Paid in full: A more in-depth look at local tax regulations

The current tax rules in Qatar are governed by Law No. 21 of 2009, which came into force with effect from January 1, 2010. The executive regulations, effective from July 1, 2011, contain the detailed rules related to the administration of the tax regime. The Public Revenues and Taxes Department (PRTD) also issues circulars from time to time to provide guidance on the interpretation of provisions in the Qatar tax law and its application in practice.

Local Source Income

Qatar tax law imposes income tax on local source income generated by both residents and non-residents that have permanent establishments in Qatar. Local source income includes the following:

• Gross income derived from an activity carried on in Qatar; and

• Gross income derived from contracts wholly or partly performed in Qatar. The legal provisions do not apply to the following:

• Private associations and foundations and private foundations of public interest;

• Not-for-profit bodies;

• Salaries, wages and allowances;

• Gross income from legacies and inheritances; and

• Qatar Financial Centre (QFC) entities. The only exception to this is the withholding tax compliance obligation, which applies to all bodies other than those registered in the QFC.

Permanent Establishment

The definition of permanent establishment in Qatar’s tax law is close to the terms of the definition in the Organisation for Economic Cooperation and Development (OECD) Model Convention; in essence, “a fixed place of business through which the business of the taxpayer is wholly or partially carried on, including for instance a branch, office, factory, workshop, mine, oil or gas well, quarry, building site, assembly project or place of exploration, extraction or exploitation of natural resources”.

The activity in Qatar of a “dependent agent”, i.e. a person (other than an independent agent) “acting on behalf of” the taxpayer or “in its interest” may also create a permanent establishment in Qatar.

Companies that have a permanent establishment in the country are likely to be subject to corporate income tax in Qatar.

Exemptions

The tax law provides that the following income will be exempt from tax:

• Bank interest and returns due to natural persons other than those carrying on a taxable activity in the state, whether or not resident in the state;

• Interest and returns on public treasury bonds, development bonds and public corporation bonds;

• Capital gains on the disposal of real estate and securities derived by natural persons provided that the real estate and securities disposed of are not part of the assets of a taxable activity;

• Dividends and other income from shares if the amounts distributed during a taxable year were taken from profits that were: i. subject to the tax under Law No. 21 or other laws; or ii. distributed by a company the income of which is exempt from tax under Law No. 21 or other laws.

• Gross income from handcraft activities that do not use machines provided that the gross income does not exceed QR100,000 ($27,390) per year, the average number of employees does not exceed three during the taxable year and the activity is carried out in one single establishment, in accordance with the limits and conditions provided for in the executive regulations of Law No. 21;

• Gross income from agriculture and fishing;

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

• Gross income of Qatari natural persons resident in the state, including their shares in the profits of legal persons. Under the GCC reciprocity agreement, this exemption is extended to GCC nationals resident in the state; and

• Gross income of legal persons resident in the state and wholly owned by Qatari nationals. Under the GCC reciprocity agreement, this means that legal persons that are wholly owned by Qatari/GCC nationals are generally exempt from tax; however they are still required to file a tax return and submit audited financial statements if the share capital is equal to or greater than QR2m ($547,800) or the gross revenue is equal to or greater than QR10m ($2.74m). Other tax exemptions may be provided for under special laws or international agreements or may be granted by the Tax Exemption Committee under provisions 51 to 56 of the tax law.

Corporate Income Tax Rate

Profits attributable to non-Qatar nationals are generally subject to income tax at a flat rate of 10%. A different tax rate may apply to entities with oil and gas operations or where the activities are carried out under an agreement with the government. Non-residents who run a business in Qatar without a permanent establishment may be subject to withholding tax at either 5% or 7% (depending on the nature of the payment) on gross receipts.

Deductions & Losses

Taxable income is determined by subtracting allowable deductions and losses from gross income.

To be deductible, expenses must meet the following requirements;

• They are necessary to derive the gross income;

• They are actually incurred and supported by documentary evidence;

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

• They are related to the taxable year. The following items are specifically non-deductible:

• Expenses and costs incurred to derive exempt income;

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

• Fines and penalties for the breach of the laws of the state;

• Expenditures or losses in respect of which compensation is receivable or has been received if that compensation has not been included in the taxpayer's gross income;

• The share of total expenditures on entertainment, hotel accommodation, restaurant meals, vacations, club fees and gifts to customers, in accordance with the circumstances, conditions and limits provided for in the executive regulations of Law No. 21;

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

• The share of the branch in the headquarters’ or head office’s general and administrative expenses that exceeds the percentage determined in the executive regulations of Law No. 21. Tax losses may be carried forward for a period of up to three years.

