Corporate taxation in
Middle East and North Africa
2014
Contents
Bahrain — 12
Introduction — 04
Afghanistan — 06
Egypt — 16
Iraq — 22
Jordan — 26
Kuwait — 32
Libya — 52
Lebanon — 44
Qatar — 74
2
Saudi Arabia — 86
Corporate taxation in Middle East and North Africa (MENA) 2014
Syria — 94
Oman — 56
Palestine — 62
Pakistan — 66
Appendix 1–108
Appendix 2–112
Appendix 3–116
UAE — 100
Contents updated — January 2014
Corporate taxation in Middle East and North Africa (MENA) 2014
3
Looking forward to
After nine decades, EY
continues to lead change
in the MENA region ...
It gives me great pleasure to introduce
the EY MENA 2014 Corporate Taxation
reference guide. This publication
is intended to provide an easy starting
point for tax information relating
to the latest corporate income tax laws
and tax practices in the Middle East
and North Africa (MENA) region.
Sherif El-Kilany
EY Middle East and North Africa Tax
Service Line Leader
The year 2013 was a milestone
for EY as we celebrated 90 years
in the MENA region.
Our first MENA office opened in Iraq
in 1923. EY was the first professional
services organization to operate
in the region. We were the first to see
the potential that this region holds.
After nine decades, EY continues to lead
change to realize the potential that
the MENA region offers.
Today, EY is the largest
and most established professional
services organization in MENA, with more
than 5,000 people providing top-quality
assurance, tax, transaction and advisory
services to our clients in Saudi Arabia,
Kuwait, Qatar, United Arab Emirates (UAE),
Oman, Bahrain, Egypt, Libya, Lebanon,
Jordan, Palestine, Syria, Iraq and Pakistan.
Over the last 90 years, EY has been
a strong influence in the region, guiding
business and working closely with
the public sector. It is now up to us
to create an even stronger EY for future
generations.
In the words of our Chairman Abdulaziz
Al-Sowailim, “ Our purpose means that EY
is committed to doing its part in building
a better working world. To us in the region,
the message is very clear. Building
a better working world is not just about
creating a better office environment.
It’s about channeling our strong legacy
as an organization and who we are as
individuals, working together as a region
to achieve sustainable growth and make
a positive impact in our communities.”
Our new brand name and logo demonstrate
clearly and boldly who we are and reflect
the traits we need to have to be the best
brand in our profession.
EY tax services in MENA — what
our clients can expect from EY
in 2014
EY is well prepared to help our clients meet
the tax challenges that their businesses
face. With a clear and deep understanding
of the latest changes in the tax laws
and compliance practices, our tax partners
and directors look forward to helping
you by providing you with up-to-date
thought leadership insights, tax updates,
information and tax solutions.
To deliver on our commitment to you, we
have a busy year of thought leadership
and tax communications activities
and initiatives planned ahead.
We start 2014 with a new purpose
and brand name.
4
Corporate taxation in Middle East and North Africa (MENA) 2014
2014
with optimism, confidence and preparedness
MENA Tax Insight
and MENA Tax Review
Country tax seminars
and workshops
EY MENA tax conference
in London
During 2014, we will continue to provide
you with monthly updates on the latest
tax developments, tax law changes
and tax practice determinations with our
e-newsletter, EY MENA Tax Insight.
We will continue to organize and host
country and sector-specific tax workshops
to provide you with the opportunity
to meet with our in-country and sectorial
tax specialists, and understand current
issues from professionals who deal with key
tax issues on a daily basis.
Finally, we plan to round off the year
with our biannual London tax conference
in November 2014, to update our clients
in Europe on the latest developments
and issues in MENA.
We will supplement this up-to-date
communication with MENA Tax Review
(METR). METR is a quarterly tax
bulletin that consolidates tax developments
during the previous quarter with new tax
reviews and feature articles on the key tax
developments, issues and solutions.
If you do not already receive these tax
communications, please contact our
editor Morris Rozario at subscribe.
unsubscribe@om.ey.com.
Webcast tax seminars
EY MENA’s increasingly popular
webcast seminars and Q&A forums
provide a regular opportunity for clients
to benefit from in-depth discussion
and understanding of important tax
matters and issues.
During 2014, we plan to address many key
tax topics of importance and relevance,
including:
• Related party transactions and transfer
pricing
EY MENA 2014 tax conference
in Dubai, 19–20 March 2014
At this premier regional tax conference
in Dubai, senior EY tax partners from
various MENA countries participated
in panel discussions with senior tax
executives from leading multinational
companies, to share their in-country
tax experiences and discuss key issues
and changes in tax laws, regulations
and practices.
Indeed, another very busy year ahead,
and we very much look forward to working
with you.
Sherif El-Kilany
EY Middle East and North Africa Tax
Service Line Leader
Over 300 senior finance and tax
professionals attended this conference
and gained valuable insights from
EY’s experience on key current
tax issues in MENA. This year’s
conference included consideration
of the likely impact of the global base
erosion and profit shifting (BEPS)
tax reforms on fiscal and tax policies
in the MENA region.
• Managing withholding tax retentions
• Benefiting from double tax treaty relief
and exemptions
• Tax implications of Islamic finance
products
• Managing tax audits and assessments
Corporate taxation in Middle East and North Africa (MENA) 2014
5
Afghanistan
Afghanistan is bordered to the west by Iran, to the north by Turkmenistan,
Uzbekistan and Tajikistan, and to the east and south by China and Pakistan.
Almost half of the country lies about 2,000 meters or more above sea level.
Afghanistan constitutes a major watershed, with the Oxus (Amu-Darya) rising on
the north side of the Hindu Kush and flowing into central Asia and, on the south
side, several rivers forming tributaries of the Indus.
The population comprises numerous ethnic groups, the major ones being
Pashtuns, Tajiks, Hazaras, Uzbeks, Chahar Aimaks, Turkmen and Balochs.
The Islamic Republic of Afghanistan has an estimated population of 32m.
Afghanistan possesses a wide variety of mineral resources, including natural
gas, coal, oil and gemstones, but the security situation has precluded their
effective utilization. The estimated GDP for 2013 is 3.1% (2012: 7.2%).
The unit of currency is Afghani. The official exchange rate is approximately
51.02 Afghanis (AFN) to US$1.00.
Corporate taxation
Corporate income tax
Companies that are resident in Afghanistan are subject
to tax on their worldwide income. Tax is levied on
the total amount of income earned during the tax period.
BRT does not apply to the following categories
of income:
• Interest income
• Fees earned from banking transactions
Tax rates
The corporate income tax rate is 20%.
Certain types of income are subject to final withholding
taxes.
Business receipts tax
Business receipts tax (BRT) is imposed on total gross
revenue before deductions. BRT is a deductible
expense in computing taxable income for the same
tax year. It is imposed at rates of 2%, 5% or 10%
of the gross receipts, depending on the nature
of the business or category of the receipt.
In addition, importers of goods are subject to BRT at
a rate of 2% at the time of import. The customs office
collects the BRT. This tax is treated as an advance
payment against the BRT paid by the importer based
on its receipts from the sale of goods.
6
The BRT return must be filed and BRT must be paid
on a quarterly basis within 15 days from the end
of the quarter.
• Proceeds of futures contracts, whether settled
in cash or otherwise
• Insurance or reinsurance premiums
• Distributions received by shareholders with respect
to their interests in the company
• Exports of goods and services
• Salaries, dividends, royalties and other payments
that are subject to withholding tax
• Income received from the rent or lease of residential
property to a natural person if the tenant uses
the property for residential purposes for more
than six months of the tax year
• Income of persons not having a business license who
are taxed at fixed rates (see “Fixed tax scheme”)
Corporate taxation in Middle East and North Africa (MENA) 2014
Fixed tax scheme
For certain categories of income and persons, the Afghanistan
Income Tax Law (AITL) provides for a fixed tax scheme under
which taxpayers are required to pay a fixed tax during the year,
instead of income tax and BRT. The fixed tax applies to income
received by importers and contractors that do not hold a business
license in Afghanistan for the supply of goods and services,
transporters, entertainers and natural persons deriving business
income below certain limits. The amount of the tax varies,
depending on the category of income and the person deriving
the income.
Withholding tax
Withholding tax (WHT) is an interim tax payment that may or may
not be the final tax liability. Amounts withheld that are not final
taxes are credited against the eventual tax liability of the taxpayer
for the relevant year.
On the right are the rates of significant withholding taxes under
the AITL.
Type of payment
WHT rate (%)
Rent for immovable property used
for commercial, industrial and other
economic purposes
10/15 (a)
Salaries and wages
2/10/20(b)
Payments for imports by importers that have
a business license
4 (c)
2
Payments to persons that have a business
license for the providing of goods, material,
construction and services under contracts
to government agencies, municipalities, state
entities, private entities and other persons
Dividends
20 (d)
Interest
20 (d)
Royalties from patents
20 (d)
Commission
20 (d)
Prizes
20 (b)
Rewards
20 (d)
(a) The rate depends on the monthly rent.
(b) The rate depends on the monthly salary.
(c) T
he tax is calculated based on the cost of the imported goods, including
customs duty, and is collected by the customs office where the custom
duty is paid. Half of the tax (that is, 2% of the value of imports) may
be offset against the BRT payable by the importer, while the balance
is treated as a tax credit against the tax liability for the year. See
the discussion of BRT in Section B.
(d) This is a final WHT.
Corporate taxation in Middle East and North Africa (MENA) 2014
7
Dividends
Interest and penalties
A company paying a dividend must withhold tax at a rate of 20%
of the gross amount. Dividends are regarded as Afghan-sourced
if they are received from resident companies operating
in Afghanistan.
A legal person that fails to file a tax return by the due date without
reasonable cause may be subjected to additional income tax
of AFN500 per day.
If a branch of a nonresident person pays or incurs an amount
to the head office or any person connected to the non­resident
person, that amount is also treated as a dividend.
Dividends paid in cash, from which tax has been deducted at
source, are allowed as deductions for the payers of the dividends.
However, such deductions are not allowed to branch offices
in Afghanistan making payments of dividends to their head offices
and other affiliates.
Dividends paid in the form of securities or shares, or loans
of a similar nature, are not deductible from the income
of corporations or limited liability companies.
Capital gains
Gains arising from the sale, exchange or transfer of capital
assets, including depreciable assets, shares of stock and trades
or businesses, are included in taxable income. However, gains
derived from the sale or transfer of movable or immovable
property acquired by inheritance are not included
in taxable income.
Legal persons transferring movable or immovable property must
pay 1% tax on the amount received or receivable with respect
to the transfer of ownership of such property. The tax paid may be
used as a credit against tax payable when the tax return is filed.
Losses incurred on the sale or exchange of capital assets used
in a trade or business are deductible from the taxable income
in the tax year of the sale or exchange, if the gain from this sale
or exchange would have been taxable.
Losses incurred on the sale or exchange of shares or stock may
be offset only against gains from the sale or exchange of shares
or stock in the same year. If the gains exceed the losses from such
transactions, the excess is taxable. However, if the losses exceed
the gains, the excess is not deductible.
8
In addition, if a person fails to pay the tax by the due date,
penalties amounting to 0.1% of the tax per day may be imposed. If
no tax is paid, an additional tax of 10% may be imposed in addition
to the 0.1% penalty.
A person that is determined to have evaded income tax may be
required to pay the income tax due and the following additional
penalties:
• In the first instance of tax evasion, additional tax penalty
of double the evaded tax
• In the second instance, additional tax penalty of double the
evaded tax and termination of the person’s business activity by
order of the court.
A person that fails to withhold tax from payments without
reasonable cause may also be subject to additional tax of 10%.
Foreign tax credit
If a resident person derives income from more than one foreign
country, proportionate foreign tax credit is allow­ed against income
from each country.
Administration
Afghanistan follows the solar period with a tax year that starts
from 21 December and ends on 20 December in the following
calendar year. If a legal person wishes to use a 12-month
period other than the solar period as its tax year, it may
apply to the Ministry of Finance (MoF) in writing and pro­vide
the reasons for the change. The MoF may grant such application
if it is justifiable.
The income tax return, together with the balance sheet, must be
filed by 20 June following the calendar year-end.
Corporate taxation in Middle East and North Africa (MENA) 2014
Determination of taxable
income
General
The determination of taxable income is generally
based on the company’s financial statements, subject
to certain adjustments.
Business expenses incurred during a tax year or in one
of the preceding three tax years are deductible for purposes
of calculating taxable income.
Inventories
An inventory for a tax year is valued at the lower of cost or market
value of the inventory on hand at the end of the year. All taxpayers
engaged in manufacturing, trading or other businesses must value
inventories in accordance with the method prescribed by the MoF.
Tax depreciation
Depreciation of movable and immovable property (except
agricultural land) used in a trade or business or held
for the production of income is allowed as an expense. The total
depreciation deduction for property may not exceed the cost
of the property to the taxpayer.
A person is not entitled to claim depreciation for that part
of the cost of an asset that corresponds to a payment for which
the person failed to withhold tax.
Enterprises registered under the Law on Domestic and Foreign
Private Investment in Afghanistan are entitled to a deduction
for the depreciation of buildings and other depreciable assets over
the following time periods:
• Buildings: four years
• Other depreciable assets: two years
Depreciation is calculated using the straight-line method,
in equal proportions. However, if a depreciable asset is held
by the enterprise for less than half of the year, depreciation
is calculated and deducted for half of the year. If a depreciable
asset is held for more than half of the year, depreciation
is calculated and allowed for one year.
Net operating losses incurred by a taxpayer on account
of depreciation may be carried forward by the enterprise until such
loss is fully offset. However, to claim such offset, the enterprise
must be an approved enterprise under the AITL.
Depreciation and expenditure that relate to a period covered by
a tax exemption or to a period before an enterprise becomes
an approved enterprise for the first time may not be included
in the calculation of a net operating loss.
Hydrocarbon contracts
Special provisions are embedded in the tax law relating
to the taxability of qualifying extractive industries taxpayers
(QEIT). A QEIT is a person who holds a mining license or mining
authorization, or is a party to a hydro-carbon contract.
Corporate taxation in Middle East and North Africa (MENA) 2014
9
Relief for losses
Miscellaneous taxes
A corporation or limited liability company (LLC) that incurs a net
operating loss in a tax year may deduct the loss from its taxable
income of the following three years in equal proportions.
Afghanistan does not impose value added tax or goods
and services tax. Customs duties apply to the import of goods.
Net operating losses incurred by approved enterprises as a result
of depreciation may be carried forward until they are fully offset.
Miscellaneous matters
Foreign-exchange controls
In general, remittances in foreign currency are regulated
and are required to be converted to AFN at the established
rate of the Da Afghanistan Bank. In certain cases in which
the Da Afghanistan Bank does not trade for a particular
currency, the currency is first converted into US dollars and then
into afghanis.
Anti-avoidance rules
All transactions between connected persons are expected to be
carried out at arm’s length. If transactions are not conducted
on an arm’s length basis, the tax authorities may determine
the arm’s length standard under prescribed methodologies.
These methods are similar to those available in the commentary
to the Organisation for Economic Co-oper­ation and Development
(OECD) Model Convention.
Tax incentives
Some of the significant tax incentives available
in Afghanistan are described in the following paragraphs.
Income derived from the operation of aircraft under
the flag of a foreign country and income derived by
the aircraft’s staff is ex­empt from tax if the foreign country
grants a similar exemption to aircraft under the flag
of Afghanistan and the aircraft’s staff.
Organizations that are established under the laws
of Afghanistan and operating exclusively for educational, cultural,
literary, scientific or charitable purposes are exempt from
income tax.
Income derived from agricultural or livestock production is not
subject to income tax.
Scholarships, fellowships or grants for professional and technical
training are exempt from income tax.
These incentives are subject to a private ruling obtained from
the MoF of the Government of Afghanistan.
If a person enters into any transaction or arrangement with
the intent to cause reduction of liability to pay tax, the MoF may
disregard this transaction or arrangement and assess all persons
affected by it as if the disregarded transaction or arrangement had
not taken place.
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Corporate taxation in Middle East and North Africa (MENA) 2014
Bilateral agreements
A bilateral agreement between Afghanistan and the United States
exists in the form of Diplomatic Notes exchanged between the two
countries. Under the Diplomatic Notes, tax exemption is p
­ rovided
to the US Government and its military, contractors and personnel
engaged in activities with respect to the cooperative efforts
in response to terrorism, humanitarian and civic assistance,
military training and exercises, and other activities that the US
Government and its military may undertake in Afghanistan.
Military and technical agreements have also been entered into with
International Security Assistance Forces (ISAF), which allow similar
exemptions.
Exemptions available under these agreements are subject
to private rulings to be obtained in advance from the MoF.
In addition, the agreements generally do not provide exemptions
from the obligation to withhold tax from all payments
to employees, vendors, suppliers, service providers, lessors
of premises and other persons, as required under the local tax
laws.
More recently, a Memorandum of Understanding (MoU)
has been signed between the Islamic Republic
of Afghanistan and the United Kingdom, concerning tax
and customs provisions applicable in Afghanistan to development
projects funded by the United Kingdom.
Corporate taxation in Middle East and North Africa (MENA) 2014
11
Bahrain
As Bahrain’s oil resources are limited, the country has focused on developing
its financial and commercial markets and industrial base with a globally
competitive, value creation proposition.
Bahrain provides an open and transparent business environment with
good governance and skilled resources. Foreign investment is also strongly
encouraged.
Bahrain is a leading financial services hub in the GCC region, with particular
emphasis on investment and Islamic banking activities.
Certain infrastructure-related industrial undertakings, such as power production
and aluminum processing plants, have also been successfully established.
Although, in the past, many large commercial and infrastructure enterprises
have been largely government owned, there is an increasing trend toward
privatization. Currently, most industry sectors or business segments are open
to foreign investors.
To carry out any commercial activity in the Kingdom of Bahrain, a legal vehicle
should be established in accordance with the Bahrain Commercial Companies
Law No. 21 of 2001.
The unit of currency is the Bahraini Dinar (BD). The official exchange rate is
approximately RO1 to US$2.6
Taxation
Incentives
Bahrain levies no taxes on income, capital gains,
sales, estates, interest, dividends, royalties or fees
other than those specifically imposed on oil and gas
companies.
The Government encourages foreign investment,
expertise and technologies to develop and diversify
the economy, privatize infrastructure projects,
promote tourism and develop small to medium
enterprises.
Oil and gas companies
Companies engaged in the exploration, production
or refining of oil and other natural hydrocarbons
in Bahrain are subject to corporate income tax at a rate
of 46% on taxable income derived in Bahrain.
Taxable income is taken to be the net profit earned by
a company after deduction of business expenses from
gross business income.
Oil and gas companies are required to file an estimated
tax declaration on or before the 15th day of the third
month of the tax year (calendar year). Tax must be paid
in 12 monthly installments.
Trading losses of oil companies may be carried forward
indefinitely. However, carryback is not permitted.
12
Bahrain offers many concessions and incentives
to foreign investors, including:
• A tax-free business presence with no personal,
corporate and withholding taxation
• No restrictions on repatriation of capital, profits,
royalties and dividends
• One hundred percent foreign ownership
of companies, in permitted cases
• Foreign (non-GCC) ownership of high-rise
commercial and residential properties, as well
as tourist properties, banking, financial, health
and training projects in specific geographic areas
• Well-established industrial zones
Corporate taxation in Middle East and North Africa (MENA) 2014
• Developed infrastructure with excellent transportation
and communication systems
Free zones
• Well-defined laws and regulations
There are three free zones in Bahrain.
• Recognition of intellectual property rights
Mina Salman, Bahrain’s major port, provides a free transit zone
to facilitate the duty-free import of equipment and machinery.
• Duty-free import of machinery and raw materials to be used
in new processing industries in Bahrain
Companies with a Bahrain industrial license also qualify for
treatment under the GCC common market accord (for example,
duty-free imports of GCC-produced goods across GCC countries)
Companies wishing to qualify for incentives must employ
a specified percentage of Bahraini national employees
(normally 20%).
Employment-related incentives include:
• Subsidies for Bahraini nationals employed, including training
incentives within the Tamkeen program
• Reimbursement for the costs incurred in training Bahraini
employees for specialized job positions
Another free zone is located in the North Sitra Industrial Area.
The same facilities in the two free zones are used
for the temporary import of goods for re-export.
Hidd is the third industrial zone where foreign investors may
establish operations.
Manufacturers in free zones are exempt from customs duties on
the import of raw materials and capital equipment.
Leases run for 25 years and rentals are subject to readjustment
every five years.
Foreign exchange controls
There are no exchange control restrictions on converting
or transferring funds.
Corporate taxation in Middle East and North Africa (MENA) 2014
13
Other taxes
Foreign workers levy
There are no personal income taxes in Bahrain.
All private and public companies are required to pay a monthly
levy with respect to each expatriate that is employed. The levy
is charged at a rate of BD5 per employee for the first five expat
employees and BD 10 for each expat employee thereafter.
Social insurance
The foreign workers levy has been reintroduced on
1 September 2013 after being suspended since April 2011.
Social insurance contributions are payable for employees who
are Bahrain nationals at a rate of 15% of their compensation (basic
salary plus recurring allowances),* of which 9% is contributed by
the employer and 6% by the employee.
Withholding taxes and value added tax
Employers are also required to contribute an additional amount
equal to 3% of the compensation of all employees (both Bahraini
and expatriates) to provide cover against employment injuries.
Municipal tax
Personal income tax
Unemployment insurance at a rate of 1% is also payable by both
Bahrainis and expatriate employees.
*The compensation for each employee, for the calculation of social insurance
contributions, is limited to a maximum of BD4,000 per month (i.e., where it exceeds
BD4,000 per month, the amount of contribution will be calculated only on
BD4,000).
End-of-service benefit
At the completion of their employment contract in Bahrain,
expatriate employees are entitled to an end of service benefit,
calculated on the following basis:
• Half a month’s salary for every year of service for the first
three years of continuous service
• One month’s salary for every year of service thereafter
Training levy
Organizations with 50 or more employees are liable to pay
a training levy at a rate of 4%.
The training levy is calculated based on the gross salary
of registered expatriate employees.
The training levy applies only on salaries paid to expatriates.
There are no withholding taxes in Bahrain. Bahrain also has no
value added tax, property tax or production tax.
A municipal tax is payable by individuals or companies renting
property in Bahrain.
The tax rate varies for unfurnished or furnished residential
property and commercial property.
Customs duties
The GCC countries (Bahrain, Kuwait, Oman, Qatar,
Saudi Arabia and the UAE) announced the unification of customs
duties with effect from 1 January 2003.
There are no customs tariffs on the trade of locally manufactured
goods between GCC Member States where the local shareholding
is 51% and value added in Bahrain exceeds 40%.
Bahrain is a member of the World Trade Organization (WTO)
and applies its customs tariff according to the codes issued by
the World Customs Organization (WCO).
The following categories of the customs duty apply:
• Free duty — vegetables, fruit, fresh and frozen fish, meat, books,
magazines and catalogs
• Five percent duty — all other imported items such as clothes,
cars, electronics and perfumes
• One hundred percent duty — tobacco and tobacco-related
products
• One hundred and twenty-five percent duty — alcohol
14
Corporate taxation in Middle East and North Africa (MENA) 2014
Tax treaties
Bahrain has entered into double tax treaties with many countries,
including: Algeria, Barbados, Belarus, Bermuda, Brunei, Bulgaria,
China, Czech Republic, Egypt, Estonia, France, Georgia,Iran,
Ireland, Isle of Man, Jordan, Korea, Lebanon, Luxembourg,
Malaysia, Malta, Mexico, Morocco, Netherlands, Pakistan,
Philippines, Seychelles, Singapore, Sri Lanka, Sudan, Syria,
Thailand, Turkey, Turkmenistan, UK, Uzbekistan and Yemen.
Further treaties with Belgium, Sri Lanka, and Sudan are at various
stages of negotiations or ratification.
Corporate taxation in Middle East and North Africa (MENA) 2014
15
Egypt
Egypt is one of the largest economies in the Arab world, with highly developed
economic and social structures and abundant labor resources.
Since the revolution in 2011, Egypt has suffered substantial budget deficits
and accumulated significant overseas debt.
In order to improve its economic performance and restore growth, the new
Government is embarking on an aggressive economic and fiscal reform
program. The new initiatives aim to build a free market economy, stimulate
business growth and create much needed employment opportunities by
encouraging local and foreign investment. Immediate and short-term policies
and initiatives are directed at lifting restrictions on imports, lowering customs
duties, removing exchange control restrictions and floating the Egyptian pound.
The Government offers attractive incentives to encourage foreign investment,
particularly in projects that contribute to the earning of foreign currency
and to reducing the country’s reliance on imports.
A number of free trade zones (FTZ) have been set up where projects can be
established without necessarily having Egyptian equity participation.
Non-Egyptian nationals and businesses may engage in commercial, industrial
and agricultural service activities. There is no restriction on foreign participation
in Egyptian corporations other than those related to an agency or undertaking
importing activities, where non-Egyptian participation is restricted.
The unit of currency is the Egyptian Pound (EGP). The official exchange rate is
approximately EGP6.9 to US$1
Corporate taxes
Corporate income tax
Egyptian corporations are subject to corporate income
tax on their profits derived from Egypt, as well as on
profits derived from abroad, unless the foreign activities
are performed through a permanent establishment
located abroad. Foreign branches are subject to tax
only on their profits derived from Egypt.
Rates of corporate income tax
The standard rate of corporate income tax is 25%.
Exceptions
Oil prospecting and production companies are subject
to tax on their profits at a rate of 40.55%.
The Suez Canal Company, the Egyptian General
Petroleum Corporation and the Central Bank of Egypt
are subject to tax on their profits at a rate of 40%.
16
Capital gains
Capital gains are subject to tax at the ordinary
corporate income tax rates, with any capital gains
treated as business profits. Trading and capital losses
derived from sales of other assets are deductible
against taxable capital gains.
Administration
Companies must file their annual tax returns, together
with all supporting schedules and the original financial
statements, before 1 May each year, or four months
after the end of the financial year. The tax return must
be signed by the taxpayer and a chartered accountant.
Taxpayers can file a request for an extension of the due
date for filing the tax return if the estimated amount
of tax payable is paid at the time of the request.
A request for an extension must be filed at least 15
days before the due date.
Corporate taxation in Middle East and North Africa (MENA) 2014
An extension of up to 60 days may be granted. An amended tax
return can be filed within 30 days of the due date of the original
tax return. Any tax due must be paid when the tax return is filed.
A late penalty is imposed at a rate of 2% plus the credit
and discount rate set by the Central Bank of Egypt in January
of each year.
The law has set up appeal committees at two levels — the Internal
Committee and the Appeal Committee. The Appeal Committee’s
decision is final and binding on the taxpayer and the Egyptian Tax
Authority (ETA), unless a case is appealed to the courts by either
party within 30 days of receiving the decision, which is usually
in the form of an assessment.
Withholding tax
In general, payments for all services performed by nonresident
companies for Egyptian companies in or outside Egypt are subject
to withholding tax at a rate of 20%.
• Transportation
• Shipping
• Insurance
• Training
• Participation in conferences and exhibitions
• Registration in foreign stock markets
Dividends
• Direct advertising campaigns
Dividends distributed by Egyptian companies are not subject
to withholding tax, because they are paid out of corporate profits
that are taxed under the normal rules.
The new law also reapplies the “addition system” to WHT payable.
The law requires entities liable to withhold tax payments under
Article 59/1 of Law No. 91 of 2005 to add a percentage equal
to the amount to be collected from a payee. This percentage
should then be deducted from the amount payable and accounted
for as WHT deducted from the payee. The WHT and addition
system also applies to corporations and foreign branches that sell
crops, goods and manufactured products to private sector entities
for the purpose of trading or manufacturing.
Dividends received by residents from foreign sources are taxed
in Egypt.
Corporate taxation in Middle East and North Africa (MENA) 2014
17
Finally, this law also requires the entities withholding tax
payments under Article 59/1 to apply WHT due on rental
payments paid by lessees who conduct business activities relating
to trading, the manufacturing and provision of any services, food
and beverages. The lessor has to add the WHT to the rental amounts
and account for the WHT as an amount deducted from the lessee.
Foreign tax relief
Tax credit can be claimed for foreign tax paid by resident entities
outside Egypt, if supporting documents are available.
Treaties concluded between Egypt and other countries regulate
the credit for taxes paid abroad on income, subject to corporate
income tax in Egypt.
Determination of taxable
income
General
Corporate income tax is based on taxable profits, determined
in accordance with generally accepted accounting
and commercial principles, and subject to adjustments for tax
purposes in accordance with the statutory provisions relating
to depreciation, provisions, inventory valuation, and intercompany
transactions and expenses.
Dividends are exempt from tax. Interest on bonds listed
on the Egyptian stock exchange is also exempt from tax if
certain conditions are satisfied. Start-up and formation expenses
may be deducted in the first year.
Interest paid to individuals who are not subject to tax or exempt
from tax is not deductible. Deductible interest is limited
to the interest computed at a rate equal to twice the discount rate
determined by the Central Bank of Egypt.
Inventories
Inventory is normally valued for tax purposes at the lower
of cost or market value. Cost is defined as purchase price plus
direct and indirect production costs. Inventory reserves are not
permissible deductions for tax purposes. For accounting purposes,
companies may elect to use any acceptable method of inventory
valuation, such as first-in, first-out (FIFO) or average cost.
Provisions
Provisions are not deductible, with the following exceptions:
• Provision up to 80% of loans made by banks is required by
the Central Bank of Egypt.
• Insurance companies’ provision is determined under Law No. 10
of 1981.
Bad debts are deductible if the company provides a report from
an external auditor certifying the following:
• The company is maintaining regular accounting records.
• The debt is related to the company’s activity.
• The debt appears in the company’s records.
• The company has taken the necessary action to collect the debt.
Depreciation and amortization allowances
Depreciation is deductible for tax purposes and may be calculated
using either the straight-line or declining-balance method
in accordance with the following depreciation rates.
Method
of depreciation
Rate (%)
Straight-line
5
Intangible assets
Straight-line
10
Computers
Declining-balance
50
Heavy machinery
and equipment
Declining-balance
25
Small machinery
and equipment
Declining-balance
25
Vehicles
Declining-balance
25
Furniture
Declining-balance
25
Other tangible assets
Declining-balance
25
Type of asset
Buildings, ships
and airplanes
Accelerated depreciation is allowable only once, at a rate of 30%,
on new machines and equipment in the year in which they
are placed into service.
Normal depreciation is calculated after taking into account
the accelerated 30% depreciation on the net value of new assets,
provided that proper books of account are maintained.
However, the method should be applied consistently, and, if
the method is changed, the reasons for such change should be
disclosed.
18
Corporate taxation in Middle East and North Africa (MENA) 2014
Allocation of head office expenses
The deductibility of a branch’s share of head office overhead
expenses is limited to 10% of the taxable net profit. Head office
expenses, other than overhead and general administration
expenses, are subject to negotiations with the tax authorities.
They are fully deductible if they are directly incurred by the branch
and are necessary for the performance of the branch’s activity
in Egypt. Such expenses must be supported by original documents
and approved by the head office auditors.
Relief for losses
Tax losses may be carried forward for five years. Losses incurred
by construction companies on long-term projects may be carried
back for an unlimited number of years to offset profits from
the same project.
Free zone tax
Companies in FTZs are permanently exempt from corporate
taxes. Law no. 11 of 2013, which is effective from 1 June 2013,
requires all business entities set up under the special economic
zone and free zone laws to withhold tax on interest, royalties,
service fees, and sporting activity and artists’ fees.
Miscellaneous matters
Foreign exchange controls
Egypt has a free market exchange system. Exchange rates
are determined by supply and demand, without interference from
the Central Bank or the Ministry of Economy.
Group of companies
Transfer pricing
Associated or related companies in a group are taxed separately
for corporate income tax purposes. Egyptian law does not include
provisions for group assessment, under which group losses may be
offset against profits within a group of companies.
The Egyptian tax law contains specific tax provisions relating
to transfer pricing based on the arm’s length principle. Under
these measures, the tax authorities may adjust the income
of an enterprise if its taxable income in Egypt is reduced as a result
of contractual provisions that differ from those that would be
agreed to by unrelated parties.
Corporate taxation in Middle East and North Africa (MENA) 2014
19
However, according to the Egyptian tax law, it is possible to enter
into arrangements in advance with the tax department regarding
a transfer pricing policy (advance pricing agreement).
An advance pricing agreement ensures that transfer prices will not
be challenged after the tax return is submitted and, accordingly,
eliminates exposure to penalties and interest on the late payment
of taxes resulting from adjustments of transfer prices.
The Egyptian Tax Authority (ETA), in association with the OECD,
has issued transfer pricing guidelines (Guidelines). The Guidelines
provide taxpayers with guidance on the application of the arm’s
length principle in pricing their intragroup transactions, as well as
outlining the documentation taxpayers should maintain as
evidence to demonstrate their compliance with the said principle.
Supply and installation contracts
With respect to supply contracts, tax is not charged on profits from
a contract, when the supplier has no activity within Egypt.
In the case of a combined supply and erection (installation)
contract, where the value of both part is shown separately,
the contract would be taxed as follows.
Value of supply portion
The supply portion would not be subject to tax in Egypt
if the taxpayer provided appropriate custom clearance
documentation or confirmation from the customer of receipt
of the supply.
Value of the erection portion
The value of the erection portion of a contract would be taxed in all
instances.
If it was not possible to separate the value of supply and erection
portions, the total value of the contract would be subject to tax.
20
Other taxes
Personal income tax
The tax year is based on the calendar year.
Tax applies to salaries and similar remuneration as follows:
• All earnings due to the taxpayer resulting from work
with third parties with or without a contract, periodically
or non-periodically, whatever the names, forms or reasons
of those earnings, whether they are for works performed
in Egypt or abroad and paid by a source in Egypt, including
wages, remunerations, incentives, commissions, grants,
overtimes, allowances, shares and portions in profits, as well as
monetary privileges and allowance in kind of all types
• Earnings due to the taxpayer from a foreign source for works
performed in Egypt
• Salaries and remunerations of chairmen and members
of the board of directors in public sector companies and public
business sector companies who are not shareholders
• Salaries and remunerations of chairmen and members
of the board of directors
Tax is imposed on the total net income of natural persons (resident
and nonresident).
