Corporate Tax 2020

Last Updated January 20, 2020

Jordan

Law and Practice

Authors



Shaddad & Partners was founded in 1995 and specialises in tax matters. It offers a detailed and customised approach to clients combined with deep knowledge of taxation and financial matters. Shaddad & Partners acts for a wide range of clients in Jordan, from private individuals to corporations, and covers taxation work related to the various tax systems within Jordan, including free zones, development zones and the Aqaba Special Economic Zone. Its corporate tax team handles litigation, tax planning and advice, and forensic accounting.

All commercial activities in Jordan can be conducted only after registration with the Ministry of Industry and Trade’s Company Controller Department. Registration can be as individuals; as incorporated companies limited by shares, which may be public or private; or as partnerships. Public company shares are listed on a stock exchange, while a private company is any company other than a public company.

The types of companies allowed under Jordanian law are general partnership, limited partnership, limited partnership in shares, limited liability company, private shareholding company and public shareholding company.

The Jordanian corporate tax regime is not a two-tier taxation: company income is taxed at the company level; however, dividend income distributed by companies to shareholders or partners is not subject to income tax.

Transparent entities commonly used in Jordan include partnerships, which, like incorporated entities, are not subject to two-tier taxation. In a general partnership, partners are jointly and severally liable. A creditor of the general partnership may sue the company and partners therein for all the partnership's liabilities, as opposed to a limited partnership, in which the limited partners contribute to the capital of the partnership without having the right to manage the company or to realise its operations, and the liability of each one of them towards the company debts and liabilities is limited to their share in the capital of the company. Limited partnerships must have a general partner who manages the partnership and realises its operations, and is jointly and severally liable for all the partnership’s debts and liabilities with unlimited liability.

A company is considered resident in Jordan if it was incorporated in Jordan; or if registered as an operating foreign company, then the Jordanian branch of that foreign company is considered a Jordanian entity.

The corporate tax rate for incorporated businesses in 2020 is 20%, except for entities that work in the telecommunications, electricity generation and distribution, mining, insurance and reinsurance, and brokerage sectors, which have a corporate tax rate of 24%. The corporate tax rate for banks is 35%. In addition to those corporate tax rates, certain sectors are required to provide a contribution to the National Fund as follows based on taxable income: 3% for banks, and electricity generation and distribution; 7% for mining companies; 4% for brokerage and leasing companies; 2% for telecommunications, and insurance and reinsurance companies; and 1% for all other corporate entities.

Capital gains and losses arising from real estate transactions located in Jordan (including real estate associations) are not taxed, unless they are realised by an entity that engages in the sale of real estate as part of its corporate objectives.

Transparent entities, such as business partnerships, are subject to taxation in Jordan at the partnership level. Dividends distributed to partners are not taxable as such. Dividends from publicly listed companies are not taxable; however, there is a flat tax of 0.08% on buy-sell orders for stock exchange transactions.

Jordanian companies' income is taxed on a worldwide basis, based on a flat rate of 10% of the net income declared in the financial statements of the foreign branch. Also, any foreign income realised using funds or deposits generated from any activity in Jordan and then used to invest outside Jordan is subject to a flat rate of 10% of the net income generated from such investment. Similarly, foreign companies are only subject to Jordanian tax with respect to their Jordan-sourced income.

The company’s net income is calculated according to the International Financial Reporting Standards (IFRS), which, once reconciled with the provisions of the Jordanian Tax Code and its regulations, determines the tax base for corporate tax purposes. In general, the accrual method of accounting is used by Jordanian companies to report their income for accounting and tax purposes.

In order to encourage start-up investments in the information technology sector, Jordanian tax law allows IT companies that create, process or store data, as well as companies working in programming, to exempt from corporate taxation all capital gains generated from the sale of company shares. This exemption is valid for the first-time sale of shares within 15 years from the date of company incorporation, and may be extended by a Cabinet decision.

Corporations engaged in industrial activities are entitled in 2020 to a 20% reduction of their corporate tax rate. Similarly, corporations in the drug and garment industries are entitled in 2020 to a 30% reduction of their corporate tax rate. Additionally, entities registered as venture capital companies are exempt from corporate income tax.

Accelerated depreciation, up to 300% of the regular rate of depreciation, is allowed regardless of the industry type provided that the accelerated deprecation rate selected is maintained for the remainder of the asset life. This does not apply to buildings, which normally have a fixed depreciation rate of 2% for non-industrial buildings, a 10% depreciation rate for temporary buildings, and 4% for buildings housing industrial equipment and machines.

