Guide to Qatar’s taxation laws

Guide to Qatar’s taxation laws

On December 13, 2018 Qatar repealed the decade-long Income Tax Law (Law No. 21 of 2009) and issued the new Income Tax Law (Law No. 24 of 2018). Executive regulations (ERs) implementing Law No. 24 of 2018 were published on December 11, 2019. Highlights have been prepared based on the ERs accompanying Law No. 24 of 2018. The new ERs contain substantive changes covering the determination of taxable income, withholding tax application, exemption of Qatar/GCC natural persons, subsidiaries of listed entities and transfer pricing (TP). The effective date of these new ERs was the day after their issuance in the Official Gazette: December 12, 2019.

Investment Basics

There are two tax regimes in Qatar: the state of Qatar tax regime, operated by the General Tax Authority (GTA), which applies to the majority of businesses operating in Qatar; and the Qatar Financial Centre (QFC) tax regime, operated by the QFC Tax Authority within the QFC Authority.

Accounting Principles

The QFC tax regime follows International Financial Reporting Standards, UK Generally Accepted Accounting Principles (GAAP), US GAAP or any standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions. For tax years beginning on or after January 1, 2020, financial statements must be prepared in Arabic.

Principal Business Entities

The most common legal entity structures registered with the Ministry of Commerce and Industry are the limited liability company, private shareholding company, public shareholding company and branch of a foreign company. Other forms of business include the limited partnership, joint liability company, limited share partnership and joint venture company. Within the QFC, the most common legal entity structures are the limited liability company, branch, general partnership, limited partnership and limited liability partnership. Other forms of business include the special purpose company, single family office and trust.

Corporate Taxation

A body corporate is resident in the state of Qatar if it is incorporated under Qatari law or if its head office or place of effective management is in Qatar. All taxpayers carrying out activities in Qatar must apply to the GTA for a tax card within 60 days of either (i) the commencement of activities or (ii) the date of registration with the Commercial Register of the Ministry of Commerce and Industry. A penalty of QR20,000 ($5490) may be imposed for failure to register with the GTA or to maintain a valid tax card.

Basis

Tax is imposed on a taxpayer’s Qatari-source income. Entities wholly owned by Qataris and other GCC nationals are exempt from corporate income tax, but may be required to file tax returns (see “Compliance for corporations”).

Permanent Establishment

The new ERs provides further clarity on the constitution of a permanent establishment (PE) as follows:

• Project PE: A building site or a construction, installation or assembly project that lasts longer than six months, including related supervisory activities;

• Service PE: A non-resident provides services ( including consultancy services) in Qatar through employees or other personnel for a period or periods aggregating more than 183 days in a 12-month period. The new ERs also bring in the risk of attribution of income or revenue earned in Qatar to an existing PE, where the activities are similar in nature. The definition of taxable income is now widened, especially for a non-resident. It is also noted that the general principles of the OECD have been taken into consideration while determining the scope and definition of taxable income.

Taxable Income

Under the state of Qatar tax regime, the main categories of taxable income include gross income derived from: activities carried out in Qatar; contracts wholly or partly performed in Qatar; real estate in Qatar; the exploration, extraction or exploitation of natural resources situated in Qatar; consideration for services paid to a head office, branch or related company; and interest on loans obtained in Qatar.

Income Exempt From Tax

Certain income is exempted from tax, including:

• Bank interest and returns due to natural persons who do not carry out a taxable activity in the state, whether or not resident in the state.

• Interest and returns from public debt securities, Islamic financial securities issued pursuant to the Financial System Law and public corporation bonds.

• Capital gains derived from the disposal of real estate or securities held by natural persons provided that the real estate or securities disposed of are not part of the assets of a taxable activity.

• Capital gains derived from revaluation of a company’s assets upon offering them as share in-kind for the purpose of contributing to the capital of a shareholding company that is resident in the state, provided that the proportion of the stocks against the share in-kind is nominal and not disposed of before five years have lapsed.

