What factors influence the corporate financial compliance in the GCC countries?

The areas of financial compliance

1. monitoring compliance with the current legislation:

• timely submission of tax returns, transfer pricing reports and payment of taxes
• regular KYC procedures in relation to the current bank accounts
• registration for tax purposes within the required timeframes
• keeping documents confirming tax calculations
• conducting mandatory audit of reporting
• preparation and submission of notifications, reports on achieving the effect of the presence in the jurisdiction (substance)
• provision of information to banks upon requests in the area of ​​compliance with anti-money laundering requirements
• the renewal of company licenses, visas and residence permits of employees within the regulatory timeframes

2. organization of the internal control system for the purposes of:

• checking the compliance of transactions with regulatory requirements
• eliminating of possible fraudulent activities

3. risk management:

• obtaining a second opinion from independent consultants and auditors
• searching for and analyzing court cases on similar tax precedents
• discussion with the representatives of servicing banks of possible transactions, correspondent banks, currencies, routes of money movement
• obtaining tax rulings on controversial issues
• hedging currency risks

4. analysis of draft laws and changes in the regulatory framework in the field of:

• global and local taxation, transfer prices
• requirements for doing business in the country (licenses, share of local employees, maintaining a presence).

Comparison of tax regimes and other regulatory aspects

Fig. 1. Characteristics of tax systems in the GCC countries

Fig. 2. Scoring of the tax regimes

Comment: the higher the score assigned to the type of tax/jurisdiction, the more favorable the taxation conditions.

However, other factors must be taken into account in addition to the tax rates, when choosing a jurisdiction for doing business: availability of financial/other infrastructure, regulatory requirements etc.

Fig. 3. Withholding tax rates for payments from the Russian Federation to the GCC countries

Fig. 4. Qualitative assessment of the regulatory requirements in the GCC countries

Let's take a closer look at financial compliance requirements and other aspects by country.

1. UAE

Banking compliance when organizing payments:

• carrying out transactions in accordance with the anti-money laundering legislation
• conducting business in line with the issued license
• coordinating the planned transactions, currencies, counterparties with the bank in order to manage the risks of blocking transactions and accounts
• it’s necessary to be prepared to promptly respond to bank requests: provide explanations and documents on transactions.

Features of compliance in free zones (FZ):

1. there are 45+ FZ in the country with various specializations (trade, IT, logistics, financial, scientific and technical, etc.)
2. there are special compliance requirements in certain zones.

For example, for DIFC:

• filing a CRS notification (standard for automatic exchange of tax information)
• registration and reporting for the purpose of paying social fees
• development of a policy for the protection of personal data.

3. conditions for applying the zero rate of corporate tax for the qualified FZ-residents:

• not exceeding the minimum threshold for revenue per year – 3M AED
• execution of transactions on the market conditions (“at arm's length”)
• no intention (application) of switching to the general regime
• receiving the qualified income from the qualified activities
• availability of audited financial statements under IFRS
• having a presence (substance) in the country
• other aspects:
  • it is advisable to maintain separate tax accounting registers for qualified types of income
  • registration for tax purposes within the regulatory deadlines
  • submission of the tax returns and the payment of corporate tax – no later than 9 months after the end of the tax period
  • storage of information (for 7 years) regarding meeting the requirements for applying the zero rate.

4. Compliance in the area of substance:

• fulfillment of necessary requirements:

• managing business from the UAE
• conducting business in the UAE
• availability of sufficient resources (local expenses or outsourcing of functions, assets, employees)

• submission of the special documents under ESR (Economic Substance Regulations), depending on the activity and registration zone:

• ESR notifications – before the expiration of 6 months after the end of the financial year
• ESR report – before the expiration of 12 months after the end of the financial year.

5. Risks of the violation of compliance procedures: the right to the preferential tax rate will be lost in the next 5 years (including the current tax year).

2. Bahrain

Substance requirements:

1. storage of documents in the jurisdiction and availability of IFRS reporting
2. availability of an office (lease agreement or premises in ownership)
3. required disclosures (about the parent company, UBO, etc.)
4. notification of the authorities about the significant changes (participants, members of the board of directors, constituent documents, business plans)
5. managerial decision making in Bahrain
6. sufficient number of qualified personnel, assets, expenses in the country (outsourcing services are allowed).

Features of the tax system

1. no income tax (except for oil and gas revenues, where the rate is 46%)

The draft law on the introduction of income tax is being considered.

2. VAT rates – 0% and 10% (for domestic transactions)

A company is registered if the threshold of 37’500 BHD / year (~ $ 100 K) is exceeded.

Customs duties depend on the product nomenclature: in the range of 5-225%%.

3. social funds fee rate – 4% and 24% for foreign and local employees, respectively
4. 50+ Double Taxation Avoidance Agreement (DTAA), no agreement with Russia
5. no withholding taxes (on dividends, %, royalties)
6. excise duty rates: 5-100%% (depending on the type of goods).

3. Qatar

Substance requirements:

1. sufficient number of employees, level of operating expenses, conducting business in the country
2. obligations to submit reports on the level of economic presence upon achieving the conditions:

• outsourcing is used for the main type of activity
• at least 75% of income is qualified
• > 60% of assets are located outside Qatar or foreign sources generate > 60% of income from assets outside the country.

