Economic Substance Requirements
On 17 October 2021, the Ministry of Finance in the State of Qatar issued Decision No. 20 of 2021 (concerning economic substance regulations in Qatar, “the Regulations/ESR”), requiring “qualifying entities” that carry on specified activities to demonstrate economic substance in Qatar from 4 November 2021 if they want to benefit from a preferential tax regime.
- Depending on the date of incorporation, qualifying entities would be required to comply on an immediate basis.
- Sanctions for non-compliance and filing requirements will be determined in due course.
- All entities in Qatar should perform an analysis to assess whether they fall into ESR scope and take immediate steps for compliance.
All Qatari entities will need to assess whether and which of their activities fall within the scope of the ESR, and how to ensure they meet the ESR requirements in respect of each Relevant Activity. This is both a qualitative and quantitative assessment that would involve consideration of operational, financial, tax / transfer pricing, legal and governance matters.
New Income Tax Law
Qatar has introduced a new Income Tax Law, which was signed on 13 December 2018 and published on 17 January 2019 ('New Tax Law'). The fundamental principles underlying the New Tax Law are the same as under the old law; however, there are changes that could have a significant impact on companies operating in Qatar.
The New Tax Law also introduces some rules aimed at providing administrative simplification. One of those rules relates to the tax assessment procedure. Under the previous law, income tax was assessed on the basis of the taxable income as determined in the tax return, provided such return was accepted by the GTA. Under the New Tax Law, however, the income tax return is deemed a tax assessment on the same day of its submission (self-assessment).
The new Executive Regulations ('Regulations') to the New Tax Law were published on 11 December 2019. The New Tax Law along with the Regulations have caused some significant changes in the tax landscape, especially to the taxation of non-residents carrying out business in the State of Qatar ('the State'). Some of these key changes are summarised below:
- Fully owned subsidiaries of listed entities are now taxable to the extent of non-exempt ownership (i.e. foreign or non-exempt Qatari / GCC ownership). Previously, there was a perception amongst taxpayers that such subsidiaries were tax exempt.
- New detailed transfer pricing requirements have also been introduced (see below).
Taxpayers are required to notify the GTA of contracts that they enter into with residents and non-resident (subject to certain monetary thresholds) within 30 days of signing such contract. The New Tax Law and Regulations have introduced a penalty of 10,000 Qatari riyal (QAR) per contract that is not reported as per statutory requirements. With the introduction of Dhareeba, contract notifications are also required to be submitted in Dhareeba.
Withholding tax (WHT)
The application of WHT on 'service' payments has been extended with the introduction of a 'benefits test' or 'consumption test' (i.e. services shall be considered as having been performed in the State as long as they are used, consumed, or benefited in the State, even if they are carried out in whole or part outside the State).
New provisions have also been introduced whereby certain unpaid amounts are 'deemed' as having been paid if they remain unpaid for a certain specified period. This is contrary to the previous practice where WHT was only due upon actual settlement.
Based on the above, it is anticipated that a much larger numbers of contracts, agreements, arrangements, and transactions (including deemed arrangements), whether with third parties or related parties, could now come within the scope of WHT provisions, and taxpayers should review existing and new arrangements.
In case a relief from WHT is available under a double tax treaty (DTT), Qatar has a pay and reclaim mechanism (i.e. the payer is required to withhold and pay to the GTA). The payee will have to file a refund application to the GTA in order to avail the relief provided under the DTT.
Transfer pricing requirements
Historically, transactions between related parties were expected to be undertaken on an arm’s-length basis and in accordance with the comparable uncontrolled price (CUP) method or any other Organisation for Economic Co-operation and Development (OECD) acceptable pricing method. However, there was no specific requirement for filing transfer pricing documentation with the GTA. The Regulations outline certain specific transfer pricing requirements:
- The CUP methodology is stipulated as the primary methodology. In case the CUP method is not applicable, the taxpayer should lodge a request to the GTA for the application of a different transfer pricing methodology.
- A new requirement for performing a 'functional analysis' describing a taxpayer’s position and economic role with related entities, identifying the functions performed, risks assumed, and the tangible and intangible assets owned and used.
- A new requirement to update the analysis supporting the arm’s-length character of the inter-company transactions every three years.
- A new requirement of a transfer pricing declaration as part of the annual income tax return, of which the form and content should be specified by the GTA.
- Tax deductibility of interest on loans paid to related parties shall be dependent on such loans being economically beneficial to taxpayers. On this basis, a 'commercial purpose' test has been introduced. The loan amount and interest charge should also not exceed three times the equity of the Qatar tax paying entity and should be documented in an inter-company agreement between the parties.
- A new requirement to prepare transfer pricing documentation (Local File and Master File) by the time of filing the tax return for the period during which the respective related party transaction(s) occurred or at any other date that the GTA may specify otherwise if the following conditions are met:
- The threshold (to be established by the GTA) on revenues or assets of the taxpayer is met.
- One of the related parties of the Qatari taxpayer is established outside of Qatar.
