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On December 13, 2018 Qatar repealed the decade-long Income Tax Law (Law No. 21 of 2009) and issued the new Income Tax Law (Law No. 24 of 2018).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;