Additionally, Jordan has established within its territory free zones in which there are reduced or no income tax. Specifically, the Aqaba Special Economic Zone (ASEZ) allows enterprises registered with the Aqaba Special Economic Zone Authority (ASEZA) to enjoy a 5% income tax on income generated from activities inside the ASEZ or outside Jordan except for banking, insurance and land transport services. Additionally, there are several free zone areas in Jordan that allow enterprises registered within them to enjoy exemption from income tax on all income generated from dealings outside Jordan; ie, transit commerce out of the free zone.

Operating losses incurred from a branch of the business or trade may be used to offset any other operating income or gain recognised by the company in the same tax year. Capital losses can only be offset against capital gains. Net operating losses of a company may be carried forward for five years, although they may not be carried back and cannot be carried forward for losses incurred from exporting goods and services.

Carry-forward loss generally survives ownership change.

Generally, sums paid on interest are deductible, provided that the capital was used for the production of taxable operational income. As a general rule, all income is expected to be associated with a cost, and therefore it is acceptable to deduct the cost of that income to arrive at the gross taxable profit.

Jordanian law does not allow for consolidated tax grouping. Each corporate entity has its own tax number and file.

Capital gains on the sale of depreciable assets are considered taxable income. Capital gains from the sale of shares in publicly listed companies are exempt from income tax. However, the sale of shares in a non-listed company will trigger an escalating income tax from 0.5%-5%, based on the value of the sale and not the capital gains realised.

All contracts executed by incorporated businesses are subject to stamp duty at 0.3% for contracts among private parties, and 0.6% of the value of contracts among private and governmental entities.

VAT/sales tax is paid by the final consumer, and not by the manufacturing or selling company; however, incorporated entities are responsible for collecting and forwarding the sales tax to the Income and Sales Tax Department (ISTD). Excise tax, however, is paid directly by the incorporated entity. Excise tax is regulated by Cabinet resolution and falls only on specified goods and activities, such as cigarettes, alcohol and cellular devices. Transfer tax applies to the sale of real estate.

Jordan charges VAT/sales Tax on transactions in Jordan and on the importation of goods and services into Jordan, the standard rate of which is currently 16%, and 7% for the ASEZ. A transaction that is a sale of goods is deemed to have taken place in Jordan if, in the case of a tangible asset, it was delivered in Jordan or exported and if, in the case of an intangible asset, the seller is a Jordanian resident. Brokerage firms and financial institutions are subject to 24% income tax, and banks are subject to 35% income tax. There is a tax on paid salaries (salary tax), which is deducted from the salary of the employee and delivered by the employer to the ISTD. Salary tax is an escalating tax starting at 5% up to 30%, subject to certain adjustments. Businesses are entitled to recover input VAT/sales tax costs in connection with goods or services used by them to create their taxable (including a zero rate) supply.

Jordan imposes customs duties in accordance with the Customs Law.

It is difficult to ascertain how most closely held businesses operate in practice. However, in the event that they do incorporate, the responses laid out below will apply.

The Jordan corporate tax regime only taxes the corporation and does not impose any taxation for the distribution of dividends, therefore it is not based on two-tier taxation. The corporate tax rate for incorporated businesses in 2020 is 20%, except for entities that work in the telecommunications, electricity generation and distribution, mining, insurance and reinsurance, and brokerage sectors, which have a corporate tax rate of 24%. The corporate tax rate for banks is 35%.

The highest applicable marginal tax rate on ordinary income is 30% (in 2020).

Closely held corporations are taxed on the income that stems from their operations, based on the income tax rate specific to their specific sector. The corporate tax rate for incorporated businesses in 2020 is 20%, except for entities that work in the telecommunications, electricity generation and distribution, mining, insurance and reinsurance, and brokerage sectors, which have a corporate tax rate of 24%. The corporate tax rate for banks is 35%.

In addition, in the event that a closely held corporation has not distributed a dividend, the distribution of the dividend does not damage or negatively impact the company, and the lack of distribution is not a means of tax avoidance because there are no taxes on dividends.

Individuals are subject to 0.08% tax upon the sale or purchase of shares in publicly traded companies. Dividends of publicly traded companies are not subject to taxation.

Individuals are subject to 0.08% tax upon the sale or purchase of shares in publicly traded companies. Dividends of publicly traded companies are not subject to taxation.

The sale of shares in a non-listed company will trigger an escalating income tax from 0.5%-5%, based on the value of the sale and not the capital gains realised.

In the absence of an applicable income tax treaty, the following particular withholding taxes apply to foreign residents.

