By Khaled Alsalem, Associate, Zimam

For Saudi companies and individuals with U.S. tax exposure — whether through U.S. shareholders, U.S. operations, or cross-border ownership structures — a recurring question comes up: can zakat paid in Saudi Arabia be credited against U.S. tax the same way income tax is? The U.S. foreign tax credit (FTC) system lets taxpayers offset U.S. tax with foreign taxes paid, but only levies that qualify as an income tax, or a substitute for one, under U.S. rules. Because zakat is rooted in Islamic law rather than conventional income tax concepts, it is often assumed — too quickly — that it simply falls outside this system. A closer look at how zakat is actually structured and administered under Saudi law tells a more complete story.

How the U.S. System Treats Foreign Levies

U.S. tax law does not accept a foreign levy as creditable just because it is labeled a “tax” at home; what matters is how it actually functions. There are two paths to creditability. Under IRC section 901, a levy can be credited if it operates like a genuine income tax — reaching realized economic gain, taxing actual receipts, and allowing recovery of legitimate business costs. Under IRC section 903, a levy can instead be credited if it operates as a substitute for an income tax a country would otherwise impose — even if its base and calculation method look nothing like a conventional income tax. Entitlement to the credit also turns on who is legally liable for the levy under the relevant law, not simply who ends up bearing the cost.

How Zakat Is Structured Under Saudi Law

Zakat’s religious origin does not by itself determine how a foreign legal system should treat it. What matters is how Saudi law defines and enforces it today. Under the Zakat Collection Law and its Implementing Regulation, zakat is a compulsory public levy administered by the Zakat, Tax and Customs Authority, collected through registration, filing, assessment, and dispute-resolution procedures much like any statutory tax. The regulation defines specific categories of zakat payers and, importantly, expressly excludes persons and shares already subject to Saudi income tax. Income tax and zakat therefore apply to different ownership interests within the same economy, rather than stacking on top of one another.

Zakat is calculated at 2.5% of a base built primarily from balance sheet items — chiefly equity and its equivalents — rather than directly from net income. At the same time, the regulation incorporates amended net profit and allows deduction of legitimate business expenses, giving the base a real profit-linked dimension alongside its balance-sheet structure.

Where Zakat Fits

Measured against the stricter section 901 path, zakat’s base is not primarily built from realized income or receipts, so it does not fit neatly there. It fits far more naturally under section 903 as a substitute levy: Saudi law deliberately keeps zakat and income tax in separate, non-overlapping lanes based on ownership status, with zakat occupying the space that income tax would otherwise occupy for the ownership interests within its scope. That structural design — not zakat’s religious label — is what should drive the analysis.

That structural design — not zakat’s religious label — is what should drive the analysis.

Why This Matters for Saudi Businesses

For Saudi companies with U.S. shareholders, U.S. operations, or cross-border investment structures, this distinction has real, practical consequences. If zakat can be credited through the more flexible substitute-tax pathway under section 903, it changes how U.S. tax exposure is calculated for the Saudi side of an ownership structure, potentially avoiding double taxation on the same income. Businesses operating across both systems should factor this analysis into how they structure ownership, evaluate their U.S. tax positions, and document zakat compliance — since the legal characterization of zakat, not just the amount paid, can materially affect the outcome.