• Share profits and other income from shares if the dividend distributed during a taxable year were deducted from: (a) profits subjected to the tax under this law; (b) profits distributed by a company whose profits are exempt from tax under this law or other laws.

• Gross income from handicraft activities that do not use machines, whose gross income does not exceed QR200,000 ($54,900) per year, where the average number of employees does not exceed three during the taxable year and when the activity is carried out in a single establishment. The exemption conditions under this item may be amended by a decision from the Council of Ministers based on recommendation by the minister.

• Gross income from agricultural and fishing activities.

• Gross income of non-Qatari air and sea transport companies operating in the state, subject to reciprocity.

• Gross income of Qatari natural persons resident in the state.

• Gross income of legal persons resident in the state and wholly owned by Qataris.

• Gross income of legal persons that are resident in the state, to the extent of the shares of the following persons: (a) Qatari natural persons; (b) legal persons wholly owned by Qataris; (c) legal persons partly owned by Qataris to the extent of their shares of the profits thereof. The provisions of this paragraph shall not apply to the shares of profits of legal persons that are wholly or partly, directly or indirectly, owned by the state and that operate in the petroleum or petrochemical industries.

• Gross income derived from activities authorised for private entities that are registered in the state or in another state and licensed to operate in the state to the extent their activities are not for profit.

• Share of non-Qatari investors in the profits of companies whose shares are offered for trading in the stock market.

• Share of non-Qatari investors in the profits of investment funds whose units are offered for trading in the stock market.

• Share of non-Qatari investors in profits derived from trading all securities, including investment funds that are listed for trading in the stock market.

Deductions & Losses

Allowable deductions are expenses and costs incurred by the taxpayer that satisfy the following requirements:

• They are necessary to derive the gross income;

• They are actually incurred and supported by documents;

• They do not increase the value of fixed assets used in the activity; and

• They are related to the taxable year. The taxpayer may deduct losses incurred during the taxable year from the net income of the following five years. The following expenses and costs may not be deducted:

• Expenses and costs incurred to derive tax-exempt income.

• Payments that are made in breach of the laws of the state.

• Fines and penalties imposed for the breach of the laws of the state.

• Expenditures or losses pertaining to compensation that is receivable or has been received if that compensation has not been included in the taxpayer’s gross income.

• The share of total expenditures that was spent on entertainment, hotel accommodation, restaurants, vacations, club fees and gifts to customers in accordance with the circumstances, conditions and limits provided for in the regulations.

• Salaries, wages and similar remuneration, including fringe benefits paid to the owner, his/her spouse and children, partners of a general or limited partnership, members of the board of directors, and the manager of a limited liability company who owns, directly or indirectly, the majority of the shares of the company.

• The share of the branch in the head office’s general and administrative expenses that exceeds the percentage determined in the regulations.

• Commissions of the agents of foreign companies that exceed the limits defined by the regulations.

• Any other disallowed deduction pursuant to the provisions of this law.

Tax Depreciation

The amount of fixed asset depreciation shall be deducted if the following conditions were available:

• The asset subject to depreciation was a fixed asset in accordance with the definition stated in the accounting standards applicable in the state.

• The asset must be totally used for the purposes of an activity subject to tax, and in the event of using it partially for the purposes of an activity subject to tax, the depreciation shall be deducted within the limits of this use only.

• The asset must be depreciable, whereas its value decreases due to use, passing of time or technological obsolescence.

• The asset shall be a property of the taxpayer under documents proving ownership, such as property certificates, contracts and otherwise.

• The depreciation is calculated from the actual date of use based upon cost total that was spent to obtain the asset and prepare it for use.

• The depreciation carried out by the taxpayer shall be deducted based upon rules controlled by the accounting standards applicable in the state, without exceeding the deductible fixed depreciation instalment calculated on the assets owned by the taxpayer, including the buildings constructed on third-party property with the outlined maximum percentages (see table).

