More responsive and efficient tax regime incentivising investment in Jordan

Over the past decade Jordan’s business environment has experienced significant and rapid changes in terms of its complexity and competitiveness in global markets. Increased demand for qualified labour, coupled with growing international competition for resources, have forced Jordanian businesses to remain flexible and become more resourceful. The government has worked diligently at implementing a raft of different measures to support local businesses and promote investment in the kingdom, while at the same time maintaining a balance with its need to generate the tax revenues that form a large percentage of its annual budget. With relatively well-developed basic infrastructure and business-friendly facilities, Jordan’s economy is an attractive investment proposition, which the government is working to strengthen through investment promotion laws that aim to maintain a certain amount of tax revenue while also providing the additional edge sought by investors and business owners alike.

Corporate Income Tax 

Jordan’s income tax regime is set out in Income Tax Law No. 34 of 2014, upon which new laws have been enacted and came into effect in 2015 and 2016. According to Article 3 of Income Tax Law, corporate income tax (CIT) is levied on corporate entities and foreign branches with respect to taxable profit in Jordan on all income earned in or derived from Jordan, irrespective of where the payment is made, and as well as on income generated from investing Jordanian capital outside of the kingdom. There is no definition of permanent establishment in the country; however, for CIT purposes, the legislature has made a clear distinction between a resident and a non-resident juridical person, whereby the latter is not liable for CIT in the kingdom. However, non-residents are liable for paying for 10% of this withholding tax.

Article 2 of the Income Tax Law indicates that if a firm is legally registered in Jordan, it is deemed a resident juridical person there and would as a result be required to comply with applicable tax laws and regulations.

CIT Rates 

CIT rates for resident corporations vary from 5% to 35%, depending on the type of activity performed by the business. The CIT rates for specific economic sectors are broken down as follows:

• 35% for banking;

• 24% for insurance, telecoms, stockbrokers, finance companies, currency exchange companies and leasing companies;

• 14% for the industrial sector;

• 5% for the IT sector; and

• 20% for all other sectors; The agriculture sector is tax exempt. The rate applied to the IT sector was reduced from 20% to 5%, effective January 1, 2016, given certain conditions are met.

Administration & Filing 

All business expenses incurred to generate income are eligible for deduction with certain limitations and exceptions. The tax year for corporations corresponds to their accounting financial year, while for individuals it is the calendar year. Tax returns must be filed by all taxpayers on a prescribed form, in Arabic within four months after the end of each tax year. The tax return requires disclosures relating to individual’s or corporation’s income, expenses, exemptions and tax payable, including details of goods and services supplied and payroll incurred for the year. The total amount of tax due must be paid at the time of filing to avoid penalties. Furthermore, the tax authority has the right to conduct an income tax audit for up to four previous years and to charge the company any additional taxes it finds to be owed that were not previously declared or paid. The tax regulations allow for payment of the year’s taxes on a set schedule, where payments made during the year are made on account.

Taxpayers whose gross income exceeds JD1m ($1.4m) are required to make an estimated tax payment by the end of the sixth month of the year. If the taxpayer’s half-yearly financial statements are ready, the estimated tax payment should be 40% of the half-yearly taxable income; however, if the taxpayer’s half-yearly financial statements are not ready, the tax payment is determined to be 40% of the preceding year’s CIT liability. The remaining income tax due must be settled within four months after the end of the fiscal year i.e. by April 30, assuming a December 31 year end. If the taxpayer has made a 2% advance income tax payment in respect of imported goods, they are allowed to reduce the required 40% payment on their account by the aforementioned 2% payment made during the first half of the taxpayer’s fiscal year.

Dividends 

Dividends income is exempt from tax, except for dividends received by banks and financial institutions from mutual investment funds. An amount equal to 25% of the exempt dividend income is added to taxable income as long as the total income does not exceed total allowable cost.

Interest 

Interest paid by banks to depositors, with the exception of interest on local interbank deposits, is subject to a 5% withholding tax (WHT). The WHT is considered to be a payment on account for Jordanian firms and a final tax for both non-resident and resident individuals and non-resident companies. Deposit interest generated in Jordan by non-operating banks and financial firms from banks and financial institutions operating in the kingdom are exempt from income tax.

