By the book: A look at key sections of Law No. 21, as well as the executive regulations released in support of the law

On November 17, 2009 the government of the state of Qatar issued a new tax code in the form of Law No. 21 of 2009. The new law, which came into effect on January 1, 2010, officially replaces Law No 11 of 1993, the country’s previous tax code. The new law was formulated after careful perusal of Qatar’s Constitution, Law No 11 of 1993 (the previous tax law), proposals from the Ministry of Economy and Finance, the draft law submitted by the Council of Ministers and input from the state’s Consultative Council.

APPLICATION OF THE LAW: The articles of the new law do not apply to:

• Private foundations and associations and private foundations of public interest, so long as these organ isations were formed in accordance with the laws which are governing each of them;

• Other private organisations registered in Qatar and authorised to operate in Qatar, so long as they do not aim to achieve profits;

• Wages, salaries, allowances and similar income; and

• Legacies and inheritances.

Any exemptions that were in force when the new law came into effect will remain valid until previously agreed upon conditions for expiry are met.

TAXED INCOME: Law No. 21 imposes an annual tax on taxable corporate income derived from sources that are located in Qatar. This includes:

• Gross income from an activity performed in Qatar;

• Gross income from contracts wholly or partly performed in Qatar;

• Gross income from real estate located in Qatar, including the sale of shares of corporations or partnerships that hold assets consisting mainly of local real estate;

• Gross income from shares in companies located in Qatar or listed on Qatar-based stock exchanges;

• Consideration for services paid to head offices, branches or related companies;

• Interest on loans issued in Qatar;

• Gross income from any exploration, extraction or exploitation of natural resources located in Qatar; and

• Gross income subject to tax in Qatar under a double-taxation agreement. Additionally, tax will be imposed on:

• Bank interest and returns realised outside Qatar, so long as said interest and returns are derived from capital deriving from the activity of the taxpayer in Qatar;

• Commissions due under brokerage, agency or commercial representation contracts that are accumulated outside Qatar but that derive from activity carried out within Qatar.

TAX EXEMPTIONS: In addition to tax exemptions provided for under international laws or special agreements, and exemptions provided for by the Tax Exemption Committee (as defined under Articles 51-56 of Law No. 21), the following income is exempt from tax:

• Bank interest and returns payable to natural persons other than those involved in a taxable activity in Qatar, regardless of whether or not the individual is in Qatar;

• Interest and income from Treasury bonds, development bonds and public corporation bonds;

• Capital gains on the disposal of real estate and securities by natural persons so long as neither the real estate nor the securities constitute the assets of a taxable activity;

• Dividends and other income from shares if the amounts withdrawn were taken from assets that were:

• Subject to taxation; or

• Distributed by a corporation the income of which is exempt from taxation under Law No. 21 or other laws;

• Gross income from handicraft activities that do not use machines, provided that:

• Said gross income does not in any way exceed QR100,000 ($27,460) per annum;

• The average number of employees does not exceed three during the taxable year; and

• The activities are performed in only one establishment, in accordance with the limits and conditions described in the executive regulations of Law No. 21;

• Gross income from agricultural or fishing activities;

• Gross income from foreign air and sea transport firms operating in Qatar, so long as reciprocity measures are in place;

• Gross income of Qatari nationals resident in Qatar, including their shares in corporations; and

• Gross income of corporations resident in Qatar and wholly owned by Qatari nationals.

ACCOUNTING PERIOD: A taxpayer in Qatar is taxed on taxable income earned during the accounting period of one taxable year. With the prior approval of the Public Revenues and Taxes Department, a taxpayer may adopt an accounting period that differs from the taxable year in accordance with the limits and conditions described in the executive regulations of Law No. 21. Regardless, the accounting period will be 12 months, subject to the following:

• If the taxpayer begins the taxable activity after the beginning of the taxable year, the accounting period will start from the date of the beginning of the activity. The initial accounting period may not be less than six months or more than 18 months. In all cases, tax will be calculated on the taxable income of the actual accounting period;

• If the activity is liquidated, the accounting period will run from the end of the previous accounting period until the end of liquidation;

• If the activity is ceased, assigned or sold, the accounting period will run from the end of the previous period until the date of cessation, assignment or sale;

• If the taxpayer performs a temporary activity that does not exceed 18 months, the accounting period will be the period of activity.

ACCOUNTING STANDARDS: The taxpayer will determine taxable income on the basis of the accruals accounting method used in commercial accounting and in accordance with the rules set forth under international accounting standards.

The taxpayer may not use any other accounting method, except after getting approval and authorisation from the Public Revenues and Taxes Department.

