Executive summary

On 16 May 2023, the Council of Ministers in the State of Qatar published Council of Ministers Decision No. 3 of 2023 (Amended Regulations), amending the Executive Regulations of the Income Tax Law.

The Amended Regulations principally focus on: (i) the expanded definition of permanent establishment (PE) in the Income Tax Law; (ii) a revised determination of taxable income for a PE; (iii) amendments to certain criteria for tax exemption; (iv) expanded powers of the General Tax Authority (GTA) to collect information; and (v) new economic substance rules.

The Amended Regulations are effective from 17 May 2023, the day after they were published in the Official Gazette.

Detailed discussion

Background

On 2 February 2023, Qatar published Law No. 11 of 2022 in the Official Gazette, amending the Income Tax Law.

On 16 May 2023, Qatar published amendments to the Executive Regulations (Original Regulations) to the Income Tax Law, which had originally been issued on 11 December 2019. All provisions of the Original Regulations, other than those stated in the Amended Regulations, continue to apply.

Key amendments to the Executive Regulations

Determination of a PE

Key changes to the PE rules are described below.

Negative list: The Amended Regulations introduce a "negative list" in line with the 2017 Organisation for Economic Co-operation and Development (OECD) Model Tax Convention. The Amended Regulations confirm that activities described in the negative list shall not constitute a PE in Qatar.

However, the negative list will not apply, and a PE will be considered to exist in Qatar, to the extent that either:

• A closely related entity of the entity undertaking activities on the negative list performs an activity in Qatar that serves a complementary function as part of a cohesive business operation

• A person in Qatar habitually retains an inventory of goods or merchandise that is regularly delivered in Qatar on behalf of the nonresident entity

The Amended Regulations introduce a new requirement that a nonresident undertaking a negative-list activity should register with the GTA and obtain a tax identification number; however, there is no provision explaining whether a nonresident undertaking a negative-list activity must file an annual income tax return or bear other tax compliance obligations in Qatar.

Insurance PE: The Amended Regulations introduce the concept of an insurance PE under which a PE shall be deemed to exist where a nonresident insurer collects premiums in Qatar or insures risks in the State via a person in Qatar. This applies to direct insurance premiums and not to reinsurance. However, an insurance PE in Qatar will not be considered to exist if the person collecting premiums in Qatar is an independent agent.

Agency PE: The Income Tax Law includes a provision under which a nonresident is deemed to have a PE in Qatar where a person in Qatar habitually concludes contracts, or exercises the key role leading to the conclusion of contracts, without any substantial amendment by the nonresident and irrespective of whether the contracts are under the name of the nonresident (agency PE). The Amended Regulations confirm that an agency PE will not be considered to exist if the Qatar person is an independent agent.

Independent Agent: An insurance PE or an agency PE shall not be considered to exist if the Qatar person who is collecting premiums in Qatar, or habitually concluding contracts on behalf of a nonresident, is an independent agent and acts for the nonresident in the normal course of its business.

An independent agent shall not exist if the Qatar person either:

• Acts exclusively or almost exclusively on behalf of the nonresident
• Is closely related to the nonresident

Determination of taxable income of a PE

The Amended Regulations outline a number of changes to the manner in which the taxable income of a PE is determined, including with regard to: (i) new force-of-attraction rules, (ii) related-party dealings, and (iii) determining nondeductible and nontaxable expenditures.

Taxable Income: In addition to considering income from activities performed by a PE to be taxable income, a new force-of-attraction rule considers the following income to be taxable to the PE:

• Income from sale of goods or merchandise by a nonresident entity (of which the PE forms a part) in Qatar where such goods or merchandise are of the same or similar type to those sold through the PE

• Income from other business activities conducted in Qatar by the nonresident entity (of which the PE forms a part) if the business is of the same, or similar, type to the PE's business

The Amended Regulations further state that the PE's taxable income should be determined in a consistent manner from one year to the next, unless otherwise justified to and accepted by the GTA.

Related-party dealings: The Amended Regulations introduce a "separate legal entity" concept under which the dealings between the head office (of which the PE forms a part) and the PE should be determined as if the PE is a separate and distinct enterprise.

Deductible expenditure: In determining a PE's taxable income, the Amended Regulations outline that the PE can claim a deduction for any expenses incurred for the purposes of its activity, including any general and administrative expenses, whether the expense is incurred in Qatar or elsewhere. Thus, the Amended Regulations remove the existing 3% limitation on allocated overhead expenses (which was calculated based on adjusted income), and now require expenses allocated to the PE to be determined in line with the separate-legal-entity concept.

Nondeductible/nontaxable income: The Amended Regulations state that in calculating a PE's taxable income, the following payments, made or earned by a Qatar PE from its head office or sister PEs, shall not be tax deductible or taxable:

• Royalties
• Rights to use patents or other rights
• Commissions
• Interest (not applicable for PEs of foreign banks)

Criteria for tax exemption

The Income Tax Law provides a tax exemption for a Qatar taxpayer on:

• Capital gains from disposal of: (i) non-Qatari immovable property; (ii) non-Qatari property of a non-Qatari PE of a Qatar taxpayer, including capital gains from the transfer of the non-Qatari PE; (iii) capital gains on the disposal of non-Qatari shares, interest or other rights
• Board member fees and other similar payments from a non-Qatari company

The Amended Regulations establish that this tax exemption shall only be applied where the Qatar taxpayer pays tax outside Qatar with respect to the capital gain, board member fees or other similar payments.

