Zakat and Income Tax in Mixed Companies: How the Base Is Divided Between Saudi and Foreign Partners, and What Each Part Carries

When a Saudi or GCC partner and a foreign partner sit in the same company, the company is not subject to one regime but to two at once: zakat on the Saudi and GCC share, and income tax on the non-Saudi share. This is the “mixed company” of everyday practice, and it is where we most often see returns prepared on one logic and then assessed on both.

This article explains — from the text of the Implementing Regulation for Zakat Collection (1445H edition), the Income Tax Law and its Implementing Regulation — who counts as Saudi and who does not, how the base is divided between the two parts, and what each part carries in deadlines, advance payments and penalties, with a worked example and the recurring mistakes.

First: who counts as Saudi, and who does not?

The rule starts with the definition. The Zakat Regulation defines a Saudi as “a person holding Saudi Arabian nationality, and anyone treated as such among the nationals of the Gulf Cooperation Council states” (Article 1); it subjects to zakat “the share of the Saudi partner or shareholder in resident companies” (Article 3(3)) and excludes “the shares of legal persons that are subject to income tax” (Article 6(1)). The Income Tax Law, for its part, taxes “a resident capital company in respect of the shares of its non-Saudi partners” (Article 2(a)), and its Regulation clarifies that this means shares owned by non-Saudis directly or indirectly (Article 1(1)(a)).

Partner or shareholder	Treatment	Basis
Saudi, whether a natural or a legal person	Zakat on their share	Zakat Regulation, Art. 3(3)
National of a GCC member state	Zakat — treated as a Saudi	Zakat Regulation, Art. 1 (definition of “Saudi”)
Non-Saudi, by direct or indirect ownership	Income tax at 20% on their share of the tax base	Income Tax Law, Arts. 2(a), 6(a) and 7; Regulation, Art. 1(1)(a)
Non-Saudi holding shares in a listed company bought for trading through the exchange	Zakat — an exception to the rule	Zakat Regulation, Art. 3(6); Income Tax Regulation, Art. 1(1)(a)
Non-Saudi founder of a listed company	Income tax on their share	Zakat Regulation, Art. 3(6)
Shares owned by persons engaged in oil and hydrocarbon production	Tax, whatever the nationality, except shares in listed companies	Zakat Regulation, Art. 6(2)

The words “directly or indirectly” are the key to the most common mistake. If the partner in your company is a Saudi company of which foreigners own 40%, then 40% of that company’s share in yours is a taxable share, not a zakatable one. The nationality ZATCA assesses is that of the ultimate owner through the chain of ownership, not that of the immediate partner recorded in the commercial register.

Second: how the base is divided between the two parts

The two parts do not split a single figure; each has its own base, computed on its own footing:

• The zakat part: the zakat base is computed for the whole entity under the Regulation — the additions (Article 23), the deductions (Article 26) and the minimum base that may not fall below the adjusted net profit (Article 27) — and zakat is then computed on the portion corresponding to the Saudi and GCC partners’ ownership. The rate is 2.5% for a Hijri year; where the financial year is Gregorian it is computed on actual days: (2.5% ÷ the number of days in the Hijri year) × the number of days in the financial year (Article 15).
• The tax part: the tax base of a resident capital company is “the non-Saudi partners’ share of its taxable income from any activity from sources in the Kingdom, less the expenses allowed under this Law” (Article 6(a)); it is computed independently of the shareholders or partners (Article 6(e)), and the rate is 20% (Article 7).
• The ownership percentage that counts: for zakat, “the taxpayer is assessed according to its owners and ownership shares at the end of the zakat year, regardless of changes in the percentage during the year” (Article 13(4)). The date on which a share transfer is recorded in the commercial register therefore decides on what basis the base is divided.

