Zakat and tax treatment of endowments in Saudi Arabia is a critical topic for endowment trustees, guardians, legal advisors, and financial professionals alike. With the rapid legislative development sweeping the Kingdom and the continuous updates to zakat and tax regulations issued by the Zakat, Tax and Customs Authority (ZATCA), understanding endowment zakat and tax obligations has become essential for ensuring regulatory compliance and avoiding penalties. This comprehensive guide reviews in detail the legal and regulatory framework for zakat and tax treatment of endowments in Saudi Arabia, focusing on available exemptions and required obligations under the latest legislation.
Endowments in the Kingdom of Saudi Arabia represent vast national wealth requiring specialized financial management, particularly in zakat and tax aspects that may be complex for many trustees. Some endowments may be exempt from zakat or tax under specific conditions, while others are obligated to pay zakat and submit periodic declarations to ZATCA. Understanding these provisions is not a luxury but a practical necessity for anyone managing endowment assets. In this guide, we answer all questions related to zakat and tax exemptions for endowments, regulatory obligations incumbent upon trustees, and practical procedures for filing returns and complying with regulatory requirements.
This article covers: the legislative framework for zakat and tax on endowments, zakat exemptions for charitable and family endowments, value-added tax on endowment investment income, endowment trustee zakat and tax obligations, how to file returns, the difference in zakat treatment of various endowment types, and answers to frequently asked questions.
Legislative Framework for Zakat and Tax on Endowments in Saudi Arabia
The legislative framework for zakat and tax on endowments in Saudi Arabia rests on several integrated laws and regulations, most notably: the Zakat System issued by Royal Decree No. M/113 dated 15/11/1443 AH, the Value Added Tax System issued by Royal Decree No. M/113 dated 10/11/1438 AH, the new Endowment System issued by Royal Decree No. M/120 dated 20/12/1441 AH, and the executive instructions issued by ZATCA regarding the treatment of endowments and non-profit entities. Together, these regulations form the legal framework determining how endowments are treated from a zakat and tax perspective.
Endowments in Saudi Arabia are subject to two basic fiscal systems: the Zakat system (a religious obligation applied by the state to assets subject to zakat) and the Value Added Tax (VAT) system applied to goods and services. An endowment's treatment varies according to its type (charitable, family, mixed), the nature of its assets (real estate, cash, investment), and its economic activity, if any. Exemptions and benefits granted to endowments also differ depending on whether the endowment is officially registered with the General Authority for Awqaf and licensed by the National Center for Non-Profit Sector Development. It is important to note that ZATCA issued several explanatory instructions during 2025-2026 simplifying zakat and tax procedures for the non-profit sector and endowments, as part of the state's direction to empower this sector and achieve Vision 2030 goals.
The Role of ZATCA
The Zakat, Tax and Customs Authority (ZATCA) is the body responsible for overseeing the implementation of zakat and tax systems in the Kingdom. ZATCA is responsible for: determining the zakat base for entities subject to zakat, issuing executive and explanatory instructions regarding the obligations of endowment and non-profit entity taxpayers, auditing zakat and tax returns submitted by trustees and endowment guardians, imposing fines and penalties on violators, and providing facilities and incentives for compliant entities. The Authority has established a specialized unit for dealing with the non-profit sector and endowments, offering advisory and guidance services to trustees to help them understand and comply with their obligations correctly.
Zakat Exemptions for Charitable and Family Endowments
Saudi regulations grant important zakat exemptions to charitable and family endowments that meet certain conditions, encouraging charitable and developmental work and achieving Vision 2030's goals of empowering the non-profit sector. Understanding these exemptions and their conditions is critical for trustees to benefit from them correctly and avoid any regulatory violations.
Conditions for Zakat Exemption of Endowments
ZATCA has established specific conditions for zakat exemption of endowments that must be met for the endowment to benefit from exemption: the endowment must be officially registered with the General Authority for Awqaf and recorded in the endowments register, the endowment entity must prove that its primary purpose is charitable, religious, educational, healthcare, social, or cultural, the endowment's activity must not be directed primarily at generating commercial profit, the endowment entity must commit to submitting periodic returns to ZATCA even if exempt, and the share of exempt activities must not be less than 80% of the endowment's total income. It should be noted that exemption is not automatic; an application must be submitted to ZATCA accompanied by supporting documents, and written approval of exemption must be obtained.
Endowments Exempt from Zakat
Several types of endowments fall under the zakat exemption: charitable endowments whose proceeds are dedicated to charitable purposes such as food provision, water supply, clothing the needy, and caring for orphans and widows; religious endowments dedicated to serving mosques, Quran teaching, and religious propagation; educational endowments supporting schools, universities, educational and research institutions, and scholarships; healthcare endowments supporting hospitals, health centers, and treatment of indigent patients; and social endowments supporting needy families, persons with disabilities, the elderly, and contributing to developmental housing. These endowments are exempt from zakat if they meet the prescribed conditions, provided they do not engage in commercial or investment activity generating zakatable profits exceeding 20% of total income.
