A guide to ESR in Qatar
Qatar has taken significant steps to align its regulatory framework with international standards, particularly in response to global initiatives and ensuring that businesses have genuine economic activities within their borders. For those businesses wishing to establish and enjoy the Qatari market, it is important to have an understanding of the key intricacies and aspects of Qatar's economic substance requirements. Whether a multinational corporation or a local business owner, understanding Qatar's economic substance regulations (ESR) is essential for staying compliant and navigating the evolving landscape of international taxation.
As outlined in Qatar’s recent Ministerial decision no 20/2021 on ESR and the New Amendments to Qatar’s Income Tax Law (covering recent changes regarding ESR), the ESR in Qatar mandates that licensees must prove they have a legitimate economic presence in Qatar. Furthermore, it requires that the activities conducted by these licensees are not primarily motivated by tax benefits or tax-driven purposes. In essence, the ESR is designed to ensure that entities operating in Qatar are genuinely engaged in economic activities within the country and that their presence is not solely established for tax avoidance or optimisation purposes. This regulation is part of global efforts to combat harmful tax practices and promote transparency in international business activities.Top of Form
Who is subject to the Qatar Economic Substance Regulations?
The ESR pertains to organisations engaged in specific activities, which are broadly categorised as either Covered Service Activities or Intellectual Property Activities ("Relevant Activities").
These organisations must also enjoy favourable tax treatment in Qatar, referred to as a "Preferential Tax Regime". The Preferential Tax Regime encompasses any system that provides tax advantages compared to the standard tax principles in the State of Qatar, irrespective of whether these advantages relate to mainland, Free Zone, or QFC operations. The ESR introduces a framework for ascertaining the income that qualifies and the associated expenses under such a preferential tax regime.
The relevant activities under the ESR are:
- Businesses with headquarters in Qatar.
- Distribution and service centres (Including purchasing raw materials and finished products from other members of the group, reselling them, and providing services like transportation and storage of goods, as well as handling requests).
- Providing consultancy or other administrative services.
- Financing and leasing.
- Fund management.
- Banking activities.
- Insurance activities.
- Holding companies.
- Technical consulting (This involves providing opinions, information, or advice on technical matters based on a scientific approach, offering technical assistance, conducting technical studies, and presenting technical proposals and recommendations).
- Technical training.
- Intellectual property activities.
These activities are subject to specific regulations and requirements as outlined in the context of the original document. The activities listed are not too different from the ones outlined in the UAE ESR legislation (which is unsurprising given that all ESR legislations can be brought back to the same origin).
Therefore, organisations operating within Qatari free zones, specifically QFZ and QSTP, as well as those whose income is exempt from taxation, must comply with ESR filing obligations. For Intellectual Property (IP) activities, adherence to the DEMPE criteria is essential. Meanwhile, other activities must satisfy conventional requirements, including maintaining an appropriate number of full-time employees, meeting operating expenditure thresholds, and having dedicated office space, among other criteria.
Qatar's economic substance regulations are applicable to entities that meet the following criteria, referred to as Relevant Entities:
- Generated over 75% of their income from Relevant Income in the two preceding fiscal years.
- More than 60% of the book value of the entity's assets is located outside Qatar, or more than 60% of the entity's Relevant Income comes from foreign sources.
- Outsourced the management of day-to-day operations and decision-making on key functions.
Excluded Relevant Entities
Entities falling under the following categories are excluded as Relevant Entities and are considered Excluded Relevant Entities:
- Entities listed on the Qatar Stock Exchange.
- Regulated financial institutions.
- Entities that are entirely beneficially owned by Qatar tax residents and primarily 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.
- Entities having a minimum of five full-time employees engaged in core income-generating activities leading to the production of Relevant Income.
Relevant Income includes income from: (i) immovable property, (ii) dividends, (iii) interest, or (iv) royalties.
How to comply with the Economic Substance Regulations in Qatar?
In order to meet the ESR requirements for covered services activities, a qualifying entity must adhere to the following:
- Conduct the essential "core income generating activities" in Qatar.
- With respect to the extent of activities carried out in Qatar:
- Employ a sufficient number of qualified full-time personnel with the required qualifications in Qatar.
- Incur a satisfactory amount of operating expenditure in Qatar.
- Comply with any additional prerequisites stipulated by the relevant licensing authority.
To meet the ESR requirements for intellectual property activities, a qualifying entity must:
- Conduct research and development activities in Qatar. These activities should meet the following criteria to qualify as research and development:
- They must be innovative or new.
