On 17 October 2021, the Ministry of Finance in the State of Qatar issued Decision No. 20 of 2021 (concerning Economic Substance Regulations in Qatar, “the Regulations/ESR”), requiring “qualifying entities” that carry on specified activities to demonstrate economic substance in Qatar from 4 November 2021 if they want to benefit from a preferential tax regime.
Depending on the date of incorporation, qualifying entities would be required to comply on an immediate basis.
Sanctions for non-compliance and filing requirements will be determined in due course.
All entities in Qatar should assess whether they fall into ESR scope and take immediate steps to comply.
The Regulations apply to entities that perform certain specified activities which are broadly defined as either a Covered Service Activity or an Intellectual Property Activity (“Relevant Activities”) and benefiting from a “Preferential Tax Regime” in Qatar. Preferential Tax Regime is defined as any regime that offers a tax preference compared to the general principles of taxation in the State of Qatar, regardless of the form or amount of the preference. We expect the Regulations to have a broad impact on entities in Qatar that benefit from preferential tax regimes.
The following are considered to be relevant activities under the Regulations:
To satisfy the ESR requirements in relation to covered services activity, a qualifying entity must:
Conduct the relevant “core income generating activities” in Qatar
With reference to the level of activities performed in Qatar:
Have an adequate number of qualified full-time employees with the necessary qualifications in Qatar
Incur an adequate amount of operating expenditure in Qatar
Fulfill any other requirements that would be specified by the applicable licensing authority
To satisfy the ESR requirements in relation to intellectual property activity, a qualifying entity must:
Conduct the research and development activities in Qatar. The following criteria is required to be met for an activity to be research and development:
It has to be new.
It has to be creative.
The results are uncertain.
It has to be methodical.
It must be transferable and reproducible.
Where a qualifying entity does more than one relevant activity, the economic substance requirements may potentially be required to be met for each of the relevant activities.
Outsourcing research and development activities
The Regulations allow a qualifying entity to outsource its research and development activities; however, where the outsource providers are related parties, they must in their own right have an adequate presence in Qatar.
A qualifying entity performing covered services activities should provide the following information:
A qualifying entity performing intellectual property activities is expected to provide the following information:
The administrative requirements pertaining to reporting and sanctions for non-compliance are to be determined by the applicable licensing authority in consultation with the General Tax Authority.
Qualifying entities that were established under preferential regimes prior to 1 November 2020, have until 31 December 2023 to comply with ESR in respect of activities that were undertaken before 1 November 2020.
Qualifying entities established under preferential regimes after 1 November 2020 may need to comply with ESR immediately. Qualifying entities established prior to 1 November 2020 also need to comply with these requirements immediately in respect of any new activities commenced after 1 November 2020.
ESR should have limited impact on Qatar-headquartered businesses and foreign multinationals that have genuine commercial operations and management in Qatar (aside from complying with additional disclosure requirements going forward). For multinationals that undertake relevant activities in Qatar but are managed remotely, the governance structure and operating model should be reassessed in light of the Qatari ESR, and any necessary adjustments should be made to ensure compliance.
All Qatar entities will need to assess whether and which of their activities fall within the scope of ESR, and how to ensure they meet ESR requirements in respect of each relevant activity. This is both a qualitative and quantitative assessment that would involve consideration of operational, financial, tax / transfer pricing, legal and governance matters.
As a leading provider of assurance, tax, legal and business consulting services in Qatar, we are ideally placed to help you in determining whether the Qatar’s ESR apply to your business / entities, and how to ensure you can demonstrate the required economic substance in Qatar.
M&A / International Tax Services Leader, PwC Middle East
Tel: +971 (0) 4 304 3445
Qatar Tax Leader, PwC Middle East
Tel: +974 4419 2830
Director, Middle East FATCA/CRS Leader, PwC Middle East
Tel: +971 (0)54 793 4271
David Van Der Berg
Director, M&A and International Tax, PwC Middle East
Tel: +974 7974 2724
Manager, International Tax | UAE and Bahrain ESR, PwC Middle East
Tel: +971 (0) 54 793 4087