Non-Exempt Endowments
Conversely, certain types of endowments that engage in commercial or investment activities on a professional basis are subject to zakat: investment endowments owning investment portfolios or funds for the purpose of asset development and profit distribution to beneficiaries; commercial endowments owning commercial properties leased at market rates to maximize proceeds; and industrial or productive endowments operating through companies and projects affiliated with the endowment. In these cases, the trustee must submit periodic zakat returns and pay the zakat due according to the legally prescribed zakat base. Mixed endowments—those engaged in both charitable exempt activities and investment activities subject to zakat—pay zakat on the investment activity only, based on its proportion of total endowment income.
| Endowment Type | Zakat Treatment | Filing Requirements | Notes |
|---|---|---|---|
| Pure Charitable Waqf | Exempt | Simplified annual return | Commercial activity must not exceed 20% of income |
| Educational/Healthcare Waqf | Exempt | Simplified annual return | Must be registered with competent authorities |
| Investment Waqf | Subject to zakat | Full zakat return + financial statements | Base calculated per financial valuation rules |
| Mixed Waqf | Partial exemption (based on charitable activity ratio) | Zakat return + revenue breakdown by activity | Zakat applies to investment activity only |
| Family (Dhurri) Waqf | Same as individuals | Per asset type | Each beneficiary treated individually |
Value Added Tax on Endowments in Saudi Arabia
Endowments are subject to Value Added Tax (VAT) provisions under the VAT System and its implementing regulations. An endowment's VAT treatment varies according to the nature of its activity and the goods and services it provides or receives. Trustees must be fully aware of these provisions to ensure compliance and avoid penalties.
Activities Subject to VAT
Certain activities that endowments may undertake are subject to VAT at 15%: leasing commercial properties owned by the endowment (subject to VAT unless residential), selling goods and products produced by the endowment (such as souvenirs, publications, agricultural products), providing commercial or consulting services for a fee, and importing goods and equipment from outside the Kingdom. In these cases, the trustee must register the endowment with ZATCA as a VAT taxpayer if the value of annual taxable supplies exceeds the mandatory registration threshold (SAR 375,000 annually). Registration is voluntary if supplies range between SAR 187,500 and 375,000.
Activities Exempt from VAT
Certain endowment activities are exempt from VAT: leasing residential properties (whether charitable or family endowment housing), providing direct educational and training services (if accredited by competent authorities), providing direct healthcare and treatment services, pure charitable and humanitarian activities with no material consideration, and leasing properties to government entities or registered charitable entities. The trustee must retain supporting records and documents to prove exemption status during ZATCA audits.
Input Tax Deduction
The trustee is entitled to deduct VAT paid on purchases and expenses related to taxable activities (Input Tax Deduction). Deductible expenses include: maintenance costs for commercial endowed properties, fees for legal and financial advisors, investment fund management fees, and costs of improving and developing investment assets. Input tax relating to exempt activities or non-taxable charitable activities is not deductible. Where the endowment engages in both taxable and exempt activities, input tax is deducted in proportion to taxable activities as a percentage of total activity (Partial Exemption Method).
Endowment Trustee Zakat and Tax Obligations
The endowment trustee bears specific zakat and tax obligations that must be fulfilled to ensure regulatory compliance and avoid liability and penalties. These obligations vary according to the nature, size, and type of the endowment. Awareness of these obligations is the first step toward sound and compliant endowment management.
- Registration with ZATCA: The trustee must register the endowment with ZATCA and obtain a tax identification number, whether the endowment is subject to zakat or exempt. Registration is mandatory for all endowments engaged in any investment or commercial activity, even if zakat-exempt, for supervision and oversight purposes.
- Submitting periodic zakat returns: The trustee must submit an annual zakat return to ZATCA, including a complete breakdown of endowment assets, liabilities, revenues, and expenses. The return must be filed within 120 days of the end of the endowment's fiscal year. For exempt endowments, simplified returns are submitted showing activities, revenues, and expenses, and proving satisfaction of exemption conditions.
- Submitting VAT returns: If the endowment is registered for VAT (exceeding the registration threshold), periodic VAT returns must be submitted (monthly or quarterly depending on supply volume), detailing the endowment's taxable sales, purchases and expenses with deductible input tax, and the net tax payable or refundable.
- Maintaining records and documents: The trustee must retain all financial and accounting records and supporting documents for at least 10 years. These include: contracts, invoices, receipts, bank statements, asset registers, and investment agreements. These documents must be available for audit by ZATCA upon request.
- Cooperating with ZATCA: The trustee must fully cooperate with ZATCA during any audit or inspection, respond to all inquiries and questions, and provide any information or documents requested within specified timeframes.
Fines and Penalties
The Zakat and Tax System imposes financial penalties for violations related to endowment obligations, including: late filing of zakat returns (1% to 5% of zakat due per month of delay), late payment of zakat due (1% to 2% per month), failure to register for VAT (up to SAR 50,000), and errors in tax returns (10% to 50% of the tax difference depending on violation type). Where the violation is intentional or involves fraud, penalties may extend to imprisonment and substantial financial fines. Therefore, it is essential for trustees to engage specialized zakat and tax advisors to ensure full compliance.
