Many Middle East countries have traditionally encouraged foreign corporations to set up entities for the purpose of conducting business in the region by offering attractive tax benefits.

In relation to trade conducted within the GCC, no custom duties are levied between GCC countries, but there is a common customs tariff of 5 per cent imposed on most foreign goods imported from outside the GCC union, except for tobacco and alcohol, which attract a higher customs tariff. Foreign goods imported into the GCC states from the international free zones, while exempted from tax upon entry, are subject to customs duties when exiting these zones.

Business establishments and residency

Business is mostly conducted in the different GCC countries by establishing one of the following entities: a joint-stock company; a limited liability company; a general partnership; a holding company; a branch of a foreign company; or a representative office.

Typically, the preferred form of entity structure is the limited liability company, and in most jurisdictions there are foreign ownership restrictions, whereby it is mandatory for a local national to hold a minimum percentage of shares in the limited liability company. However, this does not apply to free zones located in the UAE, and in some of these free zones a limited liability company may be incorporated with a single shareholder.

Generally, the income of an entity that is ‘resident’ in a country is taxed. As a general rule globally, for a body corporate to be ‘resident’ in a country for tax purposes, it has to be incorporated under the law of that country, or its principal place of business or its effective management located in that country.

Some countries, including Bahrain and Oman, however, do not apply this principle, nor provide a definition of what constitutes a ‘resident’ for the purposes of corporate taxation.

In Bahrain, for example, companies that have activities in the oil, gas and petroleum sectors are taxed irrespective of their place of incorporation.

Taxation on income

No tax is levied on companies in Bahrain, except for those companies operating in the oil and petroleum sectors, where the rate of tax is 46 per cent. In Qatar, tax is imposed on a private company’s income at a rate of 10 per cent; however, the income earned by oil and gas companies is taxed at 35 per cent. In Kuwait, a non-GCC entity may be subject to tax on its income at the rate of 15 per cent, whereas income tax is not imposed on Kuwaiti companies. In Oman, a tax rate of 12 per cent is applicable on all entities, including permanent establishments, of foreign companies with taxable income exceeding RO30,000 ($77,912), and income from the sale of petroleum is taxed at a rate of 55 per cent.

Nationals of Saudi Arabia and citizens of the GCC are exempt from tax in Saudi Arabia, but are subject to zakat, which is a religious tax emanating from sharia (Islamic law), and constitutes the giving of a portion of one’s wealth to charity. The income received by the foreign shareholder in a corporation registered in the country is liable to be taxed at a rate of 20 per cent.

The UAE does not generally impose taxes either on individuals or on the income of companies or branches, except companies carrying out the business of oil and gas exploration and production, and branches of foreign banks in the UAE. All the free zones in the UAE are tax-free zones and offer tax holidays of up to 50 years.

Withholding taxes

None of the GCC countries impose withholding taxes on dividends or interest except Saudi Arabia, which imposes a 5 per cent withholding tax on the dividends or the interest earned by a non-resident; and Qatar, which imposes a 7 per cent withholding tax on interests. Withholding taxes on royalties range from 5 per cent to 15 per cent in some countries. For example, in Qatar there exists a 5 per cent withholding tax on royalties; Saudi Arabia imposes a 15 per cent withholding tax on royalties; and companies with a permanent establishment in Oman are subject to a 10 per cent withholding tax on royalties. Bahrain, Kuwait and the UAE do not impose withholding taxes.

Social security tax

Each of the GCC countries provides for a social security tax. In Bahrain, a national employee’s contribution amounts to 7 per cent and a foreign employee’s contribution is 1 per cent. In Qatar, where an employee has a pension scheme arranged by their Qatari employer, the employee is required to make a pension contribution of 5 per cent. Kuwait requires both its employees and employers to make a security tax contribution, the rate being about 11 per cent for the employer and 8 per cent for the employee. Oman requires the employer to contribute an amount equal to about 9.5 per cent for Omani nationals.

In Saudi Arabia, the employer and employee are both required to contribute 9 per cent towards social security. In the UAE, foreign workers are exempt from paying social security tax, whereas UAE employees are required to pay a social security tax of 5 per cent and a 12.5 per cent contribution is to be made by the employer towards the national employee pension scheme.

Double-taxation treaties

Many of the GCC states have entered into double-taxation treaties with various countries to enable local businesses to expand internationally and to encourage foreign corporations to invest capital and thereby expand the economic growth of the region. Currently, Qatar and Kuwait have signed more than 40 treaties, Oman has signed 24 treaties, Saudi Arabia has signed 33 treaties and the UAE has signed about 60 double-taxation treaties.

These agreements are designed to do away with double taxation of income that is received in one country and paid to residents of another. They are agreements between countries that work on the premise that the tax on the income is divided between the resident’s country of origin and the resident’s country of operation. Double-taxation treaties aim to reduce the taxes on profits remitted abroad for the business entities operating in the GCC. Furthermore, the double-taxation treaties may offer a scenario whereby a business entity is not taxed either in its own home jurisdiction or in the country of operation. For example, there may be a scenario where income derived from dividends of a foreign company may not be taxable in the hands of the foreign country of origin of the foreign company, despite no taxes being levied in the UAE.

The increasing number of double-taxation treaties that have been agreed by GCC countries indicates the region’s desire to make itself a more attractive destination for foreign investment and to foster economic growth.