  • In general, payments made to foreign individuals and foreign corporations are subject to 10% withholding tax.
  • Interest and royalties paid to non-resident corporations are generally subject to withholding tax of 10%. Certain interest payments to non-resident investors are generally exempt from withholding tax, such as interest on certain traded government bonds.
  • Dividends distributed to foreign shareholders are not subject to withholding tax.
  • Income from interest, deposits, commissions, and profits of deposits in banks and paid by banks and financial companies in Jordan to any resident or non-resident person is subject to withholding tax at the rate of 5% for individuals and 7% for legal persons. These withheld amounts are considered final tax for the non-resident legal person and the natural person.

Jordan has entered into income tax treaties with Algeria, Azerbaijan, Bahrain, Bulgaria, Canada, Croatia, the Czech Republic, Egypt, France, India, Indonesia, Iran, Iraq, Italy, South Korea, Kuwait, Lebanon, Libya, Malaysia, Malta, Morocco, the Netherlands, Pakistan, Palestine, Poland, Qatar, Romania, Saudi Arabia, Sudan, Syria, Tunisia, Turkey, Ukraine, United Arab Emirates, the United Kingdom, Uzbekistan and Yemen.

Jordan signed the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting in 2019.

Jordan does not have a formal position on the use of treaty country entities by non-treaty country residents.

Tax law requires all transactions between related parties to be based on arm’s-length terms such that if a preferred price was obtained due to a special relationship between the parties, the transaction is expected to be reported based on the market’s actual price. The ISTD would often compare the price of the transaction with the price of a similar international transaction between unrelated parties. The ISTD must amend the price between the related parties to match the price otherwise used between unrelated parties.

There is likely to be more focus in the future on transfer pricing as a result of the OECD's initiatives on BEPS, and the forthcoming implementation of legislation following such initiatives.

In Jordan an agent acting for the foreign principal does not constitute a permanent establishment as a dependent agent in Jordan. Therefore, if a foreign company sells goods via subsidiaries or other affiliates in Jordan that do not assume the responsibility of a fully fledged distributor, no tax is assessed on the foreign company’s revenue generated from the sale in Jordan, because the ISTD views such revenue as generated from sale to Jordan and not as income generated by sales in Jordan.

ISTD regulations and Jordanian courts have not addressed the issue of existence of a permanent establishment in Jordan in the case of commissionaire arrangements with a foreign principal.

Jordan signed the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting in 2019. It is not clear if this signing will affect the way the ISTD addresses the status of foreign principals using distributors in Jordan, or if it will result in a revised definition of permanent establishment.

The OECD Transfer Pricing Guidelines are not explicitly included in Jordanian legislation, but the Income Tax Law contains a reference to international standards, and guidelines on transfer pricing issued by international agreements concerned with taxation. Thus, the OECD guidelines alongside could be used for referencing and interpretation when ISTD auditors deal with transfer pricing cases.

There is currently very limited application of specific transfer pricing rules or mechanisms.

The income of Jordanian or overseas companies is taxable if it is accrued in or derived from Jordan.

Important points to note regarding branches include:

  • there is an automatic withholding tax on money transfer as income accrued in Jordan to overseas entities of 10%; and
  • the ISTD deems intercompany interest and royalty income derived from Jordan by a branch of an overseas company to be accrued and derived from Jordan, and thus subject to tax in Jordan.

Capital gains on the sale of depreciable assets are considered taxable income. Capital gains from the sale of shares in publicly listed companies are exempt from income tax. However, the sale of shares in a non-listed company will trigger an escalating income tax from 0.5%-5%, based on the value of the sale and not the capital gains realised.

Transfer tax is payable on the transfer of ownership of real estate located in Jordan, even where such ownership is indirectly held through intermediate holding companies. The transfer tax is 9%, traditionally split 5%-4% between seller and buyer.

No specific formulas are used by the tax authorities to determine the income of foreign-owned local affiliates.

Rather, the taxable profits of a local branch of a foreign company are generally calculated by reference to the income and deductions attributable to the branch under the assumption that it operates as an independent business unit and in accordance with transfer pricing rules.

There is no specific standard applied in allowing a deduction for payments by local affiliates for local management and administrative expenses incurred by a non-local affiliate. The deduction must be carried out in accordance with the fair market value of such services.

A tax deduction is allowed for any interest paid or payable to a person not resident in Jordan. Interest paid to a person not resident in Jordan is subject to 10% withholding tax.

Income accrued in, or derived from, Jordan is taxable. However, to encourage transit commerce, the government exempts income generated from transit of goods within the free zones and several services outside the free zone from income tax.

