Comprehensive Overview of Saudi Arabia's Zakat Guidelines for Related Party Transactions

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Introduction: 

Saudi Arabia has recently issued detailed guidelines clarifying the Zakat treatment of transactions with related parties who maintain legal accounts. These guidelines aim to provide clear directives on the zakat treatment of common transactions, covering various aspects of business operations, compensation to board members, salaries to partners, and loans in different forms. The guidelines also introduce Transfer Pricing Regulations for Zakat Taxpayers, outlining a two-stage implementation plan starting from 2024.

Business Operations: 

The guidelines categorize related party transactions in business operations into three main types:

1. Commercial transactions: Treated as arm's-length transactions with no adjustments required to the zakat base.

2. Indirect financing transactions: Involving a related party paying a cost or expense on behalf of the taxpayer. These transactions don't affect the zakat base when assessing the income statement but may be treated as debts for zakat purposes on the statement of financial position.

3. Direct financing transactions: Involving a related party financing the taxpayers commercial establishment. These transactions are treated as debts for zakat purposes, with detailed explanations provided for various forms of financing, such as working capital financing, long-term financing, and financing in terms of cash or in-kind assets.

Working Capital Financing:

 The guidelines outline conditions under which the amount of financing from a related party classified as short-term debt obligations is added to the zakat base. These conditions include cases where the related party has financed a non-zakat-liable asset, penalties out of equity, and long-term financing plans. The treatment of receivables due from related parties arising from financing transactions is also discussed.

Compensation to Board Members: 

Directors fees, regardless of their structure and nomenclature, are treated as expenses in determining a company's results, provided they are fair, reasonable, and customary in transactions between independent parties.

Salaries to Partners: 

Salaries and allowances of the owner registered with the corporation are considered deductible expenses without a specified ceiling, given the presence of a legal employment contract and proper registration with the General Organization for Social Insurance.

Assets Recorded in Taxpayers and Financial Statements: 

Assets recorded in the names of partners but used in the company's operations are deducted from the zakat base, provided certain conditions are met. These conditions include the assets being an in-kind share in the capital, being used in the company's activity, and facing obstacles preventing their transfer to the company's name.

Partners Loans:

The guidelines elaborate on the treatment of partner loans in different forms:

1. Partner loans in the form of debts, those lasting 354 days or more, are considered long-term and added proportionally to the zakat base. Continuous financing without interruption is crucial. Non-obligatory transactions are treated as capital. Short-term partner debts from commercial transactions are exempt.

2. In the case of equity loans, if not deducted during the zakat year, they're treated as capital increase, added proportionally.

3. Non-zakat base assets financed by partners are fully added to the zakat base.

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