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January 3, 2023
2023-0005

Saudi Arabia Ministry of Finance issues Zakat Collection Rules for Investment Funds

  • The Zakat Collection Rules for Investment Funds (Fund Zakat Rules) will be effective from 1 January 2023.
  • The Fund Zakat Rules were issued to clarify the zakat calculation mechanism for the Capital Market Authority's (CMA) approved investment funds (or real estate investment funds) and their investors.
  • Approved investment funds (Funds) in Saudi Arabia should register and file information declarations as per the Fund Zakat Rules.

Executive summary

On 23 December 2022, Saudi Arabia's Ministry of Finance (MoF) released the Fund Zakat Rules through its Resolution No. 29791 dated 9/5/1444 H to be effective from 1 January 2023.

Under the Fund Zakat Rules, Funds are required to register with the Zakat Tax and Customs Authority (ZATCA) before the end of their first fiscal year in which the Fund Zakat Rules become effective. In addition, Funds are also required to file information returns within 120 days from the end of the zakat year.

A zakat payer, who is an owner of an investment unit in a Fund (Unit Holder), may deduct the value of its investment in the Fund from its zakat base, subject to certain conditions.

Detailed discussion

Background

On 4 August 2022, the draft Fund Zakat Rules were issued for public consultation with comments due by 31 August 2022. Following the public consultation process, the MoF has now issued the Fund Zakat Rules which will be effective from 1 January 2023.

Key elements of the Fund Zakat Rules

Registration and filing of return

Funds are required to register with the ZATCA, although such Funds are not subject to zakat. A Fund must be registered with the ZATCA before the end of its first fiscal year in which the Fund Zakat Rules become effective.

The Fund shall also submit an information declaration with the ZATCA within a period not exceeding 120 days from the end of the zakat year of the Fund, along with the following attachments:

  • Audited financial statements of the Fund approved by a chartered accountant licensed in Saudi Arabia
  • A record of the transactions between related parties associated with the Fund
  • Any other data that the ZATCA requests during the declaration filing period

If the fiscal year of the Unit Holder and the Fund is different, the Fund's fiscal year will be taken into consideration in the calculation of zakat on investment in the Fund.

Deduction from zakat base of the Unit Holders

The Unit Holder may deduct the value of its investment in the Fund from its zakat base, under the following conditions:

  • Its investment in the Fund is for non-trading purposes.
  • The calculation of zakat is supported by the calculation in the audited financial statements or auditor's certificate.
  • The Unit Holder settles its share of zakat on its investment.

Zakat calculation

  • The zakat of the Unit Holder shall be calculated according to the following formula:
  • The zakat base of the Fund shall be calculated in accordance with the Zakat Implementing Regulations (2019), considering certain items mentioned in Article 6(2) of the Fund Zakat Rules.
  • The minimum zakat base would be equal to the Unit Holder's share in the net adjusted profit of the Fund.

Exception

The Fund Zakat Rules do not apply to the following:

  • A holder of a unit in a finance fund. A finance fund is an investment fund established for the purpose of undertaking direct and indirect finance activity in accordance with relevant laws and regulations in Saudi Arabia.
  • A holder who owns the entire Fund (directly or indirectly) and has submitted a consolidated zakat return.

Transactions with related party

Transactions with related parties would be subject to Saudi Arabia's transfer pricing rules.

Implications

Investors and Funds in Saudi Arabia should review the Fund Zakat Rules carefully to determine whether such rules apply to them. Where applicable, Funds and investors should make the necessary preparations to meet their obligations under the Fund Zakat Rules. We understand that the ZATCA will issue further guidelines in respect of Fund Zakat Rules in due course.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Professional Services (Professional LLC), Riyadh

Ernst & Young Professional Services (Professional LLC), Jeddah

Ernst & Young Professional Services (Professional LLC), Al Khobar

Ernst & Young LLP (United States), Middle East Tax Desk, New York

 

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