Qatar’s Business Environment & Tax Regime
In 3Q2014, as reported by Qatar National Bank, Qatar’s non-hydrocarbon sector breached 50% of GDP, a result of a concerted effort to diversify the economy. One example is the focus that Qatar has become central to the world of sport, having hosted the FINA Swimming World Championship in 2014, the Men’s World Handball Championship in 2015, and confirmed hosts for the 2019 IAAF World Championship and 2022 FIFA World Cup. On the economic front, Qatar’s international reserves hit $42.2 billion (June 2014), and in July its trade surplus reached $9 billion. Qatar continues to invest in infrastructure, with planned spending in the region of $205 billion mainly on roads, stadiums, and rail projects. Despite the recent drop in oil prices, Qatar is still expected to continue with the majority of its projects as planned.
During the past few years, we have seen substantial changes to the business and taxation scene. In the State of Qatar, we have witnessed some reforms in the Ministry of Economy and Commerce, such as introduction of online payment system (Hukoomi), new public service centers, and reforms in the foreign investment law attracting more foreign investments. On the taxation front, the introduction of withholding taxes (WHT), reduction of the tax rates to 10%, and the migration to an advanced online Tax Administration System. In the Qatar Financial Centre (QFC), the QFC tax department has also issued the GCC’s first Transfer Pricing guidelines and overhauled its tax regulations.
ENCOURAGING A COMPETITIVE BUSINESS ENVIRONMENT
Economic development and diversification is an integral pillar of Qatar’s National Vision (QNV) 2030. The country’s leadership has the vision to develop the country’s economy by encouraging a competitive business environment, attracting additional foreign investments, and stimulating business growth, thus reducing its reliance on hydrocarbons and petroleum activities.
ATTRACTIVENESS TO INVESTORS
Qatar plans to stimulate a business environment that is capable of attracting more national and foreign investments. In August 2014, Law 9/2014 was issued, amending the foreign investment law to allow for an increase in the share of non-Qatari investors in publicly listed companies listed on Qatar Exchange to 49%. Prior to this amendment, listed companies had a ceiling on combined foreign ownership that was usually not more than 25%. In addition, the law allows GCC citizens to be considered in parity with Qatari citizens in the ownership of the companies listed on Qatar Exchange.
Various forms of business entities are available for investors, both national and foreign, to operate in Qatar. The most common legal form of business set-ups are the limited liability company, the Qatar shareholding company (public or private), and branches of foreign companies. With the introduction of the new electronic platform and collaboration with electronic payment system, the administration process has become more efficient and effective.
The business environment in Qatar encourages contractors of such mega-projects to establish temporary branches wholly owned by the foreign contractors. Such set ups are, however, restricted to work with government and quasi government projects and the duration of these branches is only for the life of the awarded project.
Law 13/2000 restricts the share of foreign ownership up to 49% of the capital of the businesses. However, in certain sectors, upon obtaining the required approvals, it is possible to increase foreign ownership up to 100% (see Note 1).
International professional services firms such as law firms, engineering consulting firms, architecture and design firms, consulting firms specializing in business consultancy and technical services, can also form 100% owned permanent branches after obtaining the required approvals.
In addition, foreign investors can invest in real estate. There are 18 designated “investment zones” where investment can be made through the acquisition of “rights of usufruct,” in effect purchasing the leasehold from the owner. There are three designated areas; these are The Pearl, West Bay Lagoon, and Al Khor Resorts Project, which allow foreigners to acquire the freehold of the property.
Qatar’s tax system plays an important role in the country’s attractiveness and appeal to foreign investors:
• The lowest tax rate in the region:
In the year 2010, with the introduction of the Income Tax Law number 21/2009 the State of Qatar reduced its tax rate to a flat 10% on net taxable income. This is so far the lowest tax rate in the region, after the UAE and Bahrain, which do not have a corporate tax regime. The rate of 10% is attractive when compared with other GCC countries, namely Saudi Arabia, which stands at 20%, Kuwait at 15%, and Oman at 12%. The tax rate of petroleum activities and certain government contracts still remains at 35%.
