Zakaah on shares of an ETF (Exchange-Traded Fund)

Question:

As-salaamu ‘alaykum

I am buying and holding shares of an ETF (Exchange-Traded Fund). My intention is to continue to buy and hold for at least the next 30 years. I will not sell at all until im retired. Keep in mind that an ETF is actually a collection of many different companies stocks that are being traded regularly by the ETF manager. However, the ETF is still regarded as one whole stock and is bought as one whole stock, and as long as you dont sell it, not sale will be recorded in your tax report despite the internal selling being done by the ETF Manager. Keeping this in mind, how do I pay zakaat on this?

Answer:

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

On the outset one should ensure that the companies in which shares are owned are of a Halaal and Shariah compliant nature.

Dealing in shares, purchasing and selling, will only be permissible in Shari’ah subject to the following conditions:

1. The main business of the company is not in violation of Shari’ah.
Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest, like conventional banks, insurance companies, or the companies involved in some other business not approved by the Shari’ah, such as the companies manufacturing, selling or offering liquors, pork, haram meat, or involved in gambling, night club activities, pornography etc.

2. If the main business of the companies is halal, like automobiles, textile, etc. but they deposit there surplus amounts in an interest-bearing account or borrow money on interest, the share holder must express his disapproval against such dealings, preferably by raising his voice against such activities in the annual general meeting of the company.

3. If some income from interest-bearing accounts is included in the income of the company, the proportion of such income in the dividend paid to the share-holder must be given charity, and must not be retained by him. For example, if 5% of the whole income of a company has come out of interest-bearing deposits, 5% of the dividend must be given in charity.

4. The shares of a company are negotiable only if the company owns some non-liquid assets. If all the assets of a company are in liquid form, i.e. in the form of money that cannot be purchased or sold, except on par value,
because in this case the share represents money only and the money cannot be traded in except at par[1].

Zakaah is payable on both the capital and the dividend of the share if the company one has shares in is a trading company, such as a fabric, car manufacturer, store, etc.  Zakaah will be due on the market value of the share on the day one is paying Zakaah. This is if one has the intention for resale or capital gain, the entire value of the share is subjected to Zakaah.

If, however, the shares are purchased with the intention of holding them as an investment and receiving the dividend income, Zakaah is not Waajib on the entire share. Rather Zakaah is only Waajib upon the Zakaatable assets of the company, i.e. current assets (cash, stock etc.). Non zakaatable items (such as machinery, land, furniture etc.) will be subtracted.

If the company is not a trading investment and only receives revenue, for example from rentals of properties or vehicles then Zakaat is payable only on the dividends[2].

And Allah Ta’āla Knows Best

Mufti Arshad Ali

Darul Iftaa, Jaamia Madinatul Uloom (Trinidad)

www.fatwa-tt.com /www.jaamia.net


[1] Introduction to Islamic Finance, Mufti Taqi Usmani

[2] Fatawa Rahimiyyah