Boasting the third largest natural gas reserves, Qatar is one of the richest countries in the world with one of the highest GDP per capita (2019: USD 70,288). Despite all efforts to diversify the economy, oil and gas currently still account for 50% of GDP. The country is pursuing a strategy (Qatar National Vision 2030) that consists of four pillars (human, social, economic and environmental development) and is designed to promote economic diversification. To achieve the 2030 strategy's goals, the existing tax system, which is characterized by very low tax rates, is also to be reformed.
Qatar's tax system
Anyone who generates income from Qatari resources and is not explicitly exempt from tax is required to pay tax in Qatar.
1. Personal income tax and social security
Salaries of employees are tax exempt. Income from commercial activities or self-employment in Qatar is taxed if Qatari sources of income are used.
Employers are only required to pay social security contributions for Qatari employees. They are not obliged to pay social security contributions for employees of other nationalities.
2. Business taxes
Qatar currently has two different tax systems, administered by the General Tax Authority (GTA) and the Qatar Financial Centre (QFC). In addition, the Qatar Science and Technology Park (QSTP) and the Qatar Free Zone Authority regulate the rules for free trade zones.
The most common legal forms for foreign investors are the state limited liability company (LLC), which in principle must be 51% Qatari owned; project- or contract-specific branches (temporary branch) or permanent branches, which are only available for specific industries. Companies in the QFC, QSTP and the Free Zones can be founded by companies operating in specific industries.
2.1 Qatar's General Tax Authority (GTA)
The General Tax Authority, GTA, was established in 2019 to enable better management of taxes, VAT and excise duties based on international and regional standards. The GTA is an autonomous authority that is responsible for the administration, collection and enforcement of all taxes in the state.
The GTA is also responsible for the formulation and implementation of the national tax strategy, policy and legislation.
The state tax system, together with the ordinary tax law, forms the general framework for the majority of companies operating in Qatar. In addition to companies registered in the commercial register (LLC and branches), tax liability can also be substantiated by any other form of permanent presence of a company in Qatar (tax establishment).
Qatar tax law defines a permanent establishment as a permanent presence of a company in Qatar through which business is conducted either entirely or in part. This can be a branch, office, factory or workshop, mines or oil/gas production companies, or a simple permanent presence of employees. Individuals acting on behalf or in the interest of the taxpayer may also be considered as permanent establishments. In order to determine whether a taxable permanent establishment is established, the applicable double taxation treaties are of major importance. Qatar has concluded double taxation treaties with more than 60 countries, including France, Great Britain, Italy, Iran, Austria, Switzerland, Turkey and Russia.
Apart from the permanent establishments of foreign companies purely for tax purposes, any company must have a legal presence in Qatar and be registered in the commercial register in order to file a tax return via the Electronic Tax Administration System (TAS). All companies also need a tax card.
2.1.1 Corporate Income Tax
Corporate income tax is governed by income tax law. The implementation guidelines contain detailed instructions for the implementation of the tax system. Corporate income tax is a business tax levied primarily when a company is wholly or partly foreign-owned and generates income from Qatari sources.
Only profits that are proportionately attributable to non-Qatari shareholders are subject to tax. The tax is based on the effective regulation of profit distribution, which may differ from the distribution of shares in accordance with ownership law. A company 51% of whose shares are held by Qatari shareholders, but for which it has been agreed that 97% of profits will be distributed to non-Qatari shareholders, correspondingly pays tax on 97% of its profits.
The applicable tax rate is a flat rate of 10%. Other, significantly higher tax rates may apply for profits from the oil and gas sector.
The tax assessment is based on annual financial statements prepared in accordance with IFRS standards, which have to be adjusted for tax purposes (for example, provisions are not accepted for tax purposes with a few exceptions, and depreciation is subject to tax restrictions).
Tax losses (loss carryforward) can be carried forward up to five years (previously three years) after they have been incurred, but losses cannot be carried back.
Companies held directly (or indirectly via no more than one other company) by Qatari nationals or GCC nationals resident in Qatar for tax purposes do not pay corporate income tax.
