The practical stakes

Doing business in Iraq, or doing business with Iraq, the line that decides whether you are taxed. A foreign company that has not registered an entity in Iraq often assumes that it sits outside the Iraqi tax system. The assumption feels reasonable. If there is no Iraqi company and no Iraqi branch, where is the tax. In Iraq this reasoning does not hold, and acting on it can leave a company with an unexpected tax liability on the whole value of its contract.

Iraqi tax does not depend on whether a company has registered a presence. It depends on whether the company is considered to be doing business in Iraq, and that question is answered by looking at the contract itself. Meeting even one of a small set of factors can bring the entire contract within Iraqi tax. The question is therefore decided at the moment a company drafts and signs its contract, often before it has decided whether to operate through a branch or a limited liability company. A company that understands this can plan around it. A company that does not may find the liability arrives with the first assessment.

The legal position

The Income Tax Law No. 113 of 1982 imposes tax on profits arising from commercial activity under Article 2, and Article 21 of the same law allows a non-resident to be taxed in Iraq where that activity is carried out in Iraq. Iraqi law does not use the concept of a permanent establishment that is familiar from tax treaties in other countries. The Iraqi authorities do not, in practice, decide taxability by reference to a permanent establishment. They decide it by reference to whether the company is doing business in Iraq, as opposed to doing business with Iraq.

To make that distinction workable, the Ministry of Finance issued Instructions No. 2 of 2008, which set out the factors that determine whether a non-resident is taxable. The position can be summarised as follows. If any one of the following factors is present, the company is treated as doing business in Iraq and is taxable. If none of them is present, the company is treated as doing business with Iraq and should fall outside Iraqi tax.

  1. The place of signing the contract by the party performing the work is in Iraq.
  2. The place of performance of the work is in Iraq.
  3. The place of delivery of the goods or services is in Iraq.
  4. The place of receipt of payment for the work is in Iraq.

The important feature is that these factors are not cumulative. A single factor is enough. A company does not have to satisfy all four to be taxed. It only has to satisfy one.

These factors were later revisited by Instructions No. 1 of 2014, which came into effect in 2015 and set out a more detailed set of tests. The later instructions address, among other things, contracts signed or performed through a branch or office in Iraq, the completion of legal formalities in Iraq such as customs clearance, the receipt of payment in Iraq including payment in barter, and the separate treatment of supplementary and professional services that are performed in Iraq. In practice, however, the General Commission for Taxes has continued to apply the original four factors from the 2008 instructions in most cases. The relationship between the two sets of instructions is therefore a source of uncertainty, and a company should not assume that either set will be applied to the exclusion of the other.

What this means in practice

The taxable question is most usefully treated as a contract drafting question, because that is where it is decided.

  1. Address the tax position when the contract is drafted and signed, not after the work has started. By the time an assessment is raised, the factors that determine taxability are already fixed in the contract and the conduct of the parties.
  2. Recognise that performance in Iraq is the factor that is hardest to avoid. For a service contract, an engineering contract, or an operation and maintenance contract that requires work to be carried out on the ground in Iraq, the performance factor will usually be present, and the contract will usually be taxable.
  3. Plan for registration once the contract is taxable. A company that is doing business in Iraq is required to register a presence, obtain a tax identification number, file annual returns, and pay the tax due. It is common in the market for companies to begin work before registration is complete, but the company must still report all of its operations for the pre registration period and pay the tax, or it will not be in compliance.
  4. Expect your Iraqi counterparty to require registration. A company that pays an unregistered foreign contractor whose work amounts to doing business in Iraq can be made responsible for the tax that should have been withheld. For that reason, Iraqi customers, and in particular government and state owned customers, increasingly insist that the foreign party is properly registered before payments are made.
  5. Treat the structuring of a contract into separate scopes as a matter for specific advice. Companies sometimes seek to divide a contract so that part of the work is performed outside Iraq and only part within it. Whether such an arrangement reduces the Iraqi tax, and whether the authority will respect it, depends on the detail of the contract and on how the work is actually carried out. This is not a step to take from a general rule, and it should be planned with advice.

FAQ

  1. Can Iraq tax my company if I have not registered any entity there?
    Yes. Iraqi tax does not depend on whether you have a registered presence. It depends on whether you are doing business in Iraq under the factors set out in Instructions No. 2 of 2008, and a contract can be taxable even where the company has no Iraqi entity.
  2. What makes a foreign company “doing business in” Iraq rather than “doing business with” Iraq?
    Under Instructions No. 2 of 2008, the company is doing business in Iraq if any one of four factors is present, namely the place of signing the contract, the place of performance of the work, the place of delivery, or the place of receipt of payment is in Iraq. If none of these is present, the company is treated as doing business with Iraq and should fall outside Iraqi tax.
  3. Does Iraq use the concept of a permanent establishment?
    No. Iraqi law does not apply the permanent establishment concept used in many tax treaties, and the authorities do not decide taxability on that basis. They decide it on the doing business in versus doing business with distinction.
  4. If only part of our contract is performed in Iraq, is the whole contract taxable?
    This depends on how the contract is structured and on how the authority treats the work in the particular case. The later Instructions No. 1 of 2014 address the separate treatment of certain services performed in Iraq, but the application is not settled and the General Commission for Taxes often applies the earlier factors. Because the answer turns on the specific contract and facts, this is a point on which advice should be taken. Our tax team would be glad to assist.
  5. We signed the contract outside Iraq. Does that keep us outside Iraqi tax?
    Not on its own. The place of signing is only one of the factors. If the work is performed in Iraq, the contract can still be taxable on the performance factor regardless of where it was signed, so signing abroad does not by itself remove the Iraqi tax.

How we can help

Whether a particular contract is taxable in Iraq, and how it should be structured and registered, depends on the terms of the contract and on the way the work is carried out. Our tax team advises foreign companies on the taxability of contracts, registration with the General Commission for Taxes, and the tax aspects of contracting with Iraqi public and private parties. To discuss a specific contract, please see our Taxation practice or contact the firm. Companies deciding how to establish in Iraq may also wish to read our Corporate Structuring and Corporate and Commercial pages.