Tax Assessment

The tax shall be assessed on the basis of the taxable income as stated in the return. The tax return shall be considered an assessment of tax and an obligation to pay it on the same day of the filing thereof. The authority may amend the assessment based on the information stated in the return and supporting documents thereof, in accordance with the provisions of this law and its regulations. The authority may also issue a deemed assessment based on any information that is available where the taxpayer fails to submit their tax return or fails to submit the information and the documents supporting the return.

The authority shall, in the two cases stipulated in the paragraph above, notify the taxpayer of the assessment components and the value thereof on the form designated for this purpose by means of registered post or any other method of notification. A liquidator is considered a taxpayer and the assessment procedures will be taken against him.

Statute of Limitations

The statute of limitations states that under this law, the authority may not reassess the tax due on a taxpayer in respect of a taxable year that had been previously assessed unless the authority discovers new information affecting the taxpayer’s tax liability that was not taken into account in determining the previous assessment.

The reassessment decision shall be subject to the same rules as those applicable to the assessment decision issued in the first place of legal persons that are wholly or partly, directly or indirectly, owned by the state and that operate in the petroleum or petrochemical industries.

Contract Notification Obligation

The law requires ministries, other government bodies, public corporations and establishments, and companies to notify the GTA of the contracts they have entered into if their amounts exceed limits specified in the ERs.

Taxation of Dividends

Dividends are not subject to tax under the state of Qatar or QFC tax regimes.

Capital Gains

Under both the state of Qatar and QFC tax regimes, capital gains derived by a company are included in taxable income and subject to tax at the applicable rate.

Losses

Under the state of Qatar tax regime, losses may be carried forward and set off against profits for up to five years. The carry back of losses is not permitted. Under the QFC tax regime, losses may be carried forward for as long as the QFC entity has a source of income within the terms of its licence.

Rate

Under the state of Qatar tax regime, the standard corporate tax rate is 10%. Different tax rates agreed with the Qatari government but no less than 35% apply to income derived from petroleum operations or the petrochemicals industry, as defined under Law No. 3 of 2007. This includes income from exploration operations; developing fields; drilling, completing and repairing wells; producing and processing petroleum; filtering of impurities; storing, transporting, loading and shipping; and constructing or operating related energy and water facilities, housing or other facilities, establishments or equipment necessary for petroleum and petrochemical industries and operational activities, plus associated services, including administrative and complementary activities. Where an agreement with the government, ministries or other governmental bodies was concluded before Law No. 3 became effective and prescribes a specific tax rate, that rate will apply; where no rate is prescribed, tax is imposed at 35%. Under the QFC tax regime, income is taxed at a flat rate of 10%.

Foreign Tax Credit

No foreign tax credit is available under the state of Qatar tax regime. The QFC tax regime offers double taxation relief and provides for unilateral credit relief.

Participation Exemption

No participation exemption is provided under the state of Qatar tax regime and foreign companies selling shares in Qatar-based companies are subject to tax in Qatar. The QFC tax regime allows for a tax exemption on capital gains derived from qualifying shareholdings.

Holding Company Regime

Both the Ministry of Commerce and Industry and the QFC allow for the establishment of holding companies.

Incentives

Companies may be eligible for a tax exemption under the state of Qatar tax regime. The minister of finance may issue exemptions for a period of up to five years; longer exemptions are agreed by the Council of Ministers.

Full foreign ownership is possible under the QFC regime, which is available to companies that carry out certain permitted activities and apply for a QFC licence. Special purpose companies (i.e., registered funds, special investment funds, special funding companies, alternative risk vehicles and charities) may elect exempt status. Qatari-owned companies may elect a 0% concessionary rate if certain conditions are fulfilled.

Qatar Free Zones Authority

The Qatar Free Zones Authority (QFZA) was established in 2018 as an independent entity to develop free zones in Qatar. The first such zone, Umm Al Houl Free Zone, has been ready to receive local and foreign investors since the first quarter of 2019. The QFZA focuses on logistics, chemicals, maritime industries, heavy manufacturing, emerging technologies and industrial sectors. Benefits of setting up in one of the free zones include the possibility of 100% foreign ownership and a 20-year tax holiday, i.e., exemption from corporate tax, personal income tax and Customs duties. Companies registered in the Qatar Science and Technology Park (QSTP) are not subject to tax, even if wholly owned by foreign investors, and are permitted to trade directly in Qatar without a local agent. They also are permitted to import goods and services free of Qatari Customs duty. The QSTP is intended for companies engaged in research and development activities.