• Withholding tax regime (WHT):
The tax department has eased the tax obligation on non-residents who do not create a Permanent Establishment (PE) for their activities in Qatar. A WHT of 5% (for Royalties and Technical Fees) or 7% (for other services) applies on payments made to a non-resident for activities not connected with a PE. This WHT is the last and final tax obligation for non-residents with no PE in Qatar. The WHT rates in Qatar are very competitive, when compared to other countries in the region; namely Kuwait and Saudi Arabia with rates ranging from 5% to 15%. Oman, which has a domestic tax regime, does not apply a WHT.
Qatar Science and Technology Park (QSTP) is Qatar’s primary incubator for technology development, raising the environment required for the commercialization of research and supporting innovation. The Free Zone focuses on four themes as per the Qatar National Research Strategy announced in 2012: Energy; Environment; Health Sciences; and Information & Communication Technologies.
Businesses engaged in the field of R&D and other activities related to development of modern technology are encouraged to incorporate an entity in QSTP, which allows for 100% foreign ownership. Businesses registered in the QSTP are still required to file their corporate tax returns and administer WHT but are exempted from paying corporate tax.
There are around 24 companies registered in the QSTP which are engaged in research projects in collaboration with universities in Qatar.
QATAR FINANCIAL CENTRE
Qatar Financial Centre (QFC) is a leading financial and business hub that encourages foreign investors to own and operate 100% owned business entities. QFC caters to businesses working in the Financial Services Industry; these are regulated by the Qatar Financial Centre Regulatory Authority. The QFC also caters to certain non-regulated businesses.
QFC has its specific companies law, tax law, immigration law, and an independent judiciary system which monitors and regulates businesses operating in QFC.
RECENT REFORMS IN THE TAX REGIME
During the past year, aside from the development in the business environment, we have also seen evolutionary changes to the taxation scene in Qatar. The tax department has introduced an online electronic Tax Administration System (TAS) and also expanded the double taxation treaty network to around 54 treaties effective to date. Similarly, the QFC tax authority has issued a detailed tax manual providing guidance to tax payers on the reforms in the QFC tax regulations including GCC’s first Transfer Pricing (TP) guidelines. In addition, the QFC is also encouraging the establishment of Holding Companies.
TAX ADMINISTRATION SYSTEM
TAS is a modern information system that aims to bring in complete automation of the tax payment and management process within the State of Qatar. The new system introduces an electronic platform for taxpayers to register and file their tax returns with the Public Revenues and Taxes Department (PRTD) and track the progress of their filing.
TAS will help to keep pace with technology and support current tax administration processes, handle future tax policy changes, and facilitate the adoption of international best practices. TAS will also help in enhancing the documentation of the PRTD and cut down the process delays that were inherent with the previous paper- based filing system. With the introduction of TAS, it is more convenient for taxpayers as most of the procedures previously done on paper become automated (See Note 2).
In recent years, the global tax environment has seen a greater emphasis by tax authorities on challenging harmful tax practices by introducing a more substance-based scrutinizing of the holding structures of multinational groups. In the coming years, the OECD’s Base Erosion and Profit Shifting (BEPS) initiative is expected to fundamentally alter the guidelines of international taxation, while also introducing an ethical dimension to the process of tax planning.
BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. It is, therefore, expected to become more difficult for Qatari investors to use traditional holding platforms in foreign jurisdictions, especially within OECD or EU member countries, while also meeting the necessary substance requirements. The QFC will play a vital role in providing a tax efficient holding platform through which Qatari investors can hold their foreign investments, while also being able to present actual substance in the jurisdiction.
In order to meet an expected increased interest from local and regional players, the QFC has, during 2014, introduced new tax regulations and gone to great lengths to distinguish itself from other financial centers in the region.
One of the more innovative features of the new regulations is the possibility for certain companies to elect for a cash tax credit for tax losses made during the initial years of being established under the QFC. This “cash for losses” scheme is totally unique in the world of taxation and has generated great interest globally.
Qatar’s landscape is changing through an evolutionary transformation process under the QNV 2030 and so is Qatar’s business environment and tax system.
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