The tax is payable on income in excess of EGP5,000 of the total
net income realized by the resident taxpayer during the year.
The tax rates are as follows:
Personal incomes
Tax rate
More than EGP5,000 up to EGP30,000
10%
More than EGP30,000 up to EGP45,000
15%
More than EGP45,000 up to EGP250,000
20%
More than EGP250,000
25%
Corporate taxation in Middle East and North Africa (MENA) 2014
Personal income tax also applies to all amounts paid
to nonresidents by the entity or organization employing them
for performing services under its supervision, at the rates
previously mentioned after deducting the costs and exemptions
prescribed by law.
Employers and those responsible for paying the taxable income,
including companies or projects established under the FTZ
system, are required to retain from the amounts payable
to the nonresident an amount on account of the tax payable
according to the tax law. The tax retained is required to be
delivered to the appropriate tax district office within 15 days
of the end of the month in which the amounts are retained.
A certificate of income and a withheld taxes statement would be
sufficient evidence for an individual income. An individual does not
need to get a tax clearance certificate before leaving Egypt.
The following is exempted from the tax:
• An annual personal exemption of EGP7,000 for taxpayers
starting from September 2013
• Social insurance and other contributions to be deducted
according to the provision of the social insurance laws or any
alternative systems
• Employees’ contribution to private insurance funds established
according to the provisions of Law No. 54 of 1975*
• Premiums of life and health insurance on the taxpayer and any
insurance premiums for pension entitlement*
* Total deduction may not exceed 15% of the net taxable income or EGP3,000,
whichever is higher.
• The following in-kind benefits:
• Meals distributed to the workers
• Collective transportation of workers or equivalent
transportation cost
Any other in-kind benefits other than those mentioned above will
be subject to tax. These would include:
• Workers’ share in the profits to be distributed according
to the law
• All that is obtained by members of the diplomatic and consular
diplomatic personnel, international organizations and other
foreign diplomatic representatives within the context of their
official work, conditional upon reciprocity of treatment
and within the limits of that treatment
Miscellaneous taxes
Egypt imposes stamp duties, social security contributions, sales
tax and entertainment tax.
Customs duties
Customs duties are imposed on imported goods at rates that vary
according to official categories. General rates of customs duties
range between 0% and 30% of the cost, insurance and freight (CIF)
value. Higher rates are applied for passenger cars, nonessential
and luxury consumer goods, and alcoholic beverages.
Tax treaties
Egypt has signed and ratified double tax treaties with Albania,
Algeria, Austria, Bahrain, Belarus, Belgium, Bulgaria, Canada,
China, Cyprus, Czech Republic, Denmark, Ethiopia, Finland,
France, Georgia, Germany, Greece, Hungary, India, Indonesia, Iraq,
Italy, Japan, Jordan, Kuwait, Lebanon, Libya, Malaysia, Malta,
Morocco, the Netherlands, Norway, Pakistan, Palestine, Poland,
Romania, the Russian Federation, Serbia, Singapore, South Africa,
South Korea, Spain, Sudan, Sweden, Switzerland, Syria, Tunisia,
Turkey, Ukraine, the United Arab Emirates, the United Kingdom,
the United States, and Yemen.
• Health care
• Tools and uniforms necessary for performing the work
• Tenements provided by the employer to workers
for performing their work
Corporate taxation in Middle East and North Africa (MENA) 2014
21
Iraq
Iraq’s economy is dominated by the petroleum sector, which has traditionally
provided about 95% of foreign exchange earnings. After decades of wars
and economic sanctions, the Iraqi Government is keen on rebuilding the country
and redeveloping its economy.
Trade relations have begun to take shape in line with developments
in the operational environment. However, all sectors, and the petroleum
sector in particular, remain in great need of development and expansion.
The Iraqi Government is encouraging foreign investment in petroleum and other
sectors by relaxing controls, so that foreign investments and ownership
in general, and in the petroleum sector in particular, are not restricted in Iraq.
The unit of currency is the Iraqi Dinar (IQD). The official exchange rate is
approximately IQD1160 to US$1.
Corporate taxes
Corporate income tax
In general, corporate income tax is imposed on taxable
profit from all sources arising in, or deemed to arise
in, Iraq. Income is deemed to arise in Iraq if any
of the following is located there:
• The place of contract signature
• The place of performance of work
• The place of delivery of work
• The place of payment for the work
Otherwise, the company is not subject to Iraqi
corporate income tax purposes.
The Iraqi tax law applies a tax retention
system to all payments made to contractors
and subcontractors, whereby amounts are retained
by the payer for certain time limits unless the payee
presents the payer with a tax clearance certificate,
at which time the payer may release the retention
to the payee. If a tax clearance certificate is not
presented and the retained amount is submitted
to the tax authorities, the remitted amount will be
considered by the tax authorities as a payment on
account of the payee’s tax liability.
22
Tax rates
The corporate income tax rate applicable
to all companies (except oil and gas production
and extraction activities and related industries,
including service contracts) is a unified flat rate of 15%
of taxable income. Activities relating to oil and gas
production and extraction activities and related
industries, including service contracts, are subject
to income tax at a rate of 35% of taxable income.
Capital gains
Capital gains from the sale of fixed assets are taxable
at the general corporate income tax rate of 15% (35%
for oil and gas production and extraction activities
and related industries, including service contracts).
Capital gains from the sale of shares and bonds not
in the course of a trading activity are exempt from tax;
otherwise, they will be taxable at the general corporate
income tax rate.
Administration
Tax returns for all corporate entities must be filed
in Arabic within five months after the end of the fiscal
year. Payment of the total amount of assessed taxes
is due after the tax authority issues its tax assessment.
Corporate taxation in Middle East and North Africa (MENA) 2014
If the tax due is not paid within 21 days from
the date of notification, there will be an additional penalty of 5%
of the amount of tax due. This amount will be doubled if the tax
is not paid within 21 days after the lapse of the first 21-day period.
A rate of 10% of the tax due will be imposed as a delay fine,
up to a maximum of IQD500,000, on any taxpayer who
does not submit, or refuses to submit, an income tax return
within five months of the financial year-end.
An additional penalty of IQD10,000 will be imposed on foreign
branches that fail to submit final accounts.
Dividends
In general, dividends paid from previously taxed income
are exempt from corporate income tax in the hands
of the recipient.
Interest
Interest income is subject to corporate income tax at the same
rates applicable to net income from operations.
Foreign tax relief
Determination of taxable
income
General
If the income arises in Iraq from trading or any other source,
or is deemed to arise in Iraq, it will be subject to tax, except
for income exempt by the Income Tax Law, the Industrial
Investment Law or the Investment Law in the Kurdistan region.
Business expenses incurred to generate income are allowable,
with limitations on certain items, such as entertainment
and donations. However, provisions and reserves are not
deductible for tax purposes.
Corporate income tax is computed by applying the appropriate
tax rate to taxable income, which is based on the profit as
reported in the audited financial statements, which must be
prepared in accordance with the Iraqi Unified Accounting System
(IUAS). The General Commission for Taxes (GCT) may decide
to accept the reported taxable profit or impose a deemed taxable
profit figure based on a percentage of total revenue.
A foreign tax credit is available to Iraqi companies on income
taxes paid abroad. In general, the foreign tax credit is limited
to the amount of an Iraqi company’s income tax on the foreign
income. Excess foreign tax credits may be carried forward
for five years.
Corporate taxation in Middle East and North Africa (MENA) 2014
23
Tax depreciation
The Iraqi Depreciation Committee sets the maximum depreciation
rates for various types of fixed assets used in different industries.
Generally, there are three acceptable depreciation methods:
• Straight-line
• Declining-balance
• Other methods (with the approval of the GCT)
If the rates used for accounting purposes are greater
than the prescribed rates, the excess is disallowed for tax
purposes.
Relief for losses
A tax loss from one source of income may be offset against profits
from other sources of income in the same tax year. Unutilized tax
losses may be carried forward and deducted from the taxable
income of the taxpayer over the next five consecutive years,
subject to the following conditions:
• Losses may not offset more than half of the taxable income
of each of the five years
Miscellaneous matters
Foreign exchange controls
The currency in Iraq is the Iraqi dinar. Iraq does not impose
any foreign exchange controls. However, according to the Central
Bank of Iraq’s instructions and regulations, transfers
of funds have to be in compliance with the Anti-Terrorism
Law and the Anti-Money Laundering Law.
Debt-to-equity ratio
The only restrictions on debt-to-equity ratios are those stated
in the memorandum of incorporation and articles of association.
Tax treaties
Iraq has entered into a bilateral double taxation treaty with
Egypt and a multilateral double taxation treaty with the states
of the Arab Economic Union Council. However, it is not prudent
to rely on a treaty position in Iraq as, in practice, the treaty
provisions are unlikely to be applied.
• The loss may only offset income from the same source from
which the loss arose
In order for losses to be claimed, appropriate documentation must
be obtained, including financial statements that support the loss,
with sufficient documentation to support the expenses that
created such loss. Losses may not be carried back against profits
arising in earlier periods.
Groups of companies
Iraqi law does not contain any provisions for filing consolidated
returns or for relieving losses within a group of companies.
24
Corporate taxation in Middle East and North Africa (MENA) 2014
Corporate taxation in Middle East and North Africa (MENA) 2014
25
Jordan
Jordan is a free market economy. Jordan’s infrastructure is well developed,
with good communications and business facilities. Opportunities for tourism
and recreational amenities are excellent.
The Government is keen to encourage investment, and incentives in the form
of customs duty and tax exemptions are available for certain projects.
In addition, certain businesses established in the FTZs and the industrial cities
are eligible for tax and other exemptions.
Foreign ownership of business is allowed as follows:
• Foreign companies may register branches to carry out contracts in Jordan.
• Non-Jordanian investors may own all or any part of any economic project,
except for activities in the following sectors, where they may not own more
than 50%:
• Construction contracting
• Commerce and commercial services
The unit of currency is the Jordanian Dinar (JOD). The official exchange rate
is approximately JOD1 to US$1.41.
Corporate taxes
Corporate income tax
In general, income tax is payable by corporate
entities and foreign branches on taxable profits from
all sources arising or deemed to arise in Jordan.
Income is deemed to arise in Jordan:
• If the place of performance of work, the delivery
of work or signing of contract is in Jordan
• If the income arises from Jordanian capital invested
outside Jordan
• If output of work is used in Jordan
Rates of corporate income tax
Corporate income tax rates for resident corporations
vary from 14% to 30%, depending on the type
of activity.
The corporate income tax rates are:
Banking
30%
Insurance, telecommunications,
stockbrokers, finance companies,
currency exchange companies
and leasing companies
24%
All other
14%
Capital gains
Banks, financial companies, insurance companies,
foreign exchange dealers and finance leasing
companies are subject to tax on capital gains derived
from sales of shares and bonds in Jordan.
For other companies, income derived from sale of
shares in Jordan are exempt from shares. However,
a proportion of the cost of the shares disposed is
disallowed. The cost disallowed is determined by
applying a formula.
Income derived from current assets, which are assets
held for less than one year, and from depreciable
assets are taxable as ordinary income.
26
Corporate taxation in Middle East and North Africa (MENA) 2014
Administration
Dividends
All business expenses incurred to generate income are eligible
for deduction with certain limitations and exceptions. The tax
year for corporations corresponds to their accounting financial
year and, for individuals, it is the calendar year. Tax returns must
be filed on a prescribed form, in Arabic, within four months after
the end of each tax year.
Dividends received are exempt from tax, except for dividends
received by banks and financial institutions from mutual
investment funds. Twenty-five percent of exempt dividend income
is added back to taxable income if total income does not exceed
total allowable cost.
The tax return requires disclosures relating to the individual’s
or corporation’s income, expenses, exemptions and taxes payable,
including details of goods and services supplied and payroll
incurred for the year.
Interest
The total amount of tax due must be paid at the time of filing
to avoid penalties.
Interest paid by banks to depositors, except for interest on
local interbank deposits, is subject to a 5% withholding tax.
The withholding tax is considered to be a payment on account
for resident companies and a final tax for resident and nonresident
individuals and nonresident companies.
The tax authority has the right to conduct an income tax
audit for up to four previous years and to charge the company any
additional taxes.
Deposit interest and profits generated by non-operating banks
and financial companies in Jordan from banks operating
in Jordan and financial companies are exempt from income tax.
The tax regulations allow for payment of the year’s taxes on a set
payment schedule, where payments made during the year
are taken on account.
Foreign tax relief
Taxpayers whose gross income exceeds JOD 500,000 are required
to make an estimated tax payment by the end of the sixth
month during the year. If the taxpayer’s half-yearly financial
statements are ready, the estimated tax payment should be
37.5% of the half-yearly taxable income; however, if the taxpayer’s
half-yearly financial statements are not ready, the estimated tax
payment should be 37.5% of the prior full year’s taxable income.
Foreign tax relief may be granted in accordance with tax treaties
signed with certain countries.
Corporate taxation in Middle East and North Africa (MENA) 2014
27
Determination of taxable
income
Provisions and reserves
General
Tax depreciation
All income earned in Jordan from trading business or other
sources is taxable.
All business expenses incurred to generate income are allowable,
with certain limitations. A certain percentage of entertainment
expenses are deductible. Head office charges are limited to 5%
of net adjusted taxable income.
Withholding taxes
The withholding tax is levied on payments made to nonresidents
in respect of taxable services that are performed in Jordan.
The taxpayer is required to withhold 7% of the total payment.
A 5% withholding is required in respect of:
• Professional services provided by individuals and companies
• Other services provided by resident parties who do not have
a tax identification number
• Rents
The withholding should be submitted to the Income and Sales
Tax Department (ISTD) within 30 days from the date of payment
for the service or the date of invoice or contract, whichever
is earlier.
Late payment penalties will be applied at 0.4% of the amount due
at the beginning of every week.
Where an exemption from withholding applies, quarterly reporting
to the ISTD of payments made to exempt parties is still required,
although no amounts are actually withheld.
Provisions and reserves are not allowable as tax deductions,
except for insurance companies’ reserves and doubtful debts
provisions for banks.
Depreciation treatment is not addressed in the Income Tax Law
No. 28 of 2009. Until instructions are issued, taxpayers should
continue to apply the prior law’s depreciation provisions.
The Income Tax Law allows assets with values of less than JOD100
to be expensed during the same fiscal year as purchases.
The ISTD establishes statutory maximum depreciation rates
for various fixed assets. If the rates used for accounting purposes
are greater than the prescribed rates, the excess is disallowed,
but may be used for tax purposes at a later date. The following
maximum straight-Iine depreciation rates apply.
Asset
Rate (%)
Industrial buildings
4
Buildings
2
Office equipment
10
Motor vehicles
15
Plant and machinery
10–20
Computer equipment 25
The taxpayer may choose to use the accelerated method, whereby
twice the straight-line rate will be applied (except for buildings).
Machinery, equipment and other fixed assets that are imported
on a temporary-entry basis do not qualify for accelerated
depreciation.
Used assets are depreciated at the above statutory rates,
calculated on purchase price.
Inventories
Inventories may be valued using any internationally accepted
method normally applied in the relevant industry.
28
Corporate taxation in Middle East and North Africa (MENA) 2014
Relief for losses
Taxpayers are allowed to carry forward unabsorbed losses
to offset against the profits of subsequent periods indefinitely.
Losses may not be carried back.
Groups of companies
Companies must file stand-alone financial statements for tax
purposes.
Investment incentives
The Investment Promotion Law (No. 16) of 1995, and its
amendments in 2000, repealed all earlier laws concerning foreign
investments in Jordan. The new law opens the economy to all
investors, setting detailed guidelines for starting a business
in Jordan and the incentives available.
Pursuant to the law, a Higher Council for Investment Promotion,
chaired by the Prime Minister, was formed to achieve
comprehensive development goals. The council is empowered
to take appropriate decisions on all matters regarding investment
in Jordan.
According to the provisions of the law, the Jordan Investment
Board (JIB) was established to assist the council in promoting
investment in the country. The JIB’s main function is to implement
measures enhancing business confidence by simplifying
registration and licensing processes and implementing investment
promotion programs. The Investment Promotion Committee, with
representatives from the income tax, customs, industry and trade
departments, was also formed to carry out specific functions on
taxation and duties.
According to the Investment Promotion Law of 1995, projects
in certain sectors are allowed special exemptions to attract more
investment. The sectors are industry, agriculture, hotels, hospitals,
maritime transport and railways.
The Council of Ministers can add any other sector based on
the recommendation of the Higher Council for Investment
Promotion.
The main incentives for the listed sectors are as follows:
• The fixed assets of the project shall be exempted from
fees and taxes, provided they are imported into Jordan
within a period of three years from the date of approval.
• Imported spare parts for the project shall be exempted from fees
and taxes, provided the value of spare parts does not exceed
15% of the value of fixed assets.
• The Investment Promotion Committee shall exempt fees
and taxes on fixed assets imported for expansion of capacity
over 25%.
Corporate taxation in Middle East and North Africa (MENA) 2014
29
Jordan has set up a number of FTZs in order to encourage
export-oriented industry. The Aqaba Special Economic Zone
was the first FTZ in Jordan. Other FTZs are located at Zarqa,
the Sahab Industrial Estate and Irbid. In February 2008,
the Jordan Parliament passed the new Development Areas
Law of 2008, setting specialized rules to facilitate the creation
of economic growth areas within certain zones.
The new law also provides incentives for investment within
the specified areas, including a flat rate of 5% income tax
with no customs duties for materials, machines and equipment
used for projects in the area.
Miscellaneous matters
Foreign exchange controls
Jordan does not impose any foreign exchange controls.
Other taxes
A nonresident foreigner who has dependents residing
in Jordan may still claim the JOD12,000 exemption in respect
of dependents.
Any single household’s total exemptions must not exceed
JOD24,000.
Any amount that has been paid during the year as a donation
to the Government of Jordan or for its armed forces, its public
institutions or its local authorities is deductible from the net
income for the year.
Subscriptions and donations paid inside the country without
personal benefit for religious, charity, humanitarian, scientific,
cultural, sport or vocational purposes are deductible if
the Ministers’ Council approves the subscriptions or donations.
Donations paid for political parties are also deductible, provided
that the amount does not exceed what the Jordanian Political
Parties Law allows and on condition that the amount deducted
does not exceed one-quarter of the taxable income before
the deduction.
The following tax rates apply for resident and nonresident
employees:
Personal income tax
• Seven percent on the first JOD12,000
Individuals, whether resident or nonresident, are taxed on
income earned in Jordan from all taxable activities, including
income from employment, business (either as sole proprietors
or as partners), rental income and directors’ fees. Jordan does
not tax foreign-source income.
Income from employment includes salaries and other employer-paid
benefits, such as rent and school fees. However, the following
benefits do not constitute taxable income to the employee:
• Occasional meals given to employees at work
• Accommodation given to the employees for work purposes
• Fourteen percent on any amount exceeding JOD12,000
The employee’s monthly tax return form should be filed in Arabic
with the ISTD, along with a submission of the employee’s withheld
income taxes, within 30 days following the end of the month
to avoid late payment penalties of 0.4% of the amount due at
the beginning of each week.
An annual employee listing should be filed in Arabic. This should
include employees’ names, salaries, benefits, income tax
and welfare tax deductions, and should be filed with the ISTD
within one month after the end of the year.
• Uniforms and equipment necessary for work
The following amounts are available as personal exemptions from
individuals’ income before arriving at taxable income.
Single person
JOD12,000
Married couple (if the spouse does not work)
JOD24,000
A resident non-Jordanian employee is treated as a Jordanian
employee, with a personal exemption of JOD12,000
and an additional JOD12,000 if the employee’s dependents
are residents of Jordan.
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Corporate taxation in Middle East and North Africa (MENA) 2014
Miscellaneous taxes
• The employer’s monthly contribution will rise from 12.25%
to 14.25%.
Jordan does not levy net worth tax, inheritance tax or gift tax.
The following table summarizes other significant taxes.
Nature of tax
Rate (%)
General sales tax
(similar to value added tax)
16
Social security contributions on salaries and all
benefits except overtime
• Paid by the employer
12.75 (a)
• Paid by the employee
6.75
Withholding tax on imports; imposed on the value
of goods imported for resale paid on account against
the taxpayer’s final tax liability
2
Withholding tax on payments to nonresident service
providers
7
(a) S
ocial security
The Jordanian Parliament and Senate have issued
an amendment to the Social Security Law that increases
the monthly social security contributions from 18.75%
to 21.75%, with the increase to be implemented over four
consecutive stages starting from 1 January 2014 as follows:
The employer’s share of the increase of 2% in social security
contribution will be introduced in four consecutive stages
with an increase of 0.5% at each stage, the first stage being
effective from 1 January 2014.
Tax treaties
Jordan has entered into double tax treaties with Algeria, Bahrain,
Bulgaria, Croatia, Canada, the Czech Republic, Egypt, France,
India, Indonesia, Iraq, Iran, Kuwait, Korea, Lebanon, Libya,
Malaysia, Malta, Morocco, the Netherlands, Qatar, Pakistan,
Poland, Romania, Sudan, Syria, Tunisia, Turkey, the United
Kingdom, Ukraine and Yemen.
In addition, Jordan has entered into tax treaties, which primarily
relate to transportation, with Austria, Belgium, Cyprus, Denmark,
Italy, Pakistan, Spain and the United States.
Jordan is negotiating double tax treaties with
Serbia and Montenegro and the United Arab Emirates.
• The employees’ monthly contribution will rise from 6.5%
to 7.5%.
The employees’ share of the increase of 1% in social security
contribution will be introduced in four consecutive stages
with an increase of 0.25% at each stage, the first stage being
effective from 1 January 2014.
Corporate taxation in Middle East and North Africa (MENA) 2014
31
Kuwait
The Kuwaiti Government favors a free market, with little official intervention.
Kuwait has a small, open economy that is dominated by its oil industry,
so other non-oil sectors of the economy, such as agriculture and manufacturing,
play a lesser role in the economy.
Foreign companies have generally operated in Kuwait either through an agent
or as a minority shareholder in a locally registered company. In principle,
the method of calculating tax is the same for companies operating through
an agent and for minority shareholders.
For minority shareholders, tax is levied to the extent of the foreign company’s
share of the profits (whether distributed or not by the Kuwaiti company)
plus any amounts receivable for interest, royalties, technical services
and management fees.
However, the new Company Law and Promotion of Direct Investment
in the State of Kuwait Law introduce new legal entities and ownership structures
that allow for 100% foreign ownership.
The unit of currency is the Kuwaiti Dinar (KD). The official exchange rate is
approximately KD1 to US$3.55.
Corporate taxes
Law No. 2 of 2008, amending Amiri Decree
No. 3 of 1955 (the original tax law), became
effective for fiscal periods commencing after
3 February 2008 — the date the law was published
in the Kuwait Official Gazette.
Subsequently, on 20 July 2008, the Ministry of Finance
(MOF) issued the Executive Bylaws (the Bylaws)
for the implementation of the amendments approved
under Law No. 2.
These ERs are effective for fiscal periods ending on
31 December 2013 and thereafter.
The key changes approved under Law No. 2
and the Bylaws:
The ERs relating to the Kuwait Income Tax
and the Zakat and National Labour Support Tax
(NLST) laws introduce many changes that will
have a significant impact on the tax filings, inspections
and assessments of taxpayers to whom these
ERs apply.
• The income tax rate has been reduced to 15%.
Corporate income tax
• Profits earned by a body corporate from trading
in securities listed on the Kuwait Stock Exchange
(KSE), either directly or through mutual funds, shall
not be taxable in Kuwait. However, a withholding tax
of 15% is applied to dividends paid.
Foreign body corporates are subject to tax in Kuwait
if they carry on a trade or business, either directly
or through an agent, in Kuwait or in the islands of Kubr,
Qaru and Umm Al Maradimor, which are in the offshore
area of the partitioned neutral zone under the control
and administration of Saudi Arabia.
• Losses shall be allowed to be carried forward
for a maximum period of three years, provided
the entity has not ceased its operations in Kuwait.
• A statute of limitation period of five years has been
approved and included in the tax law.
32
On 12 December 2013, the tax department released
Administrative Order 875 of 2013 promulgating
new Executive Rules (ERs) and regulations
for the implementation of Kuwait’s Decree No. 3
of 1955 as amended by Law No. 2 of 2008.
Kuwaiti-registered companies wholly owned by
Kuwaitis and companies incorporated in GCC
countries that are wholly owned by GCC citizens
are not subject to income tax. The members
of the GCC include Bahrain, Kuwait, Oman, Qatar,
Saudi Arabia and the United Arab Emirates.
Corporate taxation in Middle East and North Africa (MENA) 2014
The term “body corporate” refers to an association that
is formed and registered under the laws of any country or state,
and is recognized as having a legal existence entirely separate from
that of its individual members.
A joint venture or consortium has no legal status in Kuwait. Under
the tax department’s rules, a consortium engaged in the joint
performance of a contract must file a combined tax declaration
for the total earnings from the contract. Each partner in the joint
venture must be separately registered in their own legal names
and are subject to tax on their share of taxable profit individually.
Law No. 2 also includes a definition of an agent, which states
that it is a person authorized by the principal to carry out
business, trade or any activities stipulated in Article 1 of the law
or to enter into binding agreements with third parties on behalf
and for the account of the person’s principal. A foreign principal
carrying on business in Kuwait through an agent, as defined,
is subject to tax in Kuwait.
Foreign companies carrying on a trade or business
in Kuwait are subject to income tax under Amiri Decree No. 3
of 1955, as amended by Law No. 2 of 2008. Foreign companies
carrying on a trade or business in the islands of Kubr, Qaru
and Umm Al Maradim are subject to tax in Kuwait under Law
No. 23 of 1961.
Foreign companies carrying on a trade or business in the offshore
area of the partitioned neutral zone under the control
and administration of Saudi Arabia are subject to tax in Kuwait on
50% of the taxable profit under Law No. 23 of 1961. In practice,
the tax department computes the tax on the total income
of the taxpayer and expects that 50% of such tax should be settled
in Kuwait. Amiri Decree No. 3 of 1955 and Law No. 23 of 1961
differ primarily with respect to tax rates.
No specific ER (previously ER No. 50 of 2010) has been issued
for incorporated bodies conducting business in the State
of Kuwait and partitioned neutral zone (PNZ).
It appears from our discussions with senior officials at the tax
department that the previous ERs issued for Law No. 2 of 2008
will not be applicable to operations in the PNZ. The tax department
has, however, advised that the tax department’s circulars applied
to Decree No. 3 of 1955 (i.e., before the issuance of Law No. 2
of 2008) will continue to be applicable to PNZ operations.
Tax rates
In accordance with Law No. 2 of 2008, the tax rate was
reduced to a flat 15%, effective for fiscal periods beginning
after 3 February 2008.
Territoriality
Foreign companies doing business in Kuwait are subject to tax on
Kuwaiti-source income only.
The source of income is considered to be in Kuwait if the place
of performance of the services is within Kuwait. This includes work
conducted outside Kuwait (offshore activity) under a contract that
also involves activity in Kuwait (onshore activity). For example,
in supply and installation contracts, the taxpayer is required
to declare the full amount received under the contract, including
the offshore supply element, to the Kuwait tax authority.
Corporate taxation in Middle East and North Africa (MENA) 2014
33
Income
Gross income includes income from a trade or business, dividends,
interest, discounts, rents, royalties and premiums, as well as any
other gains or profits of an income or of a capital nature.
Profits on royalties and license fees are generally considered
to be 98.5% of the gross payment, after deducting the head office
overhead allowance.
For contract work, tax is assessed on progress billings (excluding
advances) for work performed during an accounting period, minus
the cost of work incurred. The tax authority does not accept
the completed-contract or percentage-of-completion methods
of accounting.
• Opportunity for non-Kuwaiti investments in excess of 50%
(up to 100%) in Kuwaiti companies
• Full or partial exemption from customs duties on certain imports
and other government charges for approved projects
• A tax holiday of up to 10 years for non-Kuwaiti shareholders’
share of the profits from qualifying projects, and an additional
tax holiday for a similar period for further investment
in an approved project
• A guarantee for repatriation of profits and capital invested
in the project
• Benefits accruing from double tax treaties and investment
promotion and protection agreements
Capital gains
• Long-term leases of land in industrial estates at low rents
Capital gains on the sale of assets and shares by a foreign
shareholder are treated as normal business profits
and taxed accordingly.
• Employment of required foreign manpower without being
subject to the restriction contained in Law No. 19 of 2000
relating to the employment of Kuwaiti manpower
In addition, the DFCIL provides for:
Kuwait free trade zone
To encourage exporting and re-exporting, the Government has
established the Kuwait Free Trade Zone (KFTZ) in the vicinity
of the Shuwaikh Port. The KFTZ offers the following benefits:
• Up to 100% foreign ownership is allowed and encouraged.
• All corporate and personal income is exempt from tax.
• All imports into and exports from the KFTZ are exempt from tax.
• Capital and profits are freely transferable outside the KFTZ
and are not subject to any foreign exchange controls.
In practice, the licenses required to set up in the KFTZ
are extremely difficult to obtain.
• Adoption of a negative list approach to determine
the applicability of the law
• Establishment of a new authority, the Kuwait Direct Investment
Promotion Authority (KDIPA)
Significant changes have been introduced to widen the scope
of the applicability of the law and to simplify the process
of applying for a license.
Trading in securities listed on the KSE
Investment incentives
On 16 June 2013, Law No. 116 of 2013 regarding the promotion
of direct investment in the State of Kuwait (the New Law) was
published in the Kuwait Official Gazette. The New Law, which
will is effective from December 2013, replaces The Direct Foreign
Capital Investment Law (DFCIL) No. 8 of 2001. The incentives
under this New Law remain almost identical to the old law,
and include:
34
• Two new types of investment entities: a licensed branch
of a foreign entity; and a representative office solely
for the purpose of preparing market studies without engaging
in any commercial activities
Article 1 of Law No. 2 and Article 8 of the Bylaws provide
for a possible tax exemption of profits generated from dealing
in securities on the KSE, whether directly or through investment
portfolios. However, no further clarification has been provided
with regard to the definition of “profits” or “dealing.” Under Law
No. 2 of 2008, any capital gains arising from trading in securities
listed on the KSE are not taxable. However, the MOF has not
officially published any additional information as to whether their
position on the exemption of capital gains arising from trading
Corporate taxation in Middle East and North Africa (MENA) 2014
in securities listed in the KSE would differ if the shareholding
of a foreign investor in a company listed on the KSE were to exceed
a certain threshold or a certain period of time. Consequently,
it would be prudent to obtain clarification from the Kuwait tax
authority as to the potential tax implications of a long-term
investment in listed shares on the KSE before such an investment
is undertaken.
Dividend or distribution of profits
Under the old tax law, no tax was imposed on dividends paid
to foreign shareholders by Kuwaiti companies. However, tax
was assessed on the share of profits attributable to foreign
shareholders according to the audited financial statements
of the company, adjusted for tax purposes.
In accordance with Law No. 2 of 2008, dividend income
received by investors in companies listed on the KSE shall
be subject to a 15% withholding tax. The foreign investor’s
custodian or broker in Kuwait shall be required to withhold the tax.
Tax compliance procedures
The MOF requires the local custodian or broker of a foreign
investor to provide information about the foreign investor,
to deduct 15% tax on payments of dividends to the foreign
investor and to deposit the tax with the MOF.
The MOF has approached the major banks and custodians
operating in Kuwait to implement the tax withholding requirements
of 15% on dividends from securities listed on the KSE.
GCC investors are also subject to withholding tax in Kuwait by local
custodians and brokers until they are able to obtain a tax clearance
certificate indicating that they are not subject to tax in Kuwait.
The MOF has issued forms to allow 100% GCC-owned investors,
as well as investors from countries with which Kuwait has a double
taxation treaty, to obtain a tax clearance certificate for exemption
or reduction of withholding tax on dividends received from
companies listed on the KSE.
Any entity wishing to claim a lower withholding tax rate under a tax
treaty would need to approach the MOF and apply for a refund.
Article 46 of the Bylaws states that investment companies
or banks that manage portfolios or funds, or act as custodians
of listed shares for foreign entities, are required to withhold
corporate tax due from any payment due to such foreign entities.
The amount withheld must be deposited within 30 days from
the date of withholding, together with a list showing the names
of the foreign entities and the amounts of corporate tax withheld.
The Department of Inspections and Tax Claims (DIT) requires
investment companies or banks that manage portfolios or funds
to comply with this rule.
Undistributed profits and other income
The tax treatment of undistributed profits of companies listed on
the KSE that is not addressed in Law No. 2 has also not been fully
clarified in the Bylaws.
However, Article 13 of the Bylaws states that the investment
funds, investment trustees and companies that manage
the portfolios of the corporations subject to the income tax decree
are required to provide the tax department with a statement
including all the profits resulting from dividends of listed shares
that are managed or held as custodian on behalf of a corporation,
or any profit resulting from carrying out any activity subject to tax
in portfolios or investment funds.
It appears that, where a foreign investor holds shares
in a KSE-listed Kuwaiti company, the foreign investor may
also be subject to tax on its share of the undistributed taxable
profit of the Kuwaiti company.
This matter is being considered by the DIT and an official
pronouncement in this regard is awaited.
Administration
The Bylaws to Law No. 2 require that every corporate body should
register with the DIT within 30 days of commencing its activities
or signing the contract in Kuwait and provide the following
documents:
• The company’s name and address inside and outside of Kuwait
• The date of commencement of its activities or contract in Kuwait
• The name and address of the company’s agent in Kuwait
together with the agency agreement
• Other documents, if any, required by the DIT
The registration form requires the taxpayer to state the fiscal year
selected for tax filings in Kuwait.
A taxpayer can select any year-end comprising 12 consecutive
Gregorian months. For tax declarations covering the first and last
periods in Kuwait, it is possible to obtain approval for a period
shorter or longer than 12 months up to a maximum of 18 months.