Tax Deduction

The executive regulations outline the depreciation methods and rates that are permitted when calculating allowable depreciation for tax purposes.

For certain assets, depreciation is calculated on a straight line basis at the following rates:

• Buildings and infrastructure, including roads, bridges, pipelines, storage tanks and port ducks inside the establishment and excluding ready-made light constructions: 5% per annum;

• Ships and boats: 10% per annum;

• Airplanes and helicopters: 20% per annum;

• Drilling instruments: 15% per annum;

• Intangible assets: i. Pre-establishment expenses: 50% per annum; ii. Trademarks and patents: amortised on expected lifetime of the asset, provided that amortisation allowance shall not exceed 15% per annum. Other assets are divided into groups with tax depreciation available for the group on a reducing balance basis at the following rates:

• Computer hardware and software accessories: 33.33%;

• Machineries, plants, office equipment, electric appliances, transportation means of goods and persons including cars, vehicles, tractors and cranes: 20%; and

• Furniture, fixtures installation, other fixed assets depreciated as per groups not mentioned above: 15%. The group value for an accounting period will be calculated as follows: the net carrying value of the assets of the group for the previous accounting period, plus the costs incurred to acquire any fixed assets during the accounting period, less the consideration of the assets disposed of in the group. Depreciation rates provided in the regulations may be increased by a decision of the Minister of Finance. A taxpayer wishing to request increased depreciation rates should submit an application to the PRTD. It is also important to be aware that the executive regulations state that in the case of depreciation the requirement for expenses to be “actually incurred and supported by documentary evidence” shall only be met if “the depreciation or provision is registered in the accounts, and only up to the amounts registered in the accounts”. The PRTD interprets this provision narrowly to limit tax depreciation to accounting depreciation in the year.

Withholding Tax System

The tax law introduced a requirement for all entities registered in Qatar or with a permanent establishment in Qatar to withhold a percentage of certain payments made to non-residents. This means that although the withholding tax liability falls on the non-resident with activities in Qatar without a permanent establishment, the withholding tax compliance requirement is borne by the Qatar entity.

The applicable withholding tax rates are as follows:

• 5% of the gross amount of royalties and technical fees; and

• 7% of the gross amount of interest (some exclusions apply), commissions, brokerage fees, director’s fees, attendance fees, and any other payments for services carried out wholly or partly in the state. There is no withholding tax on dividends. The company that makes the payment to its foreign supplier is required to withhold the tax and remit to the PRTD the funds that were withheld by the 16th day of the following month. In the event that the company does not make a payment to the PRTD, the company will be liable for a penalty equal to the amount of unpaid tax due, in addition to the withholding tax.

Circular No. 3/2011 confirmed that the requirement to withhold applies to all entities registered in the state of Qatar including government bodies, public authorities and corporations. The circular also includes an instruction for such entities to refrain from including conditions relating to exemption from income tax or the bearing of its burden by them (e.g. gross-up clauses) unless written approval from the Ministry of Economy and Finance is obtained. Entities registered in the QFC do not have to withhold.

Tax Registration & Tax Card

The tax law says that if you are a taxpayer and you are carrying on a business activity in Qatar then you should register with the PRTD and submit an application for a tax card within 30 days or earlier of obtaining commercial registration or the first day of realisation of income from the activity. In practice it is prudent to act within 30 days of obtaining commercial registration even if there may be a delay before you receive your first income from the activity. A penalty of QR5000 ($1370) may be imposed for failure to register and apply for a tax card within the deadline. The duration of the first taxable period must be a minimum of six months and a maximum of 18 months. Thereafter, each period will be 12 months in duration. The default tax year-end date is December 31. An application may be made to the PRTD to seek approval for a different year-end date.

Filing & Payment Requirements

Those subject to tax in Qatar are required to submit an income tax declaration and pay any tax due to the PRTD within four months of the end of the accounting period (e.g. by April 30 2014 for an accounting period that ends on December 31 2013).

The penalty for late filing of a return is QR100 ($27.40) per day of delay (capped to a maximum of QR36,000, $9860). A separate penalty applies for the late payment of tax. This penalty is 1.5% of the amount of tax due per month (or part of month) of the delay, capped at the amount of the tax due.

Audit Requirements

Businesses that are wholly or partially foreign (non-GCC) owned are required to submit audited financial statements signed by a locally registered auditor together with the tax declaration to the PRTD if:

• The capital of the taxable entity in Qatar exceeds QR100,000 ($27,390); or

• The annual taxable income of the entity exceeds QR100,000 ($27,390); or

• In the case of a branch, if the head office is situated outside of Qatar. The tax law requires accounts to be prepared in accordance with International Financial Reporting Standards; however a taxpayer may make an application to the PRTD to use another accounting method. There is a requirement that the tax return is co-signed by a registered auditor in Qatar.