Expenses that are not wholly and exclusively used in the production of taxable income are treated by the tax authorities as non-deductible.

Dividends received from a foreign subsidiary are taxed based on a flat rate of 10%. Also, any foreign income realised using funds or deposits generated from any activity in Jordan and then used to invest outside Jordan is subject to a flat rate of 10% of the net income generated from such investment.

In general, in order for non-local subsidiaries to use intangibles developed by local corporations, the intangibles must be sold to the foreign corporation, or, alternatively, the local corporation may sign a licensing or royalty agreement with the non-local subsidiary, according to which it may use the intangibles in return for proper consideration. All the above is subject to compliance with transfer pricing rules.

Income from a controlled foreign corporation (CFC) has to be included in the gross income of the parent company and will be taxed at a 10% income tax rate. CFC income is determined for each individual foreign entity level based on its audited financial statements, and then attributed to the Jordanian parent company to be taxed.

Resident companies must include in taxable income their relevant share of the undistributed profits of a CFC, as CFC income is determined for each individual foreign entity level based on its audited financial statements, and then attributed to the Jordanian parent company to be taxed. This means that Jordanian CFC rules apply to passive and active income; that is, income derived from active business operations.

There are no specific rules that relate to the substance of non-local affiliates.

Capital gains from the sale of overseas assets was not addressed within the scope of the Tax Code in Jordan.

Anti-avoidance provisions empower the ISTD to disregard part or all of any arrangements or transactions deemed artificial and/or fictitious with a goal of reducing payable taxes.

This is often seen with refusal to consider unjustified expenses, and transfer pricing not on an arm’s-length basis. All those would normally be subject to restrictions and limitations pursuant to the application of general anti-avoidance principles.

The ISTD determines the entities that will be subject to audit based on a statistical sample of the companies that filed a tax return for that year. The tax returns filed by companies not included in the sample are considered accepted by the ISTD, even though such nominally accepted tax returns can still be audited within two years if the ISTD Director decides additional income information was revealed.

In addition, within four years of inclusion in the sample (and, in certain circumstances, two years from the date the tax return was filed), the assessing officer must audit a company’s tax return or it will be deemed accepted. The assessment of the officer may be appealed to a committee within the ISTD. The decision of the committee is subject to appeal to the tax court. The decision of the tax court may be appealed to the tax appeals court.

Jordan signed the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting in 2019.

Jordan has already begun to implement certain BEPS recommendations, especially in the area of transfer pricing as incorporated in the latest amendments of the Income Tax Law effective in 2019. In this regard, the taxpayer may be required to provide the ISTD with complete documentation of the international transaction, including the method used for price calculation. This would fall within the BEPS Action 13 recommendation regarding transfer pricing documentation.

Furthermore, consistent with BEPS Action 5, which addresses harmful tax practices, the ISTD recently enacted legislation granting preferential tax rates to technology and hi-tech companies with respect to capital gains derived from sales of shares in such companies. Specifically, Jordanian tax law allows IT companies that create, process or store data, as well as companies working in programming, to exempt from corporate taxation all capital gains generated from the sale of company shares. Such changes can also be viewed as being part of the governmental push for attracting capital investments.

The authors expect this process to continue gradually, although it is not clear at what pace and to what extent implementation will happen through changes in the interpretation of existing law and tax treaties, as opposed to changes in legislation.

One notable area still untouched is e-commerce. The newly amended Tax Code has explicitly declared as taxable the income generated from e-commerce for goods and services. However, the ISTD has yet to issue guidance on what that actually means from an implementation point of view. Specifically, what, if any, procedures will be applied to enforce taxation of income applicable to non-Jordanian internet companies selling goods or providing services to the Jordanian market through the internet, as well as the VAT/sales liability of internet services companies. The governmental response to this area has largely been, thus far, through the Customs Department’s treatment of goods received through the mail service from non-Jordanian internet companies.

As a result of Jordan signing the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, the ISTD has no option except to follow and implement the OECD’s recommendations in the BEPS reports and, accordingly, the authors expect to see amendments to domestic legislation, the enactment of regulations and the publication of guidance papers by the ISTD, which will indicate the ISTD’s position.

