Getting started: An introduction to general issues for foreign investors in Qatar

Many businesses coming to Qatar assume that a key issue they will face is taxation. Therefore, they are initially focused on structuring to ensure tax-efficient profit repatriation and to avoid the usual range of tax issues such as thin capitalisation. The standard approach to operating in Qatar by registering a branch or forming a local limited liability company (LLC) is assumed to be a fairly simple procedure which will follow the logically tax-driven conclusions and is not overly time-consuming or expensive. However, registering a branch is by no means a formality and requires ministerial approval. Indeed, registering an LLC with 100% ownership is only allowed in exceptional circumstances. Persuading foreign businesses to accept that they are limited to 49% legal ownership can be a difficult task. At the same time, it is equally important to explain that profit distribution does not need to follow the legal ownership. After all, numerous foreign businesses own only 49% of the shares on issue but obtain over 90% of the profits, leading to confusion on the part of businesses. Add to this the mechanisms by which the shareholder with 49% can control the entity by appointing the general manager, plus some carefully drafted provisions in the articles/shareholder agreements, and no doubt some may become anxious as a result.

Structure

Consequently we often make sure to stress that the initial focus should be on which legal structure is permitted, and then how it can be made to work commercially before delving into the tax structuring. Not that the tax system does not have its own share of complexity, but in the scheme of things it becomes secondary to the legal structure rather than being the main issue driving that structure. Once the legal and commercial structure has been established the focus can then turn to the normal tax structuring aspects such as debt-equity ratio, shareholder loans, intellectual property licensing, management fees, head office expense allocations and transfer pricing arrangements. Fortunately the headline tax rate for most businesses in Qatar (at 10%) is palatable and therefore the focus is more on ensuring that the fair amount of tax is paid. There is a general anti-avoidance provision, which should not be ignored by businesses. It is too early yet to say how widely it will be used and even how it will be used in practice but clearly the executive regulations point to the need to observe arm’s length principles for related party transactions. Although not entirely clear, it seems likely that they will be used where a foreign shareholder has legal ownership of only 49% shares but extracts over 50% of the profits by way of dividends.

Penalties

Another area for businesses to watch is penalties. A focus on compliance is necessary. Late filing penalties can mount up. For withholding tax it equates to 100% of the withholding tax itself. For corporate income tax there is a penalty of QR100 ($27) per day for filing a late return, but this figure is capped at QR36,000 ($9860) per annum. The real problem is late payment of tax where the penalty is 1.5% per month (or part of a month). This in turn is capped at 100% of the tax. These penalties can start to mount very quickly, especially when the issues are identified way down the path and the liabilities are for more than one year. These compliance requirements, and the associated penalties, can also apply to Qatari-owned businesses, despite no income tax being levied on companies that are wholly owned by Qatari or other GCC nationals, and the exemption from taxation on the share of profits attributable to Qatari or GCC individuals resident in the state.

Summary

Our advice to businesses investing in Qatar is as follows: first, get your legal and commercial structure sorted out as early as possible. You can then ensure that you understand and plan for the tax implications of that structure. Second, ensure that you know your compliance obligations and all appropriate processes and procedures are put in place so that any resulting taxes, whether corporate income tax or withholding tax, can be met in a timely fashion.