HMRC removes its Zakat exclusion from Saudi tax credit guidance

HMRC now lists Saudi Zakat among taxes admissible for credit under the UK–Saudi Arabia double taxation agreement. Its guidance also continues to include Saudi income tax, including natural gas investment tax. Advisers considering UK relief for Saudi tax should distinguish this broader classification from the conditions governing an individual credit claim.

The previous guidance placed Zakat under a separate inadmissible heading and referred readers to paragraph 8(b) of the Protocol. That exclusion and cross-reference have been removed. The revised wording puts Zakat and income tax under one heading for admissible taxes; it does not set out a new commencement date or explain how particular claims should be calculated.

Article 2(3)(b) lists Zakat as a Saudi tax covered by the Convention. It also lists income tax, including natural gas investment tax. Article 24 makes UK credit subject to UK law governing foreign tax credits. The Saudi tax must be payable under Saudi law and in accordance with the Convention on Saudi-source profits, income or chargeable gains, and the UK tax must be computed by reference to the same profits, income or gains.

A specific qualification remains in paragraph 8(b) of the Protocol. Paragraph 8(b) states that Saudi Arabian nationals resident in the United Kingdom are subject to income tax in Saudi Arabia on their Saudi-source incomeGOV; it therefore limits their UK credit to that Saudi income taxGOV. The manual’s broader description of admissible taxes should consequently be read alongside this rule when advising that group.

There is also a distinction for dividends. Article 24(1)(a) excludes tax on the underlying profits from its ordinary credit rule. Under Article 24(1)(b), however, the credit takes account of that underlying Saudi tax where the recipient is a UK-resident company controlling, directly or indirectly, at least 10% of the voting power in the Saudi-resident company paying the dividend.

For a proposed Zakat credit, advisers should read the revised classification alongside Article 24’s conditions and the specific rule for UK-resident Saudi nationals in paragraph 8(b). The classification alone does not establish that every Zakat payment qualifiesGOV.

The relevant basis is the 2007 UK–Saudi Arabia Double Taxation Convention, Articles 2 and 24, and paragraph 8(b) of its Protocol.