background image
Qatar Amends Income Tax Law Executive Regulations in Relation to Permanent Establishment and Economic Substance Requirements — Orbitax Tax News & Alerts

Qatar's Council of Ministers issued Decision No. 3 of 2023 on 16 May 2023, which amends the Executive Regulations to the Income Tax Law. This includes amends regarding permanent establishments, considering a new definition of permanent establishment and related changes introduced by Law No. 11 of 2022. Some of the key aspects of the amended Executive Regulations include:

  • Provisions regarding activities that will not constitute a permanent establishment (PE) as long as the activity is of a preparatory or auxiliary character (i.e., negative list), which is in line with the 2017 OECD Model Tax Convention, including related anti-fragmentation and anti-avoidance provisions.
  • A new obligation for a non-resident entity undertaking negative list activities in Qatar to register with the tax authority, although any particular compliance obligations are uncertain;
  • New insurance PE rules, providing that a PE is constituted when a non-resident insurer collects premiums in Qatar or insures risks in the State via a person in Qatar, excluding reinsurance activities;
  • New agency PE rules, providing that a PE is constituted when a person in Qatar habitually concludes contracts, or exercises the key role leading to the conclusion of contracts, without material modification by the non-resident;
  • New rules regarding independent agents, providing that an insurance PE or an agency PE will not be constituted if the person collecting premiums or habitually concluding contracts is an independent agent and acts for the non-resident in the ordinary course of its business, although the person will not be considered an independent agent if acting exclusively or almost exclusively on behalf of the non-resident or is closely related to the non-resident;
  • New rules for the determination of taxable income for a PE, including:
    • the introduction of the separate legal entity concept under which dealings between the head office and a PE should be determined as if the PE is a separate and distinct enterprise.
    • the removal of the 3% limit on allocated overhead expenses, with expenses allocated to the PE now required to be determined in line with the separate legal entity concept;
    • limits on certain payments made by a Qatar PE to its head office or another related entity, including that the following are not deductible for the PE:
      • royalties and other fees/payments for the right to use patents and other rights;
      • commissions for certain services rendered or management; and
      • interest on loans to the PE, except for PEs of foreign banks;
    • a force of attraction rule providing that the following income will be attributed to a PE:
      • income from the sale of goods or merchandise by a non-resident in Qatar if the same or similar goods are also sold by a PE maintained by the non-resident in Qatar; and
      • income from business activities carried on by a non-resident in Qatar if the same or similar business activities are also carried on by a PE maintained by the non-resident in Qatar.

In addition to the new PE provisions, the amended Executive Regulations also provide new requirements in relation to Qatar's economic substance requirements, including:

  • The economic substance requirements apply to relevant entities that meet the following conditions in the two preceding fiscal years:
    • more than 75% of their income is generated from immovable property, dividends, interest, or royalties (relevant income);
    • more than 60% of the book value of the entity is from assets outside Qatar or more than 60% of the entity's relevant income is from foreign sources; and
    • the management of day-to-day operations and decision-making on key functions is outsourced;
  • Certain entities are excluded, including:
    • entities listed on the Qatar Stock Exchange;
    • regulated financial institutions;
    • entities that are wholly owned by Qatar tax residents and mainly hold shares in Qatar businesses;
    • holding companies in Qatar that are wholly owned by Qatar tax resident shareholders or by an ultimate parent entity that is tax resident in Qatar; and
    • entities with at least five full-time employees that perform core income generating activities that generate the relevant income;
  • A relevant entity is required to submit a report to Qatar's General Tax Authority (GTA) as part of the annual income tax return that indicates whether it meets the minimum indicators of substantial activity, which include that the entity:
    • has an exclusively owned or used location in Qatar;
    • has at least one active bank account in Qatar; and
    • meets at least one of the following conditions:
      • has one or more managers that are tax resident in Qatar with the authority to make decisions related to the generation of relevant income and actively, independently, and regularly exercises this authority; or
      • can demonstrate that the majority of its employees are tax resident in Qatar;
  • A relevant entity will be deemed not to be carrying on substantial activity in respect of a reported fiscal year if:
    • the report is not submitted;
    • one of the minimum indicators is not met; or
    • documentary evidence of such indicators is not submitted to the Authority, upon its request;
  • If a relevant entity is deemed not to be carrying on substantial activity, the GTA may refuse to issue a tax residence certificate to the entity and the entity may be subject to a penalty equal to 15% of its net income.

The amended Executive Regulations are effective from 17 May 2023.