Corporate tax in Iraq

Summary

Corporate Income Tax Rate (%) 15 / 35 (a)
Capital Gains Tax Rate (%) 15 / 35 (a)
Branch Tax Rate (%) 15 / 35 (a)
Withholding Tax (%)
Dividends 0
Interest 15 (b)
Royalties 15 (b)
Branch Remittance Tax 0
Net Operating Losses (Years)
Carryback 0
Carryforward 5 (c)

a) The 15% rate is the general corporate income tax rate. The 35% rate applies to oil and gas production and extraction activities and related industries, including service contracts. The Kurdistan Region of Iraq has not yet adopted the 35% rate.

b) This withholding tax is imposed on payments to nonresidents.

c) See Section C.

Taxes on corporate income and gains

Corporate income tax. In general, corporate income tax is imposed on profits arising from commercial activities (or activities of a commercial nature), vocations and professions, including profits arising from contracts and undertakings. The General Commission for Taxes (GCT), which is the Iraqi tax authority, generally relies on the following factors to determine if income is deemed to arise in Iraq and is therefore taxable in Iraq:

  • The place of signing the contract by the party performing work under the contract (vendor or service provider) is in Iraq.
  • The place of performance of work is in Iraq.
  • The place of delivery of goods or services is in Iraq.
  • The place of payment for the work is in Iraq.

In 2015, the Iraqi Ministry of Finance issued instructions, which amended the language regarding the above factors and provides the following:

  • The vendor or service provider has a branch or an office in Iraq, and the contract is signed by the branch or office representative, any of the branch or office’s employees or any other person who is resident in Iraq and authorized to sign the contract.
  • The vendor or service provider has a branch or an office in Iraq, and the contract is performed or executed by the branch or office representative, any of the branch or office’s employees or any other person who is resident in Iraq and is authorized to perform or execute the contract.
  • The contract’s legal formalities and requirements are completed in Iraq in the name of the vendor or service provider (for exam­ple, customs clearance, payment of customs duties, opening of letter of credit or any related procedures, regardless of whether the vendor or service provider has a branch, office or agent in Iraq).
  • Payments under the contract to the vendor or service provider are received fully or partially in Iraq, regardless of the currency used to make the payments.
  • The vendor or service provider receives payment in barter.

Tax rates. The general corporate income tax rate applicable to all companies (except oil and gas production and extraction activities and related industries, including service contracts) is a unified flat rate of 15% of taxable income. Activities relating to oil and gas production and extraction activities and related industries, includ­ing service contracts, are subject to income tax at a rate of 35% of taxable income. The Kurdistan Region of Iraq has not yet adopted the 35% rate.

Withholding tax. Companies doing business in Iraq are required to retain taxes from payments made to their subcontractors and remit the retained taxes to the GCT on a monthly basis. The reten­tion rates vary, depending on the nature of activities carried out under each contract. The Kurdistan Region of Iraq does not cur­rently observe this retention and remittance process.

Capital gains. Capital gains derived from the sale of fixed assets are taxable at the normal corporate income tax rate of 15% (35% for oil and gas production and extraction activities and related industries, including service contracts, except in the Kurdistan Region of Iraq where the 35% tax rate has not yet been adopted).

Capital gains derived from the sale of shares and bonds not in the course of a trading activity are exempt from tax; otherwise, they are taxed at the normal corporate income tax rates.

Administration. In Iraq, tax returns for all corporate entities must be filed in Arabic within five months after the end of the fiscal year, together with audited financial statements prepared under the Iraqi Unified Accounting System. The Kurdistan Regional Government’s tax authority requires that these audited financial statements be filed within six months after the end of the fiscal year.

A delay fine equal to 10% of the tax due is imposed, up to a maximum of IQD500,000, on a taxpayer that does not submit or refuses to submit an income tax filing within five months after the end of the fiscal year (within six months in the Kurdistan Region of Iraq). Foreign branches that fail to submit financial statements by the due date for the income tax filing are subject to an addi­tional penalty of IQD10,000.