The taxpayer is also required to keep and maintain records and documentation pertaining to their activities in Qatar for a period of 10 years following the end of the taxable year to which the records and documentation relate, unless released from this obligation through meeting conditions outlined in the executive regulations of the law.

The tax law states that taxpayers who are carrying out a tax-exempt activity shall also submit a tax return accompanied by audited financial statements. Circular No. 4/2011 dated August 7 2011 confirms that companies and permanent establishments wholly owned by Qatari or GCC nationals are required to file corporate income tax returns (accompanied by audited financial statements) if:

• Their share capital is greater than or equal to QR2m ($547,800); or

• Their gross revenue is greater than or equal to QR10m ($2.74m). A penalty of QR15,000 ($4110) may be imposed for failure to comply with the requirements to submit audited financial statements and keep accounting records as described above.

Tax Assessments

Articles 22-24 of the tax law outline that tax is assessed on the basis of the taxable income as determined in the return, but the PRTD has the right to seek information or clarifications from the taxpayer and to reassess the tax due. Once an assessment is made, the PRTD should issue a notice of assessment to the taxpayer. The taxpayer may object within 30 days from the date of its notification, and the PRTD should respond to an objection within 60 days. If no response is provided within 60 days this is regarded as an implicit rejection of the objection.

Statue Of Limitations

The statute of limitations in Qatar is five years following the year in which the taxpayer submits the return. Where the taxpayer fails to submit the return, the statute of limitations is extended to 10 years following the taxable year in respect of which the taxpayer did not file the return.

Double Tax Treaties

Qatar has a growing network with over 50 treaties currently in force.

Retention Requirement

On 12 June 2011 the Ministry of Economy and Finance issued Circular No. 2/2011 in respect of the retention policy under the new tax law. The instructions provided under Circular No. 2/2011 replace the retention rules in previous circulars. Circular No. 2/2011 confirms the retention system continues to apply to payments made under contracts wholly or partly executed in Qatar with the precise operation of retention dependent on the status of the recipient of the payment.

For taxpayers resident in Qatar and permanent branches (whose activities are not associated with a fixed period, contract or project), the final payment should be made when the taxpayer or branch submits a valid tax card issued by the PRTD.

A tax assessment issued by the PRTD is not required. In the case of registered branches with a period of activity of one year or more on a fixed period, contract or project, retention should be made on whichever is the higher of the final payment or 3% of the value of the contract (after excluding the value of supplies and work performed outside Qatar).

The retained amounts can be released once the branch produces a no objection letter issued by the PRTD. Interim contract payments can be made in full if a tax card is presented. Payments to taxpayers that do not have a commercial registration, or that are registered for an activity or project of less than one year, will be subject to withholding tax. Payments to taxpayers who are registered in the QFC may be made once the taxpayer submits a certificate issued by the QFC confirming that the taxpayer is registered there.

Contract Notification Obligation

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

Anti-Avoidance & Transfer Pricing

The tax law gives power to the PRTD to counteract any tax advantage obtained by arrangements, operations or transactions, one of the main purposes of which is to avoid paying tax. In those cases where tax avoidance is present, the PRTD may apply the arm's length value to the particular transaction and adjust the amount of tax due by the taxpayer.

Executive regulations provide that the arm's length value should be determined in accordance with the “unrelated comparable price method”. They also provide that the taxpayer should submit an application to the PRTD if it wishes to apply any other pricing method approved by the OECD.

Other Taxes

Customs duties are applied to goods with an origin outside the GCC countries, normally at a rate of 5%. The introduction of value-added tax or a sales tax in the GCC remains under discussion.

Other TaxRegimes In Qatar

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QFC

The QFC was established in 2005 to attract international financial institutions and multinational corporations to the financial services sector. It has its own tax regulations and rules, and the Qatari tax laws do not apply to the licensed activities of entities established in the QFC. QFC entities are subject to corporate income tax in respect of activities undertaken pursuant to their QFC licence at the rate of 10%.

The procedures surrounding taxation in the QFC are discussed in further detail on the following page. Qatar Science & Technology Park (QSTP): The QSTP is a special zone for technology-based companies. QSTP entities must be physically located within the QSTP and are only able to engage in activities specified in their licence. However, they can apply for a full exemption from corporate income taxes and can import goods and services free of Customs duties.