On 2 February 2021, the GTA verbally confirmed that a Transfer Pricing Form will be required for taxpayers with either total value of assets or total revenues in excess of QAR 10 million for the financial years beginning 1 January 2020 onwards. The Transfer Pricing Form should be submitted alongside a taxpayer’s income tax returns on the Qatar Online Tax Portal. The Transfer Pricing Form will require information on the details and nature of the taxpayer’s intra-group transactions, including the OECD method applied by the taxpayer to determine that the transactions were conducted on an arm’s-length basis. In addition to the above information, the Transfer Pricing Form will also require taxpayers to provide additional transfer pricing related information.
Permanent establishment (PE)
The Regulations have broadened the scope of PE as follows:
- The definition of a dependent agent for PE purposes has been broadened to include (i) habitual conclusion of contracts and (ii) keeping of goods and merchandise on a routine basis and dealing with it for the benefit of a non-resident.
- Force of attraction rule has now been introduced, which can result in the taxation of any income from activities in Qatar that are not connected to a PE.
- Introduction of an anti-fragmentation rule.
- A provision that states that a complete business cycle or operation can result in a PE in Qatar.
Updates to Qatar Financial Centre (QFC) Tax Regulations
Exemption for security and defence contracts
The QFC has recently released a concessionary statement in which it was highlighted that, in parity with the State regime, tax exemption will be provided to contracts that are in relation to security and defence of the State of Qatar, subject to the fulfilment of certain conditions.
Exemption for listed entities
The QFC has updated its Tax Regulations in order to provide an option to listed entities whereby they can opt for an exempt status, subject to the fulfilment of certain conditions.
Qatar Free Zones
In 2018, the Qatar Free Zone Authority (QFZA) was set up as an independent entity to develop Free Zones in Qatar. It currently oversees two free zones: an Airport Free Zone (Ras Bufontas) and a Port Free Zone (Um Al Houl). The Airport Free Zone focuses on light manufacturing, international business services, the aviation sector, emerging technologies, and logistics hubs. The Port Free Zone focuses on maritime industries, heavy manufacturing, industrial sectors, emerging technologies, and logistics hubs.
Benefits of setting up in one of the Free Zones include 100% foreign ownership and a corporate income tax exemption up to 20 years.
Potential implementation of a value-added tax (VAT)
The GCC countries have signed a VAT common framework, which forms the legal basis for the introduction of a VAT system in each of the GCC member states (Kingdom of Bahrain, State of Kuwait, Sultanate of Oman, State of Qatar, Kingdom of Saudi Arabia, and the United Arab Emirates).
Saudi Arabia and the United Arab Emirates have implemented VAT as of January 2018. Bahrain has implemented VAT as of January 2019. Oman has committed to implement VAT in April 2021. The other GCC member states are also expected to issue their own VAT legislation. The Cabinet of Qatar had previously approved a draft law on VAT and its Executive Regulations as put forth by the Qatar Ministry of Finance. The laws and respective executive regulations have not been published yet. While the GTA has not made any communication in this regard, given the recent resolution of the blockade on Qatar, there is an increase in the expectation in the market that the introduction of VAT in Qatar may occur in the near future.
Introduction of excise tax
The Excise Tax Law has been in effect from 1 January 2019 and sets out various rules and obligations for taxpayers. Excise tax is applicable on the following goods ('excise goods') at their respective tax rates:
- Tobacco products: 100%.
- Carbonated drinks (non-flavoured aerated water excluded): 50%.
- Energy drinks: 100%.
- Special purpose goods: 100%.
Special purpose goods are understood to include alcohol and pork items, and excise tax is currently applied on them. Persons engaged in the import and production of excise goods, as well as the operation of a tax warehouse, will be required to register for excise tax purposes.
Multilateral Convention to implement tax treaty related measures
On 4 December 2018, the State of Qatar signed the Multilateral Convention (MLI) to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) backed by the OECD. Qatar joined some of its key tax treaty partners to become the 85th jurisdiction to adopt the Convention and become fully compliant with OECD’s BEPS initiative.
Qatar has made the following key notifications / reservations through its adoption of the MLI:
- Include additional wording in the preamble of DTTs stating the DTTs should not be used for treaty abuse (BEPS Action 6 minimum standard). Qatar’s implementation of this action is fully compliant with BEPS Action 6 (Prevention of Treaty Abuse) minimum standard.
- Include a Principal Purpose Test (PPT) without the ability to refer to a competent authority for final assessment of the availability of treaty benefits (BEPS Action 6 minimum standard). Once effective, the PPT clause in Qatar’s treaties could potentially disallow treaty benefits to inbound and outbound companies alike.
- Retain the existing PE definition in DTTs and no election to adopt the expanded PE definition.
- Election to include Mutual Agreement Procedure (MAP) in all of its DTTs to efficiently address dispute resolution in application of its DTTs.
Qatar opted to agree to specific changes to its initial MLI notifications / reservations, if any, through bilateral negotiation with its treaty partners. Qatar deposited its instrument of ratification in December 2019. The ratification of the MLI could potentially subject Qatari companies and foreign multinationals to an additional layer of complexity in managing their tax affairs, and all existing and future engagements should be carefully reviewed.