After an income tax filing is made, the tax authority undertakes an audit of the filing and may request additional information. It eventually issues a tax assessment. Payment of the total amount of tax is due after the GCT sends the taxpayer the tax assessment based on the GCT’s audit of the filed tax return and audited finan­cial statements.

If the tax due is not paid within 21 days after the date of assess­ment notification, a late payment penalty equal to 5% of the amount of tax due is imposed. This amount is doubled if the tax is not paid within 21 days after the lapse of the first period. The Kurdistan Regional Government’s tax authority imposes different penalties and administers them differently.

Dividends. In general, dividends paid from previously taxed in­come are not taxable to the recipient.

Interest. Interest paid to nonresidents is subject to a withholding tax rate of 15%.

Foreign tax relief. A foreign tax credit is available to Iraqi compa­nies on income taxes paid abroad. In general, the foreign tax credit is limited to the amount of an Iraqi company’s income tax on the foreign income. Excess foreign tax credits may be carried forward for five years.

Determination of trading income

General. In general, all income generated in Iraq is taxable in Iraq (see Cor porate income tax in Section B), except for income ex­empt under the income tax law, the industrial investment law or the investment law in the Kurdistan Region of Iraq.

Business expenses incurred to generate income are allowable, with limitations on certain items, such as entertainment and dona­tions. However, provisions and reserves are not deductible for tax purposes.

Tax depreciation. The Iraqi Depreciation Committee sets the max­imum depreciation rates for various types of fixed assets. These rates are set out in several tables for various industries. In general, the following are the acceptable depreciation methods:

  • Straight line
  • Declining balance
  • Other methods (with the approval of the GCT)

If the rates used for accounting purposes are greater than the pre­scribed rates, the excess is disallowed for tax purposes.

Relief for losses. A tax loss from one source of income may offset profits from other sources of income in the same tax year. Unused tax losses may be carried forward and deducted from the taxable income of the taxpayer during the following five consecutive years, subject to the following conditions:

  • Losses may not offset more than half of the taxable income of each of the five years.
  • The loss may offset only income from the same source from which the loss arose.

To claim losses, a taxpayer must obtain appropriate documenta­tion including financial statements that support the loss and suf­ficient documentation to support the expenses that created such loss.

Groups of companies. Iraqi law does not contain any provisions for filing consolidated returns or for relieving losses within a group of companies.

Other significant taxes

The following table summarizes other significant taxes.

 

Nature of tax Rate (%)
Stamp duties; imposed on the total contract value
Iraq 0.2
Kurdistan Region of Iraq 0.1
(The stamp duty rates provided are the most
commonly applied rates in Iraq and the
Kurdistan Region of Iraq. In practice, the
application of the stamp duty may vary.)
Property tax; imposed on the annual rent
From buildings 9
From land 2
Social security contributions; imposed on salaries and benefits of local and expatriate employees; a portion of employee allowances up to an amount equaling 30% of the base salary is not subject to social security contributions
Employer (general) 12
Employer (oil and gas sector, except in the Kurdistan Region of Iraq) 25
Employee 5

Miscellaneous matters

Foreign-exchange controls. The currency in Iraq is the Iraqi dinar (IQD). Iraq does not impose any foreign-exchange controls. How­ever, according to the Central Bank of Iraq’s instructions and regulations, transfers of funds must be in accordance with the Anti-Terrorism Law and the Anti-Money Laundering Law.

Debt-to-equity rules. Iraq does not have any debt-to-equity rules. The only restrictions on debt-to-equity ratios are those stated in the articles and memoranda of association. However, the GCT may disallow claims of interest expense if it deems the expense to be excessive.

Tax treaties

Iraq has entered into a bilateral double tax treaty with Egypt and a multilateral double tax treaty with the states of the Arab Eco­nomic Union Council.