The PE risk: When business travelling becomes more taxing

by  — 12 December 2012

Qatar has become something of a melting pot. Baking under the heat of the Arabian sun, it has become an amalgam of countries and creeds brought together in a nation that boasts not only the fastest growing economy in the world but also, depending on your source, the highest gross domestic product per capita at more than US$100,000 (QR364,000).

A government intent on developing and diversifying the country has proved magnetic to business to the extent that expatriates now outnumber Qatari nationals somewhere in the region of six to one.
Statistics like these have brought with them an increasingly complex business environment which could easily trip an unwitting new entrant to the market, and a hazard that is recurring with noticeable regularity is that of Permanent Establishments, commonly shortened to PE.

PE is a tax concept, and arises where an overseas business (for example a business which is resident or has its head office outside of Qatar) creates a taxable presence in a foreign country such as Qatar. Presence does not necessarily need to arise from a deliberate act, but can still result in tax liabilities and compliance obligations that can lead to financial penalties if not complied with. Part of its danger lies within the term permanent, which creates a bit of a misnomer as the line can be crossed much more easily than the average travelling business person might ordinarily consider.

How a PE may arise

Although normally triggered by the existence of a fixed place of business, such as a construction or installation site lasting longer than, for example, six months or an overseas office of a law firm, it is very possible that a PE could be created by an employee regularly travelling to or through Qatar and undertaking business activities as they do so. In the multinational, globalised world of today, short term transfers of employees from overseas offices of the same group, to fill temporary resource deficiencies on particular projects and engagements, are now common. This could have the same outcome for tax purposes.

Flying in subject matter specialists from abroad is also increasingly becoming standard practice, particularly within the Gulf Cooperation Council (GCC), in professional services firms such as accountants, consultants and lawyers. A recurring presence in the same location may create a PE issue for the home office. Even when formally seconded to overseas offices, businesses need to consider the tax implications of employees’ undertakings for their home office in the foreign jurisdiction.

As a different but equally pertinent example, it may not be immediately obvious but an overseas business using an exclusive distributor in Qatar (such as automotive distributors or fast moving consumer goods or as part of a wakala arrangement) may inadvertently create a PE through the dependent relationship with the wakeel or agent. This will become more of an issue where the distributors advertise themselves as acting on behalf of the company whose products they market, whether or not to the knowledge of, and generally to the detriment of the multinational producer, who can discover complex tax issues have been created through no fault of their own.
These are just common, basic examples of exactly the kind of PE risk that would tend to escape most organisations but could well be picked up by increasingly attentive tax authorities.

Resulting tax issues

A taxable presence means that it is likely a tax liability will result. Where a PE exists in Qatar it will be subject to tax at a rate of 10 percent on its tax adjusted accounting profits, requiring a calculation as to what profits of the company should be allocated to the branch. This is a conceptually difficult and potentially expensive calculation if you have flown colleagues over from Dubai to Doha to assist on a million dollar engagement. How much of that million dollars is attributed to the temporarily imported staff? Phrased differently, how much of that million dollars could the Dubai entity face a tax bill for in Qatar? It might be more than you think, or at least more than you might like it to be.

Although relief for a tax bill incurred overseas may be available in the home jurisdiction, there is no blanket guarantee that the whole amount will be covered, or any if no double tax treaty exists between the two countries. At a minimum the chances are that there will be a detrimental impact on cash flow which could potentially last several years until amounts can be reclaimed. This of course assumes the problem is spotted before penalties arise, something that no relief will be given for anywhere.

Alongside this there are compliance obligations. The tax authorities in Qatar must be notified within 30 days of the taxable presence being created – a timescale that is difficult when the boundaries are so grey. A tax card will also need to be obtained and audited annual returns filed. Notwithstanding that the PE may be subject to 10 percent corporate income tax on its profits, it may also find that it remains subject to withholding tax of five percent or possibly seven percent on its gross revenue. The hidden compliance costs and added complexities can start to multiply.

Resulting Legal Issues

The activities of foreign entities in Qatar are permitted in all sectors of the national economy, except in banking and insurance (to the extent excluded by a Decision of the Cabinet of Ministers), commercial agency and real estate trading sectors. Such activities are governed by the Foreign Investment Law No. (13) of 2000 (as amended) (Foreign Investment Law). Fines are imposed as a penalty for those found to be carrying out economic activities that violate applicable Qatari laws.

Under the Foreign Investment Law, non-Qataris, whether natural or juristic persons, may invest only through the medium of a company incorporated in Qatar in which one or more Qatari persons and or 100 percent Qatari owned entities hold not less than 51 percent of the share capital (where the non-Qatari element consists of wholly Gulf Cooperation Council persons or entities, the 51 percent may be read as 50 percent). Except in very special cases, that company must be an limited liability company (LLC). The rules regarding the establishment of an LLC are contained in Law No. (5) of the Year 2002 Commercial Companies Law.

The Foreign Investment Law does set out some exceptions to the general rule above. One of the exceptions is the establishment of a branch of a foreign company in Qatar, if that foreign company has a contract in Qatar that results in facilitating the rendering of a service or implies a public benefit (Foreign Branch). An exemption in the form of a resolution from the minister of business and trade is required.
It should be noted that such a resolution limits the Foreign Branch to carrying out the specific contract approved by the minister and that the minister’s approval is discretionary. Each new contract or extension to an approved contract that is awarded to the foreign company requires re-application by the Foreign Branch to the minister.

Once an entity has been established in Qatar, it will then require commercial registration under Law No (25) of 2005. In addition, if the business relates to engineering or architecture professions, then the entity will also be subject to Law No (19) Organising the Exercise of Engineering Profession.
In addition to having a commercial registration, a commercial permit (Municipal Licence and Signage Licence), Qatar Chamber of Commercial Registration, and the Labour Card issued by the Department of Immigration of the Ministry of Interior will be required.
Once the above procedures have been completed, an entity will then be able to bring over employees and sponsor them so that they can carry out its work.

Professional Support

Global mobility and international operations require professional support, as the pitfalls and hurdles are not always signposted. Analysis of issues like PE risk requires specialist advice as generating answers is far from an exact science. Carefully structured contracts and receiving assistance before commencing operations overseas, whatever form they may be in, can go a long way to ensuring that the grey middle returns to being closer to black and white. Advice will help ensure that any risks are known and well managed, but this is not something companies are likely to be able to source internally, whether small owner-managed operation or global company. There is just too much scope to make a financial or reputational mistake much more expensive than the plane ticket in and out.

All Qatari Laws (save for those issued by the Qatar Financial Centre (QFC) to regulate its own business) are issued in Arabic and there are no official translations, therefore for the purposes of drafting this article we have used our own translation and interpreted the same in the context of Qatari regulation and current market practice. This article should be used for information purposes only. It is not legal advice and should not be used as such. Should you have any questions, please contact Hannah Kennett of SNR Denton [email protected]

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