Mixed ownership entities—those with both Saudi/GCC and foreign shareholders—face a dual compliance landscape in the Kingdom. Determining the correct allocation between Zakat and corporate income tax is critical to avoid double taxation, penalties, and disputes with the Zakat, Tax and Customs Authority (ZATCA). This guide explains the rules, calculation methods, and best practices for accurate allocation in 2025 and beyond.
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Understanding the Mixed Ownership Model
Saudi/GCC Shareholders
Profits attributable to Saudi and GCC national shareholders are subject to Zakat under the Zakat Implementing Regulations. The Zakat rate is generally 2.5% of the Zakat base, with adjustments for sector-specific rules.
Non-GCC Shareholders
Profits attributable to foreign shareholders are subject to corporate income tax at a flat rate of 20%, unless reduced by an applicable Double Tax Treaty (DTT).
Key Principle: The allocation is based on the proportion of ownership, not the nationality of management or location of operations.
Ownership-Based Allocation Formula
| Ownership Type | Applicable Levy | Rate (Standard) |
|---|---|---|
| Saudi/GCC Nationals | Zakat | 2.5% of Zakat base |
| Foreign Shareholders | Corporate Income Tax | 20% of taxable profits |
Example: If a company is 60% Saudi-owned and 40% foreign-owned, 60% of the adjusted profit is Zakat-liable and 40% is subject to corporate income tax.
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Compliance Steps for Mixed Ownership Entities
- Confirm shareholder structure with documentary proof.
- Determine percentage ownership for Saudi/GCC and foreign investors.
- Calculate separate bases for Zakat and corporate income tax.
- Prepare reconciliations and disclosures for ZATCA filings.
- Apply treaty benefits where applicable for foreign shareholders.
Common Challenges & ZATCA Audit Risks
- Misclassification of shareholders due to complex holding structures.
- Incorrect application of DTT rates for foreign shareholders.
- Failure to maintain separate records for Zakat and tax calculations.
- Overstating allowable deductions in either Zakat or tax base.
Warning: ZATCA imposes penalties for underpayment or misreporting. Ensure robust documentation and internal controls.
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Best Practices for 2025 Compliance
- Update shareholder registers annually.
- Use ERP systems to automate allocation calculations.
- Engage in mid-year reviews to anticipate liabilities.
- Maintain separate schedules for Zakat and corporate tax computations.
- Engage tax advisors familiar with MR No. 1007 and Saudi tax law.
Conclusion
Correctly allocating profits between Zakat and corporate tax obligations is essential for mixed ownership entities in Saudi Arabia. With accurate records, compliance planning, and awareness of ownership structures, corporate taxpayers can reduce audit risks, optimize tax positions, and maintain smooth relations with ZATCA.