Withholding Taxes 

WHT on interest can be summarised several ways, including:

• Any interest paid by residents to non-residents on loans is subject to WHT tax and general sales tax at rates of 10% and 16%, respectively;

• Any other type of interest paid from resident parties (other than banks) to non-residents is subject to WHT and general sales tax rates of 10% and 16%, respectively;

• Interest paid from registered banks in Jordan to non-resident banks and non-resident finance companies for deposits that are held in Jordan are not subject to WHT in the kingdom;

• Interest paid from registered banks in Jordan to non-residents (other than non-resident banks and non-resident finance companies), whereby such interest was earned by the non-residents for deposits that are held in Jordan is subject to a WHT rate of 5%;

• WHT on taxable income paid or accrued to non-resident parties increased from 7% to 10%, effective January 1, 2015;

• The WHT rate on services provided by certain resident parties remains 5%;

• WHT at a rate of 5% on rent paid by companies to individuals has been cancelled;

• The deducted WHT is remitted to the Income and Sales Tax Department (ISTD) within 30 days of the date of payment or invoice date, whichever is earlier;

• Income from interest on deposits is subject to a 5% WHT rate, and these WHT amounts are considered a final tax for non-resident, non-natural persons and individuals; excluded from the provisions of this subparagraph is interest on deposits incurred by foreign banks;

• Late payment is subject to late payment penalties at 0.4% at the beginning of each week or part of it;

• In case of failure to pay or remit tax on a specified dates an additional penalty of JD200 ($282) to JD500 ($705) will apply; and

• Winnings from prizes and lottery that exceed JD1000 ($1410) are subject to a 15% WHT, and any withheld amount shall be considered as a final tax.

Tax Treaties 

Jordan has double taxation treaties in force with the following countries: Algeria, Azerbaijan, Bahrain, Bulgaria, Croatia, Canada, the Czech Republic, Egypt, France, India, Indonesia, Iran, Iraq, Italy, Kuwait, Saudi Arabia, South Korea, Lebanon, Libya, Malaysia, Malta, Morocco, the Netherlands, Pakistan, Palestine, Poland, Qatar, Romania, Sudan, Syria, Tunisia, Turkey, the UAE, the UK, Ukraine, Uzbekistan and Yemen. In addition, the kingdom has entered into tax treaties that relate primarily to the transport sector with Austria, Belgium, Cyprus, Denmark, Italy, Pakistan, Spain and the US. Furthermore, the kingdom is currently negotiating tax treaties with Serbia and Montenegro.

Tax Depreciation 

The depreciation rates of tangible and intangible assets are addressed in the Income Tax Law. On July 7, 2015, Regulation No. 55 of 2015 was issued and included schedules for the minimum depreciation rates applicable for tax purposes. If the rates used for accounting purposes are greater than three times the tax rates as per the regulations, the excess will be disallowed, but may be used for tax purposes at a later date. The table to the left includes some of the minimum straight-line depreciation rates.

Companies are entitled to lower their depreciation rates as long as it does not reduce their losses carried forward and the income resulting from the change in depreciation is not subject to partial or full tax exemptions. The taxpayer is entitled to benefit from an accelerated depreciation method up to three times the straight line amount, as long as the taxpayer continues to use the accelerated depreciation until that asset is fully depreciated. Machinery and equipment and other fixed assets that are imported on a temporary-entry basis (equipment that the government allows foreign contractors to import on a temporary basis for the purpose of carrying out certain contractual work in Jordan) do not qualify for accelerated depreciation. Taxpayers are allowed to carry forward unabsorbed losses to offset against the profits of the five subsequent years.

Personal Income Tax 

Individuals, whether resident or non-resident in Jordan, are taxed based on income earned in the kingdom from all taxable activities, including income from employment, business (either as sole proprietors or as partners), rental income and directors’ fees. Jordan does not currently tax foreign-source income. The following tax rates apply for resident and non-resident employees:

• 7% on the first JD10,000 ($14,100);

• 14% on the second JD10,000 ($14,100); and

• 20% on any amount exceeding JD20,000 ($28,200). Income from employment includes salaries and other employer-paid benefits, such as rent and school fees. However, the following benefits do constitute taxable income to the employee:

• Occasional meals given to employees at work;

• Accommodation provided for employees for work purposes; and

• Uniforms and equipment necessary for work. The following are permitted as personal exemptions from individuals’ income before they become taxable:

• Personal exemption of JD12,000 ($16,900);

• Dependents exemption of JD12,000 ($16,900), irrespective of the number of dependents;

• Additional exemption of up to JD4000 ($5640) for medical expenses, education, rent, home loans, interest/murabaha, technical services, engineering services, and legal services; and

• Household exemption of up to JD28,000 ($39,500). A resident non-Jordanian employee is treated as a Jordanian employee with a personal exemption of JD12,000 ($16,900) and an additional JD12,000 ($16,900) if the employee’s dependents are also residents of the kingdom. A non-resident foreigner who has dependents residing in Jordan may still claim the JD12,000 ($16,900) exemption with respect to dependents.