Accounting records should be kept in Kuwait, and it is normal
practice for the tax authorities to insist on inspecting
the books of account (which may be in English) and supporting
documentation before agreeing to the tax liability.
The tax authorities have also issued notifications restating
the requirement for taxpayers to abide by Article 13
and Article 15 of the Bylaws of Law No. 2 of 2008 that
relate to the preparation of books and accounting records,
and submission of information along with the tax declaration.
Article 13 requires the taxpayer to enclose the prescribed
documents, e.g., trial balance, list of subcontractors, list of fixed
assets and inventory register, along with the tax declaration.
Corporate taxation in Middle East and North Africa (MENA) 2014
35
Article 15 requires the preparation of prescribed books
of accounts, including general ledger and stock list. In the case
of non-compliance with these regulations, the DIT may finalize
an assessment on the basis deemed reasonable by the DIT.
Article 13 of the Bylaws provides that companies that may not
be subject to tax due to application of any tax laws, statutes
or treaties for avoidance of double taxation with various countries
would be required to submit tax declarations in Kuwait.
The Bylaws provide that a taxpayer must register
with the DIT within 30 days after signing its first contract
in Kuwait. The prior tax law did not specify a period. In addition,
a taxpayer is required to inform the Ministry of Finance (MOF)
of any changes that may affect its tax status within 30 days
after the date of the change. The taxpayer must also inform
the MOF of the cessation of activity within 30 days after
the date of cessation.
ER No. 8 of 2013 (previously ER No. 8 of 2010) —
Concerning tax declarations
Tax cards
As per the Bylaws, a system of tax cards has been introduced,
requiring all taxpayers to apply for a tax card, which needs to be
renewed annually. All government departments and public
authorities are prohibited from dealing with companies that do
not hold an active tax card. Currently, applications for tax cards
are being accepted and the MOF is updating its database.
The information required to apply for the tax card is similar
to that required at the time of registration. The following
documents must be submitted with the tax card application form:
• A copy of the articles of association of the company
and amendments, if any
• A copy of any agreements with an agent in Kuwait,
together with a certificate of registration of the agency
with the Kuwait Ministry of Commerce (if applicable)
• A copy of all contracts entered into in Kuwait
• A copy of the exemption form (in cases where the company
is exempt from tax under a specific law, such as a tax holiday
under the Foreign Direct Investment Law)
• Letter of authority for appointment of a firm of accountants
or tax advisors
• Evidence of the authorization given to the authorized signatory
of the form (e.g., power of attorney or any other official
document authorizing the company official to represent
the company in Kuwait)
Tax filing
A tax declaration must be filed on or before the 15th day
of the fourth month following the end of the taxable period
(for example, in the case of a 31 December year-end, tax
declarations must be filed on or before 15 April). Tax may be
payable in four equal installments on the 15th day of the fourth
(i.e., with the tax declaration), sixth, ninth and 12th months
following the end of the taxable period, provided that
the declaration is submitted on or before the due date for filing.
36
The amounts included in the tax declaration should be in Kuwaiti
dinars (KD).
An analysis of “contract revenue and the tax retentions” should be
included in the prescribed format.
Analysis of expenses, percentages of depreciation and provisions
to be included in the declaration.
All attached financial statements and analyses (breakdown) should
include “comparative figures” for the previous year.
Circular No. 1 of 2013
On 10 February 2013, the DIT issued Circular No. 1 of 2013.
This circular applies to all taxpayers filing tax declarations for periods
ended before or on 31 December 2012 and thereafter. Where tax
declarations are prepared on an actual accounts basis, the circular
requires that the tax declarations shall be prepared in accordance
with the tax laws and the ERs issued by the DIT. For these types
of declarations, the circular also requires the submission of a draft
income and expense adjustment computed in accordance with
the last assessment finalized by the DIT within three months
of the date of submission of the tax declaration.
Where tax declarations are prepared on a deemed-profit basis,
the circular requires inter alia that tax declarations should be
submitted on the same percentage that was applied in the last
assessment. It also requires certain supporting documents
to be provided with the tax declaration, as well as details of all
subcontractors.
ER No. 59 of 2013 (new ER) — Concerning Auditor’s
Report
The new ER requires the auditors to provide:
A report on the declaration in the prescribed format as stated
in the ER and a separate note on the items that are not in line
with the tax law, ER, rules and the instructions enforcing them,
quantifying exceptions
With this ER, it is likely that the tax department would expect that
all tax declarations are prepared in strict compliance with the ERs.
This will have a significant impact on tax filings going forward
and the information that may need to be appended to the tax
declaration.
Corporate taxation in Middle East and North Africa (MENA) 2014
Filing extension request
Revision of the tax declaration
The Bylaws provide that a request for extension in time for filing
the tax declaration should be submitted to the DIT by the 15th
day of the 2nd month after the fiscal year-end. The maximum
extensions in time to be granted will be 60 days. If such
an extension is granted, no tax payment is necessary until the tax
declaration is filed, and payment must then be in one lump sum
and not in installments. Tax is payable in Kuwaiti dinars with
a certified check drawn on a bank in Kuwait.
Under the original tax law, provided an assessment of tax
was not issued by the DIT, it was possible to revise the tax
declaration for a fiscal period by simply submitting a letter
to the DIT giving details of the proposed amendments and their
impact on the taxable results. The Bylaws for Law No. 2 of 2008
include provisions for companies wishing to submit a revised tax
declaration. The Executive Rule issued by the DIT states that
the companies may file a revised tax declaration if the assessment
for that fiscal period has not been issued by the DIT. Furthermore,
it states that the company should obtain written approval from
the DIT prior to submission of the revised tax declaration.
Penalties
In the event of a failure to file a tax declaration by the due date,
a penalty is payable equal to 1% of the tax for each 30 days or fraction
thereof during which the failure continues. In addition, in the event
of a failure to pay tax by the due date, a penalty is payable equal
to 1% of the tax payment for each period of 30 days or fraction
thereof from the due date to the date of the settlement of the tax due.
Objection or appeal against tax assessment
If the taxpayer does not agree with the assessment issued by
the DIT, they have the right to file an objection against the tax
assessment within 60 days from the date of issue. The time
limit for resolution of the objection is 90 days from the date
of filing the objection to the DIT. A revised tax assessment is issued
by the DIT after resolution of the objection filed by the taxpayer.
Tax payable per the revised assessment is then required to be
settled within 30 days of issue of the revised assessment.
Should an objection be rejected by the DIT, the taxpayer has
a right of appeal against the revised tax assessment to the Tax
Appeal Committee (TAC). The appeal should be filed with the TAC
within 30 days of issue of the revised assessment (or 30 days
from the expiry of 90 days following submission of an objection,
if a revised assessment is not issued). The matter is resolved
through appeal hearings and the final revised assessment issued,
based on the decision of the TAC.
Tax payable as per the revised assessment is then required to be
settled within 30 days of the date of issue assessment.
In the case of a dispute with the DIT regarding the tax assessment
after a rejection of appeal with the TAC, the company may turn
to the administrative court to recover the disputed amount
of tax claim. The company can then take this matter to the civil
courts or reach a settlement under Ministerial Resolution No. 10,
under which the Undersecretary of the Ministry of Finance may
reconsider the assessment.
Under Ministerial Resolution No. 10, dated 28 March 2004, which
was issued by the Ministry of Finance on submission of a request
by a taxpayer, the Assistant Undersecretary to the Ministry
of Finance may reconsider the final assessment issued by the DIT if
errors of fact exist.
The DIT issues its decision based on the opinion received from
the Undersecretary of the Ministry of Finance within 60 days
of the date of submission of the request of the taxpayer.
If the DIT accepts the amended tax declaration, the date of filing
of the revised declaration is considered as the actual date of filing
for the purpose of imposing delay fines.
Statute of limitations
Law No. 2 of 2008 has introduced a statute of limitations period
of five years into the tax law.
Determination of taxable
income
General
Tax liabilities are generally computed on the basis of profits
disclosed in audited financial statements, adjusted for tax
depreciation and any items disallowed under the tax law.
The tax declaration, supporting schedules and financial
statements, all of which must be in Arabic, are to be certified
by an accountant in practice in Kuwait who is registered with
the Ministry of Commerce and Industry.
ER No. 24 of 2013 (previously ER No. 23 of 2010) —
Concerning pre-operating expenses
As per ER No. 24, costs incurred prior to the commencement
of operations and after signing of contracts are to be treated
as incorporation expenses and shall be deducted in the year
in which they are realized, provided appropriate substantiation
documents are available.
Previously, these expenses were amortized over the life
of the contract.
ER No. 39 of 2013 (previously ER No. 38 of 2010) —
Concerning Compensations
The amended ER provides that any income earned from
a compensation claim received by the taxpayer shall be considered
as income in the year in which it is realized, subject to submission
of underlying documents. The earlier ER required such claim
income to be allocated proportionately based on the revenue
for the respective years.
Corporate taxation in Middle East and North Africa (MENA) 2014
37
Consultancy costs
Under Executive Rule No. 25 of 2010, the following percentages
of consultancy revenue are acceptable as costs for consultancy
work completed outside Kuwait:
• If consultancy work is carried out in the head office, 70%–75%
of the consultancy revenue is allowed as costs.
• If consultancy work is carried out by an associated company,
75%–80% of the consultancy revenue is allowed as costs,
provided the company complies with the regulations for 5%
retention on payments and submission of the contract with
the associated company to the DIT.
• If consultancy work is carried out by a third party, 80%–85%
of the consultancy revenue is allowed as costs, provided
the company complies with the regulations relating to 5%
retention and submission of the contract with the third party
to the DIT.
• If the consultancy revenue is not specified in the contract,
but consultancy work needs to be executed outside Kuwait,
the following formula may be used by the tax authorities
to determine the revenue:
Consultancy
revenue
for the year
=
(Consultancy costs for the year
x annual contract revenue)
Total direct costs
for the year
Design expenses and consultancy costs
ER No. 26 of 2013 (previously ER No. 25 of 2010) —
Design and consultancy incurred outside Kuwait
The percentage of costs allowed on design and consultancy
revenues has now been fixed as follows:
• If the contracts do not provide split of the revenue,
the tax department estimates the revenue from the design
or consultancy work performed outside Kuwait as follows:
Design
or consultancy
revenue
=
(Design or consultancy costs
x total contract revenue)
Total costs
Interest paid to banks
Interest paid to local banks relating to amounts borrowed
for operations (working capital) in Kuwait may normally be
deducted. Interest paid to banks or financial institutions outside
Kuwait is disallowed, unless it is proven that the funds were
specifically borrowed to finance the working capital needs
of operations in Kuwait. In practice, it is difficult to claim
deductions for interest expenses incurred outside Kuwait.
Interest paid to the head office or agent is disallowed. Interest
that is directly attributable to the acquisition, construction
or production of an asset is capitalized as part of the cost
of the asset if it is paid to a local bank.
Leasing expenses
The Kuwait tax authorities may allow the deduction of rents
paid under leases after inspection of the supporting documents.
The deduction of rent for assets leased from related parties
is restricted to the amount of depreciation charged on those
assets, as specified in the Kuwait Income Tax Law. The asset
value, for the purpose of determining depreciation, is based
upon the supplier’s invoices and customs documents. If the asset
value cannot be determined based on these items, the value
is determined by reference to the amounts recorded in the books
of the related party.
Agency commissions
Design costs incurred
for work by
Maximum cost
allowed as
a % of related
revenue
Maximum cost
allowed previously
as a % of related
revenue
Head office
75%
75%–80%
Affiliates and related
parties*
80%
80%–85%
Head office overhead
Third parties*
85%
85%–90%
Article 5 of the Bylaws provides that head office expenses shall be
allowed as follows:
The tax deduction for commissions paid to a local agent is limited
to 2% of revenue, net of subcontractors’ costs and reimbursement
costs if paid to the agent.
1. Companies operating through an agent: 1.5% of the direct
revenue
Consultancy costs
for work by
Maximum cost
allowed as
a % of related
revenue
Maximum cost
allowed previously
as a % of related
revenue
Head office
70%
70%–75%
3. Insurance companies: 1.5% of the company’s direct revenue
Affiliates and related
parties*
75%
75%–80%
Third parties*
80%
80%–85%
4. Banks: 1.5% of the foreign company’s portion of the bank’s
direct revenue
2. Companies participating with Kuwaiti companies: 1%
of the foreign company’s portion of the direct revenue
generated from its participation in a Kuwaiti company
*Taxpayers must comply with the requirements of ERs No. 5 and 6 on the retention
of 5% on each payment and submission of the contracts for these services.
38
Corporate taxation in Middle East and North Africa (MENA) 2014
Article 5 of the Bylaws also provides that, for the purpose
of computation of head office overheads, direct revenue would
be as follows:
For companies listed in 1, 2 and 4 above: gross revenue minus
subcontract costs, reimbursed expenses and design cost (except
for design cost carried out by the head office).
For insurance companies (iii): direct premium net of share of
re-insurance premium plus insurance commission collected.
Inventory
Inventory is normally valued at the lower of cost or net realizable
value, on a FIFO or average basis.
Provisions
Foreign currency exchange gains and losses
As per Executive Rule No. 36 of 2010, gains and losses on foreign
currency conversion would be classified into realized gains
or losses and unrealized gains or losses.
Realized gains and losses resulting from fluctuation of exchange
rates shall be allowed as a deduction (for losses) and taxable
(for gains), provided the taxpayer would be able to substantiate
the basis of calculations and documents in support of such
transactions.
Unrealized losses are not allowed as deductible expenses
and unrealized gains are not considered as taxable income.
Foreign exchange controls
No foreign exchange restrictions exist.
Provisions, as opposed to accruals, are not accepted for tax purposes.
Tax depreciation
Tax depreciation is calculated using the straight-line method.
The following are some of the permissible annual depreciation
rates:
Equity capital, loan capital, interest, dividends, branch profits,
royalties, management and technical services fees, and personal
savings are freely remittable.
Reimbursed costs
In cases of deemed profit filings, reimbursed costs will be allowed
as a deductible expense, subject to the following:
Asset
Rate (%)
Buildings
4
Furniture and office tools
15
• Such costs are necessary and explicitly mentioned
in the contract.
Drilling equipment
25
• Such costs shall not exceed 30% of gross revenues.
Electrical equipment and electronics
15
Tools and equipment
20
• Supporting documentation is available for such costs.
Computers and their accessories
33.3
Software
25
Trucks and traliers
10
Cars and buses
20
Relief for losses
Article 7 of the Bylaws provides that losses may be carried forward
for a maximum of three years. The original tax law provided that
losses could be carried forward and deducted from subsequent
profits without limit, provided there was no cessation of activities.
Aggregation of income
Furthermore, in cases where the reimbursable costs exceeds
30%, the taxpayer would be required to file its tax declaration on
the basis of financial accounts instead of a deemed profit.
Imported materials
ER No. 25 of 2013 (previously ER No. 24 of 2010)
— Concerning material and equipment costs
and equipment costs
The maximum costs allowed on imported material and equipment
revenues has now been fixed as follows:
Material and equipment
imported from
Maximum
cost
allowed as
a % of related
revenue
Maximum cost
allowed previously
as a % of related
revenue
Head office
85%
85%–90%
Affiliates and related
parties
90%
90%–93.50%
Third parties
95%
93.50%–96.50%
If a foreign company has more than one activity in Kuwait, one tax
declaration is required, aggregating the income from all activities.
Furthermore, the DIT believes that the Kuwait Tax Law allows
it to aggregate taxable results of all the entities commonly owned
and engaged in similar activities or on the same contract in Kuwait.
Accordingly, if the DIT becomes aware that entities are related,
it might issue a combined tax assessment on an aggregated
basis for all related entities operating in Kuwait.
• If the contracts do not specify the split of revenues, the tax
department now estimates the revenue from the supply
of imported material and equipment as follows:
Imported material
and equipment =
related revenue
Imported material and equipment
costs x total revenue
Corporate taxation in Middle East and North Africa (MENA) 2014
Total costs
39
Supply and installation contracts
Tax retention
In supply and installation contracts, a taxpayer is required
to account to the tax authorities for the full amount received
under the contract, including the offshore supply element, which
is the part of the contract (CIF to the applicable port) pertaining
to the supply of goods.
Under Articles 37 and 38 of the Bylaws and ERs No. 5 and 6
of 2010, all companies and government departments are required
to retain 5% from all payments to bodies corporate until the body
corporate presents a tax clearance from the DIT. In addition,
the following rules must be followed:
Contractors’ revenue recognition
Tax is assessed on progress billings (excluding advances) for work
performed during an accounting period minus the cost of work
incurred. The authorities generally do not accept the completedcontract or percentage-of-completion methods of accounting.
Subcontractor’s costs
ER No. 28 of 2013 (previously ER No. 27 of 2010) —
Concerning Subcontractors
The amended ER provides that:
• In the case of a sale or assignment of the main contract
or subcontract, a written approval needs to be obtained from
the main contract owner or sub-contractor
• The costs of the subcontractor works should not exceed
the revenues of such work
From our discussions with the tax department, it appears that it
would not accept any losses on work that is subcontracted to other
entities. This is a large departure from the existing practices
of the tax department, which would need to be addressed.
Work in progress
ER No. 27 of 2013 (previously ER No. 26 of 2010) —
Concerning work in progress
The earlier ER No. 26 of 2010, allowing taxpayers to carry forward
both the revenue and the costs to the next year if the total
execution of the contract did not exceed 20% of the contract value,
has now been removed.
The amended ER allows taxpayers to:
• Carry forward the costs as work in progress to the next year
if the revenue related to the costs incurred cannot be reliably
measured
• Recognize the estimated revenue against the costs incurred,
provided that the estimated revenue should not exceed the costs
incurred for the year
Further, the amended ER does not specifically
prohibit the percentage-of-completion method
in determining the revenue against the costs incurred.
It appears that the tax department may accept the use
of the percentage-of-completion method if it results in the proper
matching of revenue and costs and the method applied is reasonable.
• Local and foreign establishments, authorities and companies
carrying on a trade or business in Kuwait are required to give
the DIT details of the companies with which they are doing
business as contractors, subcontractors or in any other form.
Information to be provided should include the name and address
of the company, together with a photocopy of the contract.
• The 5% amount retained from payments due
to the contractor or subcontractor is to be kept with
the company until the contractor or subcontractor presents
a certificate from the DIT confirming that all tax liabilities have
been settled.
• When inspecting the tax declaration filed, the DIT may disallow
all payments made to subcontractors if these rules are not
observed and followed.
Article 39 of the Bylaws for Law No. 2 of 2008 empowers
the Ministry of Finance to demand payment of the 5% retained
amount, referred to above, from the entities holding the amounts,
if the contractors or subcontractors concerned fail to settle their
taxes due in Kuwait.
Furthermore, the Article provides that the contractor is responsible
for the tax due on the subcontractor if the contractor does not
comply with the regulations.
Salaries paid to expatriates
The Ministry of Social Affairs imposes stiff penalties, applicable
from 1 October 2003, if companies fail to comply with
the requirement to pay salaries to employees in their local bank
accounts in Kuwait. This requirement was further emphasized
through the new labor law issued in 2010. The DIT also seeks
to disallow a percentage of payroll costs if salaries to employees
are not paid by transfer to the employee’s bank accounts in Kuwait.
Offset program
Kuwait has designed a countertrade offset program to meet
the objectives of its economic development plan. The following
are significant aspects of the program:
• All civil contracts with a value of KD10m of more, and defense
contracts with a value of KD3m or more, attract offset
obligations for the contractors. The obligations become effective
on the date of signing the contract.
• The contractors covered by the offset obligation are required
to invest 35% of the value of the contract, after deducting
certain items described in the guidelines, into a project approved
by the National Offset Company (NOC).
Offset obligators have the following options:
• Implement investment projects suggested by the NOC
40
Corporate taxation in Middle East and North Africa (MENA) 2014
• Propose their own investment projects and seek approval
from the NOC
• Participate in any of the funds that the NOC may establish
• Purchase of commodities and services of Kuwaiti origin
Contractors (obligors) covered by the offset obligation must
provide unconditional irrevocable bank guarantees issued by
Kuwaiti banks to the NOC equal to 6% of the contract price.
The value of the bank guarantee submitted will be reduced
gradually based on the following:
• Actual execution of its work by local subcontracts and locally
procured goods or services
• Actual execution of the offset project approved by the NOC
The NOC has the right to cash in the bank guarantee if
the obligor fails to respect their offset obligation. In practice,
the offset program is likely to be implemented through
the inclusion of clauses in supply contracts that refer to an offset
obligation of the foreign contractor.
Other taxes
All companies subject to the provisions of the Law are required
to submit a declaration audited by one of the accounting
and auditing offices approved by the Ministry of Finance on
or before the 15th day of the 4th month following the end
of the fiscal period. The NLST declaration should be accompanied
with the following:
• The balance sheet, financial statements, disclosures
and supplementary notes
• Documents in support of cash dividends received
• Minutes of General Assembly
• Quarterly financial statements of subsidiaries or associates
• Confirmation of quarterly shareholding of said subsidiaries and/
or associates.
Major changes to the NLST ERs
Executive Rule No. 7 Concerning notification of cessation
of trading activity, delisting, assignment, amendment or change
in the statutory information relating to a company.
The amendments to ER No. 7 require each company subject
to NLST to notify the DIT within 30 days from the date on which
its shares cease to be traded on the Kuwait Stock Exchange (KSE)
or are delisted from the KSE.
Withholding tax
With the exception of dividend withholding tax on capital
investments in KSE-listed companies, Kuwait does not impose
withholding tax.
Personal income tax
No personal income tax is levied in Kuwait either on salaries or on
income from commercial activities.
Social security
There are no social security obligations for expatriate workers.
However, for foreign employees, it is generally necessary to make
a terminal indemnity payment, calculated at 15 days of pay per
year for the first five years of service and one month’s pay per
year thereafter.
For Kuwaiti employees, contributions are payable monthly by
both the employer and employee under the Social Security Law.
The employer’s contribution is 11.5% and the employee’s is 8%
of the monthly salary, up to a salary ceiling of KD2,500 per month.
This ER now also provides that, where the company’s shares
have been suspended from trading on the KSE, it shall continue
to file its tax declarations and pay its taxes. However, where
a company is delisted from the KSE, it shall file its tax declaration
and pay NLST only up to the date of delisting. If the company
is then re-listed on the KSE, it shall resume the submission of tax
declarations and the payment of taxes from the date of re-listing.
Executive Rule No. 21 Concerning tax treaty relief
or benefit
This new NLST ER No. 21 is similar to ER No. 18 for Zakat,
except that, in case of NLST, the taxpayer is entitled to deduct
all income taxes paid in the other country against the NLST up
to the prescribed limit.
These income taxes may be deducted from the subsidiary’s profits
that are included in the taxpayer’s financial declaration, provided
that this deduction shall not exceed 2.5% of the subsidiary’s profits.
Changes to the following ERs are similar to those relating
to the corresponding Zakat ERs.
National Labor Support Tax
Executive Rule No. 4 Concerning submission of tax declaration:
refer to Zakat ER No. 4.
As per Law No. 19 of 2000, Kuwaiti companies quoted on the KSE
are required to pay an employment tax as follows.
Executive Rule No. 13 Concerning objection to tax assessment:
refer to Zakat ER No. 10.
Basis of computation: 2.5% of the net profits per the financial
statements (before payments for Kuwait Foundation
for the Advancement of Sciences (KFAS), National Labor
Support Tax (NLST) and directors fees) minus cash dividends
from companies listed on the KSE and profit share from
companies listed on the KSE, whether or not such annual profits
are distributed to shareholders.
Executive Rule No. 18 Concerning the auditor’s report:
refer to Zakat ER No. 15.
Corporate taxation in Middle East and North Africa (MENA) 2014
41
Tax treaties
VAT
Kuwait has entered into double tax treaties with many countries,
including: Austria, Belarus, Belgium, Brunei, Bulgaria, Canada,
China, Croatia, Cyprus, the Czech Republic, Denmark, Egypt,
Ethiopia, France, Germany, Greece, Hong Kong, Hungary, India,
Indonesia, Iran, Italy, Japan, Jordan, Korea, Latvia, Lebanon,
Malaysia, Malta, Mauritius, Mongolia, Morocco, the Netherlands,
Pakistan, Poland, Romania, the Russian Federation,
Serbia and Montenegro, Singapore, South Africa, Spain, Sri Lanka,
Sudan, Switzerland, Syria, Thailand, Tunisia, Turkey, Ukraine,
the United Kingdom, Venezuela and Zimbabwe.
Further treaties with several other countries are at various stages
of negotiations or ratification.
Kuwait has also entered into treaties with several countries relating
solely to international air and sea transport.
Kuwait is a signatory of the Arab Tax Treaty and the GCC Joint
Agreement, both of which provide for the avoidance of double
taxation in most areas. The other signatories of the Arab Tax
Treaty are Egypt, Iraq, Jordan, Sudan, Syria and Yemen.
The DIT is very stringent in allowing any tax treaty benefits.
The DIT is currently concerned that companies from the countries
not having tax treaties with Kuwait may be taking an unfair
advantage by using their subsidiaries in the countries that
do to sign the contracts in Kuwait.
The DIT therefore requires to be convinced that the company has
substance and is in itself the principal contractor.
There is, however, very limited experience of application of tax
treaties in Kuwait, and differences of opinion between taxpayers
and the DIT regarding the interpretation of the various clauses of
tax treaties are not uncommon.
Disagreements that normally arise with the DIT relate to:
• Existence of a permanent establishment
• Income attributable to a permanent establishment
• Tax deductibility of costs incurred outside Kuwait
ER No. 47 and 48 of 2013 (previously ER No.
46 and 47 of 2010) — Concerning tax treatment
for incorporated bodies subject to tax treaties
and exempted under a specific Law
These ERs deal with disallowance of indirect costs by the tax
authority in cases where the taxpayer is claiming treaty relief
or exemption of income on certain operations.
As per the amended ERs:
• Disallowance of indirect costs (general and administrative
expenses) incurred in the state of Kuwait under the revised rules
ER 47 and 48 has been fixed at 20% of the costs. The earlier
range for these disallowances was 15% to 20%.
• There are no other changes made in the ERs. The ERs still do not
define the elements of costs to be considered as indirect cost
and the tax authority is therefore likely to exercise its discretion.
42
Kuwait currently does not impose any VAT or other sales taxes.
However, VAT is currently expected to be implemented across
the GCC in the next two to three years.
Customs duties
See Appendix 1: Customs duties in the GCC region.
Zakat
The Ministry of Finance has issued the Bylaws (in the form
of Ministerial Order 58 of 2007) for implementation of Zakat
in Kuwait.
Basis of computation: according to these Bylaws, public and closed
Kuwait shareholding companies (KSCs) are subject to Zakat on
the basis of 1% of gross income of operations of the company after
deduction of costs incurred by the company.
Provisions for expenses or reserves shall not be allowed as
a deductible expense. Statutory provisions or reserves required
by banks and insurance companies may be allowed as a deductible
expense.
The following amounts shall be allowed to be deducted:
• Cash dividends received from companies subject to Zakat
• Share of profit received from unconsolidated affiliate
or associate companies that are subject to Zakat
A holding or parent company that consolidates the financial
statements of its subsidiaries shall be treated as one entity subject
to Zakat. The amounts paid by the subsidiaries under this law shall
be deducted from the amount due from the parent company.
All companies subject to Zakat are required to submit a declaration
audited by one of the accounting and auditing offices approved by
the Ministry of Finance on or before the 15th day of the 4th month
following the end of the subject period.
Executive Rule No. 4 — Concerning submission
of the financial declaration
The changes require the Zakat payer to provide additional
information along with the financial declaration. Furthermore, as
per the new format of the financial declaration, the tax department
requires consolidated revenues and expenses to be reported.
If Zakat payers fail to submit their declarations with all the required
information, the tax department shall issue assessments based on
the financial statements obtained from other sources. In addition,
any amended financial declaration filed by a Zakat payer after
the issuance of the assessment shall not be considered.
The ER now enables Zakat payers to submit an amended financial
declaration if there has been a material accounting or legal
error, provided that no assessment has been issued for that year.
In order to avoid arbitrary assessments, it is clear that Zakat
payers need to ensure that they file their Zakat declarations
promptly.
Corporate taxation in Middle East and North Africa (MENA) 2014
Executive Rule No. 10 — Concerning Objection
to Zakat assessment
The revision to this ER states that, where assessments have
been issued based on the information available, Zakat payers
who did not enclose the documents required under ER No. 4 with
the financial declaration are precluded from objecting to those
items in the assessment for which documents were not submitted,
even if the supporting documents are submitted at the time
of the objection.
In effect, if the specified additional information is not submitted
with the financial declaration, the Zakat payer shall lose its right
to object against the assessment.
Executive Rule No. 15 — Concerning the Auditor’s
Report
The new ER requires the auditors to provide a report on
the declaration in the prescribed format as included in the ER,
as well as a separate note providing the items that are not
in compliance with the ERs issued by the Tax Department,
quantifying the exceptions.
This will have a significant impact on future Zakat filings
and the disclosures that may need to be appended to the financial
declaration.
Executive Rule No. 18 — Concerning benefiting from
tax treaties advantages
The Zakat payer shall be entitled to deduct the Zakat paid
in the other country from the subsidiary’s profits, which
are included in the Zakat payer’s financial declaration, provided
that this deduction shall not exceed 1% of the subsidiary’s profits.
This benefit is available only to the Zakat payer and not to entities
that are shareholders in the Zakat payer. This benefit is also
available only in relation to the direct subsidiaries of the Zakat
payer and not to the Zakat payer’s indirect subsidiaries.
The benefit shall not be available where the documents required
under this ER were not submitted or where the Zakat payer
did not explicitly request for the Zakat paid in the other country
to be deducted at the time when the financial declaration,
objection or appeal is submitted.
In accordance with ER No. 18, it appears that a Zakat payer
in Kuwait shall only be entitled to DTA relief for Zakat paid
in the other country and not for any income tax paid in the other
country. This appears to be contrary to the DTAs entered into by
Kuwait, and will need to be clarified with the tax department.
Contribution to KFAS
KSCs and closed shareholding companies in Kuwait are required
to pay 1% of their profits after transfer to the statutory reserve
and the offset of loss carryforwards, to KFAS, which supports
scientific progress. KFAS provides sponsorship and grants
for many types of scientific research projects in Kuwait.
This ER specifies the documents that need to be submitted with
the financial declaration in order to qualify for double taxation
agreements (DTAs). The ER also states the manner in which
the Zakat payer may benefit from the DTA and enumerates
the situations where the Zakat payer will not be entitled
to benefit from the DTA.
Corporate taxation in Middle East and North Africa (MENA) 2014
43
Lebanon
The Lebanese economy is based on a free enterprise system, with the private
sector being the backbone of economic activity. The most important business
sector is the services sector, with well established banking, insurance
and shipping industries. The tourism industry is returning to pre-war prosperity.
Lebanon also has a strong light industries relating to leather, plastic and light
metal products.
There are no exchange controls in Lebanon. Residents can freely import
and export currencies; own, deal in, export and import gold; own foreign
currencies and foreign securities; and maintain bank balances abroad. Overseas
remittances and capital transfers abroad are unrestricted. Nonresidents
can freely import and export any currency, and can maintain foreign currency
accounts with banks in Lebanon.
A foreign company wishing to do business in Lebanon may choose between
establishing a branch office of a foreign incorporated company or setting up
a local company, either wholly owned or in partnership with Lebanese nationals.
The laws and regulations for setting up and administering such organizations
are the same for foreign investors as they are for local organizations.
The unit of currency is the Lebanese Pound (LBP). The official exchange rate is
approximately LBP1508 to US$1.
Corporate taxes
Corporate income tax
Lebanese companies and branches of foreign
companies carrying on business in Lebanon are
subject to tax only on their income derived from
Lebanon.
A company is considered Lebanese if all
of the following apply:
• It is registered in Lebanon
• Its registered office is situated in Lebanon
• The majority of its directors are of Lebanese
nationality (unless the Government authorizes
the company to have less than a majority)
44
Rates of corporate income tax
In general, companies are subject to tax at a flat rate
of 15%.
Net profits (after tax of 15%) derived in Lebanon by
branches of foreign companies are presumed to be
distributed and subject to 10% dividend withholding tax.
Contractors on government projects are subject to tax
at the regular corporate rate on a deemed profit of 10%
or 15% of actual gross receipts, according to the type
of work.
Lebanese holding companies and offshore companies
are exempt from corporate income tax. However,
special taxes apply to these companies.
A Lebanese holding company is a special type
of company that is formed to hold investments
in and outside Lebanon (“holding company” is not
synonymous with “parent company”). An offshore
company is a company that engages exclusively
in business transactions outside Lebanon.
Corporate taxation in Middle East and North Africa (MENA) 2014
Since 2012, insurance companies have been subject to 15%
corporate income tax on 5%–10% of premium income as per
decision 1247/1 dated 24 December 2012.
The head of the revenue department of the Ministry of Finance
may grant a one-month extension at the request of the taxpayer if
the taxpayer’s circumstances warrant the extension.
Marine and air navigation companies are exempt from corporate
income tax. Foreign air and sea transport companies are also
exempt from corporate income tax if their home countries grant
reciprocal relief to Lebanese companies. However, they are still
subject to tax on dividend distribution at 10%.
Capital gains
If a taxpayer does not submit timely returns, the tax
authorities may levy tax on a deemed profit basis and impose
a non-declaration penalty of 5% of the amount of the income tax
for each month of delay, provided that the penalty is not less
than LBP750,000 and is limited to 100% of the tax due. A late
payment penalty is also imposed, 1% of the aggregate amount
of tax due and the late declaration.
Capital gains on the disposal of fixed assets are taxed at a rate
of 10%.
Dividends
If a company reinvests all or part of a capital gain subject
to the 10% rate to construct permanent houses for its employees
during a two-year period beginning with the year following
the year in which the gain was realized, it may obtain a refund
of the tax imposed on the reinvested gain.
Administration
The official tax year is the calendar year. Companies or branches
may use a different tax year if they obtain the prior approval
of the tax authorities.
