The recent growth of investments and contracts involving international companies in Iraq has raised several questions regarding their tax liabilities in the country. The following article is a general overview of the main conceptual points involved in the payment of corporate tax, personal tax, social security contributions and double-tax treatment. Please note that every tax situation is an inherently fact-specific examination, and all individuals and corporations are advised to seek independent tax assistance from a licensed Iraqi (and/or Kurdish) professional prior to initiating investment in Iraq.

Income Tax Law

According to Coalition Provisional Authority (CPA) Order No. 49 as amended, Order No. 100, and Income Tax Law No. 113 of 1983, the income of an entity is taxed at a progressive rate from 3 per cent up to 15 per cent for individuals. Corporate income tax rates are set at 10 per cent. According to Income Tax Law No. 113 of 1983, all entities are responsible for directly deducting their employees’ taxes and sending the deductions to the tax authorities on a monthly basis. In addition, the entity is responsible for sending 17 per cent of the employee’s salary to the Social Security Agency. This 17 per cent was established by Iraqi Social Security Law No. 39 of 1971, and includes a contribution of 5 per cent deducted from the employee and 12 per cent from the employer.

All entities are responsible for directly deducting their employees’ taxes

Currently, the payment of social security contributions on behalf of foreign workers is not accepted by the government of Iraq, but is nonetheless often required for compliance reasons by other agencies. This creates a tenuous situation for foreign companies and potentially subjects any company to a litany of non-compliance fines and sanctions for factors that may be outside their immediate control.

Double-Taxation Treaties

Iraq has only entered into double-taxation agreements with certain countries, including Egypt, Jordan, Libya, Somalia, Sudan, Syria, Tunisia and Yemen. However, CPA Order 49 contains a tax credit provision by which, subject to certain provisos, “income tax paid to a foreign country on income earned in that country may be credited against tax paid to Iraq.” However, notwithstanding this provision, the General Commission for Taxes (GCT) does not adhere to exemption. This provision shows that Iraqi law does, in theory, alleviate the double taxation concerns of a non-Iraqi investor. It is the application of the law that is often not reliable.

As with many issues in the federal Iraq system, taxation is dealt with slightly differently in the semi-autonomous northern region of Kurdistan. Specifically, expatriate employees in Iraqi Kurdistan must first qualify as tax residents in Iraq in order to be taxed in Iraq. According to the Kurdish Income Tax Law, a resident is “any person residing in Iraq during the year in which the income arose, for a total period of not less than six months, or he/she resides in Iraq for a period of not less than four consecutive months.” The same defines a non-resident as “a person who does not meet the residence qualifications… even if income has arisen for him/her in Iraq from any source.”

Social Security and Pension Contributions

Social security and pension contributions are governed by Pension and Social Security Law No. 39 of 1971, as amended and applied in all regions of Iraq. As a general rule, employers operating in Iraq are required to remit these contributions for their Iraqi employees working in Iraq to the Ministry of Labour and Social Affairs (MoL). The contributions are paid as follows: an amount of 12 per cent of the employee’s salary is paid by the employer to the Health Insurance, Work Injuries and Pension departments of the MoL, while another 5 per cent is deducted directly from the employee’s salary. All contributions are made monthly by certified cheque from any Iraqi bank. Prior to making a payment, an employer must register its employees at the Labour and Social Security Department of the MoL. All employers and employees, including foreign employees, must be registered. Failure to register exposes the employer to civil and criminal penalties.

There is no specific exemption under Iraqi legislation permitting non-Iraqis to be excluded from paying the contributions. Indeed, Article 3 of the Pension and Social Security Law No. 39 of 1971 states that: “The provisions of this law shall apply to all workers covered by the Labour Code No. 71 of 1987.”

Furthermore, the Labour Code covers both Iraqi and non-Iraqi employees and it applies to all workers in Iraq, including Arab and non-Arab foreigners. However, we are aware that current practice amongst employers in Iraqi Kurdistan is to ignore the registration requirement for expatriate employees. Indeed, the MoL branches in the region have, until now, turned a blind eye to this practice.

The rationale for this is most likely that some or most expatriate employees pay some kind of equivalent social security or pension contributions in their home countries, and that payment of similar amounts in Kurdistan is not justified. Although it is questionable whether a significant number of expatriate employees actually make equivalent payments in their home countries, it seems that the authorities in Iraqi Kurdistan do not require any proof that these payments are actually being made. Accordingly, a presumption of payment by the employee is applied unless the expatriate individual notifies the MoL that he/she is not making such payments abroad and wishes to pay his/her contributions in Kurdistan. Not surprisingly, very few employers (if any) register their expatriate employees for the purposes of making the contributions, although there appears to be no legislative justification for this.

Companies employing expatriate employees are advised to anticipate any change in this practice, which is not subject to any published regulation or statute, and which may take place at any time and without notice.

How to Benefit from Tax Exemption

The general rule under Iraqi tax law is that tax exemption requires a specific law. Foreign companies must qualify under such a law in order to benefit from tax exemption. For example, the Iraqi Investment Law of 2006 exempts investors from taxes and fees. Companies are advised to consult with their local attorneys and local accountants to determine if they qualify for tax exemption under existing Iraqi laws.

Another option is to encourage your own government to sign an investment treaty with the government of Iraq and include tax exemptions to companies from your country in Iraq. In December 2012, Iraq ratified a treaty with the US to exempt US entities and personnel from taxes in Iraq. The treaty focuses on economic and technical cooperation. It is our understanding that the treaty provisions provide tax exemption for economic, technical and human support to Iraq paid for by the US, but this will require further clarification in the near future.