As part of this trend, many GCC countries have adopted the OECD’s permanent establishment guidelines to assist in determining whether nonresidents’ business activities have created a taxable presence in their countries. Most recently, Oman and Qatar adopted permanent establishment concepts through the introduction of their new domestic tax laws in 2010. Though foreign companies welcome the certainty of such rules, these concepts are new to some GCC tax authorities, and so these rules sometimes are applied inconsistently in practice.
The article below features a summary of permanent establishment concepts and associated key tax issues of creating a taxable presence in some of the more advanced GCC country tax regimes.
Qatar - commercial registration required
In Qatar, the rules determining whether or not a ‘taxable presence’ is created have undergone some significant procedural changes since the country’s new tax code was introduced on 1 January 2010.
Qatar’s new corporate tax system now imposes a flat 10 percent tax rate on almost all transactions – companies owned wholly by Qatari or GCC citizens remain exempt from corporate income tax. Qatar now requires every taxpayer who carries on an ‘activity’ or derives ‘taxable income’ in accordance with Qatar tax law to register with the Public Revenues & Taxes Department (PRTD) and submit an application for a tax registration card.
The PRTD’s strict enforcement of these new tax registration requirements has been somewhat offset by the introduction of new withholding tax rules. The withholding tax applies at the rate of 5 or 7 percent to amounts paid to non-residents (i.e. generally, entities without a Qatar tax registration card) where the activity is not connected with a permanent establishment in Qatar and where the services are carried out either ‘wholly’ or ‘partly’ in Qatar.
Qatar’s withholding tax regime incorporates the OECD concept that entities have a corporate taxable presence in Qatar if they operate through a permanent establishment there. According to the OECD and Qatar tax law, a permanent establishment is basically a fixed place of business of an enterprise in a particular jurisdiction. Further, under PRTD’s current interpretation, one of the key requirements for creating a permanent establishment is the need for an entity to have a valid Qatar commercial registration. From a practical point of view, unless an entity carrying out business in Qatar legally formalizes their business operations in Qatar (i.e. obtains a commercial registration), the PRTD generally would not consider the entity to have a ‘taxable presence’ in Qatar.
So, even though a company may meet the legal Qatar tax definition of a permanent establishment, without the valid commercial registration that is almost always required to obtain a tax registration card, the company’s taxable presence could be denied, preventing it from filing a corporate tax return.
Companies could find themselves exposed to withholding taxes as a result. Withholding taxes may result in a higher overall tax burden for an international group, unless relief is available under one of Qatar’s extensive number of tax treaties. Most companies with businesses in Qatar may prefer to conduct their activities through a permanent establishment to take advantage of the 10 percent flat corporate tax rate applied to a business’s net profit as opposed to a 5 or 7 percent withholding tax rate applied on a gross basis.
The revised Qatari tax law is still in its infancy, and there is little in the way of practice statements, interpretative decisions or other detailed formal guidance on the permanent establishment rules. The PRTD also sometimes makes subjective determinations in this regard. However, the PRTD is continually updating its processes and practices to comply with best practice where applicable, for example, by adopting OECD taxation principles. The situation is expected to become clearer as Qatar’s tax law evolves.
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Kuwait - no permanent establishment concept
When it comes to taxable presence determinations, most GCC countries have opted to take up OECD principles, while Kuwait has become an outlier. Kuwaiti tax law has no ‘permanent establishment’ concept. Under practice developed by Kuwait’s tax authorities over the years, even a day’s presence in Kuwait of a foreign entity’s representative in connection with a business contract may create a taxable presence for the company.
A permanent establishment exemption may be available under one of Kuwait’s tax treaties. However, the application and interpretation of the treaties in Kuwait differs from their interpretation internationally and taxpayer disputes over permanent establishment issues are common. Before a company considers undertaking any contract or business activity in Kuwait, consideration of permanent establishment tax issues is critical.
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Saudi Arabia - new definition creates uncertainty
According to the current Saudi tax law, resident capital companies (based on their foreign partners’ share) and non-residents who do business in the Kingdom of Saudi Arabia through a permanent establishment are subject to corporate income tax in Saudi Arabia at a rate of 20 percent.
