deductibility of Investments
5.1 General Rule
Investments are deductible from the zakat base if:

• The investee is subject to zakat in Saudi Arabia.
• A valid zakat certificate is presented or zakat has been paid by the investor.

5.2 Conditional Deductibility
For foreign investments or non-zakat entities, deduction requires:

• The investor paying zakat on their share of the investment.

Example: Local vs Foreign Investment

• Company A invests SAR 5M in Company B (zakat-subjected): Deductible.
• Company A invests SAR 5M in Company C (foreign): Not deductible unless zakat paid.

6. Impact of Accounting Treatment on Zakat
6.1 Equity Method (IAS 28)

• Investment initially recorded at cost.
• Adjusted annually for investor’s share of profit/loss and dividends.
• Impact on zakat:
  • Year-end investment balance is considered for deduction.
  • Income share affects adjusted profit (minimum base).

Illustration:
Company A owns 30% of Company B:

• Investment at start: SAR 3.5M
• Share of profit (SAR 600K x 30%) = SAR 180K
• Dividends received (SAR 1.2M x 30%) = SAR 360K
• Year-end balance = 3.5M + 180K – 360K = SAR 3.32M

6.2 Fair Value Through P&L (IFRS 9)

• Valuation gains/losses reported in income.
• Affects net profit and thus minimum zakat base.

Illustration:
Cost = SAR 200K, fair value = SAR 217K. Gain = SAR 17K.

• Gain added to profit → higher zakat base.
• Year-end investment = SAR 217K (may be deductible).

6.3 Fair Value Through OCI (IFRS 9)

• Gains/losses recorded in equity.
• Affects maximum zakat base.

Illustration:
Cost = SAR 30M, fair value = SAR 30.6M. Gain = SAR 600K.

• Added to equity → impacts maximum base.

7. Other Investment Instruments
7.1 Sukuk and Bonds

• Sukuk and conventional bonds are considered financial instruments that may generate periodic returns.
• These instruments are typically zakatable at face value or market value, depending on their classification.
• Deductibility depends on whether the issuer is subject to zakat or if the investor has settled their share of zakat liability.
• If held for trading, they follow fair value accounting and may affect the minimum base.
• If held to maturity, they follow amortised cost and may be deductible if returns are zakated.

Practical Note: Where bonds are issued by government or sovereign entities, exemption or special treatment may apply.

7.2 Murabaha and Deposits

• Islamic finance instruments such as murabaha contracts are zakatable due to their fixed profit nature.
• They are treated as receivables and included in the zakat base.
• Deposits with banks are also zakatable, particularly if short-term in nature.
• Accrued income from murabaha is added to net profit, thereby affecting the minimum base.

Example: Company A places SAR 10M in murabaha and earns SAR 500K profit annually. This profit is added to adjusted net profit.

7.3 Derivatives and Financial Instruments

• Includes options, swaps, and forwards, often used for hedging or speculative purposes.
• Under IFRS 9, derivatives are typically measured at fair value through profit or loss.
• Unrealised gains/losses from derivative positions directly affect the income statement.
• For zakat purposes, these gains or losses impact the adjusted net profit and thus the minimum base.
• If derivatives are embedded in other financial instruments, further analysis may be required.

Example: Company B holds a currency forward contract showing a gain of SAR 200K at year-end. This gain is included in net profit and increases the zakat base accordingly.

8. Practical Recommendations

• Classify correctly under IFRS 9 / IAS 28 / IFRS 10.
• Ensure documentation of zakat status and valuation.
• Assess impact on both zakat bases.
• Coordinate financial and zakat teams.
• Consult ZATCA or advisors for complex instruments or foreign exposure.

9. Conclusion
The 2025 ZATCA Guide offers critical clarity on the integration of accounting and zakat rules. By understanding the tax treatment of various investment forms, entities can ensure compliant and optimised zakat reporting. Effective coordination between finance, tax, and compliance teams is essential for accurate zakat computation and regulatory alignment.