Corporations with a financial year-end of 31 December must file
their tax returns by 31 May of the year following the year in which
the income is earned. Other corporations must file their returns
within five months of their financial year-end.
In general, dividends and interest, other than bank interest,
are subject to a withholding tax of 10%.
Dividends received by a Lebanese corporation from another
Lebanese corporation are exempt from tax. However, dividends
redistributed by a parent company to its shareholders or partners
are subject to a withholding tax of 10%. Dividends distributed by
Lebanese holding companies and offshore companies are exempt
from dividend withholding tax.
Dividends and interest income earned by banks and financial
institutions are considered trading income and consequently
are subject to tax at the regular corporate tax rate of 15%.
Corporate taxation in Middle East and North Africa (MENA) 2014
45
Interest revenue
Inventories
Interest income and other income from creditor and savings
accounts with banks is subject to tax at 5%, which is deducted
at source.
Inventories are normally valued at the lower of cost or net
realizable value. Cost is usually determined using the FIFO method
or the weighted-average cost method.
Foreign tax relief
Provisions
A foreign tax credit is allowed under tax treaties with
Algeria, Armenia, Bahrain, Belarus, Bulgaria, Cyprus, the
Czech Republic, Egypt, France, Iran, Italy, Jordan, Kuwait,
Malaysia, Malta, Morocco, Oman, Pakistan, Poland, Qatar,
Romania, the Russian Federation, Senegal, Syria, Tunisia, Turkey,
and the United Arab Emirates, Ukraine and Yemen. Income subject
to foreign tax in other foreign countries is taxed in Lebanon net
of the foreign tax paid.
The following provisions are normally allowed for tax purposes:
Determination of taxable
income
General
Tax assessment is based on audited financial statements prepared
in accordance with generally accepted accounting principles,
subject to certain adjustments.
Deductions are allowed for expenses incurred wholly
and exclusively for business purposes. Branches, subsidiaries
and affiliates of foreign companies may deduct the portion
of foreign head office overhead charged to them if the auditors
of the head office present to the tax authorities a certificate
confirming that the overhead was fairly and equitably allocated
to various subsidiaries, associated companies and branches.
However, the deductible overhead is subject to a tax of 7.5%.
46
• The actual amount due to employees on the balance sheet date
for end-of-service indemnities
• Doubtful debts owed by debtors who have been declared legally
bankrupt
Banks and financial institutions may deduct provisions
for doubtful debts before declaration of bankruptcy of the debtor
if they obtain the approval of the Banking Control Commission
of the Central Bank of Lebanon.
Tax depreciation
Depreciation must be calculated using the straight-line method.
The Minister of Finance released decision No. 8391/1 dated 21
August 2007, which is published in the Official Gazette No. 54
dated 6 September 2007 related to depreciation of fixed assets,
which was amended by several subsequent decisions.
The minimum and maximum depreciation rates that should
be used to depreciate fixed assets are as per the table on
the following page.
Corporate taxation in Middle East and North Africa (MENA) 2014
Depreciable fixed asset
Minimum
Maximum
Developed buildings from concrete for commercial, touristic and service
sector use (offices, shops, stores, restaurants, hotels, hospitals, etc.)
2%
5%
Developed buildings from concrete used for industrial and handcrafts
3%
10%
Developed buildings from metal for commercial and industrial use
6%
20%
Large renovation, maintenance and decoration works for buildings
6%
25%
Technical installations, industrial equipment and accessories
8%
25%
Computer hardware and software
20%
50%
Cars
10%
25%
Vehicles for transportation of goods and people
6%
20%
Sea transport means
5%
10%
Air transport means
20%
25%
Office equipment, furniture, fixtures
8%
25%
Non-consumable tools in restaurants, coffee shops, etc. (i.e., glass cups, silver
spoons)
Subject to count every
Subject to count every
year to be valued at cost year to be valued at cost
Gas bottles
8%
20%
Boxes, bottles and crates
20%
25%
A company may be able to use a rate between the minimum
and the maximum depreciation rates to depreciate the fixed
asset under each category. If the company opts to use any rate
that differs from the minimum rate, it should inform the income
tax authorities; otherwise, it is considered eligible only to use
the minimum depreciation rates.
Corporate taxation in Middle East and North Africa (MENA) 2014
47
Relief for losses
Groups of companies
Law for the Encouragement of Investment: in August 2001,
the Lebanese Parliament passed a new law (No. 360)
for encouraging investment in Lebanon. Some of the benefits
that this law provides, depending on the geographical location
of the project, are:
Parent companies must prepare consolidated financial statements
that incorporate the activities of their associated companies
and subsidiaries. However, each legal entity is taxed separately.
• Location A: an exemption from income taxes for an additional
two years when a certain percentage of the shares
is publicly traded
Investment incentives
• Location B: in other situations, a reduction, for a period of five
years, of 15% of the income tax on profits and on dividends
In general, tax losses may be carried forward for three years.
Profits derived by industrial enterprises established in Lebanon
after 1 January 1980 are exempt from income tax for up to 10
years from the date of commencement of production, if such
enterprises satisfy all of the following conditions:
• The factory is built in certain areas that the Government intends
to develop.
• The object of the enterprise is to manufacture new goods
and materials that were not manufactured in Lebanon before
January 1980.
• The total value of property, plant and equipment used
in Lebanon by the new enterprise and allocated for production
of new goods and materials is at least LBP500m.
Profits benefiting from this tax holiday may not exceed the original
cost of the property, plant and equipment used by the enterprise
on the date production begins.
Industrial establishments may obtain certain tax incentives
in respect of investments, which improve their production
capabilities. Amounts invested will be set off against a maximum
of 50% of the profit achieved during the financial year in which
the financial investment was made, and over the following three
years. However, this percentage rises to a maximum limit of 75%
if the investment is made in one of the areas the Government
wishes to develop (prior approval from the tax authorities
is required).
48
• Location C: full exemption, for a period of 10 years, from
the income tax on profits and on dividends
The law also provides a “package deal” for investors who satisfy
certain conditions. Under the package deal system investors may
be granted the following incentives:
• Full exemption from the income tax on profits and on dividends
resulting from the project for a period up to 10 years effective
from the date of the commencement of the investing project
• The granting of work permits for various staff categories,
provided that the beneficiary system maintains the ratio
of at least two Lebanese against each non-Lebanese as per
the registration in the National Social Security National Fund
• The reduction of the duties on work and residence permits for up
to a maximum of 50% for all staff categories and the reduction
in the deposit that has to be placed with the Housing Bank to up
to half of the amount
• A reduction up to a maximum of 50% of the license dues
in respect of the construction of buildings necessary
for realizing the investing project benefiting from the provisions
of the package deal
• Full exemption from the real estates registration dues in the Real
Estate Register
Corporate taxation in Middle East and North Africa (MENA) 2014
Miscellaneous matters
Other taxes
Foreign exchange controls
Personal income tax
Lebanon does not impose any foreign exchange controls.
Salaries, wages and benefits paid to local and expatriate
employees, after deduction of family exemptions, are taxed
at an escalating rate ranging from 2% to 20%. Amounts over
LBP120,000,001 are taxed at the rate of 20%.
Transfer pricing
Transactions with related entities must be on arm’s length basis.
Anti-avoidance legislation
Under the Lebanese tax law, criminal or tax penalties may be
imposed for specified tax avoidance schemes.
Nonresidents and persons with no registered place of business
in Lebanon who earn business income for services rendered
in Lebanon receive special treatment under the business income
tax rules. They are taxed on a deemed profit of the income
received from Lebanon. The deemed profit percentage is 50% on
services and 15% on products, and the tax rate is 15%. Therefore,
the effective tax rate is 7.5% and 2.25% respectively of income
generated from Lebanon.
Corporate taxation in Middle East and North Africa (MENA) 2014
49
Miscellaneous taxes
Stamp duty
Other significant taxes are set out in the table below.
As per the Lebanese stamp duty law, fiscal stamps at the rate
of LBP3 per thousand must be affixed on all deeds or contracts.
Payment of stamps is due within five days from the date
of signature of the deed or contract. A fine equal to five times
the duty will be imposed where the stamp duty is paid after
the time limit allowed or is not settled.
Nature of tax
Rate (%)
VAT imposed on the supply of goods
and services by a taxable person in
the course of an economic activity
in Lebanon and on imports; certain supplies
are exempt and registration with the
Directorate of VAT is required if an entity’s
total taxable turnover for the four preceding
quarters exceeded LBP150m.
10%
Tax on a portion of a foreign head office
overhead allocated to a Lebanese subsidiary
associated company or branch: annual tax
of Lebanese holding companies is calculated
on total capital and reserves and is limited
to a maximum tax of LBP5m (tax is due
in full from the first year of the company’s
operations, regardless of the month
operations begin)
Customs duties
Customs duties differ according to the tariff and the value
declared to the customs authorities. The parts of the declaration
that are necessary for charging are value, the type of tariff
and origin of the goods.
The majority of the imported products are subject
to an ad valorem tariff duty that ranges between 0% and 138%.
The customs value is calculated on a CIF basis.
7.5%
Customs duty applies on products such as tobacco, cement,
gasoline, motor vehicles and alcoholic beverages. Preferential
customs duties apply for items used as raw materials and inputs
in production — 3% for industry and 6% for agriculture.
All ordinary personal effects are exempt from customs duty.
Tax treaties
Lebanon has entered into double tax treaties with Algeria,
Armenia, Bahrain, Belarus, Bulgaria, the Cyprus, Czech
Republic, Egypt, France, Iran, Italy, Jordan, Kuwait, Malaysia,
Malta, Morocco, Oman, Pakistan, Poland, Qatar, the Romania,
Russian Federation, Senegal, Syria, Tunisia, Turkey, the United
Arab Emirates, Ukraine and Yemen.
50
Corporate taxation in Middle East and North Africa (MENA) 2014
Corporate taxation in Middle East and North Africa (MENA) 2014
51
Libya
Corporate income tax is levied under the provisions of Income Tax Law 7/2010,
which was enacted on 28 April 2010.
Oil companies are assessed for tax under the provisions of Petroleum
Law 25/1955, as amended, and by the specific terms of their exploration
and production sharing agreements (EPSAs).
Libya offers investment incentives under Investment Law No. 9. The law is
applicable to the following sectors: industry, health, tourism, services
and agriculture, and to any other field specified by a decision of the
Government upon a proposal by the Minister for Planning,
Economy and Commerce.
The Stamp Duty Law 12/2004, as amended by Law 8/2010, specifies
that any document to be used or executed in Libya is subject to duty.
This specifically includes EPSAs.
The unit of currency is the Libyan Dinar (LYD). The official exchange rate is
approximately LYD1.23 to US$1.
Corporate taxes
Corporate income tax
Taxes are levied under the provisions of Income Tax
Law 7/2010, which was enacted on 28 April 2010.
The new law has been applied to accounting periods
ended after that date.
Article 1 of the Income Tax Law states that all income
arising in Libya from any tangible or intangible assets
situated therein or from any activity or work carried
out in Libya is subject to tax.
Rates of corporate tax
Tax for all companies and branches, foreign
and national, are assessed at a flat rate of 20%.
A further 4% of profits is payable as Jihad tax.
Capital gains
There is no specific capital gains tax in Libya. Gains
generated by a branch or company are assessed as
trading income.
As a matter of practice, de facto PE status
is established if any work is undertaken, or service
performed, in the Libyan Jurisdiction.
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Corporate taxation in Middle East and North Africa (MENA) 2014
Administration
Libyan companies
Tax is assessed on income of the preceding year.
Oil companies are assessed for tax under the provisions
of Petroleum Law 25/1955, as amended, and by the specific terms
of their exploration and production sharing agreements (EPSAs).
Under Libyan tax law, a company is required to submit a tax
declaration not later than one month after the approval of its
accounts by the directors, and not later than four months after its
year-end. The financial year runs from January to December, but
a company may choose a different financial year if it has obtained
approval from the Libyan tax authorities.
As a result of disruption caused by the 2011 revolution, the filing
deadlines for financial years 2010, 2011 and 2012 have been
postponed to 30 June 2014.
Dividends
Dividends received are taxable, but the process for withholding tax
on a dividend payable to an overseas shareholder has not yet been
confirmed.
Interest paid on bank deposits is subject to a 5% withholding tax.
The filing deadline for financial year 2013 is 30 June 2014.
Foreign tax relief
However, corporate income tax, payroll tax and stamp duty
payments should be paid by the relevant due dates.
Foreign tax relief is granted in accordance with tax treaties signed
with certain other countries. Libya has DTAs with several countries
in the Middle East and Asia, Pakistan, the United Kingdom,
Malta and France. Various other agreements have been signed but
not yet ratified. There is no agreement with the United States.
All companies and branches are subsequently subject to audit by
the tax department in order to determine final tax liabilities.
Audits are frequently conducted at three- or four-year intervals
for three and four years’ accounts. A process is underway
to close audits to at least financial year 2009 for all companies.
Prior to the introduction of the 2010 Income Tax Law, taxes were
assessed almost exclusively on a deemed profit basis for foreign
service providers and Libyan private companies.
Corporate taxation in Middle East and North Africa (MENA) 2014
53
Determination
of taxable income
All companies must prepare a balance sheet and profit and loss
account for submission with the annual tax return. There is no
body of Libyan accounting standards, so a generalized GAAP
may be applied. Accounts may be prepared on either a “cash”
or an “accruals” basis.
With the exception of general provisions, all business expenses
are generally deductible, but it should be noted that the law states
that “general expenses, service remunerations, and interest
and commissions charged by a foreign company to its branch will
only be allowed by the tax department up to a maximum of 5%
of administrative expenses approved by the tax department.”
Tax is payable on declared profit at scale rates set by the law,
plus Jihad tax. No tax is payable if a loss is declared.
At the request of either the company or the tax department,
an audit of the company’s books and records will be undertaken
in order to determine the final liability to corporate tax
for a particular year.
There is a seven-year statute of limitations for the assessment
of company taxes. Although corporate tax law is based on
the usual add-back basis, whereby disallowed expenditure is added
back to declared net profits or losses, practice to FY 2009 has
been that the tax department raises assessments based on
a percentage of turnover — the deemed profit basis of assessment.
Tax is therefore payable even when losses are declared.
The level of deemed profit applied to turnover varies according
to the type of the branch’s business activity. This ranges from
12%–15% for civil works and contracting (turnkey projects),
15%–25% for oil service, and 25%–40% in the case of design
or consulting engineers. Within these broad ranges, each
case is reviewed individually and, once the preliminary final
assessments are issued, taxpayers have a period of 45 days
in which to negotiate an agreed settlement or to appeal.
Thereafter, an appeal process exists through first and second
appeal committees, the Court of Appeal and then the Supreme
Court.
The Commercial Code of 2010, together with the tax law
of 2010, require that accounts must include a report issued
by a Libyan public accountant which, if accepted, will result
in assessment on an actual basis for FY 2010 and subsequent
years. The public accountant must also sign the annual tax return.
Audits will be conducted at random. There is, as yet, no precedent
as to the application of this process.
The tax department has stated that losses for FY 2011
(the year of the revolution) will be accepted subject to providing
documentary support for losses incurred.
54
Investment incentives
Libya offers investment incentives under Investment Law
No. 9. The Investment Law provides the following benefits
to an approved project:
• Exemption from customs duties, fees or taxes on
the importation of machinery, equipment and tools required
to execute the project
• Exemption from customs duties, fees or taxes for five years
for the operation of the project after commencement, including
equipment, spare parts and raw materials, and free export of all
products involved with the project
• Exemption from stamp duty on all commercial documents
• A five-year exemption from corporate income tax (but not
payroll taxes) with the possibility of a further extension
of 3 years, and tourism projects are exempt for 10 years
• Approval for repatriation of profits
• Ability to repatriate invested capital upon expiry of the project
• Investor has option to employ and import expatriates
and technical expertise necessary for the establishment
and operation of the project
The law is applicable to the following sectors: industry, health,
tourism, services and agriculture, and to any other field specified
by a decision of the Government upon a proposal by the Minister
for Planning, Economy and Commerce.
Article 27 of the law specifically prohibits this law from applying
to projects undertaken by oil companies.
Other taxes and duties
Personal income tax
Tax is applied to wages, salaries and similar incomes derived
from employment or service, whether permanent or temporary,
or whether in cash or in kind, for services rendered in Libya.
The annual rates of personal tax on income are as follows:
First
LD12,000
Balance of income
5%
10%
All individuals are granted a personal allowance — LD1,800
for a single person, LD2,400 for a married man without children,
and LD300 for each dependent child. A recent interpretation
of the Income Tax Law by the tax department has stipulated that
expatriates (irrespective of actual status) are only permitted
the single person allowance, unless their wives and children
are also resident in Libya.
Corporate taxation in Middle East and North Africa (MENA) 2014
At the same time as carrying out the tax audit for corporate tax
purposes, the tax inspector will review the company’s records
to determine whether there are any salaries or benefits in kind
paid that had not previously been subjected to personal taxes.
The additional payroll taxes due on such undeclared salaries
and benefits will be assessed on the company at a rate of 15% (plus
3% Jihad tax).
Miscellaneous taxes
Libya has no capital gains, inheritance or gifts taxes. Nor is there
any VAT in Libya. Other significant deductions are:
Employer (social security)
11.25% of gross salary
Employee (social security)
3.75% of gross salary
Social solidarity fund
1.00% of gross salary
Jihad tax
3.00% of gross salary
Customs duties
Customs duties were re-introduced in 2012 The rates are as
follows:
Base rate
5% of pro forma import invoice
Vehicles
10% of pro forma import invoice
Luxury items
10% of pro forma import invoice
Equipment and materials imported for use
in the oil and gas sector are customs duty exempt
Foreign exchange controls
Libya has foreign exchange controls and the Libyan dinar is not
a freely convertible currency. However, by concession, foreign
companies may be paid in foreign currency. Amounts paid
in Libyan dinars may not be remitted.
(Taxable salary is gross salary minus employee social security
and social solidarity fund)
Foreigners may freely convert foreign currency at a bank, subject
to that currency having been declared upon arrival in Libya.
Stamp duty
Nationals and other residents may freely convert Libyan dinars
into foreign currency up to USD10,000 per year.
The Stamp Duty Law 12/2004, as amended by
Law 8/2010, specifies that any document to be used or executed
in Libya is subject to duty. This specifically includes EPSAs.
There are 45 schedules to the law, but its practical application
to companies and branches is that a duty of 1% of the contract
value is payable on any contract for the provision of goods
and services in the Libyan jurisdiction.
Transfer pricing
There is no transfer-pricing or anti-tax avoidance legislation
in Libya.
Corporate taxation in Middle East and North Africa (MENA) 2014
55
Oman
The new tax law, effective from 1 January 2010, was published by the Official
Gazette on 1 June 2009. The Executive Regulations (ER) providing clarifications
to certain provisions of the Income Tax Law (ITL) were issued on 28 January
2012 through Ministerial Decision (MD) 30/2012.
The Government of Oman encourages foreign expertise and technology
in strategic sectors, aimed at leveraging Oman’s natural resources to develop
and diversify the economy.
The Government has embarked on substantial projects to develop a modern,
sophisticated infrastructure that will provide a suitable business environment
for growth. Interest-free loans and other incentives are granted to qualifying
projects and businesses. Tax-free contracts are available in exceptional situations.
A tax holiday, or exemption, is granted for specific projects up to a maximum of 10
years.
Non-Omani nationals wishing to engage in trade or business, or to acquire
an interest in the capital of an Omani company, must obtain a license to do so
from the Ministry of Commerce and Industry. Foreign companies may do business
in Oman by establishing a branch, or by participating in the formation of a LLC
or a joint stock company.
Commercial banks and investment and brokerage joint stock companies that
are registered in Oman may establish funds. Such funds are exempt from tax.
The unit of currency is the Omani Rial (OMR). The official exchange rate is
approximately OMR1 to US$2.58.
Corporate taxes
Corporate income tax
Omani sole proprietorships, Omani registered
companies (including partnerships and joint ventures)
and permanent establishments are subject to Omani
income tax. A permanent establishment is defined
in the law.
In addition, a permanent establishment is also created
if a foreign company provides consulting or other
services in Oman, whether through employees or
through the designated agents, for periods of not less
than 90 days, in aggregate, in any 12-month period.
Foreign shipping and aviation companies are exempt
from taxation in Oman if similar Omani companies
enjoy reciprocal treatment in the respective foreign
countries. Omani sole proprietorships and companies
engaged in shipping activities are tax-exempt.
Omani sole proprietorships, companies registered
in Oman (regardless of the extent of foreign
participation) and permanent establishments of foreign
companies are subject to tax at a rate of 0% on the first
OMR30,000 of taxable income, and at a rate of 12%
on taxable income in excess of OMR30,000.
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Withholding tax of 10% of gross payments is imposed
on specific payments (royalties, consideration
for R&D, management fees and consideration
for the use of or right to use computer software)
made to foreign companies that do not have
a permanent establishment in Oman. If a foreign
company has a permanent establishment in Oman that
does not include such incomes that are subject
to withholding tax in its gross income, withholding
tax will be applicable on such payments. Taxpayers
in Oman (including permanent establishments)
are responsible for deducting and remitting
withholding tax to the tax department. The tax
is final and foreign companies have no filing or other
obligations in this regard.
Oil exploration and production companies are taxed
under special rules covered by concessional
agreements.
Investment funds established under the Omani Capital
Market Law or those established outside Oman to deal
with Omani financial instruments listed on the Muscat
Securities Market (MSM) are exempt from taxation.
Corporate taxation in Middle East and North Africa (MENA) 2014
Capital gains
No special rules apply to capital gains. Capital gains are taxed
as part of regular income. Profit on sale of securities listed
on the MSM is exempt from tax.
Administration
The tax year is the calendar year. A company is permitted
to have a different accounting year for its tax year.
Provisional tax returns must be filed within three months
from the end of the accounting year and final returns
within six months. A foreign person who carries on business
in Oman through multiple permanent establishments is required
to submit a consolidated tax return to the tax department.
There are no advance payment procedures, and tax due should
be paid with the provisional return. A fine of 1% per month is levied
on late payments. If the tax returns are not filed by the due
date, a minimum fine of OMR100 and maximum of OMR1,000
is imposed.
Revised tax compliance forms
The ER prescribe revised forms for filing Provisional Return
of Income and Annual Return of Income. Specific forms have
been prescribed for various categories of taxpayers, including
Omani companies. The revised forms require taxpayers to provide
significant additional information along with the tax returns.
The ER also prescribes a new form for the filing of withholding
tax returns. This form has expanded the scope of payments
that are subject to withholding tax in Oman.
The ER also introduced new form for disclosure of business
particulars (FDBP) that taxpayers have to use for notifying
prescribed information. For professional businesses listed
in the ER, notification of practicing licenses is also required.
Other developments under the ER
The tax authorities have created a large taxpayer unit (LTU)
for assessing larger taxpayers. The formation of the LTU will result
in a more stringent compliance environment for large taxpayers.
For assessment purposes, the ER have introduced provisions that
authorize tax authorities to carry out examination of taxpayers’
records at their premises. Such examination shall be carried out by
giving advance notice to the taxpayer.
Dividends
Dividends received by companies from Omani companies
are not taxed.
Foreign tax relief
Foreign taxes can be set off against taxes due on the same income
in Oman.
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57
Determination
of taxable income
Tax is levied on the taxable income earned by Omani companies,
sole proprietors and permanent establishments. Financial
accounts must be presented on the accrual basis of accounting.
Expenses are deductible only if they are incurred wholly
and exclusively for the purpose of production of gross income.
If only a portion of the expense is incurred for the purpose
of income generation, the proportion of expense incurred
that is attributable to the income generation will be allowed as
deduction. Expenses incurred prior to registration, incorporation
or commencement of business shall be deemed to be incurred
on the day on which business commenced and are deductible
in the first year of commencement of operations.
Any expense that is incurred in generating a tax-exempt income
shall not be allowed as deduction.
Special rules apply to allowances such as depreciation, bad debts,
donations, shareholders’, proprietors’ and directors’ remuneration,
rent, interest, head office overhead allocated to branches
and sponsorship fees. Any exchange difference relating to head
office or related-party balances is normally disallowed.
Inventories
The tax law does not stipulate a required method of accounting
for inventories. However, the accounting method adopted
should be in accordance with International Financial Reporting
Standards (IFRS).
In general, inventory is valued at the lower of cost or net realizable
value, with cost determined using the weighted-average or FIFO
method. Any provisions to bring down the value to net realizable
value, however, are not allowed for tax purposes.
The ER has introduced specific thin capitalization provisions
requiring Omani companies to comply with minimum capital
requirements so that loans do not exceed a debt-equity
ratio of 2:1.
Tax depreciation
The tax law sets the following fixed annual depreciation rates:
Assets
Rate (%)
Category A
Permanent buildings (selected materials)
4
Buildings (other than selected materials)
15
Quays, jetties, pipelines, roads and railways
10
Ships and aircraft
15
Hospital buildings and educational establishments
100
Category B
Tractors, cranes and other heavy equipment
33 1/3
Computers, vehicles and self-propelling machines
33 1/3
Furniture and fixtures
(including computer software and copy rights)
33 1/3
Drilling rigs
10
Other machinery and equipment
15
Depreciation of assets, other than those mentioned in Category
A, have to be calculated on a pooling (or block) of assets basis.
Each pool’s asset base is calculated with reference to written-down
value plus additions minus sale proceeds of disposals. The rate
for intangible assets is determined by the Secretary General
of Taxation.
Straight-line basis depreciation is applicable for the assets
mentioned in Category A.
Allocation of head office expenses
Provision for loan losses is tax deductible in cases of banks,
and other financial companies regulated by the Oman Central
Bank subject to certain conditions. Provisions for unexpired risks,
unsettled claims and contribution to contingency funds are tax
deductible for insurance companies.
Head office costs, such as costs for technical consultants,
R&D, data processing, general administration and other similar
expenditures incurred by the head office and allocated or charged
by head office to the permanent establishment (PE), are allowed
as deductions. The ER specified that indirect expenses incurred
by the head office and allocated to the Oman (PE) are capped
at the lower of 3% of gross income (5% for banks and insurance
companies and 10% in case of high-tech industrial companies)
or actual charges. Where the head office has merely a supervisory
or control role over the Oman PE, no overhead deduction
is allowed.
Other regulations
Relief for losses
Provisions
Subject to the limited exceptions below, provisions of any nature,
whether specific or general, are not allowed as deductions for tax
purposes. The tax department takes the view that a deduction will
only be allowed when the expense is actually incurred.
In accordance with the ITL, interest payable by an Omani company,
other banks and insurance companies may be deducted from
the taxable income, subject to the conditions prescribed by the ER.
In accordance with the provisions of the ER, interest on loans
from related parties paid by an Omani company other than banks
and insurance companies may be deductible, provided the total
debt does not exceed twice the value of the shareholder’s equity.
58
Losses may be carried forward for five years. Losses of earlier
years should be set off first before utilizing losses of a later year.
Omani companies and establishments that are tax-exempt
by virtue of carrying on specific activities as set out
in the “Investment incentives” section below will be eligible
to carry forward net losses incurred during the first five years
of exemption for an indefinite period. No carryback of losses
is permitted.
Corporate taxation in Middle East and North Africa (MENA) 2014
Groups of companies
There is no concept of group taxation in Oman.
Investment incentives
Tax holidays are available to companies engaged in manufacturing,
mining, exports, operation of hotels and tourist villages, farm
and animal products processing, fishing and fish processing,
farming and breeding. Universities, higher education colleges or
institutes, private schools, training colleges, nurseries and private
hospitals are tax-exempt. The exemption under these categories
is available for five years, but may be renewed for an additional
period of five years.
The performance of management contracts and construction
contracts may not qualify for tax holidays.
Withholding taxes
In respect of transactions between related parties that
are not at arm’s length, certain arrangements and terms may
be ignored by the tax authorities if such arrangements or terms
result in lower taxable income or higher losses.
The tax authorities have the right to make adjustments
if the main purpose of a transaction, even between
unrelated parties, is to avoid taxation.
Other taxes
Personal income tax
Personal income other than from business is not taxable in Oman.
Miscellaneous taxes
Other significant taxes are set out in the table below:
Oman does not impose withholding tax on dividends or interest.
Taxes
Withholding tax of 10% of gross payments is imposed on specific
payments (royalties, consideration for R&D, management
fees and consideration for the use of or right to use computer
software) made to foreign persons that do not have a PE in Oman.
Entities in Oman (including PEs) are responsible for deducting
and remitting tax to the Government. The tax is final and foreign
persons have no filing or other obligations in this regard.
OMR 200
Vocational training levy for each non-Omani
employee paid biennially (once every two years) by
employer:
If a foreign person has a PE in Oman, but does not consider
the receipt of income that is subject to withholding tax in its gross
income, withholding tax will be applicable on such payment.
The term “royalty” is defined to include payments for the use
of or right to use software, intellectual property rights, patents,
trademarks, drawings, equipment rentals and consideration
for information concerning industrial, commercial or scientific
experience and concessions involving minerals.
The payer of these types of income must withhold and remit such
tax to the Government on a monthly basis. Penalties are imposed
for delays in payment.
Foreign exchange controls
Oman does not impose foreign exchange controls.
Transfer pricing
Specific transfer pricing provisions have been introduced
by the new tax law, which seeks to restrict any measures that
may be taken by related parties for avoidance of tax through
transactions entered into between them.
Anti-avoidance legislation
Where a company carries out a transaction with a related party
that was intended to reduce the company’s taxable income,
the income arising from the transaction is deemed to be
the income that would have arisen had the parties been dealing
at arm’s length.
Rate (%)
Social security contributions on basic salary of Omani
employees effective from 1 July 2014:
Pension fund contributions paid by: Employer
10%
Employee
7%
Government
5.5%
Occupational injuries and diseases, payable
by employer:
1%
With respect to expatriate staff, an end of service
benefit is accrued at the rate of 15 days of salary for each
of the first 3 years and 30 days’ salary for years of service
in excess of 3 years. The end of service benefit is payable on
termination of services.
Tax treaties
Oman has entered into double tax treaties with Algeria, Belarus,
Brunei Darussalam, Canada, China, Croatia, France, India, Iran,
Italy, Korea (South), Lebanon, Mauritius, Moldova, Morocco,
the Netherlands, Pakistan, Seychelles, Singapore, South Africa,
Sudan, Syria, Thailand, Tunisia, Turkey, the United Kingdom,
Uzbekistan, Vietnam and Yemen.
Oman has also signed double tax treaties with Belgium, Egypt,
Germany and the Russian Federation, but these treaties
are not yet in force.
Finally, Oman has entered into treaties with several countries
with respect to the avoidance of double taxation on income
generated from international air transport.
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59
Oman has ratified a free trade agreement (FTA) with the United
States, effective from 1 January 2009. Under this FTA, a number
of concessions are available to American companies wishing to set
up in Oman. The GCC countries, of which Oman is part, have
entered into a FTA with Singapore, but the agreement is not yet
ratified by Oman.
Recently, Oman has signed a protocol with France that provides
for 7% withholding tax on royalty payments. The protocol with
the United Kingdom provides for 8% withholding tax rate.
Free-trade zones
Salalah FTZ is adjacent to the super-hub port of Salalah,
which is located close to the equatorial trade route. The Salalah
free zone is managed by Salalah Free Zone Company SAOC.
The zone offers a host of investment-friendly incentives that
include low initial cost of setting up and a one-stop shop
arrangement for licenses, permits, visas and customs clearances.
The Ministry may, subject to a recommendation from the Foreign
Capital Investment Committee, increase the permissible level
of foreign ownership of an Omani company to 65%. In accordance
with a commitment provided to the WTO, approvals are granted
for foreign ownership of up to 70% under certain circumstances.
If a project has capital of at least OMR 500,000 (US$1.3m)
and contributes to the development of the national economy,
the Ministry may recommend to the Council of Ministers that
the permissible percentage of foreign ownership be increased
up to 100%.
Oman’s restrictions on foreign ownership do not apply to GCC
nationals investing in or pursuing activities, other than a few that
are specifically prohibited.
The Ministry may exempt the following entities from the licensing
conditions specified:
• Companies conducting business through special contracts
or agreements with the Government
In addition, Oman has established a FTZ along the borders with
Yemen. The zone is located in the town of Al Mazyouna, 260
kilometers from Salalah. Oman has also established another free
zone in Sohar.
• Companies established by Royal Decree
The Duqm Economic Zone is located in the South and is yet
another attractive free zone being established, with a number
of major projects in progress or in the pipeline.
In practice, contracts awarded by the Government, Petroleum
Development Oman LLC (PDO) and Oman LNG LLC (OLNG)
enable foreign companies to establish branches in Oman by
registering branches with the Ministry of Commerce and Industry.
Such foreign companies are exempt from registering an Omani
company.
Foreign capital investment law
Under this law, foreign entities wishing to invest in Omani
companies must file applications for licenses with the Ministry
of Commerce and Industry. In general, the Ministry grants licenses
to applicants if both of the following conditions apply:
• The paid-up capital of the Omani company in which
the investment is made is at least OMR 150,000 (US$390,000)
• Parties conducting a business that the Council of Ministers
declares necessary to the country
In accordance with a recent ministerial decree (MD), Gulf
companies shall be permitted to open branches in Oman that shall
be availed the same treatment enjoyed by Omani companies,
subject to the satisfaction of certain conditions.
• The foreign ownership of the company does not exceed 49%
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Corporate taxation in Middle East and North Africa (MENA) 2014
In-country value
requirements
Oil and gas contractors should prepare for
“in-country value” plans
Over the next five years, Oman expects to spend over
US$65b on key oil and gas and infrastructure investments,
thus doubling the level investments made during the last five
years. An estimated US$20b will be spent on transportation
infrastructure, including the Oman National Railway project, new
regional airports and expressways. BP’s US$15b Khazzan tight gas
project, the development of a US$10b refinery and petrochemical
complex at Duqm will spearhead oil and gas investment spend,
while another US$13b worth of investments will be made
in the manufacturing and industrial sectors.