The new Foreign Investment Law (Law No. 21 of 2019), enacted in January 2019, allows foreign investors to own 100% of the equity of limited liability companies operating in any sector, subject to the approval of the Ministry of Commerce and Industry. Additional incentives and support for foreign investment projects include the following:

• Allocation of land to non-Qatari investors to establish investment through use or rent in accordance with the applicable rules and regulations;

• Grant of an import licence to the non-Qatari for the investment;

• Exemption from corporate income tax in accordance with the procedures and regulations stipulated in the Income Tax Law of Qatar; and

• Exemption from Customs duties on imports of machinery and necessary equipment required for the project, in addition to raw materials and semimanufactured items for production that are not available in the domestic market.

Withholding Tax Dividends

Qatar does not levy withholding tax on dividends.

Withholding Tax Interest

Law No. 24 of 2018 introduced a single withholding tax rate of 5% applicable to interest, royalties, commission and other payments under contracts signed on or after December 13, 2018; the previous 7% rate no longer applies. For contracts signed before that date, the withholding tax treatment is as follows:

• For payments due before December 13, 2018 the rates prescribed under Law No. 21 of 2009 (i.e., 5% or 7%) apply, irrespective of when the payments are actually made; and

• For payments due on or after December 13, 2018, the 5% withholding tax rate under Law No. 24 of 2018 applies. Certain exemptions apply, or the rate may be reduced under a tax treaty. One of the major changes the new ERs brought in is the shift from the principle of “place of performance of services” to the principle of “usage, consumption or utilisation” to test taxability of payments made to non-residents. The services are now subject to withholding tax if they are consumed or utilised in Qatar even if they are rendered outside Qatar.

The new ERs stipulate that the amounts payable to non-residents (whether related parties or not) shall be considered effectively paid after the lapse of a maximum period of 12 months from the due date of the payments, with the exception of amounts owned by ministries, other government agencies and public foundations. The new ERs further provide detailed guidelines on the withholding tax refund process.

Royalties

Royalties payable under contracts signed on or after December 13, 2018 are subject to a 5% withholding tax (see Withholding Tax Interest section above for clarification of the withholding tax rate for contracts signed before that date). Certain leasing charges may be considered royalties. The withholding tax rate may be reduced under a tax treaty.

Technical Service Fees

Technical service (as well as consultancy, commission, directors’, brokerage and attendance) fees paid under contracts signed on or after December 13, 2018 to a non-resident for services carried out wholly or partly in Qatar are subject to a 5% withholding tax (see Withholding Tax Interest section for clarification of the withholding tax rate for contracts signed before that date). No withholding taxes apply under the QFC tax regime.

Wholly Owned Qatari Companies

The new ERs have prescribed for the test of residency of Qatari nationals while determining the exempt status of wholly owned Qatari companies.

We understand this residency test could be relevant for wholly-owned GCC companies and such companies being potentially taxable when the GCC nationals/ shareholders are not resident in Qatar. This could have a huge impact on many entities claiming exemption on the basis that these are wholly owned by GCC nationals. Other taxes on these corporations are as follows:

• Capital duty: None.

• Payroll tax: None.

• Real property tax: None.

• Social security: For employees that are Qatari nationals, the employer must contribute 10% of the employee’s basic salary each month.

• Stamp duty: None.

• Transfer tax: None.

• Excise tax: Excise tax applies in Qatar from January 1, 2019 and is imposed both on imports and locally produced goods. Excise tax applies at 100% on tobacco products, energy drinks and “special purpose” goods and at 50% on carbonated drinks.

