Tax Structure in the GCC

The Gulf Co-operation Council (‘GCC’) region is undoubtedly a very attractive jurisdiction for global investments mainly because of its favorable tax regimes. As per GCC’s diversification strategy and to decrease reliance on revenue from hydrocarbons, GCC nations have devoted to launch new indirect taxes and some other taxation reforms. But the developing GCC tax regimes throw up a challenge to all the foreign investors wanting to set up their presence in the GCC, or acquire a business, sell, or divest in the GCC.

In this article, we are going to give you an overview of the key taxes in the GCC.

Taxes in the GCC Region – An Overview

1. Corporate Tax

Corporate tax is a direct tax that is levied on a company’s taxable profits. People not residing in the GCC nation could be subject to corporate income tax or may be withholding tax as per the local rules in the particular GCC country. The non-residents doing business in a GCC country having a permanent setup are subjected to corporate income tax; however, non-residents earning taxable income in that GCC country could be subject to the withholding tax.

Some GCC countries like the UAE and Bahrain enforce only corporate tax on businesses operating in the oil and gas field and foreign bank branches. In the KSA, Kuwait, and Qatar, corporate tax is applicable on the profit share that is attributable to the non-GCC shareholders of the domestic entity.

2. Withholding Tax

Withholding tax is that tax, which is deducted at source on the specific payments done by a resident in the GCC nation to someone outside of that nation. Varying rates are applicable depending on what kind of payments is made. Bahrain and UAE do not impose this tax, but other GCC nations impose withholding taxes if a resident pays interest or dividends and royalties to a non-resident.

3. Zakat

Zakat is a type of Islamic tax that has been only enforced in some GCC nations like the KSA and Kuwait as of now. In the KSA, Zakat is mandatory on the shareholders of local companies who could be Saudi or GCC nationals. This tax is to be paid by the local company and is applicable at the rate of 2.5% dependant on the higher of the adjusted net profits or the Zakat base that is attributable to the shareholders who could be Saudi or GCC citizens.

4. VAT

A type of consumption tax that is imposed on goods and services supply and is charged typically on the value which gets added on each stage of the supply chain. The GCC countries implement this tax at a 5% standard rate. Every GCC nation can enact their own VAT legislation which will be based on some common principles. Till date, KSA and the UAE have implemented VAT on 1 January 2018. Then, Bahrain went on to implement VAT on 1 January 2019. While doing transaction planning, companies should evaluate the VAT effect of the asset transfer carefully and check if such VAT treatment is applicable on the transaction.

5. Excise Tax

Known as the ‘sin tax’, excise tax is a type of indirect tax that is levied on particular goods that could be detrimental to health or environment. Till date, the KSA, the UAE, Qatar and Bahrain have implemented this tax on tobacco products at 100%, carbonated drinks at 50%, and energy drinks at 100%.

6. Customs Duty

The GCC nations follow a unified customs duty regime and this duty is imposed basically at the first point when the goods are entering in the GCC. Imported goods are subjected to customs duty at the rate of 5% of the total cost, freight (‘CIF’) invoice value and insurance. But, some goods could be subject to customs duty at a much higher rate, while some other goods, are totally exempt.

7. Transfer Taxes and Stamp Duty on Real Estate

Stamp duty is imposed in Oman and Bahrain on transferring or registering real estate. In the UAE, there is a registration fee when someone transfers ownership of land or shares in the companies holding real estate.

To conclude, the GCC countries have maintained minimal or zero taxes as it attracts investments in the region. However, announcing new taxes like VAT, the variance between local tax legislation and double tax treaties and the approach of tax authorities make it complex for global investors. But if you are a foreign investor who has business interests in this region, you should keep abreast of all the GCC tax developments and re-examine your management strategies of tax risk in the region.