For Saudi corporate taxpayers liable for Zakat, understanding which expenses are deductible can make a significant difference in your liability. The Zakat, Tax and Customs Authority (ZATCA) allows specific deductions when calculating the Zakat base, but misclassification or overstatement of deductions can lead to penalties. This article breaks down what qualifies as a deductible expense, what doesn’t, and how to stay compliant in 2025.
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What Are Zakat-Deductible Expenses?
Under Saudi regulations, deductible expenses are those that directly relate to the earning of revenue and the generation of the Zakat base. They must be necessary, reasonable, and supported by proper documentation. Deductibility is evaluated under the Zakat Implementing Regulations and subject to ZATCA review.
| Category | Deductible Examples |
|---|---|
| Operating Expenses | Salaries, utilities, rent, maintenance, insurance premiums directly tied to operations. |
| Cost of Goods Sold (COGS) | Purchase costs of raw materials, freight, customs duties (if related to inventory). |
| Financial Expenses | Shariah-compliant financing costs and related service fees. |
| Depreciation & Amortization | Calculated per ZATCA guidelines for fixed assets used in operations. |
What Doesn’t Count as a Deductible Expense?
- Personal expenses of shareholders or employees.
- Fines, penalties, and non-compliant interest expenses.
- Charitable donations not meeting ZATCA-approved criteria.
- Expenses without proper VAT/Zakat-compliant invoices.
- Unrealized foreign exchange losses.
Tip: Any expense not clearly connected to income generation is likely to be challenged by ZATCA during an audit.
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Documentation & Record-Keeping
For an expense to be deductible, it must be supported by compliant documentation, such as:
- Official VAT invoices or equivalent ZATCA-recognized documents.
- Bank payment proofs for significant expenses.
- Contracts and agreements for services or lease arrangements.
Incomplete or missing records can result in the disallowance of expenses, increasing the Zakat base and liability.
Best Practices for Maximizing Allowable Deductions
- Conduct quarterly Zakat compliance reviews.
- Segregate personal and business expenses clearly.
- Ensure all expenses are properly authorized and documented.
- Engage a tax advisor to review expense classifications before year-end.
- Stay updated on ZATCA’s latest circulars and guidance notes.
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Conclusion
Understanding Zakat-deductible expenses is crucial for corporate taxpayers in Saudi Arabia. Clear classification, proper documentation, and adherence to ZATCA rules can significantly reduce your Zakat liability while ensuring compliance. Businesses should integrate compliance checks into their financial processes to avoid penalties and optimize deductions.
