Zakat Transactions in the Construction&RET Sectors

Other General Guidelines Regarding Zakat Base 1. Zakat base may not be less than the net profit adjusted for the purpose of Zakat collection. Example (15): Zakat base of one of the Zakat payers was SAR 1,000,000 and the adjusted profit was SAR 1,100,000 for the period from 1/1/20XX to 31/12/20XX of the same year. What is the Zakat base of the Company? Since Zakat is less than the adjusted profit, Zakat should be calculated based on the adjusted profit. Adjusted profit × 2.5% = Zakat amount due 1,100,000 × 2.5% = SAR 27,500 2. The Zakat payer shall be held accountable for Zakat of the entire Zakat year in which one of the partners died or waived his share and the entry of others to replace him, whether heirs or others, if the Zakat payer continues activity. Example (16): A joint venture company whose financial year ends on 31/12/2019. On1/7/2019, one partner assigned its stake in the company to another partner. How should the company be accountable for Zakat this year? As long as the activity continues, the Zakat base is not affected by the entry or exit of a partner. Accordingly, the Company is accountable for the entire Zakat year in accordance with the Regulation and the continuation of business. 3. A sole proprietorship entity shall be accounted for the Zakat year during which ownership is fully transferred to other owners in proportion to the financial period, whether transfer of ownership was by sale, assignment or otherwise. Example (17): A sole proprietorship entity transferred to a new owner on 1/7/2019 noting that the financial year ends on 31/12/2019. How will the entity be charged this year on the assumption that the calculated Zakat base was SAR 10,000,000? The old owner shall be charged proportionally from the beginning of the year until the date of transfer of ownership on 30/6/2019. The new owner shall be charged proportionally from the date of transfer of ownership (1/7/2019) to the end of the year (31/9/2019). Number of days before and after ownership transfer Days of the year (365) X Zakat base X Calculation of the Zakat base for both the old and the new owners: 4. In the event that the Zakat payer is converted from one legal form to another in any way, the accounting may not be applied in a pro rata basis other than what is mentioned in para- graph (3) above. The table below shows the Zakat treatment in cases of conversion from one legal entity to another as follows: Conversion of the legal entity Zakat Transaction From To Finance Company/Persons Sole proprietorship Zakat transaction is not affected Sole proprietorship Finance Company/Persons Zakat transaction is not affected Finance Company/Persons Finance Company/Persons Zakat transaction is not affected Sole proprietorship Sole proprietorship The period between the old owner and the new owner is divided on a pro rata basis and is charged accordingly 5. There shall be no clearing or settlement between the payable balances of owners or partners (including their current accounts) and debits to other owners or partners (including their current accounts). Clearing or settlement may be made between the balances of owner and the same owner (or the balances of the partner or the same partner). 6. For Zakat purposes, the revaluation results are taken into account in accordance with the fair value shown in the financial statements. Example (18): Al-Bahr Company owns shares in Al-Salam Company (a Saudi joint stock company listed on the Exchange) and is classified as long-term investment. The fair value of investments in Al-Salam Company amounted to SAR 1,000,000 at the be- ginning of the Zakat year. However, the fair value increased to SAR 1,500,000 at the end of the year. The increase in fair value (SAR 500,000) is included in the other overall income statement. How the investment in Al-Salam Company is treated in the Zakat Declaration? Item Amount (SAR) Value of the investment deducted from the Zakat base Change in fair value added to Zakat base