Following a similar “offset obligations initiative” in Kuwait,
the Oman Government is determined that this unprecedented
investment in megaprojects should create new opportunities
“within the country, rather than letting the outcome
of such projects merely turn into foreign exchange outflows,
and the creation of jobs and economic activity abroad.”
Oman’s Minister of Oil and Gas Mohammed bin Hamad Al
Rumhy recently commented that “The oil and gas sector is not
only the major source of income in the country, but has also
contributed by creating employment opportunities, to the extent
that Omanization levels have reached more than 80%. Therefore,
besides fueling the economy of the country, we focus on
maximizing the utilization of local content as well as creating
new value-added chains from which both companies and citizens
of Oman can benefit. In this context, we will be working very
closely with other government authorities as well as local
entrepreneurs to maximize the In-Country Value (ICV) for Oman.”
These comments clearly define the Oman Government’s plans
to further “encourage” compliance with new ICV regulations.
The new ICV rules will ensure that ICV plays a key role in policy
issues, and preference will be given to highly Omanized companies
or those with a comprehensive Omanization policy in place,
as well as local companies or companies that plan to set up
a local supply base.
It is also likely that ICV will become a key parameter in tender
evaluation. Omani suppliers will be required as the default
suppliers and permission sought if services are to be sourced from
outside the country.
Nasser bin Khamis al Jashmi, Oil and Gas Ministry
Under-Secretary, has stated that ICV planning will be a standard
prerequisite for companies looking to participate in Oman’s
lucrative oilfield industry.
It would be prudent for all companies looking to bid for oil and gas
contracts in Oman to plan and prepare ICV plans in advance
of intended participation.
Corporate taxation in Middle East and North Africa (MENA) 2014
61
Palestine
The Palestinian economy is a market-based economy in which the private
sector plays a leading role; the role of the public sector is limited to providing basic
infrastructure. Foreign firms seeking access to Palestinian markets have a variety
of options available. Goods can be imported directly into Palestine through
the use of local agents and distributors. Contractual franchising or licensing
arrangements are becoming increasingly common, and joint ventures between
local and international partners are also growing.
In order to carry out any commercial activity in Palestine, investors may
structure operations as sole proprietorship, an ordinary private company
or a shareholding company.
The unit of currency in Palestine is the New Israeli Sheqel (NIS). The official
exchange rate is approximately NIS3.5 to US$1.
Corporate taxes
Corporate income tax
Palestinian companies and branches of foreign
companies carrying out business in Palestine
are subject to corporate income tax. A company
is considered Palestinian if it is registered in Palestine.
A branch of a foreign company registered in Palestine
is treated like a Palestinian company.
Tax is calculated in New Israeli Sheqel (NIS). In cases
where accounts are maintained in other currencies,
the exchange rate that should be used is that prevailing
at the date when income tax is due.
Unless an exemption is mentioned explicitly in the law,
all income realized for any person from any source
whatsoever is subject to income tax.
Rates of corporate income tax
The income tax rate is 15% for income of up to
NIS125,000, and 20% for any amount above
NIS125,000. The income tax rate on life insurance
companies is 5% of the total life insurance premiums
owed to the company.
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Capital gains
In general, capital gains are taxable. An exception
is the exemption for 25% of the gains arising
from the sale of shares and bonds. Capital gains
are aggregated with other income and are subject
to tax at the standard corporate tax rates.
Administration
Companies must file a corporate tax return by the end
of the fourth month after the year-end. All companies
must use the calendar year as their tax year unless
the tax authorities approve a different tax year.
As a result, tax returns are generally due on 30 April.
The tax regulations provide incentives for advance
tax payments made during the tax year. The incentive
rates are announced at the beginning of the tax year.
For 2013, a 8% discount is granted for payments
made during the first and second months of the tax
year and a 6% discount is granted for payments made
during the third month of the tax year.
Corporate taxation in Middle East and North Africa (MENA) 2014
Special incentives are granted for companies who file and pay
within a certain period after the tax year-end. For submission
of tax declaration for the first, second and third months,
the incentives as follows:
Month of payment
Discount (%)
First month
4
Second and third months
2
Foreign tax relief
The Palestinian National Authority has entered into double tax
treaties with Sudan, Sri Lanka, the United Arab Emirates, Oman,
Vietnam, Turkey, Serbia and Jordan.
Determination of trading
income
Dividends
Dividends distributed by companies resident in Palestine are
exempt from tax. Twenty percent (subject to change) of dividend
income must be added back to income as disallowed expenses.
General
Withholding tax
All types of income are taxable, unless otherwise stated in the law.
All business expenses incurred to generate income may be
deducted, but the deductibility of certain expenses is limited.
Every resident person on paying income that is not exempted
from income tax to a nonresident must deduct 10% of this amount,
except reinsurers’ premium payments. The deducted amounts
shall be paid to the Income Tax Directorate.
All government agencies and public companies that pay rent
to local persons and make payments to local providers of
services and suppliers of goods should request a deduction at
source certificate. Payments exceeding NIS2,500 are subject
to withholding tax at the rate stated in the certificate. If the
beneficiary does not provide a deduction at source certificate,
payments are subject to withholding tax at a rate of 10%.
Interest paid by banks to depositors and for other companies
(except local interbank deposits) is subject to a 5% withholding tax
and considered as payment on account for resident companies
and final tax for individuals and nonresidents.
Taxable income is the income reported in the companies’ financial
statements, subject to certain adjustments.
Inventories
Companies can use any method allowed for accounting purposes
to value their inventories. The tax law does not specify a particular
method for determining the cost of inventory.
Provisions
In general, provisions are not deductible for tax purposes, except
for banks and insurance companies. Banks can deduct bad debt
provisions from their taxable income, and insurance companies
can deduct unexpired risks and outstanding claims provisions
for tax purposes.
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63
Tax depreciation
The Palestinian tax law provides for straight-line tax depreciation
rates for various types of assets, which are applied to the purchase
price of the assets, as follows:
Assets
Rate (%)
Buildings and industrial buildings
2–3
Transportation
5–15
Office furniture
Equipment used in industrial activities
10
5–10
Equipment used in agricultural activities
7–25
Technological equipment
20–25
Furniture and decorations
10–15
Computers
20
Other taxes
Personal income tax
Income tax is assessed on all remuneration and benefits earned
in Palestine. This includes director’s fees and employer-paid rent,
school fees, air tickets and relocation expenses, subsistence
and travel expenses.
Palestinian individuals must pay tax on income earned from
all taxable activities, including self-employment and business
activities, at an escalating rate ranging from 5% to 20%.
Miscellaneous taxes
Property tax is levied at the rate of 17% of the assessed rental
value of the property. Real property is assessed every five years.
Allocation of head office expenses
VAT
Head office charges are limited to 2% of net taxable income.
All transactions in Palestine are subject to VAT except
payment of wages, payments of rent for residential property
and payments for agricultural products sold directly by the farmer
to the consumer. The general VAT rate is 16%. A nil rate applies
to exports of goods and services. Financial institutions are subject
to VAT at 16% on wages on a monthly basis and on their net profits.
Relief for losses
Companies may carry forward losses to offset profits
for the following five tax years.
Groups of companies
The Palestinian tax law does not allow the filing of consolidated tax
returns.
Investment incentives
The Palestinian National Authority has created a framework
of economic laws to encourage and support foreign
and local investment in Palestine. The implementing agency
is the Palestinian Investment Promotion Agency (PIPA). These laws
were created to help protect potential investors from undue risk
and to promote the profitability of their investment.
Under the Law on the Encouragement of Investment, as amended
in 2011, approved companies may benefit from an income tax
exemption of 7 to 11 years, depending on the amount invested.
An application must be filed with the PIPA to obtain approval
for these tax benefits.
64
Purchase tax is mainly collected on consumer and processed
goods, as well as raw materials.
Customs duties
The excise duty rates vary up to 50% of the CIF value of imports.
There are three rate schedules; one for imports from the United
States, another for imports from European Economic Community
(EEC) countries and a third rate schedule for all other countries.
Tax treaties
Palestine has entered into tax treaties related to customs duties
with the following countries:
United States, the countries in the EEC, Japan and some Arab
countries.
Under these agreements, goods imported from the listed countries
have either full or limited exemption from customs, depending on
the type of goods imported.
Corporate taxation in Middle East and North Africa (MENA) 2014
Corporate taxation in Middle East and North Africa (MENA) 2014
65
Pakistan
Pakistan, officially the Islamic Republic of Pakistan, lies in south Asia. It has
a 1,046 kilometers (650 miles) long coastline along the Arabian Sea and Gulf
of Oman in the south, and is bordered by Afghanistan and Iran in the west,
India in the east and China in the far northeast. Therefore, it occupies a strategic
position between south Asia, central Asia and the Middle East. The region forming
modern Pakistan was at the heart of the ancient Indus Valley Civilization, later
influenced by Vedic, Persian, Indo-Greek, Turco-Mongol, Islamic, Sikh, Indo-Aryan,
Greek, Arab, Turk, Afghan, Mongol and British cultures.
Pakistan is currently the sixth most populous country in the world
and has the third-largest Muslim population. Pakistan is one of the founders
of the Organization of the Islamic Conference and a member of the United
Nations, Commonwealth of Nations, Next Eleven economies and G20 developing
nations. The economy of Pakistan is the 27th-largest in the world in terms
of purchasing power parity, and the 44th-largest in nominal terms. Pakistan has
a semi-industrialized economy that mainly encompasses textiles, chemicals, food
processing, agriculture and other services industries.
The State Bank of Pakistan (SBP) has expressed the Pakistani GDP as 25.3%
agriculture, 21.6% industry and 53.1% services. The economic growth rate
for fiscal year 2013 is reported to be 3.59% (2012:3.7%) as per statistics
published by the SBP. Although growth was inhibited in the past by overregulation,
today the drive for a free, open market has set in motion significant measures
for promoting investment, diversification and growth.
The unit of currency is the Pakistani Rupee Rial (PKR). The official exchange rate is
approximately PKR108 to US$1.
Corporate taxation
Corporate residency
Companies that are resident in Pakistan are subject
to corporation tax on their worldwide income. Tax
is levied on the total amount of income earned from
all sources in the company’s accounting period,
including dividends and taxable capital gains.
Branches of foreign companies and nonresident
companies are taxed only on Pakistan-sourced income.
A company is resident in Pakistan if it is incorporated
in Pakistan or if its control and management
are exercised wholly in Pakistan during the tax year.
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Company is defined to include the following:
• A company as defined in the Companies Ordinance,
1984
• A body corporate formed by or under any law
in force in Pakistan
• An entity incorporated by or under the corporation
law of a country other than Pakistan
• The government of a province
• A local authority
• A foreign association that the Federal Board
of Revenue declares to be a company
• A Mudaraba, a cooperative society or finance
society, or any other society
Corporate taxation in Middle East and North Africa (MENA) 2014
• A non profit organization
Air transport and shipping business
• A trust, an entity or a body of persons established or constituted
by or under any law for the time being in force
The gross revenue of nonresidents’ air transportation and shipping
businesses is taxed at 3% and 8%, respectively. This income is not
subject to any other tax.
Tax rates
The corporate income tax rate for the tax year 2014
(corresponding to income year-ending between 1 July 2013
and 30 June 2014) is 34% for companies other than banking
companies. For banking companies, the tax rate is 35%.
Small companies are subject to tax at a rate of 25%.
Small companies are companies that meet all the following
conditions:
• Companies with paid-up capital and undistributed reserves not
exceeding PKR 25m
• Companies with no more than 250 employees at any time during
the year
• Companies with annual turnover not exceeding PKR 250m
Minimum tax
All resident companies and nonresident banking companies
are subject to a minimum income tax equal to 1% of gross
receipts from sales of goods, services rendered and the execution
of contracts, if the actual tax liability is less than the amount
of the minimum tax. The excess of the minimum tax over the actual
tax liability may be carried forward and used to offset the actual
tax liability of the following five tax years.
For certain categories of taxpayers, including distributors
of pharmaceutical products, fertilizers, consumer goods, cigarette
manufacturers and flour mills, oil marketing and oil refineries,
petroleum agents and distributors, rice mills and dealers,
and motorcycle dealers, the rate of minimum tax stands is
as prescribed.
• Companies not formed as a result of a restructuring involving
the splitting up or reorganization of an already existing business
Corporate taxation in Middle East and North Africa (MENA) 2014
67
Advance tax payments
Brokerage and commission
In general, advance tax is payable quarterly based on the tax-to-turn
over ratio of the latest tax year. However, banking companies
must pay advance tax on a monthly basis. If the tax liability
is estimated to be more or less than the tax charged for the prior tax
year, an estimate of tax liability can be filed and advance tax
liability can be paid in accordance with such estimate, subject
to certain conditions. For taxpayers other than banking companies,
the due dates for the advance tax payments are 25 September,
25 December, 25 March and 15 June. Banking companies must pay
advance tax by the 15th day of each month.
Indenting commission
5
Other commission and brokerage
10
Advertisement services by a nonresident
person relaying from outside
Pakistan (broadcasting an advertisement
into Pakistan from outside the country)
6/10
In lieu of tax on commission earned by
the members of stock exchange
0.01(e)
Cash withdrawals exceeding PKR 50,000
0.3
Purchase of domestic air ticket
5
Dividends
7.5/10/20/25
Interest
10(a)
Royalties paid to non resident persons
15/20(b)
Fee for technical services paid to non
resident persons
6/15(c)
Branch remittance tax
10(d)
Other payments to nonresidents
20
Collection from distributors, dealers
and wholesalers for specified goods
0.1(f)
Transfers of immovable property
0.5(g)
Sales to retailers
0.5(h)
Cable operators at varied rates
(i)
Adjustable quarterly advance tax on capital gains from sale
of securities is payable on the capital gain derived during
the quarter at the rate of 2% where the holding period is less
than 6 months and 1.5% where the holding period is between 6
and 12 months.
Withholding taxes
Withholding tax is an interim tax payment that may or may not
be the final tax liability. Amounts withheld that are not final
taxes are adjustable against the final tax liability of the taxpayer
for the relevant year.
Withholding tax required to be collected or deducted from
different payments.
Type of payment
Rate (%)
From IPTV, FM radios, mobile TV, satellite
Foreign exchange proceeds from exports
of goods
1
TV channels and landing rights
20(j)
Rent for immovable property
15
Dealers, commission agents and arhaits, etc.,
at varied rates
(k)
Payment for holding functions and gatherings
10
Foreign-produced films and TV programs
PKR100,000
per episode
Payments for goods
Specified goods
1.5
Other goods
Recipient being a company
3.5
Other recipient
4
Import of goods
By industrial undertakings and companies
5
By other taxpayers
5.5
Foreign-produced films
12
Payments under executed contracts for construction,
assembly and similar projects
By companies and nonresident contractors
6
By other taxpayers
6.5
Payments of services
Rendered by residents
Transport services
2
Other services
By companies
6
By other taxpayers
7
Rendered by nonresidents through a PE
Transport services
2
Other services
6
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(a) The withholding tax on interest is considered advance payment of tax that may be
credited against the eventual tax liability for the year. However, interest received
by a nonresident not having a PE in Pakistan, in respect of debt instruments,
government securities, including treasury bills and Pakistan Investment Bonds,
is a final discharge of tax liability, provided that investments are exclusively
made through a special purpose convertible account maintained with a bank
in Pakistan. Interest paid on loans and overdrafts to resident banks and Pakistani
branches of nonresident banks and financial institutions is not subject
to withholding tax. The rate of tax deducted in respect of payments of interest
payable to nonresident persons having no PE in Pakistan shall be 10% of the gross
amount paid. The rate is 20% for nonresidents with a PE in Pakistan.
(b) T
he general rate of withholding is 15%. This tax is considered to be a final tax
for nonresident recipients of royalties. However, if royalties are derived with
respect to properties or rights effectively connected with a PE of a nonresident,
a 20% rate of withholding is imposed. The 20% withholding is available
for adjustment against the eventual tax liability.
(c) F
ees for technical services do not include consideration for construction,
assembly or similar projects of the recipient (such consideration is subject
to a 6% withholding tax) or consideration that is taxable as salary. The general
withholding tax rate is 15% of the gross amount of payment. The withholding
tax is considered to be a final tax for nonresident recipients. However, if
technical services are rendered through a PE in Pakistan, the 6% rate applies.
The 6% tax is considered to be an advance payment of tax by the non resident
recipient of such technical services fees and is available for adjustment against
the eventual tax liability.
(d) R
emittance of after-tax profits by a branch of a nonresident Petroleum
Exploration and Production Company is, however, not taxable.
Corporate taxation in Middle East and North Africa (MENA) 2014
(e) T
he 0.01% rate applies to the traded value (sales price) of shares traded on
the stock exchange in respect of the commission earned by the members.
The 0.01% tax is considered to be advance payment of tax, which is credited
against the final tax liability of members of such a stock exchange for the year.
months. Assets representing depreciable assets, intangibles
and stock-in-trade are taxed as normal business income
of the taxpayer.
(f) The tax is collected by the manufacturer and commercial importer at the time
of sale of the goods in specified sectors. The tax collected is an advance tax
for distributors, dealers and wholesalers.
With effect from 24 April 2012, capital gains on disposal of listed
securities and the tax thereon are computed, determined,
collected and deposited on behalf of a taxpayer by the National
Clearing Company of Pakistan Limited (NCCPL) as a clearing house
licensed by the Securities and Exchange Commission of Pakistan.
However, the NCCPL does not collect tax from the following
categories of taxpayers:
(g) A
person responsible for registering or attesting the transfer of immovable
property must collect the tax from the person selling or transferring
the property. The tax collected is an advance tax.
(h) T
he tax is collected by the manufacturer, distributor, dealer, wholesaler
or commercial importer at time of sale of goods to retailers dealing in specified
goods. The tax collected is adjustable against the eventual tax liability.
(i) The tax is collected by the Pakistan Electronic Media Regulatory Authority
at the time of issuance or renewal of license, depending upon the category
of license. The tax collected is adjustable against the eventual tax liability.
(j) T
he tax is collected on the permission or renewal fee.
(k) The tax is collected by the market committee from dealers, commission agents
or arhatis, etc., on issuance of renewal of license. The tax collected is adjustable
against eventual tax liability.
Dividends
Dividends, including remittances of profits by a Pakistan branch
to its head office (other than remittances of profits by
a Pakistan branch engaged in exploration and production
of petroleum), are subject to withholding tax at the general rate
of 10%.The withholding tax is considered as a final discharge of tax
liability. A 7.5% rate is imposed on certain dividends distributed
by power generation companies. Inter-corporate dividends paid
within the Group companies entitled to group taxation and group
relief are exempt from tax. A dividend received by a banking
company from its asset management company is taxable at
20% and a dividend received by a bank from money market fund
and income fund is taxable at 25%.
Capital gains
Capital gains on securities by way of sale of shares of a public
company, vouchers of Pakistan Telecommunication Corporation,
Mudaraba certificate, instruments of redeemable capital
and derivative products are taxable with effect from 1 July 2010.
The tax rates are as follows:
No. Period
Tax year
Rate of tax
1
Where holding period
of a security is less than
6 months.
2014
10%
2015
17.5%
Where holding period
of a security is more
than 6 months but less
than 12 months.
2014
8%
2015
9.5%
Where holding period
of a security is 12 months
or more.
2016
2
3
10%
Capital gains on other assets (including non-public securities)
are taxable at the corporate rate of tax. However, only 75%
of capital gains derived from transfers of capital assets, excluding
securities, is taxed if the assets were held for more than 12
• A mutual fund
• A banking company, a nonbanking finance company
and an insurance company
• A Mudaraba
• A person registered with the NCCPL as a foreign institutional
investor
• Any other person or class of persons notified by the board
Such investors are required to self-pay their capital gains
tax obligation on a quarterly basis at a rate of 1.5% or 2%
of the amount of gain, depending on the amount, by filing
a statement of advance tax and paying tax within 21 days after
the close of each quarter.
Capital gains arising on immovable property held for a period
up to two years, by a person in a tax year, is chargeable to tax at
the following rates:
• Immovable property held for a period up to one year — 10%
• Immovable property held for a period of more than one year but
up to two years — 5%
Capital losses can be offset only against capital gains. Capital
losses can be carried forward for six years. However, capital
losses on securities described above cannot be carried forward
to a succeeding year.
Interest and penalties
For a failure to file an income tax return by the due date, a penalty
equal to 0.1% of the gross tax payable for each day of default
is imposed, subject to a minimum of PKR 20,000 and a maximum
of 50% of the gross tax payable.
In addition, interest and penalties are imposed in the following
circumstances:
• Interest at a rate equal to 18% per annum is charged if tax
payments, including advance tax payments, are not made
or are partially paid.
• For non-payment or short payment of tax due, a penalty equal
to 5% of the amount of tax in default may be levied. For a second
default, an additional 25% of the amount of tax in default may
be levied, and for third and subsequent defaults, an additional
penalty of 50% of the amount of tax in default may be imposed.
Corporate taxation in Middle East and North Africa (MENA) 2014
69
• If income is concealed, a penalty equal to the amount of tax
evaded or PKR25,000, whichever is higher, is levied in addition
to the normal tax payable.
The income tax department is required to pay compensation
at the rate of 15% per annum on refunds due that have not
been paid within three months of the due date; this will be paid
from the expiration of the three months until the date on which
the refund is paid.
Inventories
Inventory for a tax year is valued at the lower of cost or net
realizable value of the inventory on hand at the end of the year.
If a particular item of inventory is not readily identifiable, the FIFO
or weighted-average methods may be used. The valuation method
should be applied consistently from year to year, but the method
may be changed with the prior approval of the tax authorities.
Provisions
Foreign tax relief
Resident companies can claim foreign tax credit for tax incurred
on foreign-source income at the average rate of Pakistani income
tax or the actual foreign tax paid, whichever is less. If foreign
income is derived under different heads (categories) of income,
the amount of the allowable credit is applied separately to each
head of income. However, income derived under a particular
head of income from different locations is pooled together.
A credit is allowed only if the foreign income tax is paid within two
years after the end of the tax year in which the foreign-source
income is derived.
Administration
The tax year commences on 1 July and ends on 30 June.
Companies are required to end their fiscal years on 30 June.
Special permission is required from the Commissioner of Income
Tax to use a different year-end. The Federal Board of Revenue has
specified 30 September as the year-end for certain industries,
such as sugar, and 31 December as the year-end for insurance
companies.
An income tax return must be filed by 30 September
of the following year if the company’s year-end is from 1 July
to 31 December and by the following 31 December if the year-end
is from 1 January through 30 June. Any balance due after
deducting advance payments and withholding taxes must be paid
when the tax return is filed.
Determination
of business income
General provisions for bad debts are not allowed as deductions
from income. However, a charge for specific bad debts may
be allowed if the debt is accepted by the income tax officer
as irrecoverable.
Nonbanking finance companies and the House Building Finance
Corporation may claim a deduction equal to 3% of the income from
consumer loans for the maintenance of a reserve for bad debts
resulting from such loans.
For advances and off-balance sheet items, banking companies
are allowed a provision not exceeding 1% of their total advances,
and up to 5% of total advances to consumers and small
and medium enterprises, if a certificate from the external
auditor is furnished to the effect that such provisions are based
on and are in line with the Prudential Regulations issued by
the SBP. The amount of provision in excess of 1% is allowed to be
carried over to succeeding years. Allowances relating to capital
expenditure have been introduced.
Tax depreciation
Depreciation recorded in the financial statements is not allowed
for tax purposes.
Tax depreciation allowances are given on assets such as
buildings, plant and machinery, computers and furniture owned
by the company and used for business purposes. A depreciation
allowance for a full year is allowed in the year the asset is placed
in service, but no depreciation allowance is allowed in the year
of disposal of the asset.
Depreciation is calculated using the declining-balance method.
The following depreciation rates are generally used.
Assets
Annual
allowance (%)
Buildings
10
Furniture (including fittings), machinery
and plant (not specified otherwise),
motor vehicles (all types), ships and technical
or professional books
15
Computer hardware, including printers,
monitor and allied items, machinery
and equipment used in the manufacture
of IT products, aircraft and aero engineering
30
Below-ground installations (including offshore)
of mineral oil enterprises
100
Offshore platform and production installations
of mineral oil enterprises
20
General
Determination of taxable income is generally based on the audited
financial statements, subject to certain adjustments. Any income
accruing or arising, whether directly or indirectly, through or from
a PE or any other business connection in Pakistan, through or from
any asset, property or source of income in Pakistan, or through
the transfer of a capital asset located in Pakistan, is subject to tax.
Expenses incurred to derive income from business that is subject
to tax are allowed as deductions to arrive at taxable income.
For branches of foreign companies, allocated head office expenses
may be deducted up to an amount calculated by applying the ratio
of Pakistani turnover to worldwide turnover.
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Corporate taxation in Middle East and North Africa (MENA) 2014
To promote industrial development in Pakistan, certain other
allowances relating to capital expenditure have been introduced.
These allowances are summarized below.
Initial allowance
comprising holding companies and subsidiaries in a 100%-owned
group can file its tax returns as one fiscal unit, subject
to the satisfaction of certain conditions.
Alternatively, on the satisfaction of certain conditions, group
companies can surrender their assessed losses (excluding capital
losses and loss carryforwards) for the tax year to other group
companies.
An initial depreciation allowance at a rate of 25% for building
and plant and machinery is granted for eligible depreciable assets.
The allowance is granted in the tax year in which the assets
are used in the taxpayer’s business for the first time, or in the tax
year in which commercial production begins, whichever is later.
Miscellaneous matters
First-year allowances
Foreign exchange controls
A first-year depreciation allowance at a rate of 90% is granted
for plant machinery and equipment installed by an industrial
undertaking established in specified rural and underdeveloped
areas. This allowance is granted instead of the initial allowance.
In general, remittances in foreign currency are regulated,
and all remittances other than a certain specific few are subject
to clearance by the SBP.
A first-year depreciation allowance at a rate of 90% is granted
for plant machinery and equipment installed for generation
of alternate energy. This allowance is available to an industrial
undertaking set up anywhere in Pakistan and owned
and managed by a company. The allowance is granted instead
of the initial allowance.
Debt-to-equity rules
Under the thin capitalization rules, if the foreign debt-to-equity
ratio of a foreign-controlled company (other than a financial
institution or a banking company) exceeds 3:1, interest paid on
foreign debt in excess of the 3:1 ratio is not deductible.
Amortization of intangibles
The SBP prescribes that borrowers from financial institutions
have a debt-to-equity ratio of 60:40. This may be increased
for small projects costing up to PKR50m or by special government
permission.
Amortization of expenses incurred before
the commencement of business
Loans and overdrafts to companies (other than banking
companies), controlled directly or indirectly by persons resident
outside Pakistan, and to branches of foreign companies
are generally restricted to certain specified percentages
of the entities’ paid-up capital, reserves or head office investment
in Pakistan. The percentage varies, depending on whether
the entities are manufacturing companies, semi-manufacturing
companies, trading companies or branches of foreign companies
operating in Pakistan. No limits apply, however, to companies
exporting at least 50% of their products.
Amortization of intangibles is allowed over the normal useful life
of intangibles on a straight-line basis. If an intangible does not
have an ascertainable useful life or if the normal useful life is more
than 10 years, for purposes of calculating annual amortization,
the normal useful life is considered to be 10 years.
The amortization of expenses incurred before the commencement
of business is allowed on a straight-line basis at an annual rate
of 20%.
Exploration and production of petroleum
The exploration and the production of petroleum is undertaken
through an agreement with the Government. Profits and gains
of the business constitute a separate class of income, subject
to special tax treatment.
Relief for business losses
Business losses, other than capital losses and losses arising out
of speculative transactions, may be carried forward to offset
business profit in subsequent years for a period not exceeding
six years. Unabsorbed depreciation may be carried forward
indefinitely.
Group of companies
To meet their working capital requirements, foreign controlled
companies and branches of foreign companies may contract
working capital loans in foreign currency that can be repatriated.
The State Bank of Pakistan also permits foreign controlled
companies to take out additional matching loans and overdrafts
in rupees equal to the amount of the loans that may be repatriated.
Other loans in rupees are permitted in special circumstances.
Certain guarantees issued on behalf of foreign controlled
companies are treated as debt for purposes of the company’s
borrowing entitlement.
Miscellaneous taxes
Pakistan imposes stamp duties, social security, sales tax, federal
excise duty, capital value tax and customs duties.
The Finance Act, 2007 introduced the concept of group taxation
in Pakistan. Under the Ordinance, a group of resident companies
Corporate taxation in Middle East and North Africa (MENA) 2014
71
Investment incentives
• Private sector projects engaged in the generation of electricity
are exempt from tax. However, this exemption is not available
to oil field electricity generation plants set up during the period
of 22 October 2002 through 30 June 2006.
• Income derived by nonresidents not operating in Pakistan from
the foreign currency account scheme held at authorized
banks in Pakistan or from certificates of investment issued
by investment banks in accordance with the foreign currency
account scheme introduced by the SBP is exempt from tax.
• Income derived from instruments of redeemable capital, as
defined in the Companies Ordinance, 1984, by the National
Investment (Unit) Trust of Pakistan, established by the National
Investment Trust Limited or by mutual funds, investment
companies or collective investment schemes approved by
the Securities and Exchange Commission, is exempt from tax if
such enterprises distribute at least 90% of their income to their
unit holders.
• Income derived by a collective investment scheme
or REIT scheme is exempt from tax if at least 90% of their
accounting income for the year, reduced by capital gains,
whether realized or unrealized, is distributed to their
unit holders, certificate holders or shareholders.
• Income derived from the export of computer software developed
in Pakistan, IT services and IT-enabled services is exempt from
tax up to 30 June 2016.
• A tax credit of 10% of the amount invested by a company in
an industrial undertaking, for purchase of plant and machinery
for the purposes of extension, expansion balancing,
modernization and replacement in an industrial undertaking
set up in Pakistan and owned by it, is allowable against the tax
payable, provided such plant and machinery is purchased
and installed between 1 July 2010 and 30 June 2015. Any
unavailed tax credit may be carried forward to the following
two subsequent years.
• A tax credit equal to 100% of the tax payable on taxable income
for a period of five years is granted to a company if the following
conditions are satisfied:
• The company is incorporated and industrial undertaking is set
up between 1 July 2011 and 30 June 2016.
• The investment is made entirely out of equity.
• A tax credit is allowed to a company that was set up
in Pakistan before 1 July 2011, where it invests 100% of any
new equity raised in the purchase and installation of plant
and machinery for an industrial undertaking. Such undertaking
may be for the purpose of expansion of the plant and machinery
already installed or a new project. The credit is allowed against
the tax payable for a period of five years. The credit is computed
72
in proportion of the tax payable as is the proportion between
new equity and the total equity including new equity.
• A tax credit equal to 20% of the amount of investment
is allowed to a company that is set up in Pakistan before 1
July 2011 that makes investment through 100% new equity,
in the form of issuance of new shares between 1 July 2011
and 30 June 2016, for the purpose of balancing, modernization
and replacement of plant and machinery already installed
in an industrial undertaking owned by a company. The tax
credit, if not fully adjusted, can be carried forward up to five
years.
• A tax credit of 15% of the tax payable is allowed in the tax
year in which a company becomes listed on a registered stock
exchange in Pakistan.
• Any income derived by a nonresident from investment in certain
exchangeable bonds issued by the Federal Government
is exempt from tax.
• Certain industrial sectors are entitled to exemption from
or reduction of tariffs on imported plant and machinery,
with customs duty ranging from 0% to 5%, no sales tax
and withholding tax on import on fulfillment of certain specified
conditions. Full exemption of customs duty and taxes
is applicable strictly on import of capital equipment on
fulfillment of certain specified conditions.
• Exemption from customs duty is available on import
of raw materials used in production of goods for export.
Pharmaceutical raw material and chemicals are also exempt
from customs duty.
Tax treaties
Pakistan has entered into double tax treaties with the following
countries: Austria, Jordan, Saudi Arabia, Azerbaijan, Kazakhstan,
Serbia, Bangladesh, Korea (South), Singapore, Balarus, Kuwait,
South Africa, Belgium, Lebanon, Sri Lanka, Bosnia and,
Herzegovina, Libya, Sweden, Canada, Malaysia, Switzerland,
China, Malta, Syria, Denmark, Mauritius, Tajikistan, Egypt,
Morocco, Thailand, Finland, the Netherlands, Tunisia, France,
Nigeria, Turkey, Germany, Norway, Turkmenistan, Hungary, Oman,
the United Arab Emirates, Indonesia, the Philippines, the United
Kingdom, Iran, Poland, the United States, Ireland, Portugal,
Uzbekistan, Italy, Qatar, Vietnam, Japan, Romania, Yemen,
Bahrain, Nepal, Ukrain, Spain and the Kyrgyz Republic.
The domestic tax rates are subject to any adjustment under
the special or concessionary provisions of a treaty that
override domestic law. If the treaty provides for a different rate
or treatment, this will prevail upon the normal provisions.
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Corporate taxation in Middle East and North Africa (MENA) 2014
73
Qatar
Qatar’s strength is derived from its oil and gas revenue, which has made
it one of the wealthiest countries in the world in terms of per capita income.
Government policy in recent years recognized the need to promote greater
private investment in core industrial projects. The Government has actively
promoted ownership by Qatari and other GCC nationals and has focused
its investment activity on areas in which private capital is unavailable
or government participation is believed to be in the national interest.
Qatar’s commercial laws limit the range of foreign participation in business
activities in Qatar. As a general rule, a non-Qatari person, whether natural
or juristic, may engage in commercial, industrial, agricultural and service
activities, provided the foreign participation in the capital does not exceed
49%. The law provides for exemptions from the general rule where the state
grants the task of extraction, exploitation or management of natural resources
to a foreign contractor, or where it is in the public interest to allow a foreign
contractor to engage in business without a local equity partner. Examples
of the latter include contractors engaged in the New Doha International Airport,
the Doha Rail and construction projects in the oil and gas sector, and civil
projects for governmental authorities. Contractors engaged in public interest
projects are granted branch commercial registrations under a Ministerial Decree
and are exempt from having to use the services of a local agent.