International tax has significant media exposure and hence a high public profile in Jordan, especially with respect to the taxation of non-Jordanian internet companies. Jordanians are not receptive to the attempts to tax payments made to such companies, because they view such purchases as legitimate overseas shopping that should not be subject to taxation. The recently implemented increased customs fees on goods purchased from internet companies such as Amazon were not well received by the public. There is not much discussion on taxation of the non-Jordanian internet companies themselves, and whether they are paying sufficient tax on their activity in Jordan. The newly amended Tax Code has explicitly declared as taxable the income generated from e-commerce for goods and services. The ISTD has yet to issue guidance as to what that actually means from an implementation point of view. It is not clear yet how the media focus on this issue, together with signing the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, will increase Jordan’s motivation to implement the BEPS recommendations.

The government is trying to encourage investment in the Jordanian economy and make it a business-friendly jurisdiction. However, the government has been struggling with determining what level of personal and corporate taxation does not discourage economic activity. Recent income tax increases have had a mixed record in terms of increased tax collection, and there is considerable concern about tax burden saturation. A considerable challenge for Jordanian tax policy is to have a more equitable collection of tax revenues from income and VAT/sales tax. Currently, approximately 75% of Jordan’s tax returns are collected from VAT/sales tax, which is considered lopsided.

As part of the Investment Law, Jordan grants extensive tax benefits to commercial activities within economically disadvantaged, developmental or free zone areas:

  • up to 30% reduction on the applicable tax rate to industrial and economic activities established in economically disadvantaged areas;
  • income tax ranges from 5-10% for all activities created within the development area;
  • income tax is at 0% within free zones for activities related to transit services within the free zone; and
  • VAT/Sales tax is at 0% on goods or services used by entities created within the development and free zone areas within Jordan, and is capped at 7% and 0%, as opposed to the standard 16%, for services sold within the development areas or free zones, respectively.

To ensure that any granted tax incentives are quickly put to use by the beneficiary, the concerned project must start operation within two years from the date the tax exemption was granted.

There are currently no proposals for dealing with hybrid instruments.

Jordan has a semi-territorial tax regime. Foreign income derived from Jordanian-based funds – eg, dividends or capital gains income from foreign companies – is taxable if the foreign assets were acquired using funds located in Jordan. There is a de facto presumption that dividends and capital gains acquired by Jordanian companies from overseas fall under taxable income.

Income from a CFC has to be included in the gross income of the parent company and will be taxed at a 10% income tax rate. CFC income is determined for each individual foreign entity level based on its audited financial statements, and then attributed to the Jordanian parent company to be taxed. The authors do not expect any significant change to the current Jordanian CFC regime.

Jordan maintains a conservative approach with respect to granting treaty benefits. Anti-avoidance provisions empower the ISTD to disregard part or all of any arrangements or transactions deemed artificial and/or fictitious with a goal of reducing payable taxes.

This is often seen in the refusal to consider unjustified expenses, and transfer pricing not on an arm’s-length basis. All those would normally be subject to restrictions and limitations pursuant to the application of general anti-avoidance principles.

Given that there are presently few specific provisions in place, the authors cannot comment on the likelihood of having more specific transfer pricing requirements introduced to Jordan. Before deciding to introduce further language, the ISTD could potentially test the current level of documentation required to be compiled by local entities who are part of multinational companies.

Regarding profits from intellectual property, the rule is that such income, including royalties, received from overseas sources is taxable at a rate of 10%. The authors cannot comment yet on the potential impact on Jordan from BEPS proposals involving intellectual property.

The authors believe that the BEPS proposal for transparency and country-by-country reporting will improve enforcement.

The newly amended Tax Code has explicitly stated that the income generated from e-commerce for goods and services is taxable. The ISTD has yet to issue guidance as to how that actually works from an implementation point of view. Specifically, what, if any, procedures will be applied to enforce taxation of income applicable to non-Jordanian internet companies selling goods or providing services to the Jordanian market through the internet, as well as the VAT liability of internet services companies. The governmental response to this area has largely been, thus far, through the Customs Department’s treatment of goods received through the mail service from non-Jordanian internet companies.

No information has been provided in this jurisdiction.

No information has been provided in this jurisdiction.

There are no other general comments.

Shaddad & Partners

21 Abdel Kader Koshik St.
Jabal Amman
Amman
Jordan

+962 6 462 3850

info@shaddadlaw.net
Author Business Card

Law and Practice

Authors



Shaddad & Partners was founded in 1995 and specialises in tax matters. It offers a detailed and customised approach to clients combined with deep knowledge of taxation and financial matters. Shaddad & Partners acts for a wide range of clients in Jordan, from private individuals to corporations, and covers taxation work related to the various tax systems within Jordan, including free zones, development zones and the Aqaba Special Economic Zone. Its corporate tax team handles litigation, tax planning and advice, and forensic accounting.

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