Highlights on Key Amendments to Income Tax Law
March 29, 2023
By: Mohamed Fouad, Managing Associate
Ribal Fattal, Senior Associate
Within the framework of its continuous efforts to develop its legislative revival of the tax system and to combat tax evasion crimes, the State of Qatar has issued Law No. 11 of 2022 (“Amending Law”) amending certain provisions of the Income Tax Law No. 24 of 2018 (“Income Tax Law”). The Amending Law has been published in the second issue of the Official Gazette dated 2 February 2023. In this article, we will consider the prominent amendments to the Income Tax Law introduced by the Amending Law.
- Amending the Scope of Application of the Income Tax Law
Under the Amending Law, private associations and institutions, private charitable associations and institutions, and private institutions of public interest are now subjected to the provisions of the Income Tax Law.
Under the Income Tax Law, capital gains resulting from the sale of an estate or a share in it, or any right it contained (“inherited property”), were exempt from tax. However, the law did not directly address whether a future sale of the inherited property would be subject to tax. The Amending Law now addresses this circumstance directly, providing that the sale of inherited property will not be subject to tax.
The Amending Law also expands the scope of application of the Income Tax Law by amending and adding to the definitions contained in the first article of the law. Definitions have been added for the terms ‘Person’, ‘Entity’, ‘Non-profit Organization’, ‘Project’, ‘Qatari Project’, ‘Foreign Project’ and ‘Businesses’. The added defined terms now have expanded the applicability of the Income Tax Law. For example, the definition of an ‘Entity’ includes every legal person or legal arrangement that prepares separate financial statements. Likewise, the definition of a ‘Qatari Project’ includes carrying out any business that generates income or profit as long as the project manager resides in the country. This definition does not require that the project itself be located in the State of Qatar.
Further, the criteria for recognising an entity as a non-profit organisation have been developed to align more closely with international standards for such entities. Accordingly, any organisation seeking non-profit status will be required to meet all the criteria provided under the new definition.
- Imposing tax on income generated outside Qatar
The Income Tax Law adopted the principle of limiting the taxes that would be applied to the profits generated from existing sources in the State of Qatar. However, the Amending Law has introduced exceptions to that principle, making profits resulting from the disposal of property of any Qatari Project abroad subject to tax. Income subject to tax includes the income derived from abroad from the following services:
1- Providing rights to distributing products or services.
2- Payments for the provision of marketing, procurement, financial intermediation, agency and other mediation services.
3- Fees paid for guarantees or similar financial support.
4- Providing communication and broadcasting services.
Some income generated outside the State of Qatar is also subject to tax where certain conditions are met, including income of a Qatari Project derived from real estate located abroad, and the income resulting from the direct use, lease or other use of immovable assets, where:
- The Qatari Project benefiting from the income of the immovable assets must not carry out businesses in a foreign country where the real estate producing that income is located through a permanent establishment located there; and
- The immovable assets for which the income is actually paid are not connected with that permanent establishment.
Further, the dividends distributed by a foreign company residing abroad to a Qatari Project are subject to tax, as well as interests and royalties generated abroad and paid to a Qatari Project, where:
1- The Qatari Project benefiting from the distributed dividends, interest or royalties does not carry out business in a foreign country in which the company paying the distributed dividends is a resident or in which interests or royalties originated through a permanent establishment in which it is located; and
2- The shares, stocks or other rights for which the dividends are paid, the debt claims for which the interest is paid, or the rights or assets for which the royalties are paid, are not actually connected to that permanent establishment.
Furthermore, technical services fees generated abroad and paid to a Qatari Project are also subject to tax, where:
1- The Qatari Project benefiting from the technical service fees is not carrying out business in the foreign country in which the fees are generated, through a permanent establishment located in that foreign country; and
2- The technical service fees are not actually connected with that permanent establishment.
- Tax Exemptions
The scope of tax exemptions provided in Article 4 of the Income Tax Law has been expanded to include the income of private associations and institutions, private charitable associations and institutions, and private institutions of public interest.
Capital gains realised by a Qatari Project are also exempted from tax where those gains are derived from:
a- Immovable assets located abroad;
b- Movable assets that form part of the property of a permanent establishment owned by the Qatari Project abroad, including capital gains derived from the transfer of ownership of that permanent establishment, solely or with the entire project; and
c- Foreign shares, stocks or other foreign rights.
Board members’ remunerations and other similar payments received by a Qatari Project in its capacity as a member of the board of directors of a company residing abroad have been exempted from tax.
The Amending Law introduced a provision stipulating that if a Qatari Project carries out business in a foreign country through a permanent establishment located therein, then the profits accruing to the permanent establishment are not subject to tax, provided that they are subject to tax in that foreign country. This provision applies the principle of avoiding double taxation. To qualify for this exemption, the tax in the foreign country must have been paid from income derived from the Qatari Project.
Another new provision has been added, whereby if a taxpayer pays a foreign tax on taxable income in the State, he may request the deduction of that foreign tax within the limits of the amount of tax due in the State, provided that:
1- the foreign tax is a tax on income imposed by a foreign country or one of its political subdivisions or local authorities;
2- the foreign tax has been actually paid; and
3- it is used to reduce the foreign tax for any amounts recovered by the taxpayer from the foreign country.