A simplified example: a limited liability company owned 60% by a Saudi and 40% by a foreign partner, with a Gregorian financial year. Its zakat base under the Regulation is SAR 8,000,000 and its taxable profit after allowable expenses SAR 3,000,000. Zakat: 8,000,000 × 60% × (2.5% × 365 ÷ 354) ≈ SAR 123,700. Tax: 3,000,000 × 40% × 20% = SAR 240,000. Note that the partner with the smaller share bears the larger amount: the two bases differ in nature, zakat being computed on sources of funds and tax on profit.

The adjustments to the result of the activity also differ between the two parts. The adjusted net profit for zakat follows the Regulation and ZATCA’s guideline on adjusting the result of the activity, while taxable income follows the allowable and non-allowable expenses of the Income Tax Law and its Regulation. Provisions, depreciation and payments to related parties may each be treated differently in each part.

Third: one return, different deadlines and payments

• One deadline: the return is filed and the amounts due are paid within 120 days of the year end in both parts — for zakat under Article 102 of the Regulation, for tax under Article 60(b) of the Law — and a mixed company files a single return on ZATCA’s portal covering both.
• Advance payments for the tax part only: the taxpayer must make three advance payments at the end of the sixth, ninth and twelfth months, each equal to 25% × (the previous year’s tax − tax paid by withholding), where the result of that formula is SAR 500,000 or more (Article 70). Zakat has no equivalent.
• Withholding on dividends: dividends paid to a non-resident partner are subject to 5% withholding tax, payable within the first ten days of the following month — set out in our withholding tax article.
• Accounts: a mixed company is an accounts-based taxpayer in both parts, so its audited financial statements are the basis of the return, and an examination extends to both parts together.

Fourth: the penalties are not the same in the two parts

For failure to file, the Income Tax Law imposes a penalty of 1% of total revenue up to SAR 20,000, or — if higher — a graduated late-filing penalty of 5% to 25% of the unpaid tax depending on the length of the delay (Article 76), plus 1% of the unpaid tax for every thirty days from the due date until payment, including late advance payments (Article 77). The 1445H Zakat Regulation contains no percentage-based late penalty, but delay holds up the zakat certificate and opens the door to an estimated assessment. The result: in a mixed company the same delay can carry no penalty in one part and a compounding penalty in the other.

Fifth: recurring mistakes in mixed companies

1. Treating a GCC partner as foreign, so that 20% tax is paid on a share that is subject to zakat — or the reverse, treating a GCC company owned by non-GCC nationals as Saudi.
2. Ignoring indirect ownership where the partner is a Saudi company with foreign ownership.
3. Splitting one base across the two percentages — computing the zakat base and then applying 20% to the foreign share of it — instead of building two independent bases, each with its own rules.
4. Overlooking the date of the share transfer in the commercial register when partners change during the year; zakat is assessed on year-end ownership.
5. Missing the advance payments when the previous year’s tax exceeds the threshold, so that the 1% per thirty days penalty accumulates.
6. Distributing dividends to a non-resident partner without the 5% withholding, or withholding without remitting on time.

Frequently asked questions

How we help

At Al-Mousa & Al-Tamimi Certified Public Accountants we build a mixed company’s two bases on a sound footing: analysing the ownership chain to the ultimate owner, preparing the zakat base and adjusted net profit under the 1445H Regulation, preparing the tax base with its allowable expenses, scheduling advance payments and dividend withholding, and filing the combined return and following the examination in both parts.

See our zakat and tax service · Read next: the zakat return — deadline and documents · ZATCA examinations and how to build your file · Contact us

Sources: Implementing Regulation for Zakat Collection, 1445H edition — Umm Al-Qura official gazette (Articles 1, 3, 6, 13, 15, 23, 26, 27 and 102; Arabic); Income Tax Law — Saudi Laws Portal (Articles 2, 6, 7, 60, 68, 70, 76 and 77; Arabic); Implementing Regulation of the Income Tax Law — Zakat, Tax and Customs Authority (Article 1; Arabic). The numerical example is hypothetical, and this article is general guidance and is not a substitute for advice on a specific case.