Transfer Pricing

The new ERs have brought in detailed TP regulations, which require entities to:

• Determine the price of related party transactions in accordance with the arm’s length principle and to evaluate those at the time of the transaction, and in any case no later than the time of submitting the annual tax return;

• Perform a detailed functional analysis at the time of preparation of the tax returns. A search for comparable transactions/operations can be conducted once in three years; however, it is expected that the financial data of the comparable operations be updated annually; and

• Submit the TP declaration with the annual tax return, if the number of total revenue or assets meet or exceed the thresholds determined by the GTA. Master file and local file filing requirements have also been introduced. These requirements shall be effective for the tax year beginning on or after the date determined by the GTA. The master file and local file requirements shall be applicable to entities meeting or exceeding the total revenue or assets thresholds determined by the GTA for this purpose. The GTA may send a specific questionnaire to be filled out and request relevant information and supporting documentation for the purpose of conducting TP audits. The onus shall be on the taxpayer to prove that transactions with associated enterprises meet the arm’s length principle.

The above-mentioned requirements shall also apply to transactions between any entity residing in the state and another entity not associated if:

• One of the two entities benefits from a preferential tax system; or

• The other entity resides in one of the non-cooperating countries or territories. A state or territory is considered as non-cooperative if no agreement that permits the exchange of information for tax purposes has been signed with Qatar. The QFC regime has detailed TP rules that are broadly consistent with OECD recommendations.

While there are no formal master file and local file requirements, the tax authorities expect taxpayers to have such documentation available during a tax audit.

Thin Capitalisation Provision

The new ERs have introduced thin capitalisation provisions whereby interest on the loans, to related parties, are restricted to the extent of amount loans that do not exceed three times the ownership rights. The ER also requires that the loan must be necessary for the purpose of taxpayer’s business.

Provisions for Doubtful Debts

As per the new ER, the provision for doubtful debts for banking and financial institutions shall be determined by the limits and instruction issued by the Qatar Central Bank only. The earlier cap of 10% of net income has been removed.

Reporting

Under both the state of Qatar and QFC tax regimes, country-by-country (CbC) reporting obligations and notification requirements apply to entities that are tax resident in Qatar and are part of a multinational group of enterprises (MNE) with consolidated revenue of at least QR3bn ($823.4m) in the preceding financial year. The requirements apply to financial years starting on or after January 1, 2017 and the CbC report must be submitted within 12 months from the end of the reportable financial year.

A Ministry of Finance circular that was issued in December 2018 confirms that CbC notification and filing requirements do not apply for FY 2017 for ultimate parent entities resident in Qatar, provided a CbC report was validly filed by a surrogate parent that is tax resident in a jurisdiction that has signed the OECD multilateral competent authority agreement. For FY 2018 notification in Qatar may be made by either the ultimate parent or the surrogate parent.

Where the ultimate parent company is resident in Qatar, meets the revenue threshold and does not have a surrogate parent entity in another jurisdiction, the CbC report and notification for FY 2018 are due by December 31, 2019.

All CbC-related filings and notifications for constituent entities (i.e., entities and branches of non-Qatari-headquartered MNE groups) are currently suspended until further notice from the tax authorities.

Under the QFC tax regime, the arm’s length borrowing capacity of a QFC taxpayer is the amount of debt that it could and would have taken on, as a stand-alone entity, from an independent lender. The safe harbour debt-to-equity ratio set out by the QFC tax authorities is 2:1 for non-financial institutions and 4:1 for financial institutions.

There are no disclosure requirements or provisions for controlled foreign companies.

Compliance for Corporations

The tax year is the calendar year, but a taxpayer may apply to prepare its financial statements for a 12-month period ending on a date other than December 31. The first accounting period for a taxpayer will be 12 months, subject to the following: commencement of activity after the start of the taxable year; or liquidation and cessation of activities. The first accounting period can be less than 12 months but not less than 6 months. Only in case of temporary activities not lasting more than 18 months shall the accounting period be equal to the period of activity. Under the QFC tax regime, the tax year is generally the calendar year.

Consolidated Returns

Consolidated returns are not permitted under the state of Qatar tax regime. Each company must file a separate tax return.