A company is considered resident in Saudi Arabia if it is formed under the Saudi Companies Regulations or if its central control of management is situated within the Kingdom. Companies that are wholly owned by Saudi nationals are subject to Zakat instead of income tax. Companies owned by Saudi and non-Saudi (and non-GCC) nationals (‘mixed companies’) pay tax on the portion of income attributable to non-Saudi (and non-GCC) national entities and Zakat on the portion of income attributable to Saudi and GCC nationals. Nationals from countries belonging to the GCC (i.e. Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) and companies fully owned by GCC nationals from these countries doing business in Saudi Arabia are subject to Zakat and not income tax.
Under Saudi tax law, the Saudi tax authorities will look to legal ownership to identify the shareholders of a Saudi resident company. In practice, when a GCC entity invests into a Saudi resident company, the tax authorities will ‘look through’ the entity and the related structure to identify the ultimate shareholders in order to determine the portion of income tax/Zakat payable.
Saudi tax law defines ‘permanent establishment’ to include a permanent place of activity of a non-resident through which it carries out business in full or in part, including business carried out through an agent (referred to as an ‘dependent agent’) whose responsibilities in Saudi Arabia may include:
- negotiating or concluding contracts on a non-resident’s behalf
- maintaining a stock of goods, owned by a non-resident to supply to clients on the non-resident’s behalf. The following places of business in Saudi Arabia are considered to constitute a permanent establishment there:
- construction sites, assembly facilities and the exercise of supervisory activities connected with them
- installations or sites used for surveying for natural resources, drilling equipment and ships used for surveying for natural resources, as well as the exercise of related supervisory activities
- a fixed base where a non-resident natural person carries out business
- a branch of a non-resident company that is licensed to carry on business in Saudi Arabia.
A place is not considered a permanent establishment of a non-resident Saudi Arabia if its activities there are restricted to:
- storing, displaying or delivering goods or products belonging to the non-resident
- keeping a stock of goods or products belonging to the non-resident for the purpose of processing by another person
- purchasing goods or products only for the purpose of collection of information for the non-resident
- performing any other preparatory or auxiliary activities in the interests of the non-resident
- drawing up contracts for signature with regard to credits (loans), delivery of goods, or provision of technical services
- performing any combination of these activities.
The definition has created question as to what exactly constitutes a permanent establishment under the new law. In response to a request from KPMG’s member firm in Saudi Arabia, the tax authority responded in writing as follows:
If the entity has no permanent place in the Kingdom through which it conducts its activity wholly or partially, does not have an agent (dependent) in the Kingdom and is not licensed to conduct operations in the Kingdom, then the nonresident entity would not be considered as having a permanent establishment in the Kingdom, and accordingly it is not required to register with the tax authority. However, amounts paid to the entity would be subject to withholding tax as a non-resident depending on the nature of the service provided.
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Oman - new permanent establishment definition adopted in 2010
A foreign company is subject to tax in Oman if it creates a permanent establishment in Oman. If not, the foreign company could be subject to withholding tax if it receives certain specified payments. In order to determine whether a permanent establishment exists for a foreign company in Oman, reference is also made to tax treaties if the foreign company is from a jurisdiction with which Oman has concluded a tax treaty.
New income tax rules that took effect on 1 January 2010 define ‘permanent establishment’ as a fixed place of business through which an undertaking carries on all or part of its business. It includes a place of sale, a place of management, branches, offices, factories, workshops, mines, quarries or any place for extraction of natural resources, building site, place of construction or an assembly plant. In addition, certain activities specifically are not considered to create a permanent establishment. (The pre-2010 income tax law also had the concept of permanent establishment but it was less well defined.)
Oman’s new tax rules also introduced a threshold for creation of a service permanent establishment. Under these rules, any foreign company that performs consultancy services or any other services in Oman shall be deemed to create a permanent establishment in Oman if it carries out such activities for a period or periods totaling at least 90 days in a 12-month period. Executive regulations to the tax law, which came into force on 29 January 2012, further clarified what constitutes a dependent agent for Oman permanent establishment purposes. In the case of turn-key contracts, the practice of the Oman tax authorities is to tax the entire project, once a permanent establishment is deemed to exist on account of the onshore services.
Oman’s tax authorities will accept that the permanent establishment should be taxed on the income from the onshore work only in cases where the offshore and onshore activities can be clearly distinguished and separated.
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In summary, when dealing with GCC tax systems, it is important to keep in mind the significant differences in their domestic laws. For foreign investors, differences in the various rules imposed by GCC countries related to the creation of permanent establishment are especially important. They should be examined closely to help ensure operations and investments in the GCC are established to access lower domestic tax rates and treaty benefits, and secure optimal tax treatment of the company’s activities in the region.
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