Calculating the Zakat Base for Investment Endowments
Calculating the zakat base for an investment endowment is one of the most complex issues in endowment zakat and tax. The zakat base depends on the nature of the endowment's assets, valuation method, and financial policy. The basic rules for calculating the zakat base for an investment endowment can be summarized as follows:
Zakatable assets: Include cash and bank deposits (in SAR or foreign currencies), investments in Sharia-compliant stocks, investments in investment funds, gold and silver (for endowments investing in them), assets held for trading (goods and commodities), and financial receivables and short-term debts (trade accounts receivable).
Zakatable liabilities: Short-term obligations due are deducted from total zakatable assets, including accounts payable and suppliers, current obligations, endowment debts due within the zakat year, and accrued expenses and unpaid salaries and wages. The result after deduction is the net zakat base subject to zakat.
Zakat rate: The applicable zakat rate is 2.5% of the net zakat base (equivalent to one quarter of one-tenth). Where the endowment's fiscal year differs from the Hijri year, ZATCA calculates zakat proportionally based on the number of days in the fiscal year.
It is important to note that fixed endowment assets (such as the original endowed properties, land, and buildings dedicated to the endowment's charitable purposes) are not included in the zakat base; only their proceeds are subject to zakat according to the nature of those proceeds. Properties purchased for the purpose of trading or resale at a profit are included in the zakat base as current assets.
Best Practices for Endowment Zakat and Tax Compliance
To ensure full compliance with endowment zakat and tax regulations, trustees are advised to follow these best practices: first, appoint an accountant or zakat and tax advisor specialized in non-profit and endowment affairs to ensure return accuracy and full compliance with regulatory requirements. Second, implement an integrated accounting system compliant with Saudi accounting standards (SOCPA) and ZATCA requirements, with complete separation of endowment accounts from the trustee's personal accounts. Third, prepare a chart of accounts designed specifically to meet zakat and tax disclosure requirements, classifying revenues and expenses by activity type (exempt charitable / taxable investment). Fourth, maintain organized electronic archiving of all supporting documents and implement a regular internal audit system for zakat and tax compliance. Fifth, utilize specialized legal advisory services for endowments structuring to maximize available exemptions while ensuring full regulatory compliance. Nova Legal for Law and Legal Consulting offers specialized zakat and tax advisory services for endowments, in cooperation with accredited zakat and accounting experts.
Frequently Asked Questions About Zakat and Tax on Endowments in Saudi Arabia
Below are answers to the most common questions about zakat and tax treatment of endowments in Saudi Arabia:
Are endowments exempt from zakat in Saudi Arabia?
Exemption is not automatic for all endowments. Pure charitable endowments meeting exemption conditions can obtain exemption after applying to ZATCA and receiving written approval. Investment and commercial endowments are subject to zakat at 2.5% of the net zakat base.
What are the endowment trustee's zakat obligations toward ZATCA?
Obligations include: registering the endowment with ZATCA and obtaining a tax number, submitting an annual zakat return within 120 days of fiscal year-end, submitting periodic VAT returns if above the registration threshold, maintaining records and documents for at least 10 years, and cooperating with ZATCA during audits.
Are endowment real estate proceeds subject to VAT?
Commercial property rentals are subject to VAT at 15%. Residential property rentals are exempt. The endowment must register for VAT if taxable rentals exceed SAR 375,000 annually.
How is the zakat base calculated for an investment endowment?
Zakatable assets (cash, investments, receivables) are summed and short-term liabilities are deducted. The zakat rate of 2.5% is applied to the net base. Fixed assets (endowed properties) are excluded from the base; only their proceeds are subject to zakat.
What are the penalties for violating endowment zakat and tax regulations?
Penalties include: late filing fines (1-5% monthly), late payment fines (1-2% monthly), failure to register for VAT (up to SAR 50,000), and return error penalties (10-50% of the tax difference). Intentional fraud may result in imprisonment and substantial fines.
Conclusion: Toward Integrated Zakat and Tax Compliance for Endowments
Compliance with zakat and tax regulations is one of the fundamental pillars of sound endowment management in Saudi Arabia. With continuous legislative development and increasing oversight by ZATCA, neglecting zakat and tax obligations is no longer an option for endowment trustees and guardians. Professional zakat and tax management not only protects the endowment from fines and penalties but also enhances the trust of beneficiaries and parties dealing with the endowment, and opens broader horizons for benefiting from the incentives and exemptions the state offers to support the endowment sector.
We invite all endowment trustees and guardians to engage specialized legal and zakat expertise to ensure full regulatory compliance and maximize available exemptions and incentives. At Nova Legal for Law and Legal Consulting, we offer specialized zakat and tax advisory services for endowments, in cooperation with a network of accredited zakat and accounting experts. We look forward to accompanying you on your compliance journey toward financial sustainability for your endowments.