However, claiming a deduction of foreign tax on tax-exempt income in the State is prohibited.
- Tax Obligations
The Amending Law has added new tax obligations on residents by obligating any resident to submit to the General Tax Authority, upon its request, a detailed statement of his financial assets abroad or the rights he has in foreign financial assets, if during an audit he is suspected of committing or participating in committing the acts stipulated in Article (26) of the Income Tax Law. For the purposes of the previous paragraph, foreign financial assets include the following assets:
- Financial accounts maintained with a foreign financial institution;
- Shares and stocks in foreign companies, partnerships and trust funds;
- Government securities, bonds, foreign debt securities and any other form of indebtedness; and
- Real estate or real estate-related rights.
The person required to submit such a statement shall report his foreign financial assets or the rights he has in the foreign financial assets, even if none of those assets or those rights affects the tax liability of that person for the reported fiscal year.
The Amending Law also sets out the obligation to maintain the confidentiality of information obtained by the General Tax Authority for tax purposes pursuant to international treaties, and specifies that such information may only be disclosed to persons or authorities, including courts, and administrative bodies, for the purposes of assessing or collecting taxes, enforcing or prosecuting the law in connection with taxes, deciding on appeals related to taxes, or supervising those performing such activities. They may disclose this information in public proceedings before the courts or in judicial judgements, and information obtained by a contracting country may be used for other purposes, if the laws of both countries authorise its use for such other purposes, and the competent authority of the country providing the information permits such use.
Further, the Entity, as defined in the Amending Law, which meets the conditions specified by the Executive Regulations, is now obliged to submit a report to the General Tax Authority on the minimum indicators for its material activities carried out in Qatar. The Minister of Finance shall issue the Executive Regulations outlining the method and timeframe for submitting such a report to the General Tax Authority.
An Entity shall be deemed to not be engaged in a material activity in the State if:
- it did not submit the material activity report referred to above;
- at least one of the minimum indicators of the material activity specified by the Executive Regulations is not met; or
- documentary evidence of such indicators is not provided to the General Tax Authority, upon its request.
If an Entity does not meet the minimum indicators of material activity, the General Tax Authority may refuse to hand over a tax residency certificate to it.
In this context, the General Tax Authority has been granted the right to obtain information and documents from any person or entity for the purpose of conducting a tax examination, or for the purpose of exchanging them with foreign competent authorities, in accordance with treaties related to administrative assistance and information exchange for tax purposes.
The General Tax Authority is also entitled to obtain information from any person in the State who possesses or controls that information, regardless of any legal obligation on that person to maintain the confidentiality of the information. Information is under the control of a person if he has the legal right, power or ability to obtain information or documents in the possession of another person.
An article has been added to the Income Tax Law whereby companies and other entities having their headquarters or place of effective management in the State shall make available to the General Tax Authority, if so requested, information identifying their legal and beneficial owners, including information on the persons on whose behalf the legal owners are acting as authorised persons, or under any similar arrangement, in addition to information on persons in a series of intermediary entities between the company or other concerned entity and its beneficial owner.
Moreover, partnerships that were established in accordance with the laws of the State or that carry out their activities in the State must make available to the General Tax Authority, if so requested, information that identifies their partners and beneficial owners.
Similarly, trust funds established in accordance with the laws of the State, or administered in the State, or in which the trustee or agent is a resident of the State, must make available to the General Tax Authority, if so requested, information about the identity of the beneficial owners, including the grantor or founder, the trustee, agent, the protector or guarantor, all beneficiaries or categories of beneficiaries, and any other natural person who ultimately exercises effective control over the trust fund.
In the same context, non-profit organisations established in accordance with the laws of the State must make available to the General Tax Authority information identifying the founders, members of the foundation’s board, existing beneficiaries, and any beneficial owners or persons who have the authority to represent the organisation.
Information provided by entities and legal arrangements on the identity of their legal and beneficial owners must be sufficient, accurate and up-to-date.
- Financial Penalties
Projects that do not comply with the requirements of having a physical presence and conducting an essential activity stipulated in the law or the implementing regulations, shall be subject to a financial penalty of (15%) fifteen per cent of their net income.
- Other Amendments
The Amending Law also stipulated that if:
- a Qatari Project participates directly or indirectly in the management, control or capital of a foreign project; or
- if a foreign project participates directly or indirectly in the management, control or capital of a Qatari Project; or
- if the persons themselves participate directly or indirectly in the management, control or capital of a Qatari Project and a foreign project;
and there exist conditions between the two projects in their commercial or financial relations that differ from those that may be imposed between two independent projects, then any profits that could have accrued to either of the two projects may be included within the profits of the Qatari Project, and will be taxed accordingly. An entity shall not be entitled to any tax exemption or advantage, unless the actual place of its management is in the State.
Finally, it appears that the amendments to the Income Tax Law aim primarily to increase tax revenues, whether by expanding the scope of its application or limiting tax evasion. Provisions have been introduced for Qatari Projects and foreign projects, and the standards that must be taken into account in relation to the tax due on each of them have been established.
Also, in order to achieve the desired purposes of the amendments, the General Tax Authority has been granted broad powers, including the power to request and obtain all information and documents that it may request from residents, companies or other entities, including but not limited to, trust funds, whether for the purposes of conducting a tax examination or for the purpose of exchanging the information with foreign competent authorities.