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Qatar issues Economic Substance Regulations

29 November, 2021

In brief

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.

In detail

Who is subject to the Regulations?

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:

  • Headquartered Businesses 
  • Distribution and service centers
  • Financing and leasing 
  • Fund management 
  • Banking activities 
  • Insurance activities
  • Shipping
  • Holding company
  • Technical consulting
  • Technical training 
  • Intellectual property activities 

What are the Economic Substance Regulations (ESR)?

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. 

What are the reporting requirements?

A qualifying entity performing covered services activities should provide the following information:

  • The entity's identity, headquarters and administration
  • The type of activity of the entity, with a description of the core income generating activities and their location, and details on outsourcing if any
  • The annual investment volume in fixed assets
  • The number of qualified full-time employees associated with the core activities, and the amount of their monthly basic salary
  • The entity's revenue and operating expenses related to its core activities and profits
  • Information related to other requirements determined by the licensed bodies, in cooperation with the competent authority, in accordance with the provisions of Article (6) of the ESR

A qualifying entity performing intellectual property activities is expected to provide the following information:

  • The entity's intellectual property assets
  • The annual revenue of the entity
  • Operating expenses incurred by the entity
  • Details of outsourcing, if any
  • The annual profits of the entity
  • The type and total amount of intellectual property activity income

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.

Transitional provisions

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.

The takeaway

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.

Contact us

Jochem Rossel

M&A / International Tax Services Leader, PwC Middle East

Tel: +971 (0) 4 304 3445

Sajid Khan

Qatar Tax Leader, PwC Middle East

Tel: +974 4419 2830

Bilal Abba

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

Sofia Azova

Manager, International Tax | UAE and Bahrain ESR, PwC Middle East

Tel: +971 (0) 54 793 4087

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