Zakah on Factories
Zakah is as obligatory as Prayer and it is a pillar of Islam. It highlights the status of faith in Islam in the heart of the eligible person in terms of its being an amount of money given on voluntarily basis and the one who pays it returns nothing but the reward from Allah. However, everyone should bear in mind that Allah is the Provider of all properties and money as He is the One Who created them and helps people acquire them.
answering the question, Dr. Rajab Abu Maleeh, states,
Muslim scholars have addressed the issue of zakah on factories by placing it under the title of zakah on exploited assets (invested property). According to the Islamic Law Affairs Office, the Zakah House of Kuwait, exploited assets refer to the forms of wealth that are not intended for sale or used for trading, but they are rather prepared to grow and to produce benefits for its owner through selling its produce or renting it.
thus, exploited assets include houses, lodging buildings, factories, airplanes, cars, and the like of assets prepared to produce income and revenues. It also includes cows, buffalos, and sheep that is not naturally pastured, which are acquired to make use of its milk and wool by selling, or any other kind of investing. Accordingly, the difference between exploited and unexploited assets is that exploited assets are acquired for the purpose of gaining profit from their produce with the assets themselves remaining unexhausted (permanent capital), while the unexploited assets are those acquired themselves for the purpose of trading change hands. In accordance, residential buildings and the like may be exploited assets and may be assets that are not exploited according to the purpose of ownership regarding them.
Scholars have two opinions regarding zakah due on exploited assets including factories:
the first opinion, some scholars opine that zakah is due on exploited assets and on the profits they generate. Hence, the value of factories and the like of exploited assets are assessed along with the profit they produce, and then a 2.5 percent of the total is given out as zakah.
the second opinion, other scholars opine that exploited assets are not included, and zakah is due only on the profit they produce. Some of them see that the due zakah rate should be 2.5 percent, while some others see that it should be 5 percent without deducting the expenses, and 10 percent after deducting the expenses. They make analogy to zakah due on crops and fruits, whose rate is 1/10 or 1/20.
however, we prefer the latter opinion as a Fatwa. There is a similar opinion adopted by the International Islamic Fiqh Academy upon discussing zakah on shares. It resolved:
“The one who invests in a company to gain the annual dividends of his shares should pay for it the same zakah (rate) due on exploited assets. This ruling is in conformity with the resolution issued by the International Council of Islamic Fiqh Academy in its second session with respect to zakah on rented real estates and non-agricultural leased lands. The owner of such shares shall not pay zakah on the market value of shares, but only on the dividends, at the rate of 1/4 of 1/10 (2.5 percent) after the elapse of one year from the date of the actual reception of the dividends, provided that all other conditions of zakah are met and no impediments exist.”
If, on the other hand, the shareholder has invested in shares for trading purposes, then his shares are subject to zakah, just as `Urud At-Tijarah (trade inventory). After the elapse of one year period, and if they are still in his possession, he shall pay zakah on their market value. If there is no stock market, he will pay zakah on their value as appraised by qualified experts. He will pay 1/4 of 1/10 (2.5 percent) of their market value plus the dividends, if they yield any dividend.
this opinion is also adopted by Sheikh Yusuf Al-Qaradawi. Yet, he opines that the rate should be 10 percent of the net profit, or 5 percent of the total profit. He stated,
as regards factories, and likewise printing facilities, rented residential buildings, and the like, for which we have given the designation “exploited assets,” referring to assets which remain unexhausted and are used in yielding benefit through their revenues and income, I believe that they are regarded as agricultural land whose zakah is what grows out of it — or what Allah brings out of it — of crops and fruits. Similarly, these things or exploited assets are fixed assets or property, and their produce of earnings or profit is like crops and fruits of the land. Hence, 1/10 is due on the net profit by analogy to the land irrigated without a machine; as the Hadith says ” in what is irrigated by rain one-tenth is due,” bearing in mind that the net profit is tantamount to the crop irrigated by rain.
the net profit is that which remains by the end of the year after deducting expenses and various wages, including maintenance expenses, and adding the charge of consuming machines and real estate, without overestimating such assessment. Then, the net profit is calculated and 1/10 of it is given out, even if it is not wholly distributed as some of it may be assigned for some reserves and the like. However, it is obligatory to give it out immediately without waiting for the passing of a year by analogy to the agricultural land, about which Almighty Allah says, (And pay the due thereof upon the harvest day)(Al-An`am 6:141).
May Allah guide us all!