- They should involve creativity.
- The outcomes should be uncertain.
- They need to follow a systematic approach.
- They must be transferable and reproducible.
In cases where a qualifying entity engages in multiple relevant activities, it may be necessary to fulfil the economic substance requirements for each of these activities individually.
Regarding outsourcing research and development activities, the Regulations permit a qualifying entity to subcontract these activities. However, if the outsourcing is done with related parties, these related parties must independently maintain a sufficient presence in Qatar.
What are the Economic Substance Regulations reporting requirements in Qatar?
A qualifying entity engaged in covered services activities should be able to provide the following details:
- Identification of the entity, including its headquarters and management.
- The nature of the entity's activities, encompassing a description of the fundamental income-generating operations and their locations, along with any relevant information regarding outsourcing.
- Annual investments in fixed assets.
- The ammount of qualified full-time employees engaged in core activities and their respective monthly basic salaries.
- Revenue, operating expenses related to core activities, and profits.
- Any additional information as stipulated by the licensing authorities, in coordination with the competent authority, in accordance with Article 6 of the ESR.
A qualifying entity engaged in intellectual property activities (IPA) should be able to provide the following information:
- Inventory of the entity's intellectual property assets.
- Annual revenue generated by the entity.
- Operating expenses accrued by the entity.
- Particulars concerning any outsourcing arrangements, if applicable.
- Annual profits earned by the entity.
- The category and aggregate sum of income derived from intellectual property activities.
A Relevant Entity, other than an Excluded Relevant Entity, shall be considered to be a Reporting Relevant Entity.
For a Reporting Relevant Entity to demonstrate minimum indicators of its core activity (Minimum Economic Substance), it should fulfil all of the following criteria:
- Possesses an exclusively owned or used location in Qatar.
- Maintains at least one active bank account in Qatar.
Furthermore, the Reporting Relevant Entity should be able to prove that it satisfies at least one of the following conditions:
- Has one or more managers who are tax residents in Qatar, possess the authority to make decisions concerning the generation of Relevant Income for the Reporting Relevant Entity, and actively, independently, and regularly exercise this authority. Importantly, this person cannot be an employee or manager of another unrelated enterprise.
- Can demonstrate that the majority of its employees are tax residents in Qatar.
What are the Transitional Provisions and Applicability deadlines for Economic Substance Regulations in Qatar?
For established businesses in Qatar, there is instruction and deadlines with regards to transitional provisions and applicability of the ESR. Qualifying entities that were established under preferential regimes after 1 November 2020 may have to adhere to ESR regulations without further delay. Qualifying entities that existed prior to 1 November 2020 must also adhere to these regulations instantly for any new activities initiated after 1 November 2020.
Qualifying entities that were established under preferential regimes before 1 November 2020 have until 31 December 2023 to align with ESR regulations for activities conducted prior to 1 November 2020.
Consequences of not adhering to the Economic Substance Regulations in Qatar - New Amendments to Qatar’s Income Tax Law
A new law (Law No. (11) of 2022), which came into effect from 2nd February 2023, introduced a new requirement for entities in Qatar that meet specific criteria to submit an ESR report to the General Tax Authority (GTA). Entities that do not meet these criteria or fail to submit the required ESR files to the GTA will be considered as not engaging in core activities within the State of Qatar, and consequently, they will not be issued a tax residency certificate.
Under the terms of the Income Tax Law, for Reporting Relevant Entities that do not comply or demonstrate the minimum economic substance requirement, 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
The Amended Regulations build upon the existing economic substance rules in Qatar.
How can PRO Partner Group help?
PRO Partner Group has an experienced team with in-depth knowledge of regulations and business practices in Qatar and close connections with key government departments.
Adhering to Qatar's Economic Substance Regulations is a vital aspect of maintaining business's compliance and reputation. PRO Partner Group can provide guidance, documentation support, and reporting assistance you need to ensure full compliance and avoid any potential penalties. As well as to help meet all the ESR criteria and reporting obligations, securing your business's position in Qatar's competitive landscape.
If you need assistance with ESR in Qatar or any other related onshore or offshore company setup, restructuring, local partner or PRO support matter in Qatar, the UAE, Oman, or Saudi Arabia, then please do get in touch with us on +974 4478 8765 for Qatar or +971 4456 1761 for Dubai , or alternatively you can email us at email@example.com or complete the contact form below and we will be delighted to assist you.