Filing Requirements

Under the state of Qatar tax regime, taxpayers are required to submit an annual income tax return and pay the tax that is due by the end of the fourth month after the company’s financial year-end. Entities wholly owned by Qataris and other GCC nationals are exempt from corporate income tax, but are required to file tax returns and audited financial statements with the tax authorities if their capital is at least QR2m ($549,000) or if their annual revenue is at least QR10m ($2.7m). The GTA has planned the introduction of a new online tax management system in 2020, called Dhareeba, with the aim of achieving complete automation of the tax payment and management process. Dhareeba enables online registration, filing of tax returns, payment of taxes due and progress tracking.

Under the QFC tax regime, the deadline to submit the annual income tax return and pay the tax due is the end of the sixth month after the company’s financial year-end. There is an online system for tax filing exclusively for QFC entities. Under the state of Qatar tax regime, all taxpayers are required to submit a withholding tax return and pay the withholding tax due to the tax authority before the 16th day of the month following the month in which the tax was withheld. All withholding tax filings must be done electronically.

From July 13, 2019 all communications with the GTA, with the exception of the financial statements, must be in Arabic.

Penalties

Under the state of Qatar tax regime, failure to file a tax return by the deadline will result in a penalty of QR500 ($137) per day up to a maximum of QR180,000 ($49,400). Failure to pay tax due by the deadline will result in a penalty of 2% of the amount of tax due per month of delay or part thereof, up to the amount of tax due. All taxpayers must register with the GTA and obtain a tax card. Both the registration and tax card must be renewed annually and failure to do so may result in a penalty of QR20,000 ($5490). Failure to withhold tax where required is subject to a penalty of 100% of the tax. Delays in remitting tax withheld are subject to a penalty of 2% of the tax per month of delay subject to a maximum of 100% of the amount of tax due.

Under the QFC tax regime, financial sanctions vary depending on the circumstances.

Personal Taxation

Qatar does not impose personal income taxation; only income from a business is taxable in Qatar. Having residence in Qatar is defined by the following characteristics:

• Natural person who satisfies any of the following requirements: a) Has a permanent home in the state; b) Has been in the state for more than 183 consecutive or separate days during any 12-month period; c) Has his centre of vital interests in the state.

• Legal person who satisfies any of the following requirements: a) It is incorporated under Qatari legislations; b) Its head office is situated in the state of Qatar; or c) Its place of effective management is situated in Qatar.

Taxable Income

Only business income is taxable in Qatar. There is no tax on employment income.

Capital Gains

Capital gains from the disposal of real estate and securities derived by an individual are exempt from tax, provided the real estate and securities are not part of the assets of a taxable activity (any gains from such assets are taxable at a rate of 10%). There are no deductions and allowances.

Rates

Business income is taxable at the rate of 10%. except for the petrochemicals industry and petroleum operations, where the tax rate applicable shall not be less than 35%.

Value-Added Tax

No value-added tax or other sales tax currently applies in Qatar. In 2019 the government announced that it would implement value-added tax during 2020; however, as of early 2020, no decision had been made on the implementation of value-added tax.

Deductible Expense Limits

The deductible expense limits are as follows:

• Entertainment, hotels, restaurants, vacations, club contributions and customer gifts: ◊ Old regulation: 2% of the net income or QR200,000 ($54,900), whichever is lower. ◊ New regulation: 2% of net income or QR500,000 ($137,000), whichever is higher.

• Gifts, donations, subsidies and contributions to charitable works: ◊ Old regulation: 5% of net income. ◊ New regulation: 3% of net income.

• Penalty for delay in contract reporting: ◊ Old regulation: Nil. ◊ New regulation: 10,000 per contract.

• Apply for change in accounting period: ◊ Old regulation: 90 days prior to the due date of filing the tax return for the previous accounting year. ◊ New regulation: 30 days prior to the due date of filing the tax return for the previous accounting year.

• Application for extension in filing the tax return: ◊ Old regulation: Should be submitted before 30 days of filing deadline. ◊ New regulation: Should be submitted before 60 days of filing deadline.

Credits : Oxford Business Group