Additionally, the Ministry of Economy and Commerce (formerly the Ministry
of Business and Trade) may grant approval for foreign investors to hold
100% ownership in a Qatar company in the following sectors: agriculture,
manufacturing, health, education, tourism, development and exploitation
of natural resources, power, mining, business consultancy and technical
services, IT, cultural, sports and leisure services, and distribution services.
Only certain areas of land may be held by foreign companies or individuals.
These areas include the West Bay Lagoon, Pearl-Qatar and Lusail
developments.
Foreign investors generally operate in Qatar by adopting one of the following structures:
• Establish a wholly owned branch of a foreign company by obtaining a Ministerial Decree to carry out
a project that facilitates economic development or the performance of a public service.
• Establish a LLC with a Qatari partner to engage in commerce, industry, agriculture and services,
provided the foreign investor’s share in the capital does not exceed 49% and the company is incorporated
in accordance with the Commercial Companies Law.
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Corporate taxation in Middle East and North Africa (MENA) 2014
The Qatar tax implications for the previously mentioned investment structures are as
summarized below:
• The Ministerial Decree (branch) entity does not require a local equity partner. Business profits of the entity accrue solely
to the foreign company and are taxable in full in accordance with the tax rates specified in the ER of Income Tax Law
No. 21 of 2009.
• A local company may be incorporated with a 51% local equity partner; however, the foreign shareholder’s
profit entitlement may be varied to be proportionately greater through the Memorandum and Articles of Association.
The business profits are subject to tax and the resulting tax liability is allocated between the shareholders. The element
of tax relating to the profit distributable to the local shareholder is exempt.
The unit of currency is the Qatari Riyal (QAR). The official exchange rate is approximately
QAR3.64 to US$1.
Taxes on corporate
income and gains
Corporate income tax
Foreign companies carrying on business activities in Qatar
are subject to tax.
The basis for taxation depends on whether a taxpayer is a tax
resident or has a PE in Qatar, or is a nonresident with no PE
in Qatar.
Joint ventures are generally taxed as corporate bodies,
except for unincorporated joint ventures, which are seen as
conduit entities and have no separate legal personality.
For a tax resident company with Qatari and non-GCC shareholders,
tax is assessed on the total profits of the company. The resulting
tax liability is apportioned between the Qatari and non-GCC
shareholders. The tax liability attributable to the non-GCC
shareholders is paid to the Public Revenues and Taxes Department
(PRTD). The Qatari shareholders are exempt from tax; hence,
the tax liability attributable to them is normally distributed as
dividends.
The tax law includes specific rules for determining tax residency
of taxpayers.
Corporate taxation in Middle East and North Africa (MENA) 2014
75
Tax exemption based on nationality
Nationals of other GCC states (Bahrain, Kuwait, Oman,
Saudi Arabia and the United Arab Emirates) are treated as Qatari
nationals for the purposes of the tax law.
An exemption from Qatar income tax is given at the corporate level
to legal persons that are tax resident in Qatar and wholly owned
by Qatari and or other GCC nationals, and at the individual level
to Qatari and other GCC nationals who are tax resident in Qatar,
including their share of profits in legal persons.
The qualification for tax exemption requires a determination
of the nationality of the ultimate individual shareholders.
Legal persons that are tax resident in Qatar and owned by
both GCC and non-GCC nationals shall be taxed based on
the share of the profits ultimately attributable to the non-Qatari
nationals who are not tax resident in Qatar.
• The project should be in line with the objectives of the economic
development plan, approved by the competent government
authority and contribute to the overall development
of the economy, taking into consideration:
• The volume of investment and location
• Its commercial profitability
• The extent to which the project is integrated with other
projects
• The extent to which the project relies on the production
factors available in the country
• The impact of the project on the balance of trade
and the balance of payments
• The project should introduce modern technology and lead
to the creation of employment opportunities for nationals.
Tax exemption based on stock listing
There is no Qatari or GCC national participation requirement.
The non-Qatari investors’ share of profits of Qatari shareholding
companies, where the shares are listed on the Qatar Exchange
(formerly the Doha Securities Market), is exempt from Qatar
income tax.
Other tax exemptions
The PRTD previously issued a letter to registered auditors in Qatar
indicating that this exemption does not extend to companies
in which the listed Qatari shareholding companies hold shares.
On 12 January 2012, the PRTD issued another letter suspending
the implementation of the taxation of companies wholly or partially
owned by listed Qatari shareholding companies.
Tax exemption based on activity
Upon application to the Tax Exemption Committee established
within the Ministry of Economy and Finance, an income tax
exemption may be given to certain entities based on their activity
for a period of up to six years.
In considering the application for tax exemption, the Tax
Exemption Committee is guided by specific criteria:
• The project should contribute to supporting and developing
industry, agriculture, fishery, trade, petroleum, mining, tourism,
land reclamation, transportation or any activities or projects
needed by the country that provide social and economic benefits.
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Foreign shipping and aviation companies are generally exempt
from Qatari income tax if the Qatari shipping and aviation
companies enjoy similar reciprocal treatment in the respective
foreign countries.
Private organizations that are registered to perform
not-for-profit activities in Qatar may not be subject to taxation
in Qatar for their licensed activities. However, this will depend
on the facts and circumstances of each particular case. Other
activities that are performed and do not fall under the given
license are subject to taxation in Qatar.
Rates of corporate income tax
Income is generally subject to tax at a standard rate of 10%.
A minimum rate of 35% is applicable to companies engaged
in petroleum operations (or rates ranging from 35% to 55%
for agreements that precede the enactment of the tax law).
Certain companies engaged in petroleum operations are liable
to taxation in accordance with the provisions of the underlying
production sharing contract or development and fiscal agreement.
Corporate taxation in Middle East and North Africa (MENA) 2014
The definition of petroleum operations includes the exploration
for petroleum, development of oil fields, drilling, well digging,
finishing, revamping, the production, processing and refining
of petroleum and the storage, transport loading and shipping
of crude oil and natural gas.
It is the PRTD’s position that payments for the following services
should be subject to withholding tax at the rate of 7%:
• Advertising and promotion services
• Intermediary services and commercial representatives
• Recruitment services
Withholding taxes
Certain payments made to nonresident entities with respect
to activities not connected with a PE in the state shall be subject
to a final withholding tax at the following rates:
• Five percent on royalties and technical fees, including:
• Computer services, including program development, network
services and maintenance services
• Engineers’ services in all fields, including mechanical,
electrical and civil
• Designs prepared by engineers and consultants
• Maintenance of industrial equipment provided by technical
experts
• Land transportation
• Customs clearance services
• Cleaning services
• Organizing events
• Administration services
Companies or a PE in Qatar that make such payments must
deduct tax at source and remit it to the PRTD by the 15th day
of the month following the month of payment. The withholding tax
will generally apply to a service provider that performs services
in Qatar and is unable to produce a tax card and commercial
registration.
• Consulting services rendered by management consultants
Taxation of nonresidents with no PE
• Legal consultation and external auditing
Under the Regulations to the tax law, tax shall not be withheld on
amounts paid to nonresident entities with a PE in Qatar and which
have been issued a tax card by the PRTD.
• Training services in any of the technical fields mentioned
above
• Seven percent on interest, directors’ fees, brokerage,
commissions and other payments in relation to contracts
for certain services conducted wholly or partially in Qatar.
It is worth noting that, under Tax Circular No. 2 of 2011,
if the payments are made to nonresident entities that are not
registered in the Commercial Register or registered for a contract
Corporate taxation in Middle East and North Africa (MENA) 2014
77
or project with a period less than a year, then such payments
should be subject to withholding tax at source.
Based on the circular, those nonresident entities that are not
registered in the Commercial Register and are determined to have
a PE in Qatar are requested to approach the PRTD and claim
a refund for the withholding tax suffered.
Tax is payable on the due date for filing the income tax return.
The due date for payment of taxes may be extended if the tax filing
date is extended.
Tax administration
Penalties for late tax filing are levied at the rate of QAR100 per
day subject to a maximum of QAR36,000. The penalty for late tax
payment is based on 1.5% of the tax due for each month or part
thereof for which the tax payment is late up to the amount of tax
due.
Tax registration
Tax review process
A taxpayer must register with the PRTD within 30 days
of commencing a taxable activity in Qatar and obtain a tax card.
The PRTD may issue tax assessments based on the taxable income
as determined in the income tax return. However, the PRTD shall
have the right to disregard the income tax return and to assess
the tax on a presumptive basis in cases where it is not possible
to make an assessment on the basis of actual income.
Taxable year
The taxable year runs from 1 January to 31 December,
and a taxpayer must use this accounting period unless approval
is obtained to adopt an alternative accounting period. Approval
to use an alternative accounting period may be granted where
the taxpayer belongs to a group of companies that uses a different
accounting period or if the nature of its activity requires the use
of an accounting period that is different from the taxable year
under the tax law.
The tax law provides for a structured appeals process against
tax assessments. The appeals process consists broadly
of the following stages:
• Objection to a tax assessment
• Correspondence and negotiations with the PRTD
• Formal appeal to the Tax Appeal Committee
• The commencement of a case in the judicial courts
Annual tax filing
Companies that are tax resident or those with a PE in Qatar
are required to file annual income tax returns within four months
after the end of the accounting period. The due date may be
extended upon submission of an application based on reasonable
grounds 30 days prior to the deadline for the tax filing, but
the length of the extension may not exceed four months after such
deadline.
Any taxpayer that carries on an activity in Qatar, including
activities that are tax-exempt under Qatar laws, shall
submit an income tax return accompanied by a set of audited
financial statements if the capital exceeds QAR100,000,
the annual taxable income exceeds QAR100,000 or the head
office is located outside Qatar.
The PRTD may inspect a taxpayer’s books and records, which
should be maintained in Qatar for a period of 10 years. The books
and records are not required to be maintained in Arabic.
Tax filing for 100% GCC-owned companies
Although exempt by virtue of the nationality of its shareholders,
100% GCC-owned companies that are tax resident in Qatar
are required to file annual income tax returns and audited financial
statements if their capital is QAR2m or more, or if their annual
revenue is QAR10m or more.
Outside of these thresholds, the filing of annual income tax returns
and audited financial statements can be made on a voluntary
basis.
The income tax return must be certified by an auditor licensed
to practice in Qatar. The income tax return and audited financial
statements must generally be denominated in Qatari riyal (QAR). If
this requirement is not satisfied, the PRTD may reject the income
tax return.
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Corporate taxation in Middle East and North Africa (MENA) 2014
Taxable income
Capital gains
Gross income
Qatar operates a territorial taxing regime; thus, only items
of income sourced from within Qatar should fall within the Qatar
tax net.
The following are some of the items included in taxable income:
• Bank interest and returns derived outside Qatar from amounts
generated from a taxable activity carried out in Qatar
• Commissions due under agency, brokerage or commercial
representation agreements accrued outside Qatar in respect
of activities carried out in Qatar
Capital gains are aggregated with other income and form part
of gross income subject to tax. However, capital gains derived by
natural persons on the disposal of real estate and securities that
do not form part of the assets of a taxable activity shall be exempt
from Qatari income tax.
Dividends
Dividends are generally not taxed. Income distributed from profits
that have already been subject to Qatari income tax will not be
subject to double taxation in the hands of the recipient. Moreover,
dividends paid by an entity that enjoys tax exemption under Qatar
laws are tax-exempt in the hands of the recipient.
• Gross income resulting from an activity carried out in Qatar
Deductible expenses
• Gross income resulting from contracts wholly or partly
performed in Qatar
Normal business expenses are allowable and must be determined
under the accrual method of accounting.
• Service fee income received by head offices, branches or related
companies
Persons carrying on a liberal profession as accountants, lawyers,
doctors etc., may choose to deduct 30% of their gross income in
lieu of all deductible expenses and costs.
• Certain dividend income and capital gains on real estate
• Capital gains on the disposal of shares in companies that are tax
resident in Qatar
• Interest on loans acquired in the course of business
Expenses for entertainment, hospitality, meals, holidays, club
subscriptions and client gifts are subject to certain restrictions.
Interest paid by a PE (branch) in Qatar to its overseas head office
or other related party outside Qatar may not be tax-deductible.
Interest payments by a subsidiary company to its parent company
or an affiliate are allowable deductions; however, these interest
payments are subject to the withholding tax provisions and should
represent arm’s length amounts.
Corporate taxation in Middle East and North Africa (MENA) 2014
79
Inventories
Inventories must be valued using the guidance under International
Accounting Standards.
Allocation of head office expenses
Charges of a general or administrative nature imposed by a head
office on its Qatar branch are allowed as deductions, provided
they do not exceed 3% of the gross income of the branch minus
certain other costs. For banks and insurance companies,
the limit is 1%. If a project derives income from both Qatari
and foreign sources, the limit is 3% of the total gross income
of the branch minus subcontract and certain other costs, revenues
from the supply of machinery and equipment, offshore revenues
derived from services performed overseas and other income not
related to activities in Qatar.
Provisions
Under the Regulations, general provisions, including provisions
for air tickets, bad debts and inventory obsolescence,
are not tax-deductible. Only when the expenses are actually
incurred and supported by documentary evidence and when
certain criteria (where applicable) under the Regulations are met
will a taxpayer be allowed a tax deduction.
Tax depreciation
The Regulations contain special rules for the computation
of depreciation of fixed assets for tax purposes. The resulting
tax depreciation may be higher or lower than the depreciation
computed for financial accounting purposes, resulting in deferred
income taxes.
In computing for tax depreciation, assets are classified into two
separate categories: the high value assets and the other assets.
Depreciation for high value assets should be calculated on
a straight-line basis. The depreciation rates vary from 5% to 50%
per annum, depending on the asset classification.
Depreciation for other low value assets should be calculated on
a reducing balance method. The depreciation rates vary from
15% to 33.33%, depending on the asset category.
80
Given the special rules, it is imperative that fixed assets
are classified into the appropriate category to ensure
the application of the correct tax depreciation rates and method.
The approval of the Minister of Economy and Finance is required
to increase the tax depreciation rates. The increase is normally
allowed only for new start-up projects upon application
and presentation of appropriate justifications to the Minister.
Lower of accounting and tax
Under the Regulations to the tax law, expenses are tax-deductible
if they are actually incurred and supported by documentary
evidence, including contracts, receipts and invoices. In the case
of depreciation and provisions, this requirement shall be deemed
met if the depreciation or provision is registered in the accounts,
and only up to the amounts registered in the accounts.
In view of the foregoing, where the tax depreciation calculated
by a taxpayer applying the rates under the Regulations is higher
than the accounting depreciation, such taxpayer may only claim
a tax deduction up to the amount of the accounting depreciation.
Relief for losses
Tax losses may be carried forward for up to three years. Carryback
of tax losses is not allowed.
Groups of companies
The tax law does not contain provisions covering groups
of companies; separate income tax returns must be filed for each
separate legal entity.
Miscellaneous
Foreign exchange controls
Qatar does not impose foreign exchange controls. Equity
capital, loan capital, interest, dividends, branch profits, royalties
and management fees can be remitted without restrictions.
Corporate taxation in Middle East and North Africa (MENA) 2014
Anti-avoidance legislation
If a company carries out a transaction with a related party that
was intended to reduce its taxable income, the taxpayer must
be able to establish that such transaction was made on an arm’s
length basis. Additionally, the PRTD will look at the substance
of the transaction or commercial structure rather than its
legal form, particularly where a taxpayer may be structuring
transactions, the primary aim of which is to avoid tax.
The PRTD may re-characterize a transaction or alter the tax
consequences of any transaction that they have reasonable cause
to believe was entered into to avoid or reduce a tax liability.
Transfer pricing
Transactions between related parties must be based on an arm’s
length principle, and the price of the transaction should be
determined based on the comparable uncontrolled price
(CUP) method. Where the CUP method is not used, a taxpayer
is required to obtain approval from the PRTD for the adoption
of an alternative transfer pricing method approved by the OECD.
Thin capitalization
Interest paid to banks and financial institutions relating to amounts
borrowed for operations (working capital) in Qatar may normally
be deducted in computing the taxable profit of a company.
However, interest paid to group or related companies outside
of Qatar may be disallowed unless it is proven that the funds
were specifically borrowed to finance the working capital needs
of operations in Qatar. Interest paid by a branch in Qatar to its
head office or related parties may not be tax-deductible.
Supply and installation contracts
Profits from “supply only” contracts, whereby the supply activity
is performed outside Qatar, are exempt from tax because
the supplier trades “with” but not “in” Qatar. If a contract
includes work elements that are performed partially outside
Qatar and partially in Qatar, and if these activities are clearly
distinguished in the contract, the revenues from outside Qatar
should not be taxable in Qatar.
Similarly, with respect to an engineering, procurement
and construction contract for a project in Qatar, the obligation
to perform construction work in Qatar may bring the revenues
arising outside Qatar into the Qatar tax net, unless the contract
clearly includes a split of revenue between work done in Qatar
and work done outside Qatar.
Retention of final payments
All ministries, government departments, public and semi-public
establishments and companies are required to retain the final
payment or 3% of the contract value (after deducting the value
of supplies and work done abroad), whichever is greater, on
payments to temporary branches of foreign entities until such
entities present a no objection letter from the PRTD.
Corporate taxation in Middle East and North Africa (MENA) 2014
81
Retention shall not apply on payments to Qatari limited liability
companies and permanent branches (e.g., certain accounting
firms and professional engineering offices) with a valid commercial
registration and tax card in Qatar. However, the retention shall
apply on payments to Qatari temporary branches (i.e., branches
whose registration is valid only for the duration of a particular
contract) with a valid commercial registration and tax card
in Qatar for a specific project or contract of more than one year.
Nonresident entities with no commercial registration and tax card
in Qatar and temporary branches registered for a specific project
or contract of less than one year shall be subject to withholding tax
instead of retention.
Qatar Financial Centre
In addition, establishments, authorities and companies
carrying on a trade or business in Qatar are required to give
the PRTD details of the companies with which they are doing
business as contractors, subcontractors or in any other form.
Information to be provided should include the name and address
of the company together with the value of the contract. The final
payment due to the contractor or subcontractor shall be retained
as discussed above.
• Brokerage and dealer operations
The Qatar Financial Centre (QFC) tax law governing entities
registered under the QFC is effective from 1 January 2010. Under
the QFC tax law, the local source taxable income of businesses
operating in the QFC is subject to a flat rate of tax of 10%.
Activities that may be carried on at the QFC include the following:
• International banking
• Insurance and reinsurance
• Fund management
• Treasury management
• Funds administration and pension funds
• Financial advice and back-office operations
• Professional services in the areas of classification
and investment grading
• Audit, legal and taxation advisory
Personal income tax
• Holding company and headquarter hosting
Qatar does not levy personal income tax on salaries and wages
earned under a contract of employment.
Customs duties
• Ship brokering and agency services
Companies engaged in captive insurance or reinsurance services
are subject to a zero concessionary rate of tax.
See Appendix 1: Customs duties in the GCC region.
Taxable income
Tax treaties
Taxable income should be calculated based on the accounting
profit disclosed in the entity’s financial statements, as adjusted
for tax purposes. QFC entities may draw up accounts under
IFRS, UK GAAP, US GAAP or standards issued by the Accounting
and Auditing Organization for Islamic Finance Institutions.
An alternative basis of accounting may be applied under
certain circumstances.
Qatar has entered into several double tax treaties with
the following countries and is actively expanding its treaty
network. Qatar has effective or in force tax treaties with: Algeria,
Armenia, Austria, Azerbaijan, Belarus, Bulgaria, China, Croatia,
Cuba, Cyprus, France, Georgia, Greece, Guernsey, Hungary,
India, Indonesia, Isle of Man, Italy, Jordan, Jersey, Korea (South),
Lebanon, Luxembourg, Macedonia, Malaysia, Malta, Mauritius,
Mexico, Monaco, Morocco, Nepal, the Netherlands, Norway,
Pakistan, Panama, the Philippines, Poland, Romania, Russia,
Senegal, Serbia, Seychelles, Singapore, Slovenia, Sri Lanka,
Sudan, Switzerland, Syria, Tunisia, Turkey, the United Kingdom,
Venezuela, Vietnam and Yemen.
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New QFC transfer pricing guidelines
On 18 July 2013, the Qatar Financial Centre Authority (QFCA)
issued the QFCA Tax Manual Extract on Transfer Pricing (QFC Tax
Manual), which provides guidance on the application of the arm’s
length principle to transactions between QFC registered taxpayers
and their related parties.
Corporate taxation in Middle East and North Africa (MENA) 2014
The key highlights of the QFC Tax Manual are
noted below.
Basic rule
The chargeable profits and tax losses must be determined on
the basis of arm’s length transactions.
Acceptable transfer pricing methods
The methods considered in the OECD Transfer Pricing Guidelines
for Multinational Enterprises and Tax Administrations may
be used. The transfer pricing (TP) method used must be
supported by documentation substantiating the appropriateness
of the selected method.
One-way adjustment
The QFC Tax Manual provides for a one-way adjustment approach,
where a TP adjustment would only be applied to increase
the amount of chargeable profits or reduce tax losses.
Comparables
The QFC Tax Manual also provides guidance on the factors
to consider when establishing comparability and allows
adjustments to comparables to eliminate differences in order
to improve comparability.
The guidelines suggest that the cost-plus basis may be
an appropriate approach where the activities performed
are of relatively low value or low risk to the business as a whole.
Documentation requirements
The QFC Tax Manual does not state that the taxpayer must file
or have TP documentation completed at the time of filing its tax
return. However, the QFCA Tax Department has stated that, where
a taxpayer has undertaken a TP study, properly benchmarked
against valid comparables, the existence and presentation
of such a study to the QFCA Tax Department will be a significant
factor in deciding if an enquiry into a return is necessary.
A TP study is specifically recommended where there is increased
risk of scrutiny; for example, when losses are incurred during
a particular tax year, or profits appear lower than in previous years
or compared with others in the industry.
Burden of proof and maintenance of records for TP
purposes
The burden of proof is on the QFC registered taxpayer to establish
arm’s length compliance. In the case of a compensating
adjustment claim, the claimant is required to show that
the conditions for the claim are satisfied based on the:
• Primary accounting records
• Tax adjustment records
• Records of transactions with associated businesses
• Evidence to demonstrate an arm’s length result, including
a functional analysis
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83
Rulings and advance pricing agreement
The QFCA Tax Department has an advance ruling
regime and welcomes QFC registered entities to apply
for an advance pricing agreement (APA) to obtain certainty
on its tax position. The advance ruling is typically applicable
for a period of two or three years.
New QFC thin capitalization rules
These safe harbor debt-to-equity ratios are non-statutory
and are non-binding on either the taxpayer or the QFCA Tax
Department. It should be noted that the safe harbor ratios relate
only to the quantum of the loan, not the interest rate. The safe
harbor guidance applies for accounting periods beginning on
or after 1 January 2012. The QFCA Tax Department does not
consider reopening settled cases agreed on a basis different
from the specified ratios.
The QFCA Tax Manual Extract on Transfer Pricing
(or the TP Manual), which provides guidance on transactions
related to intragroup services, also provides guidance on
thin capitalization requirements.
Other ratios (e.g., debt-to-EBITDA ratio, interest cover) may be
relevant and may be used by a taxpayer to support the view that,
despite the gearing being higher than the safe harbor debt/equity
ratio, the entity should not be regarded as being thinly capitalized.
A taxpayer may be thinly capitalized where they have funded their
operations with levels of debt that are excessive to their arm’s
length borrowing capacity and, as a consequence, is claiming
excessive interest deductions. The TP Manual specifies that
the arm’s length capacity of a QFC taxpayer is the amount
of debt which it would have required to finance its operations,
as a stand-alone entity, from a non-related independent lender.
Loss relief
The debt-to-equity ratio, or gearing, of a QFC registered entity
is regarded as the key ratio in determining whether a QFC
registered entity is thinly capitalized. A thinly capitalized QFC
registered entity will be subject to restrictions on the level
of interest which can be claimed as a tax deduction.
Safe harbor debt/equity ratio
As a means of providing certainty for QFC taxpayers
and to minimize the cost of undertaking a TP study
or benchmarking exercise for related party loan agreements,
the TP Manual has outlined safe harbor debt/equity ratios
as follows:
• For a non-financial institution — 2:1
Tax losses incurred can be carried forward indefinitely
for utilization against future chargeable profits. There
are restrictions, however, on the carryforward of losses where
there is a change in ownership or there is a major change
in the nature and conduct of the licensed activities of the QFC
entity. Tax losses cannot be carried back.
Exemptions
Special exemptions are allowed for certain activities to be carried
out by QFC entities to ensure that the QFC remains competitive
as a base for financial service providers on an international scale.
These exempt activities include:
• Registered funds
• Special investment funds
• Special funding companies
• Alternative risk vehicles
• Charities
• For a financial institution — 4:1
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Corporate taxation in Middle East and North Africa (MENA) 2014
Qatar Science & Technology Park
Sport and social levy
Businesses registered and operating at the Qatar Science &
Technology Park (QSTP) are exempt from corporate income
tax. However, businesses operating from the QSTP are required
to obtain a tax card, apply withholding tax on applicable
transactions, and file corporate tax returns reporting income
and costs arising on their tax-exempt activities.
Qatari public shareholding companies are subject to a sport
and social levy of 2.5% of the annual net profits. The levy
is allocated to a fund that supports sport, cultural, social
and charitable activities.
Activities that may be carried out at the QSTP include
the following:
• R&D of new products
• Technology development and development of new processes
• Low-volume, high-value specialist manufacturing
• Technology-related consulting services, technology training
and promotion of academic developments in the technology
fields
• Incubating new businesses with advanced learning
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85
Saudi Arabia
Saudi Arabia has the world’s largest proven oil reserves. It is the largest
producer of crude oil in MENA and is likely to remain so in the foreseeable
future.
Saudi Arabia is pursuing two principal economic goals:
• Economic diversification aimed at reducing the country’s dependence on oil
through the development of dedicated economic zones, the manufacturing
industry, mining, banking and finance, and agriculture
• Assumption of responsibility by the private sector of the Kingdom’s economic
development
The Government welcomes foreign investors, assuring them that
Saudi Arabia imposes no restrictions on the entry or repatriation of capital,
profits or salaries. The Government especially encourages foreign investment
that transfers technological expertise and provides employment and training
opportunities for Saudi nationals.
On 11 December 2005, Saudi Arabia became the 149th member of the WTO,
which further encourages foreign investment and economic reforms.
A LLC is an appropriate form of organization for foreign investors to use
to establish a business. The business community often loosely refers
to this form of organization as a joint venture company. The Government
encourages foreign investment in limited liability companies because these
arrangements are regarded as more permanent commitments and more likely
to lead to the transfer of expertise and technology.
Foreign investors may also operate businesses in the following forms:
• As a branch of a foreign company, either on an ongoing basis under
a permanent commercial registration or under a temporary commercial
registration to carry out a government contract
• As a professional partnership
• As a joint stock company
The unit of currency is the Saudi Arabian Riyal (SAR). The official exchange rate
is approximately SAR3.75 to US$1.
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Corporate taxation in Middle East and North Africa (MENA) 2014
Corporate taxes
Rates of corporate income tax
Corporate income tax
Natural Gas Investment Tax (NGIT) applies to natural or legal
persons (including GCC nationals and entities) engaged in natural
gas, natural gas liquids and gas condensates investment activities
in Saudi Arabia. NGIT does not apply to a company engaged
in the production of oil and other hydrocarbons.
Companies are taxed at 20%.
Income tax is assessed on profits of the following:
• A resident capital company (such as a JSC or LLC) on
the non-Saudi shareholders’ share
• A resident non-Saudi natural person who does business
in Saudi Arabia
• A nonresident who does business in Saudi Arabia through
a permanent establishment
• A nonresident who derives income subject to tax from a source
in Saudi Arabia
• An entity engaged in the field of natural gas investment
• An entity engaged in the production of oil and hydrocarbonic
materials
Non-Saudi partners in personal companies (that is, general
partnerships, joint ventures and limited partnerships) are subject
to tax rather than the personal companies themselves.
For corporate income tax purposes, non- Saudis do not include
citizens (nationals) of countries that are members of the GCC:
Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab
Emirates. The share of profits attributable to interests owned by
GCC nationals in a company or partnership are subject to Zakat.
The share of profits attributable to interests owned by non- GCC
nationals and non-GCC entities in a company or partnership
are subject to income tax.
The NGIT rates range from 30% to 85% and are determined on
the basis of the internal rate of return on cumulative annual cash
flows. The NGIT rate includes income tax of 30%. Companies
engaged in the production of oil and other hydrocarbons are taxed
at 85%.
Capital gains
In general, capital gains are treated as ordinary income and taxed
at the regular corporate tax rate. Tax on capital gains will be
assessed at 20% if there is a change or sale in the shareholding
in the company. The tax on capital gains will be determined as
the difference between the cost base of the shares and the higher
of:
• Contractual sale value
• Market value of share
• Book value of share
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87
Capital gains on sales by non-Saudi shareholders of shares
in a Saudi joint stock company traded on the Saudi Stock Exchange
are exempt from tax if the shares (investments) were acquired
after the effective date of the new tax regulations (30 July 2004)
and the sale transaction is made in accordance with the Saudi
Stock Exchange regulations in the Kingdom. Gains on the disposal
of property other than assets used in the business activity
are exempt from tax.
Capital gains tax is not applicable on a resident Saudi shareholder.
Administration
All persons subject to tax (excluding nonresidents who derive
income from a source in Saudi Arabia and are subject to final
withholding tax) are required to register with the Department
of Zakat and Income Tax (DZIT) before the end of their first
fiscal year or prior to the settlement of first withholding tax from
payments made to nonresident parties. Failure to register with
the DZIT results in the imposition of a fine ranging from SAR2,000
to SAR10,000.
A taxable entity that has a permanent establishment
in Saudi Arabia must file its annual tax declaration with
the DZIT based on its accounting books and records within 120
days following the end of the tax year and pay the income tax due
with the tax declaration.
If the taxpayer’s total taxable income (before deduction of any
expenses) exceeds SAR1m, the tax declaration must be certified as
correct by a public accountant licensed to practice in Saudi Arabia.
The non-Saudi partners of a personal company are subject to tax
rather than the personal company itself. However, a personal
company is required to file an information declaration within 60
days from the end of the tax year.
Fines for non-submission of tax declarations by the due date
may be imposed at 1% of the total revenue, with a maximum
fine of SAR20,000. A fine also may be calculated based on
percentages of the underpaid tax. Such a fine is payable if
it exceeds the amount of the fine based on total revenue.
The following are the percentages applied to underpaid tax:
• Five percent of the underpaid tax if the delay is up to 30 days
from the due date
For the purposes of the above calculation, “A” equals
the taxpayer’s liability as per the tax declaration for the preceding
year and “B” equals tax withheld at source for the taxpayer
in the preceding year.
A late fine of 1% for each 30 days of delay is computed after
the lapse of 30 days from the due date of tax payment until
the time the tax is paid.
In addition to the penalty for late payment of tax, a fraud
and evasion fine is imposed at a flat rate of 25% of the difference
in tax resulting from misrepresentation or fraud.
Dividends
Dividends paid to nonresident shareholders are subject to 5%
withholding tax.
Remittance of after-tax profits of branches of foreign companies
(including GCC-registered companies) is subject to 5%
withholding tax.
As per DZIT’s clarification, undistributed profit of the company
that is attributable to the outgoing shareholder on the date of sale
or change in the shareholding will be subject to 5% withholding tax.
Determination of taxable
income
General
The most acceptable basis to the DZIT for assessing tax liabilities
is profit as per the accounting books and records, as adjusted
for tax purposes. In certain cases (for example, foreign airlines
and foreign freight, and land and marine transport companies
operating in Saudi Arabia), tax may be assessed under
the “presumptive basis.” Under the presumptive basis, no financial
statements are presented, and the tax liability is assessed on
deemed profit calculated at rates specified in the tax regulations.
Some of the disallowable expenses are:
• Expenses not connected with the earning of income subject
to tax
• Ten percent of the underpaid tax if the delay is more than 30
and not more than 90 days from the due date
• Payments or benefits to a shareholder, a partner or their
relatives for property and services if they do not represent
an arm’s length payment
• Twenty percent of the underpaid tax if the delay is more than 90
and not more than 365 days from the due date
• Entertainment expenses
• Twenty-five percent of the underpaid tax if the delay is more
than 365 days from the due date
An advance payment on account of tax for the year is payable
in three installments. A taxpayer is not required to make advance
payments in a year if the tax liability for the preceding year was
less than SAR2m.
The installments are due by the end of the 6th, 9th and 12th
months of the tax year. Each installment of advance payment
of tax is calculated in accordance with the following formula:
25% x (A—B)
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• Expenses of a natural person for personal consumption
• Income tax paid in Saudi Arabia or another country
• Financial penalties and fines paid or payable to any party
in Saudi Arabia, except those paid for breach of contractual
terms and obligations
• Payments of bribes and similar payments, which are considered
criminal offenses under the laws of Saudi Arabia, whether paid
locally or abroad
Corporate taxation in Middle East and North Africa (MENA) 2014
Inventories
Interest expenses
Inventories should be valued at the lower of cost and market value.
Cost should be determined on the weighted-average cost method,
or any other method with prior approval from the DZIT.
The deduction for loan fees (loan interest or commission) is limited
to the lower of the following:
Provisions
• Taxpayer’s income from loan fees (interest income) plus
50% of the outcome of (a—b) where (a) and (b) represent
the following:
Provisions for doubtful debts, termination benefits and other
similar items are not deductible. Specific write-offs and actual
employment termination benefit payments that comply with
Saudi Arabian labor laws are deductible.
Tax depreciation
Depreciation is calculated for each group of fixed assets by
applying the prescribed depreciation rate to the remaining value
of each group at the fiscal year-end.
The remaining value for each group at the fiscal year-end
is calculated as follows:
The total remaining value of the group at the end of the preceding
fiscal year
Plus 50% of the cost of assets added during the current year
and the preceding year
Minus 50% of the proceeds from assets disposed of during
the current year and the preceding year, provided that
the balance is not negative
= Remaining value for the group
a = Taxpayer’s taxable income, excluding income from loan fees
b = Expenses allowable as a deduction under the income tax
regulations, excluding loan fee expenses
Banks are excluded from the application of the above limitation.
