What is the Zakat Treatment of Investments in Start-ups and Private Equity?

Question:

What is the Zakat Treatment of Investments in Start-ups and Private Equity?

In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

The Answer:

The Zakat treatment on start-up and private equity investments is that the investor should pay on the net Zakatable assets of the company annually. An investor should determine the ratio and percentage of net Zakatable assets in the company. Thereafter, the same percentage should be applied to one’s investment. Finally, 2.5% of this amount should be paid as Zakat. For example:

1. A company’s current book value is £5m.
2. By looking at the current balance sheet or discussing with the founders, I determined that the company has circa £1m Net Zakatable Assets. (To determine this, we did the following: Zakatable assets – current liabilities = Net Zakatable Assets)
3. I had invested £10,000 in this start-up.
4. £1m of £5m is 20%. (20% of the company is the net Zakatable assets figure)
5. That means, 20% of my investment is composed of the net Zakatable assets.
6. I will pay Zakat on 20% of my £10,000 investment, which is £2,000.
7. 2.5% of £2,000 is £50. 
8. The total Zakat is due £50

The Fiqh (jurisprudence of the answer):

Equity in a start-up, or private company, is relatively illiquid, as it is more difficult to sell. Start-up investors make a profit from their investments when they sell part or all of their portion of ownership in the company during a liquidity event, such as an IPO or acquisition. Thus, investors invest with a long-term view of making a profit in the future. At present, the start-up serves as a store of value and wealth. Further, the start-up is a business venture whereby the goal is to scale and increase value for the long-term. The company is not selling itself at present but is more concerned with scaling and growing, making it lucrative for buy-outs in the future. Therefore, the founders and start-up shareholders are all involved in a long-term business venture with a view to sell the business and exit from this company one day in the future. At present, it only operates like any other business.

The Fuqaha state that a when an investment or transaction is made and there is no intention at present to sell, the underlying investment will not be considered as Mal Tijarah (trade asset). A start-up investor is investing and providing liquidity in the start-up business to scale the business with a view to sell their shares one day in the future if a buy-out occurs.

When the business is not for sale at present, and nor is the investor seeking to sell their share at present, then the only Zakatable element in such an investment is the Zakatable assets in the business.

And Allah Alone Knows Best

Mufti Faraz Adam,
Shariah Advisor
Amanah Advisors 

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اشترى خادما للخدمة وهو ينوي أن لو أصاب ربحا يبيعه فحال عليه الحول لا زكاة فيه، وكذا لو اشترى جوالق بعشرة آلاف درهم ليؤاجرها من الناس فحال عليها الحول لا زكاة فيها؛ لأنه اشتراها للغلة وعزمه أنه لو وجد ربحاً يبيعها لا يعتبر  – فتاوى قاضيخان

وفي فتاوى الشيخ الفقيه أبي الليث: إذا اشترى جوالق بعشرة آلاف درهم ليؤاجرها من الناس فحال عليها الحول فلا زكاة فيها لأنه اشتراها للغلة لا للتجارة، فإن كان في نيته أنه يبيعها آخرا فلا عبرة لهذا، وكذلك الجواب في إبل الحمالين وحمر المكارين.   – التاتارخانية

(ومن اشترى جارية للتجارة ونواها للخدمة بطلت عنها الزكاة لاتصال النية بالعمل وهو ترك التجارة) ش: لأن النية إذا كانت مقرونة بالعمل كانت واجبة الاعتبار؛ لأن النية لتمييز ما اختلف من أنواع الفعل فلا تتصور مع عدم الفعل، والتجارة عمل مخصوص، والاستخدام ترك ذلك العمل، ولما نواها للخدمة وترك التجارة فيها اتصل المنوي بالعمل الذي هو إمساك الاستخدام فيعتبر فتبطل الزكاة. –  البناية

فَأَما إِذا كَانَ لَهُ مَال للتِّجَارَة وَنوى أَن يكون للبذلة يخرج عَن التِّجَارَة وَإِن لم يَسْتَعْمِلهُ لِأَن التِّجَارَة عمل مَعْلُوم وَلَا يُوجد بِمُجَرَّد النِّيَّة فَلَا يعْتَبر مُجَرّد النِّيَّة فَأَما إِذا نوى الابتذال فقد ترك التِّجَارَة للْحَال فَتكون النِّيَّة مُقَارنَة لعمل هُوَ ترك التِّجَارَة فاعتبرت النِّيَّة –  تحفة الفقهاء

(قَالَ:) وَمَا كَانَ عِنْدَهُ مِنْ الْمَالِ لِلتِّجَارَةِ فَنَوَاهُ لِلْمِهْنَةِ خَرَجَ مِنْ أَنْ يَكُونَ لِلتِّجَارَةِ؛ لِأَنَّهُ نَوَى تَرْكَ التِّجَارَةِ وَهُوَ تَارِكٌ لَهَا لِلْحَالِ فَاقْتَرَنَتْ النِّيَّةُ بِالْعَمَلِ، وَإِنْ كَانَ عِنْدَهُ عَبِيدٌ لِلْخِدْمَةِ فَنَوَى التِّجَارَةَ لَمْ تَكُنْ لِلتِّجَارَةِ مَا لَمْ يَبِعْهُمْ؛ لِأَنَّ النِّيَّةَ تَجَرَّدَتْ عَنْ عَمَلِ التِّجَارَةِ وَهُوَ نَظِيرُ الْمُسَافِرِ يَنْوِي الْإِقَامَةَ فَإِنَّهُ يَصِيرُ مُقِيمًا وَالْمُقِيمُ يَنْوِي السَّفَرَ فَلَا يَصِيرُ مُسَافِرًا مَا لَمْ يَخْرُجْ إلَى السَّفَرِ، وَاَللَّهُ أَعْلَمُ بِالصَّوَابِ.  – المبسوط للسرخسي