I wanted to clarify the Zakah due on startup investments.
The article on IFG (https://www.islamicfinanceguru.com/investment/how-to-calculate-zakat-on-startups/) advises, one needs to look at the Zakatable assets of the company (e.g £500,000) and then calculate share of it (e.g own 1% of company so £5000 is Zakatable) and then 2.5% of that would be Zakah amount (i.e. £25). This seems to be the same guidance as owning shares of a public company which makes sense as investing in a startup means one owns shares in a company.
However, the confusion arises as when I asked a direct question on IFG last year (via email) about Zakah for capital gains on startup investments I was given a different answer. I was told Zakah would be payable on the whole amount owned. So if one owns 1% of a £5 million company, would pay Zakah on £50,000, so 2.5% would be £1250.
I’m not sure which is correct. The former makes more sense.
Also, is Zakah due on it when has no access to the funds? Say the company is worth £100 million, owning 1% is £1million, therefore £25k due. However, that £1mil figure is not realised until a exit occurs and often a small investor has no control over when that will be. I realise this is partly answered in the article above with regards to founders, but is that Zakah due every year until the exit? Or once exit occurs?
Zakat is due according to the Zakatable assets in the company, and not the entire amount. You are not selling your share at present; rather it is a form of investment and savings. Exit is not known at present and it is highly contingent on numerous factors. Therefore it cannot be treated the same as trading shares with a buy-to-sell position.
Zakat is still due even if one doesn’t have access. However, in the case, you can wait until you exit and pay for all the previous years, or pay as much as you can annually and keep a record of what is left and pay when you can.
So just to confirm, even if I invested with a view to selling my share of the startup in the (distant) future i.e. capital gain. As you said. currently it is an investment/savings but my intention is to sell even if it may be in a few years. Zakah is only due on the Zakatable assets of the company?
And the same ruling applies to shares I own for a public company? I intend to hold them for at least a few years.
I realise I am repeating my questions, it’s just because I emailed last year and received a different response. I attach the email below:
Really appreciate your replies and the efforts at IFG. May Allah give its best reward to you.
One question from the article, so in the zakat considerations section for founders, it points out 4 possible solutions for the founders, and point (2) says
(2) Pay only on your salary and consider the money in the company as not truly yours due to the existence of preference shares and other controls as to what you can spend that money on.
So if a founder only chooses this option, this effectively means he is not going to pay zakat again his holdings in the company. Although as its suggested in the article, the preferred approach is (1), (3) and (4), but just a question, if a founder choose only (2), will that be permissible?
(would be great if you can share the rulings based on Fiqh Hanafi)