Characteristics of the tax regime:

1. personal income tax – 0%
2. income tax – 10%
3. withholding tax:

• 5% – on interest and royalties
• 0% – on dividends

4. VAT – 0%
5. 80+ Double Taxation Avoidance Agreement and application of the MLI concept for DTAA, i.e. there must be a justification for using a company in Qatar, which does not allow tax optimization as the main purpose.

Features of activities in the Qatar Financial Centre (QFC).

1. It’s a leading zone with its own legal, tax and business infrastructure
2. the use of tax benefits is subject to approval by the regulator upon meeting the level of presence:

• difficulties in issuing loans (even from holding companies) to independent parties
• difficulties in registering a company in the case of owning assets in Russia
• meeting the conditions for required number of staff, level of expenses and conducting business in the country.

4. Oman

General parameters of the jurisdiction:

1. registration of companies in the mainland and in special zones
2. requirements of economic presence in the country.

Basics of the tax system in the mainland.

3. income tax – 15%
4. withholding tax:

• 0% – on dividends
• 0% – on interest (there should be a rate of 10%, but it is temporarily not charged)
• 10% – on royalties.

5. personal income tax – 0%
6. VAT – 5%
7. social funds fee rate – 20.5%, including:

• at the expense of an employer – 12.5%
• at the expense of employees – 8%.

Tax regime in free zones.

Zero rate on all taxes for a period of 25 to 30 years – subject to certain conditions (achievement of the standard share of local employees, etc.).

5. Saudi Arabia

Tax regime parameters:

1. personal income tax – 0%
2. income tax – 20%
3. withholding tax:

• 5% – on dividends and interest
• 15% – on royalties.

4. VAT – 15%
5. tax period:

• income tax / Zakat: calendar year
• VAT: quarter / month

6. 55+ DTAA.

Zakat tax attributes:

1. Zakat and income tax are different.
2. Taxpayers:

• Nationals of Saudi Arabia and the GCC countries, as well as companies owned by them
• Legal entities from Saudi Arabia whose shares are traded on a local stock exchange

3. Tax base is the higher of the amount: share in the net profit or assets
4. Rates: 2.5% or 2.578% depending on the calendar used:

• Islamic (354 days) or
• Gregorian (365 or 366 days), respectively.

The planned changes in taxation:

1. The possibility of redomiciliation of companies in and out of the country is envisaged.
2. Transfer pricing regulations will be brought in line with the international standards.
3. Introduction of the MLI concept (“business purpose”) in transactions.
4. Exemption from taxes on dividends and capital gains.

Transfer Pricing Legislation

Types of regulatory reporting:

1. TP disclosure form:

• in Qatar – general information about the group, transactions with the related parties, TP methods applied for calculating market prices
• in the UAE – the document includes brief information on the controlled transaction taking into account the financial component
• in Saudi Arabia – information about transactions with the related parties (the scale of transactions is not important).

2. TP Supporting Documentation – an abbreviated analogue of the Local File, which presents an analysis of compliance with the market conditions for a specific controlled transaction.
3. MNE Notification (membership in a multinational enterprise groups) or CbC notification – the analogue forms (notifications) that include information about the ultimate parent entity of the group or authorized participants submitting reports.
4. Local Files (or national documentation) – the detailed analysis of specific transactions for market pricing
5. CbC Report or CBCR (country report) for the group contains:

• information on the activities of companies
• financial (including tax), non-financial data by country of presence.

6. Master Files (or global documentation) include:

• value chain
• sources and structure of financing
• general group information and assets
• TP methods used for the transactions with the related parties, etc.

Fig. 5. Deadlines for submission of transfer pricing documents

Fig. 6. TP requirements for turnover by jurisdiction

1. UAE

At the end of 2022, the corporate tax law came into force along with the transfer pricing rules, which began to be applied in relation to the intra-group transactions from 01.06.23.

The parties are related if the ownership share in a legal entity >=50% (legal entities, individuals, individuals and legal entities).

The related persons are:

• founders of the company
• directors or officers
• the related parties of founders, directors, officers.

For the corporate tax purposes, any payments to the related parties must be based on the market conditions and be connected with the company's activities.

There are significant fines for late submission of the certain types of TP reporting: for example, the sanctions reach up to 1 million AED for CBCR.

2. Bahrain

There is currently no transfer pricing legislation, but the planned law on income tax will contain provisions on transfer pricing regulation.

3. Qatar

There is transfer pricing legislation in force, based on the OECD guidelines.

4. Oman

There are no transfer pricing rules yet, but taxpayers must use general regulation and conduct the intra-group transactions “at arm’s length”. Otherwise, the tax authorities may challenge the transactions and impose additional taxes.

The law on income tax contains provisions with the following sections on:

• tax evasion in the transactions between related parties
• «thin capitalization» – interest on loans from related parties is recognized for income tax purposes if the ratio of debt to the borrower’s equity does not exceed the proportion of 2 to 1.

5. Saudi Arabia

The scope of the transfer pricing regulation includes all intra-group transactions from 01.01.24.

The requirements of the global legislation (new Pillar 2 rules)

Fig. 7. Timing of the Pillar 2 rules introduction

None of the GCC countries have introduced legislation and there are no official publications on the timing of the rules.

1. UAE: the Law on the implementation of Pillar 2 (amends the corporate tax legislation) was issued in 2023. According to expectations, the IIR rules may be introduced from 01.01.25.

2. Qatar:

• is a member of the OECD working group and plans to introduce the Pillar 2 rules
• internal consultations on the draft are underway.

3. Oman and Saudi Arabia support international initiatives in terms of Pillar 2.