No deduction will be permitted for the excess loan fees.
Allocation of head office expenses
The allocation of costs by a head office to a branch is not
allowed. However, certain costs incurred abroad directly relating
to the Saudi Arabian operations are deductible, subject
to adequate support and verification.
Reimbursements to the head office and affiliated nonresident
entities for services provided to the Saudi resident entity
are subject to 15% withholding tax. However, a credit will be given
against the tax liability of the Saudi branch for withholding tax
settled on payments made to the head office that are not tax
deductible expenses in the Saudi branch tax declaration.
Technical and consulting expenses
The tax law specifies the following depreciation rates:
Asset
Rate (%)
Land (non-depreciable)
0
Fixed buildings
5
Industrial and agricultural movable buildings
10
Factories, plant, machinery, computer
hardware and application programs (computer
software) and equipment, including cars and cargo
vehicles
25
Expenses for geological surveying, drilling, exploration 20
expenses and other preliminary work to extract
natural resources and develop their fields
All other tangible and intangible depreciable assets
that are not included in the above groups, such as
furniture, aircraft, ships, trains and goodwill
• Loan fees incurred during the year
10
Assets developed in respect of build-operate-transfer (BOT)
or build-own-operate-transfer (BOOT) contracts may be
depreciated over the period of contract or the remaining period
of contract.
Cost of repairs or improvements of fixed assets are deductible,
but the deductible expense for each year may not exceed 4%
of the remaining value of the related asset group at year-end.
Excess amounts must be added to the remaining value of the asset
group and depreciated.
In general, technical costs are expenses that relate to engineering,
chemical, geological or industrial work and research, even if
incurred wholly abroad by the main office or other offices.
These costs are deductible if they can be substantiated by
certain documents, such as technical services agreements, head
office auditors’ certificates and invoices.
Payments for technical and consultancy services rendered by
the head office and affiliated nonresident entities are subject
to 15% withholding tax.
Payments for technical and consultancy services rendered by
non- affiliated, nonresident third parties are subject to withholding
tax at a rate of 5%, regardless of the place of performance
of the services.
Relief for losses
Losses may be carried forward indefinitely. However, the maximum
loss that can be offset against a year’s profit is 25% of the tax
adjusted profits for that year. Saudi tax regulations do not provide
for the carryback of losses.
If a change of 50% or more occurs in the underlying ownership
or control of a capital company, no deduction is allowed
for the non-Saudi share of the losses incurred before the change
in the tax years following the change.
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89
Groups of companies
There are no tax regulations covering groups of companies.
The tax authorities require each separate taxpayer entity
to aggregate income from all Saudi Arabian and foreign sources
attributable to that entity.
Miscellaneous matters
Foreign exchange
Saudi Arabia does not impose foreign exchange controls.
Investment incentives
Transfer pricing
The Government, which encourages industrialization, grants
the following incentives to approved industrial projects that include
technology transfer:
A Saudi company is expected to deal on an arm’s length basis with
its shareholders and any affiliated companies. The DZIT generally
requests the company to submit a certificate from the seller’s
auditors confirming that the materials and goods supplied
to the Saudi Arabian company by its foreign shareholder(s)
or affiliates were sold at the international market price prevailing
at the date of dispatch. This requirement is also extended
to foreign branches importing materials and goods from the head
office for the fulfillment of their Saudi contracts.
• Financing assistance — low-cost financing through the Saudi
Industrial Development Fund (SIDF) and the Public Investment
Fund (PIF)
• Industrial facilities — nominal rent on industrial sites and low fees
for water and electricity
• Duty exemption — exemption from customs duties on imported
production equipment and raw materials
• Protective tariffs — tariff protection once the local product
achieves an approved standard
• Tax incentive — as a part of a major government drive to boost
development in certain areas, it indicated that a tax credit will
be granted to foreign investors based on their investment,
employment and training to Saudi nationals
The Government provides 10 years’ tax incentives on investment
in the following six underdeveloped provinces in Saudi Arabia:
• Hail
• Northern Borders
• Jizan
• Najran
• Abha
• Al-Jouf
The investor will be granted tax credit against the annual tax
payable in respect of the following costs incurred on Saudi
employees. The tax credits will be calculated as follows:
a.Fifty percent of the annual cost incurred on the training
of Saudi employees
b.Fifty percent of the annual salaries paid to Saudi employees,
if there is any balance of tax payable after applying (a) above
c.One-time industrial capital investment credit of 15% carried
forward for up to 10 years
The project should comply with the following conditions to avail
the tax incentive:
• Capital invested in the project should not be less than SAR1m.
• The number of Saudi employees should not be less than five,
who should be employed as technical or senior administrative
staff. The employment contracts signed with the Saudi
employees or trainees should not be less than one year.
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Certain provisions in respect of measures against tax avoidance
empower the DZIT to challenge transactions between related
parties. The DZIT has the right to:
• Disregard a transaction that has no tax effect, or reclassify
a transaction whose form does not reflect its substance
• Allocate income or deductions between related persons
or persons under common control as necessary to reflect
the income that would have resulted from a transaction between
independent persons
Supply and installation contracts
Profits from “supply only” operations by nonresidents
to Saudi Arabia are exempt from income tax (whether the contract
is made inside or outside the Kingdom), as contracts of supply
of materials to the Kingdom are not considered to have
resulted from an activity in the Kingdom unless they include
associated services. The net profits of operations that include
supply and associated services, such as erection, maintenance
and training, are subject to tax, and the contractors are required
to register with the DZIT and submit a tax declaration
in accordance with the tax regulations. Alternatively, payment
under smaller contracts should be settled via withholding tax,
provided the nonresident is not considered to have a permanent
establishment in Saudi Arabia.
The following information must be submitted in support of the cost
of imported materials and equipment:
• Invoices from the foreign supplier
• Customs clearance document
• If the supplying entity is the head office
of the Saudi Arabian branch, a certificate from the external
auditor of the head office confirming that the cost claimed
is equal to the international market value of the equipment
supplied (usually the contracted selling price)
In general, no profit results in the Saudi Arabian books on
materials and equipment supplied, because the revenue from
the sale of equipment equals the cost based on the sales value
declared for customs.
Corporate taxation in Middle East and North Africa (MENA) 2014
Payments to nonresidents
Contract retention
A Saudi resident entity and a PE of a nonresident are required
to withhold tax from payments made to nonresidents (including
nonresident GCC nationals and entities) that do not have a legal
registration or a permanent establishment in Saudi Arabia with
respect to income earned from a source in Saudi Arabia. This rule
applies regardless of whether the payer is considered to be
a taxpayer under the regulations and whether such payments
are treated as a tax-deductible expense in the Saudi resident
entity’s tax declaration.
Tax is not required to be withheld from payments to
subcontractors resident in Saudi Arabia. However, a customer that
is a government entity is required to retain 10% of the subcontract
value until the subcontractor furnishes evidence that it has
fulfilled its tax and Zakat obligations to the DZIT with respect to
the contract.
Asset
Rate (%)
5
Rent, payments made for technical and consulting
services, payments for air tickets, payments for freight
or marine shipping, payments for international
telecommunications, dividends, interest and insurance
or reinsurance premiums
Royalties and payments made to head office
or an affiliated company for services
15
Management fees payments
20
For other services
15
The party withholding the tax must register with the DZIT before
the settlement of the first tax payment, deposit the tax withheld
with the DZIT within the first 10 days of the month following
the month in which the taxable payment is made and issue
a certificate to the nonresident party. A late fine of 1% for each 30
days of delay is computed after the lapse of 30 days from the due
date for the tax payment until the date the tax is paid. An annual
withholding tax return must be filed within 120 days of the end
of the tax year.
Subcontractors
Payments to subcontractors reported by a taxpayer in its tax
return are generally subject to close scrutiny by the DZIT.
The taxpayer is expected to withhold tax due on payments
to nonresident subcontractors and to deposit it with the DZIT,
unless the taxpayer can provide a tax file number or tax clearance
certificate as evidence that such subcontractor is settling its own
tax liability in the Kingdom.
Agency fees
In 2001, the Council of Ministers issued a decision canceling
the law governing the relationship between a foreign
contractor and a Saudi service agent. A foreign contractor may
now operate in Saudi Arabia and contract with government
agencies without appointing a Saudi service agent. Accordingly,
the DZIT generally does not allow a deduction for agency fees
paid to Saudi agents with respect to contracts entered into with
government bodies after 30 July 2001.
Other taxes
Personal income tax
There are no income taxes on salaries and wages of employees
in Saudi Arabia.
Income tax at the standard rate of 20% is assessed on
profit earned in Saudi Arabia by self-employed foreign
professionals (i.e., non-GCC nationals) and consultants from their
activities conducted in Saudi Arabia.
Miscellaneous taxes
Employers must pay Saudi social insurance tax
to the social insurance authority on behalf of their employees.
The contributions are levied on the basic salary, including housing
allowance and certain commissions. The total contribution
for the annuity branch (pension annuity) with respect to Saudi
nationals is 18% (shared equally between employer and employee).
Annuity branch contributions are not required with respect
to non-GCC employees. Employers must pay contributions
for occupational hazards insurance at a rate of 2% for both Saudi
and non-Saudi employees.
Expenses relating to payments for foreign social insurance,
employee pension plans and savings plans, and contributions
to Saudi social insurance with respect to an employee’s
share are not tax deductible.
Zakat
Zakat is a religious levy imposed on the higher of the net
assessable funds and net adjusted profits attributable to the Saudi
and GCC person’s share in a Saudi Arabian resident capital
company.
The rate of Zakat is 2.5% of capital employed, not invested in fixed
assets, long-term deductible investments and deferred costs, as
adjusted by net results of operations for the year. Complex rules
apply to the calculation of Zakat liabilities.
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91
Customs duties
See Appendix 1: Customs duties in the GCC region.
Contract information forms
All persons and government bodies are required to provide
the DZIT with information relating to contracts (including
purchase orders) entered into or their amendments on
a prescribed CIF within three months of the date of contract
or purchase order or amendments thereto. This requirement
is applicable on contracts or purchase orders valuing SAR100,000
or more signed by the Saudi entity with its suppliers of goods
and services with resident and nonresident parties. In the case
of failure to file the required information, the DZIT will hold both
the contractor and contract owner responsible for tax and delay
fines.
Arabic books and records
All tax and zakat payers settling tax or zakat on accounts
basis are required to maintain the minimum accounting books,
e.g., trial balance, general journal, general ledger and inventory
book (in Arabic language), together with original accounting
records in Saudi Arabia.
Tax treaties
Saudi Arabia has entered into double tax treaties with Austria,
Belarus, Bangladesh, China, Czech Republic, France, Greece,
India, Italy, Ireland, Japan, Korea (South), Malaysia, Malta, the
Netherlands, Pakistan, Poland, Romania, the Russian Federation,
Singapore, South Africa, Spain, Syria, Tunisia, Turkey, Ukraine,
the United Kingdom, Uzbekistan and Vietnam. These tax treaties
are all in force.
The tax treaties with the Czech Republic and Tunisia were effective
from 1 Jan 2014.
Implementation of tax treaty provisions on
payments subject to withholding tax
The DZIT issued a Circular No. 5068/16/1434 dated 30.7.1434H
(corresponding to 9 June 2013) advising certain amendments
in the procedure of claiming tax treaties’ benefits as provided
in the previous DZIT’s Circular No. 3228/19 dated 9.6.1431H
(corresponding to 23 May 2010).
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Based on the DZIT’s circular, the Saudi Arabian entity making
a taxable payment to a nonresident entity can apply the provisions
of effective tax treaties if it complies with the following
requirements:
a)Reporting of all payments to nonresident parties (including
payments that are either not subject to withholding
tax or subject to withholding tax at a lower rates as per
the provisions of effective tax treaties) in the monthly
withholding tax returns (on a prescribed format)
b)Submission of a formal request for application of effective tax
treaties’ provisions, including a tax residency certificate issued
from the tax authorities in the country where the beneficiary
is residing confirming that the beneficiary is resident in that
country in accordance with the provisions of Article 4
of the treaty and that the amount paid is subject to tax in that
country (on a prescribed format)
c)Submission of an undertaking from the Saudi entity that
it would bear and pay any tax or fine due on nonresident
payees due to incorrectness of submitted information
or a computation error or misinterpretation of the provisions
of a tax treaty (on a prescribed format)
The Circular also mentions that Saudi Arabian entities who
cannot comply with these requirements may follow the procedure
provided in the previous Circular No. 3228/19 dated 9.6.1431H
(i.e., pay withholding tax at the rates prescribed under Saudi
tax regulations and claim the refund of overpaid taxes on
the basis of provisions of tax treaties).
Circular 3328/19 requires that tax is withheld on all
payments to nonresidents at the rates required under
domestic tax law (without recourse to the double tax treaty).
To benefit from a reduced withholding tax rate or exemption,
the Saudi Arabian resident taxpayer (that is, the withholder) must
submit a request for refund of “overpaid” tax to the DZIT, together
with supporting materials (for example, the tax residency
certificate of the nonresident).
To benefit from the reduced rates under the double tax
treaties, additional conditions may be required (for example,
the recipient must be the beneficial owner of the related income).
Readers should obtain detailed information regarding the treaties
before engaging in transactions.
Corporate taxation in Middle East and North Africa (MENA) 2014
Corporate taxation in Middle East and North Africa (MENA) 2014
93
Syria
Since the mid-1980s, Syria has been moving away from an economic system
that was dominated by the state towards a market economy. This move
away from a state-controlled economy has been characterized by a policy
of encouraging private and joint public-private ventures and by a relaxation
of trading and currency regulations. The trend has been helped by an increase
in oil production and a growth in agricultural output.
Investment in Syria was governed by Law No. 10 that was issued in 1991.
This law was abolished and replaced by the new investment Law No. 8, which
was issued in 2007. The new law is considered the most important investment
legislation since Syria has recognized the key roles of the Syrian private sector,
Arab and foreign investments in the Syrian economy. This law provides for many
incentives and customs duties exemptions. The authority that is responsible
for licensing the qualifying projects is the Supreme Council for Investment (SCI).
Foreign firms wishing to establish branches require the permission
of the Ministry of Economy and Trade.
The unit of currency is the Syrian Pound (SYP). The official exchange rate is
approximately SYP148 to US$1.
Corporate taxes
Corporate income tax
Syrian income tax is imposed on the net profits
of corporate entities from activities within Syria,
including the profits of a Syrian branch of a foreign
company. Income arising from sources or activities
outside Syria is not taxable.
Rates of corporate income tax
There are flat rates of tax that apply to different types
of Syrian companies as follows:
• Private and joint venture (between private and public
sectors), joint stock and limited liability companies
whose headquarters are located in Syria are subject
to corporate income tax at a flat rate of 22%.
An additional municipality surcharge tax of 4%
to 10% is levied on the tax due.
• Private banks, which must be formed as joint stock
companies, are subject to tax at a flat rate of 25%.
• Private insurance companies, which must be formed
as joint stock companies, are subject to tax at a flat
rate of 25% exclusive of the municipality surcharge
tax. If these companies issue more than 50% of their
shares in their initial public offering, they are subject
to corporate income tax at a flat rate of 15%.
• Foreign exchange broker companies
are subject to tax at a flat rate of 25% inclusive
of the municipality surcharge tax.
• Public economic sector department,
the Syrian Petroleum Company and the Syrian Gas
Company are subject to tax at a flat rate of 28%.
• The international hotel industry is subject to income
tax, wages and salary tax as follows:
• Income tax — 2.5%
• Wages and salary tax — 0.5%
• Joint stock companies that issue more
than 50% of their shares in their initial public offering
are subject to corporate income tax at a flat rate
of 14%, inclusive of the municipality surcharge tax.
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Corporate taxation in Middle East and North Africa (MENA) 2014
If the tax rates for company or business has not been
specified, it is subject to tax at the progressive rates shown
in the table below.
Taxable
income
From (SYP) To (SYP)
Rate (%)
Profit range
1
Is exempted
50,000
Profit range
50,001
200,000
10
Profit range
200,001
500,000
15
Profit range
500,001
1,000,000
20
Profit range
1,000,001
3,000,000
24
Profit range
3,000,001
–
28
There are municipal administrative levies, ranging from 4%
in Damascus City and 10% in other areas.
It is possible for small companies and businesses to pay tax on
a deemed profit basis. The profit level is normally fixed by the tax
department for a three-year period.
Capital gains
Capital gains on the sale of assets by companies are treated
as business profits and taxed at the normal progressive rates
shown above.
Administration
The Gregorian calendar year is generally used for tax purposes,
but a taxpayer may request permission from the Ministry of Finance
to use a different year-end.
The accounting records, which must be kept in Arabic, must be
complete and reflect the actual results of the entity.
Joint stock and limited liability companies must file tax returns
by the end of May following the tax year to which they relate.
Other entities must file their tax returns by the end of March.
An extension of these deadlines of up to 60 days may be allowed
in exceptional circumstances.
Tax must be paid within 30 days of the submission of the tax return.
Taxes due as a result of an additional assessment must be paid
within two months of the end of the month in which the assessment
was issued.
A taxpayer has 30 days in which to dispute an appeal raised by
the tax department. If no such objection is made, the assessment
is considered as agreed to by the taxpayer.
Appeals are initially made to the Tax Imposition Committee.
If the taxpayer is not satisfied with the decision of this committee,
the case may be taken to the Revision Committee, whose decision
is final.
The tax department does not usually carry out audits
of the taxpayer’s accounts and records, but bases its assessment
on a detailed examination of the tax return and its supporting
schedules.
Corporate taxation in Middle East and North Africa (MENA) 2014
95
Penalties are imposed on those who do not file income tax
returns when required to do so. The penalty is calculated by
the tax department at 20% of the assessed tax, and it may be
reduced to 10% if the return is then filed within 15 days of the tax
department’s notification. Penalties are also imposed on taxpayers
who do not maintain adequate accounting records at 50%
of the tax calculated on the highest profit level over the previous
five years.
A fine of 5% of the tax due is imposed if financial statements
are not filed with the tax return; this is increased to 10% after one
month of delay.
The right of the Government to claim additional tax due ceases
after five years from the date of the original tax filing deadline.
Dividends
Dividends are not taxable. Tax is assessed on the share of profits
attributable to the foreign shareholder based on audited financial
statements, as adjusted for tax purposes.
Foreign tax relief
A foreign taxpayer in Syria will need to seek relief in their home
country from taxation imposed in both Syria and the home country
on the same profits.
Determination of trading
income
Inventories
Inventories are normally valued at cost, although there are no
specific regulations on this.
Provisions
The statutory reserve may be claimed as a tax deduction.
However, provisions in general, including provisions for doubtful
debts, are not deductible. An exception is made in the case
of employee terminal indemnity provisions.
Tax depreciation
The Syrian income tax law does not specify any depreciation rates;
the law grants the tax assessor the right to determine whether
the rates used are in line with the normal rates applicable
for the same industry under the same working conditions.
The following rates are normally acceptable:
Assets
Rate (%)
Machinery and equipment
10
Furniture and fixtures
15
Hand tools
20
Vehicles
25
Higher rates of depreciation may be claimed if it can be proved
that the assets are subjected to exceptional use. Pre-operating
expenses may be amortized over five years.
The depreciation of buildings and the amortization of intangible
assets may not be deducted.
General
Allocation of head office expenses
Most normal business expenses are deductible in arriving at net
profits subject to tax. Such expenditure must be supported by
adequate documentary evidence in original form.
Branches of foreign companies are subject to nonresident tax;
accordingly, no overheads are acceptable.
Tax returns should be prepared in the form specified by
the Ministry of Finance and must be accompanied by audited
financial statements and supporting schedules, which
provide supplementary information, normally in great detail.
The financial statements of most taxpayers must be audited by
a Syrian licensed auditor.
Nonresident tax
96
Nonresident tax is imposed on certain types of income
of foreign companies, regardless of whether they have a branch
in Syria or not.
Corporate taxation in Middle East and North Africa (MENA) 2014
For contracts signed on or after 1 January 2005, if a clear
split exists between value of pure supply and services, income tax
is imposed at a rate of 5% on the total value of onshore services.
This rate is increased to 7% if the services are provided to oil
and gas companies. Wages and salaries tax is imposed at a rate
of 2% of the total value of onshore services. However, this rate
is increased to 3% if the services are provided to oil and gas
companies. In the absence of a clear split between the value
of services and supply, income tax is imposed at a rate of 3%
on the total value of the contract, and wages and salaries tax
is imposed at a rate of 1% on the total value of the contract.
Offshore services and supply are exempt from withholding tax.
Miscellaneous matters
These taxes must be withheld by the payer and remitted to the tax
authorities by the 15th day of the month following the month
of the contract payment.
The tax regulations do not include provisions relating to transfer
pricing. In practice, international market prices are considered
the appropriate standard for transactions between related parties.
The tax administration may require a taxpayer to justify charges
between related parties that differ from prices determined at arm’s
length basis.
Relief for losses
Losses may be carried forward and deducted from subsequent
profits for a maximum of five years, as long as there is no
cessation of activity. Losses may not be carried back.
Foreign exchange controls
Foreign exchange is heavily regulated in Syria. However,
the Syrian Government has started to relax many of the
restrictions. Legislative Decree No. 54 for the year 2013
sets out the regulations for dealing with foreign exchange
and Syrian pounds.
Transfer pricing
Interest
Losses incurred on the disposal of capital assets are not allowed as
deductions from income.
The finance costs of a project are deductible. Interest that is paid
to a company’s overseas head office or other related party is not
deductible on the grounds that it represents profit.
Group of companies
Withholding taxes
Entities with more than one activity must aggregate the income
from all activities in one tax return.
Withholding tax is imposed on income derived by
Syrian individuals or entities from contracting, construction
work and services and supply work that is performed with
or for the benefit of the Syrian public, joint ventures (involving
the private and public sectors), the private and cooperative sectors
and foreign companies.
Corporate taxation in Middle East and North Africa (MENA) 2014
97
Income tax at a rate of 1% is imposed on the total invoice value
of purchases of food materials. Such supply is exempt from wages
and salaries taxes.
Income tax at a rate of 2% is imposed on the total invoice value
of purchases of materials. Such supply is exempt from wages
and salaries taxes.
Payments for supplies and services by public
sector establishments are also exempt from this withholding tax.
Income tax is imposed at a rate of 3% on the total value
of construction works (turnkey projects) and on the value
of contracts without a clear split between services and supply.
Wages and salaries tax is imposed at a rate of 1% on the total value
of turnkey projects and on the total value of contracts without
a clear split between services and supply. Income tax at a rate
of 5% is imposed on the total value of services. However, this rate
is increased to 7% if the services are provided to oil and gas
companies. Wages and salaries tax is imposed at a rate of 2%.
However, this rate is increased to 3% if the services are provided
to oil and gas companies.
These taxes must be withheld by the payer and remitted to the tax
authorities by the 15th day of the month following the month
of the payment. Both the payer and payee are collectively
responsible for the payment of the tax due.
Other taxes
Miscellaneous taxes
There are social security and several special taxes, stamp duties
and municipal taxes in Syria, such as:
• Income from movable capital assets. Tax is charged at a flat rate
of 7.5% on income from bonds and shares, and, on loans, 80%
of the interests of the following shall be exempted from the tax
on income from movable capital:
• Investment certificate
• The amounts deposited in saving accounts opened with
public banks
• Royalties are subject to nonresident tax at a rate of 7% on
the total amount of royalties.
• Interest received by a Syrian resident is taxed at a rate of 7.5%
in addition to a municipal administrative tax of 10%.
• Rental income from real property is taxed at various rates from
14% to 60%, as determined by the Tax Department.
• Property registration fees are taxed at 10% of the property’s
value on transfer, as estimated by the Ministry of Finance. This
is paid by the purchaser of the property.
• Consumption taxes of 3% to 30% are levied on luxury goods
and services, including high-class hotel and restaurant bills.
• Stamp duty on contracts is levied on contracts, instruments
and documents as follows:
• Percentage basis: from 0.1% to 3%
Personal income tax
Tax is imposed on salaries and wages paid for services performed
in Syria. It is not relevant where payment is made or whether
the individual is a Syrian or an expatriate. Taxable salary includes
the value of most benefits, including basic salary, bonuses,
overtime, allowances and foreign benefits.
Tax is calculated at progressive rates of 5% to 22% for individuals.
Foreign employees working in Syria are subject to the same rules
and rates as those applied to Syrian employees. This does not
apply to companies subject to nonresident tax or withholding tax.
• Lump sum basis: from SYP10,000 to SYP50,000
• Five percent rebuilding tax on direct and indirect taxes
and SYP50 war effort stamp is imposed on specific documents.
Customs duties
Customs duties are based on a basic duty plus a unified tax
surcharge. The CIF value of raw materials and foodstuffs
is usually calculated at the promotions rate, while luxury goods
are calculated at the neighboring country rate.
Duty rates are progressive and range from 1% to 100%, depending
on the Government’s view of the necessity of a product.
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Corporate taxation in Middle East and North Africa (MENA) 2014
Tax treaties
• Any additional facilities granted by the Higher Council
for Investment
Syria is a signatory of the tax treaty of the Arab Economic Union
Council that allows for the avoidance of double taxation in most areas.
• Permission for non-Syrian investors to obtain work permits
during the operation of the project
Syria has entered into double tax treaties with Algeria, Armenia,
Bahrain, Belarus, Bulgaria, China, Croatia, Cyprus, Egypt, France,
Germany, India, Indonesia, Iran, Italy, Jordan, Korea (North), Kuwait,
Lebanon, Libya, Malaysia, Malta, Morocco, Oman, Pakistan, Poland,
Qatar, Romania, the Russian Federation, Saudi Arabia, Slovakia,
Sudan, Tunisia, Turkey, Ukraine, the United Arab Emirates and Yemen.
• Permission to repatriate funds and profit after paying
the income tax due on the project
Syria has entered into limited tax treaties for sea
and air transportation with Cyprus, France, Greece, Italy
and the Netherlands.
Investment incentives
Investment Law No. 8 of 2007
A new investment Law No. 8 issued in 2007 abolished
the investment Law No. 10 of 1991. The main points dealt with
in this investment law are detailed below:
• Permission to import all materials and requirements necessary
for running a licensed project, irrespective of the rules relating
to importation, country of origin and hard currency regulations
• Repatriation of 50% of wages and salaries for expatriates
and citizens of Arab and foreign countries working
for the project and 100% of end of service indemnity after
paying wages and salaries tax due on them
Decree No. 186 of 1985 exempts tourism projects from income tax
for seven years, starting from the commencment of operations.
Real Estate Development Law No. 15 of 2008
Real Estate Development Law No. 15 of 2008 was established
to encourage investment in real estate and attract Arab
and foreign investment to participate in real estate development.
The following incentives are granted:
• Temporary admission for all mechanisms and equipments that
are necessary for the implementation of the projects during
the project’s life
• Import of all the necessary materials and advice
for the implementation of the projects
• Exemption from customs duties on imported material for
machines and equipment used in the production and means
of transport
Corporate taxation in Middle East and North Africa (MENA) 2014
99
UAE
The United Arab Emirates (UAE) is located on the southern coast
of the Arabian Gulf and is a federation of seven Emirates; Abu Dhabi, Dubai,
Sharjah, Ajman, Umm Al Quwain, Ras Al Khaimah and Fujairah. The country has
achieved considerable growth and development since its formation in 1971, due
to its liberal economic policies.
The UAE’s dynamic economic environment, as well as the economic
diversification strategy, has been made possible due to the massive
investment in infrastructure, comprising efficient road networks, excellent
telecommunications facilities and links with the outside world through first-class
ports, both sea and air, which are continually being upgraded.
In Dubai, hotels, office blocks, shopping malls and entertainment complexes
are being developed on a massive scale, putting the Dubai property market
on the world map. The trigger for much of this expansion was the Emirate‘s
decision to allow non-nationals to purchase freehold property in property
developments such as Nakheel‘s development of The Palm, Jumeirah, which
is a residential project in Dubai.
The Commercial Companies Law No. 8 of 1984, which establishes seven
types of business organizations, addresses among other matters minimum
capital levels and UAE national equity ownership requirements, the number
of directors and shareholders, and other topics relating to the management
and administration of businesses. A new (draft) revised form of the Commercial
Companies Law has been approved by the Federal National Council
and is expected to be enacted in 2014.
Under the present Commercial Companies Law, foreign ownership of “onshore”
companies is restricted to a maximum of 49% in most cases, while 100% foreign
ownership is permissible within a free-trade zone (FTZ). Branches of foreign
companies may be registered in the UAE; however, a service agent is required
in all cases, except in regards to branches within a FTZ.
Ministerial Decree No. 194 of 2004 allows other GCC nationals to own 100%
of the shares in a UAE LLC.
The unit of currency is the Emirati Dirham (AED). The official exchange rate is
approximately AED3.67 to US$1.
Taxes on corporate
income and gains
Although there is currently no federal UAE taxation,
each of the individual Emirates (Dubai, Sharjah,
Abu Dhabi, Ajman, Umm Al Quwain, Ras Al Khaimah
and Fujairah) has issued corporate tax decrees that
theoretically apply to all businesses established
in the UAE. However, in practice, these laws have
100
not been uniformly applied. Taxes are currently
imposed at the emirate level only on companies
with actual oil and gas production in the UAE under
specific government concession agreements, and on
branches of foreign banks under specific tax decrees
or regulations or fixed agreements with the rulers
of the emirates in which the branches operate.
Note that this is merely how the practice has
evolved the UAE. There is no general exemption
in the law. Anyone investing in the UAE should be
Corporate taxation in Middle East and North Africa (MENA) 2014
aware of the possibility that the law may be more generally applied
in the future.
The income tax decrees that have been enacted in each Emirate
provide for tax to be imposed on the taxable income of all bodies
corporate, wherever incorporated, and their branches that
carry on trade or business at any time during the taxable year
through a permanent establishment in the relevant Emirate.
Bodies corporate are taxed if they carry on trade or business
directly in the Emirate or indirectly through the agency of another
body corporate.
Abu Dhabi
According to the Abu Dhabi Income Tax Decree, all corporate
entities carrying out trade or business in Abu Dhabi are taxable.
In practice, tax is imposed as follows:
1. Corporate taxes on companies with actual production
of oil and gas at rates specified in the relevant concession
agreement. Oil companies also pay royalties on production.
2. Branches of foreign banks are assessed a fee at the rate of 20%
on annual fees income. The fees income of banks shall be
calculated by reference to their audited financial statements.
In principle, the Abu Dhabi Income Tax Decree of 1965 (as
amended by Abu Dhabi Income Tax Decree Number (4)
of 1972) applies to every chargeable person who conducts
trade or business, including the rendering of any services
in Abu Dhabi, and states that shall be subject to tax at a sliding
scale of rates up to a maximum of 55% as follows:
Taxable income
Rate (%)
Exceeding AED
Not exceeding AED
0
1,000,000
0
1,000,000
2,000,000
10
2,000,000
3,000,000
20
3,000,000
4,000,000
30
4,000,000
5,000,000
40
5,000,000
-
55
A “chargeable person” means a body corporate wherever
incorporated, or each and every branch thereof, carrying on
trade or business of any time during an income tax year through
a permanent establishment situated in the Emirate, whether
directly or through the agency of another body corporate (and not
entitled under an agreement with the ruler to an exemption
from liability to income tax). Two or more such branches
of a body corporate carrying on trade shall each be treated as
separate chargeable persons. The fact that a body corporate has
a secondary body corporate carrying on trade or business through
a permanent establishment in the Emirate shall not in itself
constitute that parent body corporate as a chargeable person.
“Carrying on trade or business” means:
• Selling goods or rights in such goods in the Emirate
• Operating any manufacturing, industrial or commercial
enterprise in the Emirate
• Letting any property located in the Emirate
Corporate taxation in Middle East and North Africa (MENA) 2014
101
• Rendering services in the Emirate (excluding the mere
purchasing of goods or rights of such goods in the Emirate)
The tax charged on a sliding scale in Abu Dhabi shall be reduced
by the credit aggregate of oil dealt in for that fiscal year, so long
as the total of all reductions granted to all chargeable persons
in that fiscal year shall not exceed the credit aggregate of oil dealt
in for that fiscal year.
Taxable income is computed after the deduction of all costs
and expenses incurred by a chargeable person earning such
income. Deductible costs and expenses include acquisition cost
of goods, the expenses of operating the business, allowances
for depreciation, obsolescence and exhaustion of both tangible
and intangible assets, and losses sustained by the chargeable
person in connection with the business.
Dubai
The Dubai income tax decree, in principle, applies to all companies
carrying on trade or business in Dubai that requires them to pay
tax on their earnings. The rates of tax apply on a sliding scale up
to a maximum of 55%. In practice however, only:
• Oil and gas companies that have actual production in the Emirate
pay tax at rates specified in the relevant concession agreement.
Oil companies also pay royalties on production.
Taxable income
Rate (%)
Exceeding AED
Not exceeding AED
0
1,000,000
0
1,000,000
2,000,000
10
2,000,000
3,000,000
20
3,000,000
4,000,000
30
4,000,000
5,000,000
40
5,000,000
55
A “chargeable person” means a body corporate, wherever
incorporated, or each and every branch thereof carrying on
trade or business of any type during an income tax year through
a permanent establishment situated in the Emirate, whether
directly or through the agency of another body corporate (and not
entitled under an agreement with the ruler to an exemption
from liability to income tax). Two or more such branches
of a body corporate carrying on trade shall each be treated as
separate chargeable persons. The fact that a body corporate has
a secondary body corporate carrying on trade or business through
a permanent establishment in the Emirate shall not in itself
constitute that parent body corporate as a chargeable person.
“Carrying on trade or business” means:
• Branches of foreign banks pay tax at a flat rate of 20% on annual
profits. The taxable income of banks is calculated by reference
to their audited financial statements.