DEDUCTIONS & LOSSES: Taxable income will be determined by subtracting allowable deductions and losses from gross income. Allowable deductions include:

• The costs of raw materials, consumables and services required to carry out the activity;

• Interest on loans used to fund the activity;

• Salaries, wages, end-of-services benefits and similar payments, including contributions toward setting up retirement pensions, end-of-service payments and employee investment fund contributions;

• Rents;

• Insurance premiums;

• Bad debts;

• Depreciation of fixed assets;

• Provisions set up by banks for doubtful debts and by insurance companies for risks covered up to 10% of the net income before this deduction and the deduction described in the following point;

• Donations, gifts, aid and subscriptions to charitable, humanitarian, scientific, cultural or sporting activities paid in Qatar to governmental authorities, public organisations or institutions or any other authorised entity in Qatar, so long as their value does not exceed 5% of the net income before this deduction and the deduction which has been described in the previous point; and finally

• Taxes and duties other than income tax. The following items may not be deducted:

• Expenses and costs incurred in the process of deriving exempt income;

• Payments made that are in breach of the law;

• Fines and penalties relating to breaching the law;

• Compensation for expenditures and losses if said compensation has not been included in the taxpayer’s reported income;

• Expenditures on entertainment, hotel or other accommodation, restaurant meals, vacations, club fees and gifts to customers;

• Salaries, wages and other compensation paid to the owner, his family, members of a general or limited partnership or the director of a limited liability company that owns the majority of the shares of a company located in Qatar;

• The share of the branch in the head office’s expenses that exceeds the percentage under regulations. A taxpayer may deduct losses incurred during a taxable year from the net income of subsequent years, subject to the following:

• Losses may not be carried forward for more than three years from the end of the taxable year during which they are incurred; and

• Losses resulting from an exempt or non-taxable source of income may not be deducted.

THE TAX RATE: The tax rate will be 10% of the taxable income earned by the taxpayer during the taxable year, with the following exceptions:

• The tax rates agreed to in contracts to which the government, the ministries or other governmental entities or public organisations or enterprises are party will be concluded before Law No. 21 will apply. If said contracts do not specify a tax rate, it is 35%;

• The tax rate and all other tax conditions described in agreements relating to oil operations or the exploitation of natural resources will apply so long as the tax rate is not less than 35%. Payments made to non-residents with respect to taxable activities not connected with permanent establishment in Qatar will be subject to a final withholding tax, under the following:

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

• 7% of the gross amount of interest, commissions, brokerage fees, director’s fees, attendance fees and any other payments for services carried out in Qatar.

TAX CARD: Every taxpayer in Qatar will register with the Public Revenues and Taxes Department within 30 days of obtaining the approval of the relevant authority to begin activity or the first day of realisation of the income, whichever is earlier. Every taxpayer in Qatar will notify the Public Revenues and Taxes Department of any change that will affect the taxpayer’s tax obligations within 30 days. Additionally, every taxpayer will submit an application to the Public Revenues and Taxes Department for a tax card within 30 days.

PREVENTION OF TAX AVOIDANCE: If the taxpayer arranges any operations or transactions with the primary purpose of avoiding the payment of taxes, the Public Revenues and Taxes Department may:

• Apply the arm’s length value to a deed or an economic event subjected to a different value by taxpayers;

• Re-characterise the deed where the form of such a deed does not reflect its substance;

• Adjust the amount of tax levied on the taxpayer or any other person involved in the operations or transactions that were arranged with the primary purpose of avoiding the payment of taxes.

EXECUTIVE REGULATIONS: In the executive regulations for Law No. 21, published in June 2011, the Public Revenues and Taxes Department sought to clarify the government’s position on certain features of the new tax code. There were a number of clarifications: In regard to the minimum tax rate of 35% levied on oil companies under Law No. 21, the executive regulations further define petroleum activities as exploration and production, including drilling, processing, transporting, storing, filtering, loading and shipping of petroleum and petroleum products. Additionally, the tax applies to all construction, operation, administrative and other activities deemed necessary.

In regard to items that may not be deducted, the executive regulations state that any expenditures given on entertainment, hotel or other accommodations, restaurant meals, vacations, club fees and gifts for customers by banks, insurance and re-insurance companies may not exceed 2% of net income before deductions are allowed, up to QR200,000 ($54,920) on an annual basis.

In regard to items that may not be deducted, a head office or a company headquarters may deduct no more than 3% of the gross income of a branch. In regard to the definition of “interest” as it relates to the new withholding tax, the withholding tax is levied on all interest paid (at a rate of 7%), with exceptions:

• Interest on deposits in banks in Qatar;

• Interest on bonds and securities issued by the government and other public authorities, establishments and corporations;

• Interest on loans, transactions and facilities with financial institutions; and

• Interest paid by a permanent establishment in Qatar to a head office or other similar entity outside Qatar. In regard to the issuance of tax card, the executive regulations state that while taxpayers resident in Qatar and non-residents with a permanent establishment in Qatar shall fulfil the obligation of registration and application for tax card, non-residents who do not control a permanent establishment need not apply for tax card.

OBG would like to thank The Advisors RSM for their contribution to THE REPORT Qatar 2012.