Donation Tax Breaks 

Any amount that has been paid during the year as a donation to the government or the armed force, its public institutions or local authorities is deductible from the net income for the year. The following rules apply in this situation:

• Donation to any governmental department, public or institution or municipalities may be deducted at 100% (not to exceed the net income); and

• Donations paid to non-governmental entities that the Council of Ministers has pre-approved, such as religious, charitable and humanitarian organisations may be deducted up to 25% of taxable income after deducting donations paid to a government body.

Exempt Income 

The following items and/or services are currently exempt from income tax:

• Non-operating foreign companies’ (such as representative offices) income;

• All product exports from Jordanian firms (excluding mining exports) export agreements with the government and exports resulting from business protocols;

• A variety of service exports including, but not limited to, computer and IT export services, consulting services (financial, legal, auditing and engineering), and TV and cinema productions, among others;

• Dividend income and gains from trading in stocks earned inside the kingdom;

• Compensation paid by insurance companies, other than reimbursement payments for the loss of income from business activity or employment;

• Capital gains, other than revenues from assets subject to depreciation;

• First JD5000 ($7050) of end of service compensation related to post 1/1/2010;

• First JD3500 ($4940) of monthly pension salary paid to a resident person;

• Revenues generated by re-insurance companies operating in the kingdom;

• Income generated by non-Jordanian resident investors from non-Jordanian sources such as investing foreign capital in Jordan, and the repatriation of such investments outside of the kingdom;

• Income from agricultural activities; and

• Income of any religious, charitable, cultural, educational, sporting or health institutions, and the income of non-profit organisations.

Filing Requirements 

An employee’s monthly tax return form should be filed in Arabic with the ISTD, along with a submission of the employee’s withheld incomes taxes within 30 days following the end of the month in order to avoid late payment penalties of 0.4% of the amount, due at the beginning of each week. An annual employee listing for all taxable companies should be filed in Arabic. This should include employee’s names, salaries, benefits, income tax and welfare tax deduction and should be filed with the ISTD within one month after the end of the year.

Miscellaneous Taxes 

Jordan does not levy net worth tax, inheritance tax or gift tax. Other significant taxes levied by the government include a general sales tax, employer and employee s contributions, and WHT on imports and on payments to non-resident service providers (see table below).

Social Security 

Parliament and the Senate have issued an amendment to the Social Security Law that raised the monthly social security contribution from 18.75% to 21.75%, over four consecutive stages between 2014 and 2017, to then remain at its 2017 rate.

• The employees’ monthly contribution rose from 6.5% to 7.5%: the employees’ share of the increase of 1% in social security contribution was implemented in four consecutive stages with an increase of 0.25% at each stage, the first stage being effective since January 2014. The current employees’ monthly social security contribution is 7.5%; and

• The employer’s monthly contribution rose from 12.25% to 14.25%: the employer’s share of the increase of 2% in social security contribution was implemented in four consecutive stages with an increase of 0.5% at each stage, with the first stage being effective from January 2014. The employer’s monthly social security contribution is 13.75%. The table below outlines the implemented rates.

Sales Taxes 

Jordan’s general sales tax (GST) law is set out in Law No. 6 of 1994 (GST Law), which provides for two types of taxes: GST and special sales tax (SST). GST and SST are generally applicable to any entity or individual (i.e. taxable person) registered or required to be registered for sales tax. In Jordan GST and SST are imposed on the following transactions, unless specifically exempt under the GST Law:

• The supply of taxable goods or services made by a taxable person; and

• The import of taxable goods or services made by a taxable person.

GST Registration 

A taxable person is required to register for GST by the earlier of the following dates:

• One year following commencement of a new business that makes supplies if the taxable turnover during the 12 months following the commencement date appears likely to exceed the threshold;

• At the end of any month if taxable turnover during the preceding 12 consecutive months has reached the threshold; and

• At the end of any month if it appears that the person’s taxable turnover during the 12 consecutive months ending with the subsequent month may reach the threshold. The threshold referred to above for registration with the ISTD for GST purposes is as follows:

• JD10,000 ($14,100) for manufacturers producing goods subject to SST;

• JD50,000 ($70,500) for manufacturers producing goods not subject to SST;

• JD75,000 ($106,000) for suppliers of goods other than those subject to GST; and

• JD30,000 ($42,300) for service suppliers. Importers are mandated to register their company prior to the first planned import transaction. If a taxable person carries out more than one of the business activities mentioned above, the minimum limit is the applicable registration threshold. If a taxable person fails to register for GST purposes, a penalty of two to three times the output tax plus a criminal penalty equivalent to JD200 ($282) will be imposed if the registration is more than 60 days from the date on which a business should have been registered. However, if the date of registration is less than 60 days from the date on which the business should have been registered, a penalty of JD100-500 ($141-705) will be imposed.