• Selling goods or rights in such goods in the Emirate
The Dubai Income Tax Ordinance of 1969 and Dubai Income Tax
Decree (and its amendment in 1970) specify that an organization
that conducts trade or business in Dubai shall be subject
to taxation as follows:
• Letting any property located in the Emirate
• Operating any manufacturing, industrial or commercial
enterprise in the Emirate
• Rendering services in the Emirate (excluding the mere
purchasing of goods, or rights in such goods in the Emirate)
The tax charged on a sliding scale in Dubai shall be reduced by
the credit aggregate of oil dealt in for that fiscal year, so long
as the total of all reductions granted to all chargeable persons
in that fiscal year shall not exceed the credit aggregate of oil dealt
in for that fiscal year.
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Corporate taxation in Middle East and North Africa (MENA) 2014
Taxable income is computed after the deduction of all costs
and expenses incurred by a chargeable person earning such
income. Deductible costs and expenses include acquisition cost
of goods, the expenses of operating the business, allowances
for depreciation, obsolescence and exhaustion of both tangible
and intangible assets, and losses sustained by the chargeable
person in connection with the business.
Sharjah
In principle, all corporate entities carrying out trade or business
in Sharjah are taxable under the Sharjah income tax decree.
In practice, however, tax is imposed as follows:
• Oil and gas companies with actual production in Sharjah pay
tax at rates specified in the relevant concession agreement.
Oil companies also pay royalties on production.
• Branches of foreign banks pay tax at a flat rate of 20% on annual
profits. The taxable income of banks is calculated by reference
to their audited financial statements.
The Sharjah Income Tax Decree 1968 (and its amendments)
specifies that there shall be imposed upon the taxable income
of every chargeable person for each income tax year-ending after
the date of this Decree tax at the following scale:
Taxable income
Rate (%)
Exceeding AED
Not exceeding AED
0
1,000,000
0
1,000,000
2,000,000
10
2,000,000
3,000,000
20
3,000,000
4,000,000
30
4,000,000
5,000,000
40
5,000,000
-
55
A “chargeable person” means a body corporate wherever
incorporated, or each and every branch thereof, carrying on
trade or business at any type during an income tax year through
a permanent establishment situated in the Emirate, whether
directly or through the agency of another body corporate (and not
entitled under an agreement with the ruler to an exemption from
liability to income tax). Two or more such branches of a body
corporate so carrying on trade shall each be treated as separate
chargeable persons. The fact that a body corporate has
a secondary body corporate carrying on trade or business through
a permanent establishment in the Emirate shall not in itself
constitute that parent body corporate as a chargeable person.
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103
“Carrying on trade or business” means:
• Selling goods or rights in such goods in the Emirate
• Operating any manufacturing, industrial or commercial
enterprise in the Emirate
• Letting any property located in the Emirate
• Rendering services in the Emirate (excluding the mere
purchasing of goods or rights in such goods in the Emirate)
Investment incentives
Several of the Emirates have FTZs that offer tax and business
incentives. The incentives usually include tax exemptions at
the Emirate level for a guaranteed period, the possibility of 100%
foreign ownership, absence of customs duty within the FTZ
and a “one-stop shop” for administrative services. The FTZs
include, but are not limited to, the Dubai Airport FTZ (DAFZ),
Dubai International Financial Centre (DIFC) for financial services,
Dubai Internet City (DIC), Dubai Media City (DMC), Dubai Multi
Commodities Center (DMCC) and Jebel Ali Free Zone (JAFZ).
Approximately 30 FTZs are located in the Emirate of Dubai alone.
Miscellaneous matters
Foreign exchange controls
No foreign exchange controls are imposed by either the Federal
Government of the UAE or the individual Emirates.
Withholding tax
There are no withholding taxes in the UAE at present.
104
Other taxes
Personal income tax
There is currently no personal taxation in the UAE.
Capital gains
There is no capital gains tax in the UAE. For tax-paying entities,
capital gains are taxed as part of business profits.
Value added tax
There is currently no VAT in the UAE. While it is our understanding
that the introduction of VAT in the UAE is under discussion at
the federal level, timing of its implementation is not clear. No draft
legislation has been released at this stage.
Social security
The UAE does not impose social security taxes on expatriates.
UAE and other GCC-national employees contribute to retirement
and pension funds in accordance with specific regulations.
Municipal tax and property tax
Municipal taxes are imposed on hotel services and cinema shows.
Service charge percentages vary among the Emirates. A service
charge of 5% to 10% is charged on food purchased in restaurants.
Hotels charge a 10% to 15% service charge per night on room
rates. These charges are usually included in the customer’s bill,
which the municipality will collect from restaurants and hotels.
Individuals living and working in Dubai, for example, pay a 10%
service charge on food purchased in most restaurants. Hotels also
charge an additional 15% service charge on the services
they provide.
Corporate taxation in Middle East and North Africa (MENA) 2014
In most of the Emirates, municipality or housing fees are payable
by tenants based on annual rent from commercial and residential
premises, generally at a rate of 10% on commercial property
and 5% on residential premises. We understand these charges
are not considered a tax as such, but more of a fee based on
annual rent. Please note that the application of this fee is not
consistently applied across the Emirates. There are also different
modes of collection, i.e., it may be collected at the same time
or included in the license fees, renewal of the license or through
the utilities billing system.
Specifically in regards to Abu Dhabi, there are municipality
or housing fees payable by landlords based on the annual
rental income of commercial premises. We understand that
the municipality fees in Abu Dhabi are assessed at a rate
of 5% to 10%, and are payable by the landlord upon obtaining
or renewing the business license.
Sale or purchase fee
In Dubai, a sale registration fee of 2% of the value of the sale
is imposed on the seller, payable to the Dubai Land Department.
A purchase registration fee of 2% of the value of the sale is payable
by the buyer of the property. The rate can differ in other Emirates.
Customs duty
Please refer to the section on “Customs duties in the GCC region.”
Goods should generally not incur customs duty on import
into a UAE free zone, and there is no export duty applied on
goods removed from a UAE free zone. However, if the goods leave
the free zone for a destination within the GCC, customs duty will be
levied on the import at the first point of entry into the GCC.
Tax treaties
The UAE has more than 50 tax treaties currently in force, including
the following: Algeria, Armenia, Austria, Azerbaijan, Belarus,
Belgium, Bosnia and Herzegovina, Bulgaria, Canada, China,
the Czech Republic, Egypt, Estonia, Finland, France, Georgia,
Germany, India, Indonesia, Ireland, Italy, Korea (South), Lebanon,
Luxembourg, Malaysia, Malta, Mauritius, Morocco, Mozambique,
the Netherlands, New Zealand, Pakistan, Philippines, Poland,
Portugal, Romania, Russia (limited), Serbia, Seychelles, Singapore,
Spain, Sri Lanka, Sudan, Switzerland, Syria, Tajikistan, Thailand,
Tunisia, Turkey, Turkmenistan, Ukraine, Venezuela, Vietnam
and Yemen.
In addition, treaties with the following countries are in various
stages of negotiation, renegotiation, signature, ratification,
translation or entry into force: Bangladesh, Benin, Cyprus, Fiji,
Greece, Guinea, Hong Kong, Hungary, Japan, Jordan, Kazakhstan,
Kenya, Lithuania, Mexico, Mongolia, Palestine, Panama, Peru,
Slovenia and Uzbekistan.
Corporate taxation in Middle East and North Africa (MENA) 2014
105
Work
and residence permits
and self-employment
Non-GCC foreign nationals wishing to take up employment
in the UAE need labor permits, which are issued by the Ministry
of Labor, and residence permits, which are issued by
the Immigration Department. The FTZs in the UAE operate
in a slightly different way, but the requirements are similar.
Until a residence permit is issued, a foreign national may not
obtain a driving license.
Family members of a foreign national normally are sponsored
by the foreign national. However, to sponsor dependents, there
is a minimum salary requirement of AED 4,000 (approximately
US$1,090) per month.
The application process for obtaining an employment
visa is completed by the sponsoring company. The company
submits an application form including, but not limited to,
the following documents:
• Copy of the employee’s passport
• Copy of the trade license of the sponsoring company
• Letter of guarantee of employment from the sponsor
• Legalized educational certificates of the employee
After all of the documents are submitted, it takes approximately
four to six weeks for the issuance of the employment
visa and residence permit.
Foreign nationals may not commence employment until their
application and other papers are approved and accepted.
Foreign nationals, may change employers after completing two
years of their initial contract unless they satisfy certain conditions.
Consultation with an advisor is generally required for those wishing
to establish a business or to set up a foreign subsidiary in the UAE.
This procedure requires case-by-case analysis and advice.
106
Corporate taxation in Middle East and North Africa (MENA) 2014
Corporate taxation in Middle East and North Africa (MENA) 2014
107
Appendix
1
Customs duty
in the GCC
The GCC Customs
Union
On 22 December 2002, the six GCC Member States of Saudi
Arabia, Kuwait, Bahrain, Oman, Qatar and UAE, approved
the regulations for the implementation of the GCC Customs
Union, under which member states agreed to adopt the GCC
Customs Law, which unifies customs procedures in all GCC
Customs Administrations. All of the GCC member states
have legislated the GCC Customs Law. However, the practical
implementation of the law is not completely consistent across
each of the member states.
The GCC Customs Law is based on the principle of a single
entry point upon which customs duty on foreign imported
goods are collected; therefore, goods moving between
GCC member states should not be subject to customs duty.
Goods considered of GCC origin for customs duty purposes
are treated as “national products,” and should also not be
subject to any customs duties when moved within the GCC
member states.
Under the GCC Customs Law, there is a common GCC
Customs Tariff under which most foreign imports are subject
to customs duty of 5% of CIF invoice value, except tobacco,
alcohol and those items on the exemption list. There
are exceptions to this in Saudi Arabia with duty of up
to 20% on certain imports. There are is no customs duty on
the export of both foreign and national goods from the GCC.
108
GCC member states
exemptions
Certain goods are exempted from customs duties in accordance
with the schedule of exempted items applicable under the GCC
Customs Law. GCC member states have approved a list of 417
exempted goods. Exemptions include:
• Basic foodstuffs
• Imports for diplomatic and consular missions
• Imports for military and internal security forces
• Imports for civilian airlines and helicopters
• Personal effects and used household items
• Accompanied passenger luggage and gifts
• Goods required for charitable societies
• Ships and other vessels for the transport of passenger
and floating platforms
Exemptions may also be available for imports for industrial
projects in accordance with guidelines established by the GCC
Customs Secretariat. The exemptions cover the following:
• Plant and equipment
• Spare parts
• Raw materials
Corporate taxation in Middle East and North Africa (MENA) 2014
The import of plant, equipment, spare parts and primary raw
materials may be exempted for the life of an industrial project.
Semi-finished goods and packing materials may be exempted
for five years, and this exemption period may be renewed.
For strategic industries of major economic value, the concerned
national department may recommend duty exemption periods
for longer durations.
For an industrial project to qualify for exemption under these
provisions, the application for exemption must be recommended
by the concerned national government authority. The application
will then be reviewed by the GCC Industrial Cooperation Committee
and the GCC Financial and Economic Cooperation Committee.
In the event that the application meets the conditions set by these
committees for exemption, approval for the exemption will be
granted by the concerned GCC authority.
Each exempt importer will need to specifically identify the goods
that are covered by the exemption. These will be recorded in a GCC
Unified Customs register. The GCC regulations include examples
of the format for the registers.
Temporary imports
Goods may be imported on a temporary basis without the levy
of customs duty. A time limitation of six months has been set
for temporary imports; however, this period is renewable, generally
to a maximum of three years. The importer must deposit the value
of customs duty to a customs department clearing account
or provide a bank guarantee. This amount will be refunded by
the customs department after proof of export within the time
limitation of six months or within the extended time period.
Personal effects and household items
Personal effects and used household items brought into any GCC
member state by GCC nationals residing abroad, and foreigners
arriving for the first time to take up residence are exempted
from customs duties. In addition, personal effects and gifts
in the possession of passengers may be exempted from customs
duty provided that such goods are not of a commercial nature.
Greater Arab Free Trade Agreement
The GCC member states are also signatories to the Greater Arab
Free Trade Agreement (GAFTA), which came into full effect on
1 January 2005, covering 17 Arab states out of the 22 Arab
League countries, including Bahrain, Egypt, Iraq, Jordan, Kuwait,
Lebanon, Libya, Morocco, Oman, Palestine, Qatar, Saudi Arabia,
Syria, Sudan, Tunisia, the United Arab Emirates and Yemen.
GAFTA maintains that goods originating from GAFTA member
countries may receive preferential treatment from a customs duty
perspective when imported into another GAFTA member country.
The provisions in GAFTA state that, in order to treat a good as
originating from a GAFTA member country, the good must meet
the rules of origin as determined by the Council, and the value
added as a result of production in a GAFTA country must not be
less than 40% of the value of the finished good.
Some GAFTA member countries are not currently applying
GAFTA preferential treatment; for example, Iraq, where
the customs duty regime has been suspended and a rebuilding Iraq
levy of 5% is applied on most imports regardless of their origin;
Yemen, which has not yet applied any GAFTA rules to its customs
duty regime; and Algeria, which has produced a negative list
of items specifically excluded from GAFTA preferential treatment.
However, all of the GCC member states currently honor GAFTA.
GCC-Singapore Free Trade Agreement
The GCC-Singapore Free Trade Agreement (GSFTA)
is an FTA between the GCC member states and Singapore that
came into effect on 1 September 2013. The agreement ensures
the staggered implementation of customs duty free concessions
for 99% of domestic Singaporean goods entering the GCC.
For GCC-origin goods imported into Singapore, the benefits
are limited due to the fact that most imports into Singapore
are already customs duty free regardless of the origin of the goods
being imported, apart from beer, stout, samsu and medicated
samsu, which are unlikely to be produced in the GCC.
The procedural requirements for claiming preferential customs
duty treatment have not yet been finalized in the GCC. Exporters
in Singapore whose goods meet the rules of origin requirements
of the GSFTA can choose to apply for a Preferential Certificate
of Origin in Singapore. However, they are currently likely to face
a rejection of the Preferential Certificate of Origin when claiming
preferential tariff rates within some of the GCC member states.
Reform of EU customs GSP may impact GCC
exports to Europe
Effective 1 January 2014, a wide range of products from the GCC
member states will lose the benefits of zero customs duty on entry
into the European Union (EU) market.
These customs duty rate increases arise from changes to the EU’s
General Scheme of Preference (GSP), which provides benefits
to products originating in certain non-EU countries of developing
nation status, which up to now included GCC countries. GSP
benefits are withdrawn from GCC countries from 1 January 2014.
The changes will not affect some products, such as crude oil,
that do not rely on GSP where the full customs duty rate is 0%.
Examples of products that will be affected include jet fuel (+ 4.7%),
base oils (+ 3.5%), petrochemicals (+ 6.5%), chemicals (up to +
5.5%) and aluminum (up to + 7.5%).
The GCC oil, gas and petrochemical industry in particular will
be affected by this EU trade regulatory change and will need
to assess the impact on businesses and develop strategies
to mitigate the financial impact on operations. For example,
the GCC’s principal competitors for exporting these products
to the EU include Norway and Korea, both of which have free trade
agreements with the EU, resulting in a competitive advantage
for these countries over GCC products from 1 January 2014.
Corporate taxation in Middle East and North Africa (MENA) 2014
109
What is GSP?
Implications for GCC businesses
The EU’s GSP supports developing nations by granting preferential
or 0% customs duty rates on exports of products to the EU.
The system was revised in 2012 to focus on nations in most
need, poor-developing and least-developed nations. Accordingly,
effective 1 January 2014, nations currently benefiting from GSP
benefits have been classified as “high income countries” or “upper
middle income countries”.
The customs duty on certain oil and gas products that the EU
imports from GCC countries may increase from 0% to 4.7%
and the customs duty rate on certain downstream products,
including chemicals, polymers and aluminum, may increase
to 7.5%.
Banks will lose the benefits of the GSP for three consecutive
years. Nations that will no longer benefit from preferential
access to the EU markets will include the GCC countries (Kuwait,
Saudi Arabia, Bahrain, Qatar, the United Arab Emirates and Oman).
This means that, from 1 January 2014, standard customs duty
rates will apply on products from GCC countries when imported
into the EU.
110
The financial impact of the loss of GSP benefits for sales to the EU
will be determined in the coming months. With competition
from Norway and South Korea, which both have effective free
trade agreements with the EU, and with limited opportunities
for GCC producers to recover the increased customs duty cost
from customers at current market prices, certain GCC products
may become uneconomic in EU markets. For further information
and specific tax advice, contact EY Qatar Tax Partner, Finbarr
Sexton: finbarr.sexton@qa.ey.com or EY Qatar Senior Director
Garrett Grennan: garrett.grennan@qa.ey.com, or any
partner from the EY offices in Bahrain, Kuwait, Oman, Qatar,
Saudi Arabia and the United Arab Emirates (please see contacts
in the directory listing).
Corporate taxation in Middle East and North Africa (MENA) 2014
Corporate taxation in Middle East and North Africa (MENA) 2014
111
Appendix
2
Services provided
by EY in MENA
EY has more than 19,000 tax professionals around the world who
help clients with their business and tax affairs. Complementing
this extensive network, EY’s long-established international tax
desk system gives clients ready access in their home countries
to direct, timely and coordinated foreign tax expertise.
EY has long recognized that the complexity of modern taxation
matters makes it a subject in itself. In MENA, prior to starting
operations, particular emphasis must be given to strategic
planning to ensure that tax exposures are managed appropriately.
Such planning is always predicated on the business imperatives
of the taxpayer’s operations in the MENA region, and takes
into account the tax effect in the taxpayer’s home country,
transfer pricing implications, impact of tax treaties, evaluating
the tax effects of major business decisions, etc.
Our tax services in MENA include:
Tax compliance
Data gathering, compilation and generation of tax returns
for individuals engaged in business, as well as for partnerships,
joint ventures and other entities subject to tax or tax and Zakat. Tax
compliance is not prospective, and does not include tax controversy
resolution or tax accrual and provision preparation or review.
We provide clients with services relating to registration of taxable
entities with taxation authorities. In addition, we prepare, review
and advise on the tax returns prior to their submission, identify
critical issues relating to tax that may have a significant impact on
our clients’ operations and assist in responding to the enquiries
raised by the tax authorities and in finalizing their assessments.
Tax compliance works together with, and complements, the firm’s
tax consulting practice of day-to-day advice to corporate
taxpayers, whether routine or highly technical.
112
Tax consulting
and controversy
EY’s tax consulting works with clients to produce robust,
commercial and practical tax planning based on the business
needs of the client. Prospective tax planning includes the provision
of day-to-day advice to corporate taxpayers, whether routine
or highly technical. In addition, we can advise on tax planning
avenues available under tax treaties, i.e., agreements regarding
the avoidance of double taxation between countries.
International Tax
Services
Our International Tax Services (ITS) team is experienced in working
with global multidisciplinary teams to manage operational
changes and transactions. In particular, we regularly advise
on the following:
• Tax structuring: choice of appropriate structure (holding,
financing and operating) is extremely important from
a commercial as well as regulatory perspective. The type
of structure chosen can determine the flexibility in tax planning.
Holding companies, finance vehicles and intellectual property
entities may be considered in order to possibly improve
a company’s tax efficiency.
• Profit repatriation: foreign-sourced dividends, interest
and royalties often suffer a withholding tax in the country
of source. Such tax may push up the overall effective tax
rate considerably at the group level. Use of an appropriate
holding, intellectual property or financing structure may
Corporate taxation in Middle East and North Africa (MENA) 2014
enable a reduction in dividend withholding tax and tax-efficient
repatriation of cash within the foreign structure.
• International acquisitions: depending upon commercial
objectives, acquisitions could be structured as a share purchase
or asset purchase. The regulatory environment across
MENA for overseas acquisitions often enables leveraged buyouts
and debt financing in a tax-efficient manner. Location of any
relevant sub-holding company can also have an impact on the
compliance management and costs of withholding taxes.
• Any tax structuring should closely align with the actual
developments of the OECD relating to base erosion profit shifting
(BEPS). Consequently structuring of outbound investment
from MENA need to be closely monitored.
Our professionals are experienced in advising on the tax aspects
of international expansion plans of MENA-based businesses.
Key structuring issues relevant when businesses
expand internationally:
• Holding structures
• Financing strategies
• Intellectual property management
• Transfer pricing, including head office expense allocation
Tax compliance and reporting requirements
We work with our clients to develop tailored tax strategies that
address tax risks and seek out opportunities for efficiencies.
Then, we support in the actual implementation.
Personal Tax Services
EY’s Personal Tax Services (PTS) practice offers tax-related
domestic and cross-border planning and compliance assistance
to business-connected individuals and their associated entities.
In addition, in today’s global environment, cross-border services
help meet the ever-growing needs of internationally positioned
clients. Our experienced people and in-depth knowledge help
you to effectively manage your requirements on a global
basis, whether you require our planning or compliance services.
In particular, services we provide to family businesses
and their owners include:
• Advice on succession and inheritance planning and governance
• Personal tax and other wealth management services
Transfer pricing
Transfer pricing is a term used to describe all aspects
of intercompany pricing arrangements between related
business entities, including transfers of intellectual property;
transfers of tangible goods; services and loans; and other
financing transactions.
Intercompany transactions across borders are growing rapidly
and are becoming much more complex. Compliance with
the differing requirements of multiple overlapping tax jurisdictions
is a complicated and time-consuming task, which also brings
with it increasing tax planning and management requirements.
At the same time, tax authorities from each country are imposing
stricter penalties, new documentation requirements, information
exchange and increased audit and inspection activity. In addition,
there is a growth in the number of tax authorities adding to the list
of countries with official transfer pricing rules, which further
complicates transfer pricing issues and audit, with each country
adding their own particular requirements. Following in the footsteps
of other nations, tax authorities across MENA have in recent years
adopted their own assessment procedures with respect to transfer
pricing practices and, increasingly, we are seeing the enactment
of specific transfer pricing regulations on a country-by-country basis.
We are also seeing the introduction of specific anti-avoidance
measures providing tax authorities with the powers to overturn
transactions, structures and business arrangements that lack
commercial substance and economic reality.
Specific transfer pricing rules have been enacted by three
countries in the region (Egypt, Oman and Qatar), with Egypt
being at the forefront through its adoption of the transfer pricing
guidelines as noted under the OECD Guidelines. Other countries
in the region are expected to follow suite.
To manage compliance risks in the current changing transfer
pricing landscape in MENA, businesses should:
• Review transfer pricing documentation requirements
in all MENA jurisdictions
• Consider whether an advance pricing agreement is a better
option than defensive documentation
• Respond to a tax authority transfer pricing audit or enquiry
taking into account the specific tax practice considerations
applicable in the relevant jurisdiction
• Continually update and manage worldwide transfer pricing
policies and procedures in line with latest changes
• Tax planning related to investment decisions, nationally
and internationally
• Tax due diligence on mergers and acquisitions
• Family office services
• Investments and assets protection
• Assistance in selecting the service providers required for setting
up and servicing the structure
Corporate taxation in Middle East and North Africa (MENA) 2014
113
Operating model
effectiveness
Chief financial officers and tax directors of multinationals
operate in an environment of intense scrutiny and challenge.
Transactions, intercompany pricing, supply chains, structuring
and funding are increasingly under the spotlight. More than ever,
operating model effectiveness (OME) that supports the business
strategy can help maintain competitive advantage and give
value to shareholders. Our multidisciplinary OME teams work
with you on supply chain design, business restructuring,
systems implications, transfer pricing, direct and indirect tax,
customs and accounting. We can help you build and implement
the structure that makes sense for your business and improve your
processes. Our people have backgrounds in tax law, tax authorities
and business economics. We deploy those skills to build
the proactive, pragmatic and integrated strategies that address
the tax risk of today’s businesses and help your business achieve
its potential. It’s how EY makes a difference.
Human capital
Our globally integrated performance and reward professionals
help you design compensation programs and equity incentives
that really engage your key people. We help you meet your
executive tax compliance obligations, stay on top of regulatory
change, manage your global talent effectively and improve
your function’s strategic alignment.
Zakat consulting
services
Prospective Zakat planning and structuring of transactions
to manage Zakat implications includes the provision of day-to-day
advice to corporate taxpayers, whether routine or highly technical.
Tax consulting comprises the entire cycle, from overall account
management to helping businesses understand the impact of
legislative changes and plan accordingly. It also includes practice
and procedure groups that assist corporate taxpayers undergoing
tax audits initiated by federal, state, local and other taxing
authorities, and the review and preparation of financial statement
tax accounts.
114
We undertake, on behalf of clients, registration with
the Department of Zakat and Income Tax (DZIT)
in the Kingdom of Saudi Arabia. In addition, we prepare,
review and advise on Zakat returns prior to their submission,
assist clients in the preparation of provisional and final Zakat
declarations, including detailed schedules required in support
thereof, and calculate the amount of Zakat due.
We also advise clients on the accounting records and reporting
requirements to ensure that these are consistent with the legal
requirements and comply with Zakat regulations.
Indirect taxes
Customs duty is generally imposed in the region, and FTZs
are effectively customs-bonded warehouse regimes in which
customs duty compliance requirements must be strictly adhered
to. Our professionals provide details of indirect taxes levied
in each of the countries within the region and assist on planning
for international trade. The rules that govern international trade
in the region are complex, but allow great scope to plan. From
import and export process design and systems implementations
to the use of beneficial customs regimes and free trade
agreements, our clients find that investing in international trade
planning is an outstanding value proposition.
The rationale is compelling: the rules and regulations
around the world that govern international trade come from
the same authorities — for example, the WTO and from the same
multinational treaties and conventions.
This means that the insights we have and the solutions we build
have potentially wide application. The power our global business
has to create real and lasting value for our clients, anywhere they
need it, is enormous. Our global EY Customs and International
Trade Service lines bring our experienced people and knowledge
from around the world to our clients.
VAT is likely to be adopted by all countries in the region within
the medium to long term. The challenges in implementing a VAT
regime are daunting and the demands made of businesses in
the initial rollout of the VAT regime cannot be underestimated.
Our regional indirect tax professionals are here to help clients
cope with the first wave of VAT implementations and to develop
strategies to migrate existing accounting systems and practices
to manage the new compliance challenges.
Corporate taxation in Middle East and North Africa (MENA) 2014
Claim for refund of European VAT incurred in 2014
EY can help you:
Will your business established or resident in MENA incur VAT
in Europe during 2014? If, your answer is yes, you may be able
to recover the VAT cost by applying for a refund. The deadline
for applications for expenses incurred in 2014, for most EU
countries, is 30 June 2015 — however, it is best that you get
started as soon as possible!
• Ascertain whether your business is entitled to a VAT refund
in the relevant EU Member State
Your business may, for example, incur EU VAT on trade
fairs and conferences, meals and accommodation, travel,
transportation and fuel costs, business entertainment, marketing
and advertising costs, professional services, telecommunication,
printing materials, and stationery and training.
• Apply for a tax certificate from the domestic tax authorities
What you should do?
• Identify VAT incurred in Europe and its eligibility for refund
• Determine if you have sufficient documentation to support
a VAT reclaim
• Review your activities to identify any European VAT
compliance issues
• File the VAT refund application in the local language,
where necessary
If your business incurs VAT on business expenditure in Europe
during 2014, you should contact Garrett Grennan, EY MENA VAT
Senior Director, or any tax partner listed in the directory.
Corporate taxation in Middle East and North Africa (MENA) 2014
115
Appendix
3 Directory of EY in
MENA offices and
key tax contacts
Bahrain
Jordan
Oman
Ivan Zoricic
Ali Samara
Sridhar Sridharan
ivan.zoricic@bh.ey.com
ali.samara@jo.ey.com
sridhar.sridharan@om.ey.com
P.O. Box 140, 15th floor, The Tower,
Bahrain Commercial Complex,
Manama, Kingdom of Bahrain
Tel: + 973 5354 55
300 King Abdulla street, 1118,
Amman 1118, P.O.Box 1140,
Jordan
Tel: + 962 6580 0777
Ahmed Amor Al-Esry
Egypt
Kuwait
Sherif El-Kilany
Alok Chugh
sherif.el-kilany@eg.ey.com
alok.chugh@kw.ey.com
Palestine
Ahmed El-Sayed
Tobias Lintvelt
Saed Abdallah
ahmed.el-sayed@eg.ey.com
tobias.lintvelt@kw.ey.com
saed.abdallah@ps.ey.com
Hossam Nasr
18–21st Floor, Baitak Tower, P.O. Box 74,
Safat Square, Ahmed Al Jabber Street,
Safat 13001, Kuwait
Tel: + 965 2295 5000
Al Ersal Street, Second Floor,
Al-Salam Building, P.O. Box: 1373,
Ramallah 1373, Palestinian Authority
Tel: + 972 2240 1011
Lebanon
Pakistan
Ramzi Ackawi
Karachi
hossam.nasr@eg.ey.com
Ring Road, Zone #10A, Rama Tower,
P.O. Box 20, Kattameya,
Cairo 11936, Egypt
Tel: + 202 2726 0260
Iraq
Ali Samara
ali.samara@jo.ey.com
Al Harthia District, Block 609, Street 3,
Villa 23, Al-Ameerat Street, Al-Mansour,
Baghdad, Iraq
Tel: + 964 1543 0357
ramzi.ackawi@lb.ey.com
Commerce & Finance Bldg., 1st Floor, Kantari,
P.O. Box: 11–1639, St Charles City Centre,
Omar Daouk Street, Beirut 1107–2090, Lebanon
Tel: + 961 1760 800
Libya
ahmed.amor@om.ey.com
3rd & 4th Floor, EY Building,
Al Qurum, Opposite CCC, P.O. Box 1750, Ruwi,
Qurum Muscat 112, Sultanate of Oman
Tel: + 968 2455 9559
Nasim Hyder
nasim.hyder@pk.ey.com
EY, 601,
Progressive Plaza, Beaumont Road,
Karachi-75530, Pakistan
Tel: + 922 1356 81965
Gerry Slater
gerry.slater@ly.ey.com
Bashir Al-lbrahimi Street,
Yaser Arafat Square,
Tripoli 91873, Libya
Tel: + 218 2133 4413 0
116
Corporate taxation in Middle East and North Africa (MENA) 2014
Islamabad
Saudi Arabia
Syria
tariq.jamil@pk.ey.com
Riyadh
Abdulkader Husrieh
asim.sheikh@sa.ey.com
P.O. Box 30595,
Villat Sharqieh — Mezzeh,
5 Shaee Street, Damascus, Syria
Tel: + 963 9442 27402
Syed Tairq Jamil
EY, 3rd Floor, Eagle Plaza,75-west,
Fazal-ul-Haq Road, Blue Area,
Islamabad-44000, Pakistan
Tel: + 925 1287 0290
Lahore
Asim Sheikh
Ahmed Abdullah
ahmed.abdullah@sa.ey.com
Imran Iqbal
Muhammad Awais
imran.iqbal@sa.ey.com
muhammad.awais@pk.ey.com
Franz Josef Epping
EY, Mall View Building,
4 Bank Square, Lahore-54000,
Pakistan
Tel: + 924 2372 11531
franz-josef.epping@sa.ey.com
Qatar
Finbarr Sexton
finbarr.sexton@qa.ey.com
Paul Karamanoukian
paul.karamanoukian@qa.ey.com
Marcel Kerkvliet
marcel.kerkvliet@qa.ey.com
P.O. Box 164
24nd Floor, Burj Al Gassar,
Onaiza, West Bay, Doha,
State of Qatar, Arabian Gulf
Tel: + 974 4457 4111
Al Faisaliah Office Tower, Level 6,
King Fahad Road, Olaya, Riyadh 11461,
Saudi Arabia
Tel: + 966 1273 4740
Al Khobar
Naveed Ahmed Jeddy
naveed.jeddy@sa.ey.com
Syed Farhan Zubair
farhan.zubair@sa.ey.com
Flour Building — 4th floor, Jufali Tower
P.O. Box 3795 AlKhobar 31952,
Saudi Arabia
Tel: + 966 3849 9500
Jeddah
Craig Mcaree
abdulkader.husrieh@sy.ey.com
UAE
Dubai
International Tax Services
Stijn Janssen
stijn.janssen@ae.ey.com
Michelle Kotze
michelle.kotze@ae.ey.com
P.O. Box 9267, 28th Floor,
Al Attar Business Tower, Sheikh Zayed Road,
Dubai, United Arab Emirates
Tel: + 971 4332 4000
Abu Dhabi
Tobias Lintvelt
tobias.lintvelt@ae.ey.com
P.O. Box 136, Al Ghaith Tower,
Hamdan Street, Abu Dhabi,
United Arab Emirates
Tel: + 971 50 621 0184
craig.mcaree@sa.ey.com
Irfan Alladin
irfan.alladin@sa.ey.com
13th Floor, King’s Road Tower,
King Abdulaziz Road, P.O. Box 1994,
Jeddah 21441, Saudi Arabia
Tel: + 966 2221 8400
Corporate taxation in Middle East and North Africa (MENA) 2014
117
EY | Assurance | Tax | Transactions | Advisory
About EY
EY is a global leader in assurance, tax, transaction and advisory
services. The insights and quality services we deliver help build
trust and confidence in the capital markets and in economies
the world over. We develop outstanding leaders who team to deliver
on our promises to all of our stakeholders. In so doing, we play
a critical role in building a better working world for our people,
for our clients and for our communities.
EY refers to the global organization, and may refer to one or more,
of the member firms of Ernst & Young Global Limited, each of
which is a separate legal entity. Ernst & Young Global Limited, a UK
company limited by guarantee, does not provide services to clients.
For more information about our organization, please visit ey.com.
The MENA practice of EY has been operating in the region since
1923. For over 90 years, we have grown to over 5,000 people
united across 20 offices and 15 countries, sharing the same values
and an unwavering commitment to quality. As an organization,
we continue to develop outstanding leaders who deliver exceptional
services to our clients and who contribute to our communities.
We are proud of our accomplishments over the years, reaffirming
our position as the largest and most established professional
services organization in the region.
© 2014 EYGM Limited.
All Rights Reserved.
EYG no. DL1002
ED None
This material has been prepared for general informational purposes only and is
not intended to be relied upon as accounting, tax, or other professional advice.
Please refer to your advisors for specific advice.
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