QSTP companies and Free Zone companies can apply for full exemption from corporate income tax but are required to file tax returns with the GTA.
2.1.2 Withholding tax
Qatar-based companies, branches and permanent establishments must withhold and pay the GTA a 5% withholding tax on services purchased from foreign service providers. This also applies to companies established in the QSTP and Free Zones.
Since the end of 2019, withholding tax is also due on the purchase of services that are fully consumed outside Qatar (e.g. commissions, interest (unless paid to banks), royalties, electronic services, consulting services, management services, etc.).
Withholding tax can be reclaimed by the service provider under certain circumstances (in accordance with applicable double taxation treaties) or credited against the tax in his country of residence in accordance with local law.
The so-called retention must not be confused with withholding tax. Retention obliges domestic companies to withhold up to 3% of the contract value when making payments to certain contract partners (temporary branches) until it is proven that the contract partner has fulfilled its tax obligations in Qatar and can present a NOC).
2.1.3 Transfer Pricing
The arm's length principle for transactions between associated companies has been anchored in Qatar's state tax law for some time. Qatar, however, now approved the introduction of a comprehensive transfer pricing reporting system in December 2019. It is expected that the details will be published shortly (presumably still in 2020).
2.1.4 Tax Assessment and Fines
Although the situation has improved massively since the GTA was founded, communication with the tax authorities can be a challenge at times. In particular, correcting errors is difficult and usually involves fines, which can quickly amount to 100% of the taxes owed.
A correct declaration and payment of taxes is therefore extremely important.
2.2 Qatar Financial Centre (QFC)
The Qatar Financial Centre is an independent institution with its own tax law and tax system. The QFC regime applies mainly to financial companies. Profits earned locally by QFC companies are subject to 10% corporate income tax. Certain companies that are at least 90% Qatari owned are exempt from tax (including Qatari family offices, reinsurers and captive insurance companies).
The QFC's preliminary ruling services are obliged to review tax returns within 12 months of filing, thus providing a high level of security to QFC-licensed companies. Tax losses can be carried forward indefinitely, in contrast to the state tax authority (maximum five years). The QFC publishes detailed tax instructions online in an electronic tax manual.
The QFC does not levy withholding tax.
3. Custom and Excise Duties
Customs duties generally apply when products are imported from outside the GCC region. These products are normally taxed at a rate of 5%. Higher duties apply for specific products (e.g. musical instruments 15% and tobacco products 100%).
In addition to the duties mentioned above, an excise duty has been levied on the import of specific products from outside the GCC region as of January 1, 2019. Energy drinks, alcohol, tobacco tobacco products and pork are taxed at 100%. An excise duty of 50% is levied on carbonated sweetened drinks. The introduction of an excise tax on all other sweetened drinks is currently under consideration
4. Current Reform Proposals and Changes
4.1 Daribi Tax Administration System
Dhareeba is a new administrative tax administration system that is to replace the current online TAS system this year. The fully automated system allows taxpayers and their legal representatives to carry out and manage all tax transactions via an online platform. All taxpayers must register in the new electronic tax administration system and will receive a new tax identification number.
4.2 Introduction of Transfer Pricing, Value Added Tax (VAT)
Unlike the GCC states Bahrain, Saudi Arabia and the United Arab Emirates, Qatar currently does not levy VAT, although all GCC states have committed to introducing VAT systems by 2019.
Reputedly, Qatar intends to introduce a VAT rate of 5% as of January 1, 2021. However, this could be postponed again due to the effects of the Covid 19 pandemic.
Conclusion: moder and transparent
The recent tax reforms described above aim to simplify Qatar's tax system and bring it in line with international standards. By establishing a general tax administration, introducing a new online tax administration system, VAT and transfer pricing, Qatar is also taking another important step towards diversifying the Qatari economy by modernizing the fiscal framework and increasing transparency.
In recent years, Qatar's government has made massive efforts to promote the country as a business location and intends to bring more foreign companies to Qatar. To this end, the government is granting various tax advantages not only to domestic companies, but increasingly also to foreign companies.