Since the launch of Vision 2030, Saudi Arabia is witnessing a series of economic reforms that have affected local fixed income markets, the first of which is the legislation on government Sukuk zakat, which was issued by the General Authority for Zakat and Income in March of 2019.
Unlike what happens with some other countries when individuals are forced to pay taxes on profits earned from periodic payments of government bonds, Saudi Arabia has ensured that zakat is borne on government bonds issued by the Ministry of Finance locally (denominated in Saudi riyals). However, the mechanism for recovering the amounts paid for zakat lies in the investors submitting a refund request from the Ministry of Finance, according to the clarifications of a responsible source.
The state's bearing of the zakat resulting from the Sukuk came to enhance domestic and international investment in them, and this issue is of great importance to investors, as it affects the percentage of what they receive from the periodic profits of the Sukuk. This trend is in line with the Financial Sector Development Program document, whose most important initiatives were the treatment of zakat treatment, the method of calculation, as well as the withholding tax for debt instruments.
The rules for calculating zakat for financing activities indicate that the zakat assets of the taxpayer will be reached by deducting “non-zakat” assets from the total assets. When looking at the non-zakat assets, it will become clear that they are limited to government bonds, whose maturity period remains for more than a year, for which the state will bear zakat. It is also represented in the loans directed by banks towards infrastructure projects, as well as long-term financing loans, which are mostly housing products, which are usually directed to individuals.
Zakat on specialized funds
In the same context, the zakat treatment of the funds specialized in government Sukuk that are presented in the Saudi market varies, for example, a document of one of the fund managers stated that the fund manager has the right to pay zakat on investment units for investors, and it is the unit owner responsibility to pay zakat on what he owns of investment units. If the Zakat assessment is not performed, as stipulated in Ministerial Resolution No. (2218) issued in 2019.
The ministerial decision stipulated that the state would stop bearing any of the government debt instruments, except for the instruments issued within the program of issuing Sukuk in Saudi riyals with the Ministry of Finance, starting from 2020.
During the first half of 2019, the General Authority for Zakat and Income launched a guideline on Islamic finance, which dealt with how to apply value-added tax to the most important Islamic finance products, such as murabahah, leasing, musharaka, tawarruq, Sukuk, mudarabah, and agency.
These products are the backbone of banks and Islamic banking windows in Saudi Arabia, and how to deal with the tax on corporate bonds has been discussed, given the existence of legislation for zakat government debt instruments.
The guide addressed the most prominent sticking points in the tax field, such as the issue of the temporary transfer of Sukuk assets (it is considered outside the scope of tax because possession by the other party is not permanent), in addition to that, those assets that are in the possession of the special purpose company will be returned to the issuer later, and therefore the issuance assets and periodic installments are not subject For value-added tax.
Economic Reports Unit