GST & SST Rates 

GST is applied in Jordan to the supply and import of goods and services, as well as on interest payments on loans from non-residents at a flat rate of 16%. The GST category of 8%, which applied to internet plans, iron, the clothing industry and certain foods, no longer exists and was amended to 16%, effective February 12, 2017. For certain goods, such as tea, dairy products and live animals, the GST rate was reduced to 4%. GST on services provided in the IT sector has been reduced to 0%, which includes, but is not limited to, software development, programming, video games and sector-related online training, given that certain conditions are met. In addition to the standard GST rate, certain goods and services are subject to SST based on their weight, size or unit of packaging. The goods to which this tax applies comprises mainly alcoholic beverages, cigarettes and motor vehicles.

GST & SST Returns

A taxpayer should file a GST return every two months with the ISTD within 30 days following the two-month period. The GST tax return should reflect the amounts which have been paid on the taxpayer’s inputs and the GST received on its outputs every two months. SST returns are to be filed on a monthly basis within 30 days following the previous payment. If the GST and/or SST return is not submitted within the statutory time limit, a penalty of JD100-500 ($141-705) will be imposed. Furthermore, additional late payment penalties of 0.4% per week or any part of the week may apply.

GST & Imported Services 

Imported services are subject to a 16% GST, which is not recoverable. In addition, as explained above, these services will be subject to a 10% WHT rate. In other words, imported services are subject to a total tax rate of 26%. Importers of services shall pay the tax due in any of the following cases on the following timelines, or whichever date is earlier:

• Within one month of the date when the payment for the imported service or any part thereof is made, limited to the amount related to that part;

• When the means that includes the service is released from customs; and

• During a period of six months from the date when the service or any part thereof was received, limited to the amount related to the part. If the GST imported services return is not filed within one month of service delivery or payment date, whichever comes first, a late payment penalty will apply, which is equivalent to 0.4% of tax liable on each late week, up to 200% of the amount due three months after payment date has passed. A company may be able to reduce this tax by importing such service from the headquarters to its Jordanian branch, as head office charges are exempt from GST on imported services, and therefore attract only a 10% WHT on payments.

GST Recovery 

A taxable entity may recover input tax, which is the GST imposed on goods and services supplied to the taxable entity, purchased or imported by the entity for business purposes. Input tax is generally recovered by being deducted from output tax (the GST imposed on goods and services sold by the taxable entity). Non-resident businesses are not allowed to recover GST on goods and serviced purchased in Jordan.

Other Penalties

According to the GST Law, a person who commits a criminal tax fraud offence shall be liable to a civil compensation penalty paid to the ISTD of OBG would like to thank EY for its contribution to THE REPORT Jordan 2018 no less than twice and no more than three times the tax due, as well as a criminal penalty of JD200-1000 ($ 141-1410). In the case of a recurring offence, the criminal penalty shall be doubled. If the offence recurs within one year thereafter, the court may impose criminal fines at their highest limit, which is equivalent to 200%, or a term of imprisonment for no less than three months and not exceeding six months, or both.

Investment Incentives 

Jordan has set up a number of development zones in order to encourage development in export-oriented industries. The Aqaba Special Economic Zone was the first such development zone in Jordan. Other zones are located at Zarqa, the Sahab Industrial Estate and Irbid. Several incentives are provided to encourage investment, with the exception of Aqaba, and they are as follows:

• Companies registered in development areas are subject to reduced income tax rates, as low as 5%;

• Companies registered in free zones are exempt from income tax;

• Non-Jordanians employed in free zones and development zones are exempt from tax; and

• Companies registered with the Jordan Investment Commission are exempt from sales tax on their purchases and sale of goods to other registered firms. Article 5 of the Investment Law No. 30 of 2014 provides for the reduction of tax between 40% and 100% of the current tax rate for companies operating in underdeveloped areas in the kingdom, excluding Amman, Irbid and Zarqa, resulting in an effective income tax rate between 5% and 12%. This amendment is effective January 1, 2016 and includes companies involved in:

• Tourism activities and services;

• Handicraft activities; and

• Industrial activities, which includes cement and fertiliser-related activities, though excluding mining.