Extension of powers of the GTA

Several provisions in the Amended Regulations extend the GTA's power to collect information. These extended powers principally relate to obtaining information connected to financial accounts under the US Foreign Account Taxes Act (FATCA) or the OECD's Common Reporting Standard (CRS) and to determine ultimate beneficial ownership (UBO).

These provisions include the power to obtain information or documentation for inspection or as required under double tax treaties, exchange of information treaties, or multilateral competent authority agreements for the exchange of information.

The GTA has the power to obtain information from any person in Qatar, irrespective of any legally binding confidentiality agreement.

Exchange of information: Where the GTA requests information or documentation to satisfy an exchange of information agreement with other jurisdictions, the GTA can request this information or documentation without being required to show that either:

• The information and documentation requested are required for a tax purpose
• Acts to which the requested information pertains are criminalized in Qatar

UBO of legal entities: Qatar-incorporated or tax-resident entities (Reporting Entity) must provide the GTA with information relating to:

• The legal and/or beneficial owners of the Reporting Entity
• Any delegate of nominee owners of the Reporting Entity
• Any intermediary entities between the Reporting Entity and the UBO

Trust funds: Trust funds established in Qatar (other than the Qatar Financial Centre) or their agents shall provide the GTA, on request, details of their: (i) beneficiaries; (ii) grantor founders; (iii) trustees; (iv) agent custodians or guarantors; or (v) any natural person effectively controlling the trust fund.

Nonprofit organizations: Nonprofit organizations should provide the GTA information on their: (i) founders; (ii) board members; (iii) beneficiaries; and (iv) any person with authority to represent the nonprofit organization.

Economic substance

The Amended Regulations expand on current economic substance rules in Qatar.

Relevant entities: Qatar's economic substance rules apply to entities that in the two preceding fiscal years (Relevant Entity):

• Generated more than 75% of their income from Relevant Income
• More than 60% of the book value of the entity from assets outside Qatar or more than 60% of the entity's Relevant Income is from foreign sources
• Outsourced management of day-to-day operations as well as decision-making on key functions

Excluded Relevant Entity: The following are excluded as a Relevant Entity (Excluded Relevant Entity):

• Entities listed on the Qatar Stock Exchange
• Regulated financial institutions
• Entities that are wholly beneficially owned by Qatar tax residents and mainly hold shares in Qatar businesses
• Holding companies in Qatar wholly owned by Qatar tax resident shareholders or by an ultimate parent entity that is tax resident in Qatar
• Entities with at least five full-time employees who are performing core income-generating activities resulting in the generation of Relevant Income

A Relevant Entity, other than an Excluded Relevant Entity, shall be considered to be a Reporting Relevant Entity.

Relevant Income: Relevant Income includes income from: (i) immovable property, (ii) dividends, (iii) interest, or (iv) royalties.

Reporting requirements: A Reporting Relevant Entity must indicate in its annual corporate tax return whether it satisfies the following criteria (to demonstrate minimum indicators of its core activity, the entity should satisfy all criteria) (Minimum Economic Substance):

• Has an exclusively owned or used location in Qatar
• Has at least one active bank account in Qatar

In addition, the Reporting Relevant Entity will need to demonstrate that it meets at least one of the following conditions:

• Has one or more managers who is tax resident in Qatar with the authority to make decisions related to the generation of Relevant Income of the Reporting Relevant Entity and who actively, independently and regularly exercises this authority; this person cannot be an employee or manager of another nonrelated enterprise
• Can show that the majority of its employees are tax resident in Qatar

Under the terms of the Income Tax Law, where a Reporting Relevant Entity is unable to demonstrate Minimum Economic Substance, the GTA can employ the following actions:

• Decline to issue a tax residency certificate to the Reporting Relevant Entity
• Apply a financial penalty equal to 15% of the net income of the Reporting Relevant Entity

Implications

The Amended Regulations outline significant changes to the determination of existence of a PE in Qatar and reporting obligations. Non-Qatari companies doing business in Qatar with or without a PE, or operating under an agency arrangement, should carefully consider how the Amended Regulations will affect their operating model.

Companies that have a PE in Qatar should be mindful of the revised basis to determine income of a PE under the force-of-attraction rules. Nonresidents who sell goods, merchandise or services in Qatar via both a Qatar PE and from their head office should carefully consider the extent to which this provision will apply to them.

Further, noting the introduction of the separate legal entity concept, PEs should consider current cost allocation and transfer-pricing models to support their expenses. The nondeductible/nontaxable items need to be considered in the context of the separate legal entity concept.

Entities operating in Qatar should be aware of the GTA's extended powers to request information related to matters such as the FATCA, the OECD's CRS, UBO and other disclosure requirements, and should review their current ability to provide information that may be covered by a GTA information/documentation request.

Finally, any entity operating in Qatar should consider how Qatar's economic substance rules apply to its business and how the entity will satisfy its minimum indicators of a core activity and compliance obligations.

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For additional information with respect to this Alert, please contact the following:

EY Consulting LLC, Doha

• Ahmed F. Eldessouky, Qatar Tax Leader | ahmed.f.eldessouky@qa.ey.com
• Kevin McManus, International Tax and Transaction Services | kevin.mcmanus@qa.ey.com
• Roger Akl, Global Compliance and Reporting | roger.akl@qa.ey.com
• Fareed Patel, Global Compliance and Reporting | fareed.patel@qa.ey.com
• Sherif Ismail, Global Compliance and Reporting | sherif.ismail@qa.ey.com

Ernst & Young LLP (United States), Middle East Tax Desk, New York

• Asmaa Ali | asmaa.ali1@ey.com

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor