Saudi Arabia proposes amendments to Zakat Executive Regulations for real estate projects under construction

• Saudi Arabia has proposed amendments to the Zakat Executive Regulations for off-plan real estate projects, adding a provision that addresses the zakat treatment of off-plan real estate sale projects.
• Public consultation on the proposed amendments is open until 29 January 2025.

Executive summary

On 15 January 2024, Saudi Arabia's Zakat, Tax and Customs Authority (ZATCA) announced on the public consultation platform (Istitlaa), proposed amendments to Article 73 of the Executive Regulations for Zakat Collection (Executive Regulations) relating to real estate projects under construction.

The ZATCA has proposed to add a new paragraph 3 to Article 73 of the current Executive Regulations addressing the zakat treatment of off-plan real estate sale projects and taking into account the nature of these projects.

The deadline for receiving comments on the proposed amendments is 29 January 2025.

Detailed discussion

Background

On 21 March 2024, Saudi Arabia's Minister of Finance approved the Executive Regulations under Ministerial Resolution No. 1007, dated 19/8/1445 AH.

The Executive Regulations, or Bylaws, were aimed at clarifying the zakat regulations and compliance requirements, particularly on zakat calculation methods, while also consolidating all other zakat regulations previously issued for specific sectors, such as financing, insurance and investment funds.

The most recent proposed amendments, pertaining to real estate projects, provide for a method of calculating zakat liabilities, taking into consideration the nature of the projects.

Highlights of the proposed amendments

The proposed amendments allow for the deduction of off-plan real estate sale projects from zakat base under the following conditions:

Deduction equation:

Off-plan real estate sale projects licensed by competent authorities are eligible for a deduction from the zakat base.

Deduction formula:

Amount deducted = Project balance at year-end - Additions to the project during the year (provided the result is greater than zero).

Project-specific application:

The equation must be applied separately to each off-plan real estate sale project.

Audited financial statements classification:

If a project's balance is split between current assets and noncurrent assets in the audited financial statements, the deduction starts with the noncurrent assets and any remaining deductions are applied to current assets.

Sources of funds:

Sources of funds for off-plan sales projects should be added to zakat base in accordance to Chapter 3 of the Executive Regulations.

Compliance with Article 25:

After applying the above treatment, the provisions of Article 25 (addition of liabilities to the zakat base) of the Executive Regulations should be considered and applied accordingly.

Implications

The proposed amendments aim to encourage transparency in the zakat treatment of off-plan real estate sale projects and improve compliance with zakat requirements. Real estate businesses should monitor the proposed amendments and assess their readiness to comply with the relevant changes.

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

Ernst & Young Professional Services (Professional LLC), Riyadh

• Asim Sheikh, Saudi Arabia Tax Market Segment Leader
• Ahmed H Akeel, Business Tax Services
• Amr Farouk, Global Compliance and Reporting
• Atif Khan, Global Compliance and Reporting
• Esraa Albuti, Business Tax Services
• Hosam Abdulkareem, Business Tax Services
• Imran Iqbal, Global Compliance and Reporting
• Mirza Ashraf, Global Compliance and Reporting
• Babar Ali, Business Tax Services
• Wissam Merhej, Business Tax Services
• Carl Suchtelen, Global Compliance and Reporting
• Rula Dajani, Business Tax Services
• Suleiman Mohammed, Global Compliance and Reporting
• Billy Thorne, International Tax and Transaction Services
• Carsten Kuhlmann, International Tax and Transaction Services
• Ricardo M. Cruz, KSA ITTS and Transfer Pricing Leader

Ernst & Young Professional Services (Professional LLC), Jeddah

• Ayman Abu El lzz, Global Compliance and Reporting
• Hussain Asiri, Business Tax Services
• Amro El Fadly, Business Tax Advisory
• Ahmed Mubarak, Business Tax Services
• Dana D. Dandashi, Global Compliance and Reporting
• Khalid Feroze, Business Tax Services
• Asem Habis, Business Tax Services

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

• Syed Farhan Zubair, Global Compliance and Reporting
• Ali K. Khamis, Business Tax Services
• Patrick Oparah, International Tax and Transaction Services
• Miranda Baas, International Tax and Transaction Services
• Bilal Mian, Global Compliance and Reporting
• Javed Aziz, Global Compliance and Reporting
• Haytham Hassan, Global Compliance and Reporting
• Waqas Khan, Business Tax Services

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

• Yuriy Melnyk

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor