Corporate structures in Iraq include the following.

• The limited liability company (LLC) structure requires at least two shareholders. Liability is limited to their contributions, excluding banking/insurance activities. The LLC structure is ideal for SMEs and investors seeking liability protection.

• The joint stock company (JSC) structure is designed for larger businesses that can issue shares, and can be public or private. JSCs are common in sectors like energy and telecommunications. They require more capital compared to LLCs.
• Foreign branches allow foreign companies to operate in Iraq as an extension of their parent company, and are suitable for multinational companies.
• In general partnerships, shareholders share profits, losses and liabilities equally. General partnerships are commonly used for small businesses and professional services, and are taxed at the individual level.
• The sole proprietorship is owned by one individual with unlimited liability; this structure is best for small businesses and self-employed individuals. Income is taxed as personal income.

LLCs and JSCs are taxed separately at 15%, with higher rates for companies in the oil and gas sector, while partnerships and sole proprietorships pass income through to owners, who are taxed individually. Foreign branches are taxed on Iraqi income, with potential withholding taxes (WHTs).

Transparent entities in Iraq allow income or losses to pass through to owners, who are taxed individually. These entities are simpler than formal structures, making them attractive for specific sectors and investment groups.

• General partnerships share profits, losses and liabilities among partners. They are simple to form and common in small, family, legal, accounting and consultancy businesses. Partners are fully liable.

• Limited partnerships encompass general partners (with unlimited liability) and limited partners (with liability limited to their investment). They are attractive for investment groups – especially in the context of real estate, private equity, hedge funds, energy and infrastructure – allowing easy profit distribution, providing liability protection and flexible management and helping share risks and resources in large projects, such as in the oil and gas sector.

• Joint ventures (JVs) are temporary partnerships for specific projects, with income and liabilities distributed based on agreement. JVs are often used in large infrastructure, construction and oil and gas projects, helping share risks and resources for large projects in, for example, the oil and gas sector.

• Unincorporated investment vehicles are informal structures used for pooling funds, with income taxed at the investor level. They are common in private equity and niche investments.

Concerning determination of the residence of incorporated businesses and transparent entities, the following applies.

• Incorporated businesses:
1. place of incorporation – businesses incorporated under Iraqi law are considered tax residents of Iraq;
2. place of management and control – if management and control is conducted in Iraq, the business is considered a tax resident;
3. place of effective management – refers to where key management decisions are made, which is important for dual residence situations;
4. economic connection – a company with significant operations or assets in Iraq may be considered a resident; and
5. permanent establishment (PE) – a foreign company with a PE in Iraq (eg, an office or construction site) is taxed on income earned in Iraq.
• Transparent entities (eg, partnerships, joint ventures):
1. residence of shareholders – the tax residence of shareholders determines the entity’s residence;
2. location of activities – if the entity operates in Iraq, its residence is tied to the location of its activities; and
3. PE – transparent entities operating through a PE in Iraq are taxed on Iraq-sourced income, with shareholders reporting income individually.
• Double taxation treaties (DTTs):
1. tie-breaker rules – when an entity is a resident of both Iraq and another country, DTTs use criteria like management location, incorporation and economic activities to determine residency; and
2. PE provisions – DTTs specify what constitutes a PE and determine Iraq’s rights to tax its income. Income is typically taxed in the source country (eg, Iraq for income sourced from Iraq), with relief provided by the country of residence.

Concerning the tax rates paid by incorporated businesses and businesses owned by individuals, the following applies.

• Incorporated businesses:
1. corporate income tax (CIT) – the standard rate is 15%, but businesses in the oil and gas sector may face a rate of up to 35% due to special agreements;
2. WHT – 15% on payments to non-resident entities unless reduced by a tax treaty; and
3. capital gains – taxed at the standard 15% CIT rate.
• Businesses owned by individuals:
1. individual income tax – income up to IQD250,000/month and income over IQD250,000/month is taxed at 15%;
2. partnerships and JVs – income is passed through to individual owners and taxed at personal income tax rates; and
3. sole proprietorships – taxed on net profits as personal income.
• Sector-specific considerations:
1. incorporated businesses in the oil and gas sector are taxed at up to 35%;
2. construction and infrastructure – LLCs and JSCs are taxed at 15%, with potential WHT for non-residents; and
3. small businesses and professional services are typically taxed at individual rates for sole proprietorships or partnerships.

Basis of Taxation

Concerning the basis of taxation, the following applies:

• accounting profits – accounting profits in financial statements are adjusted to meet Iraqi tax laws;
• accruals basis – taxable income is based on earned income and incurred expenses, not when cash is received or paid; and
• receipts basis – small businesses may use the receipts basis for simplicity.

Taxable Income Adjustments

Concerning taxable income adjustments, the following applies:

• non-taxable income excludes income, such as dividends, from Iraqi-resident companies and government-exempt income;
• non-deductible expenses – expenses like fines, excessive entertainment and unrelated costs are not deductible;
• depreciation – accounting depreciation is adjusted, and tax depreciation follows fixed rates;
• provisions and reserves are not deductible unless realised or specifically allowed;
• loss carry forward – losses can offset future profits for up to five years, and there is no loss carry back; and
• transfer pricing – profits may be adjusted if related-party transactions do not follow arm’s-length pricing.

Allowable deductions include operating expenses, interest, repairs and maintenance, research and development (R&D) and taxes paid.

Capital gains are taxed as ordinary income at 15%, foreign income classified as “worldwide income” is subject to tax that may be relieved under tax treaties and the WHT rate is 15% on payments to non-residents, unless reduced by a treaty.

The following applies regarding special incentives for technology investments.

• Tax and investment incentives:
1. R&D deductions – businesses can deduct expenses related to R&D activities, such as product development and process improvement, and some costs may require capitalisation and amortisation with proper documentation;
2. investment law benefits – the Investment Law (No 13 of 2006) provides incentives for technology-focused projects; and
3. depreciation of technology assets – technology investments may qualify for accelerated depreciation, reducing taxable income more rapidly.
• Priority sectors for technology investment:
1. IT and telecommunications – focusing on modernising infrastructure, with regulatory support and partnership opportunities; and
2. renewable energy and green technology – extended tax exemptions and grants are available for clean energy projects (eg, solar, wind).
• Limitations:
1. Iraq does not have a patent box system or advanced R&D tax credits, although businesses can benefit from general tax incentives; and
2. international businesses may receive tax relief on intellectual property (IP) income through DTTs.

Iraq provides a range of tax incentives to promote investment and economic development across various industries. These incentives are designed to support key sectors and encourage business growth.

Concerning specific industries, oil and gas businesses receive customs duty exemptions on equipment, while renewable energy projects, especially solar and wind, can benefit from up to ten years of tax exemptions and machinery import relief. Manufacturing businesses, particularly export-focused ones, also receive favourable tax treatment.

Transaction incentives include reduced WHTs for infrastructure financing and tax holidays for public-private partnerships in sectors like transportation and healthcare. Real estate developers in affordable housing projects can access duty exemptions on materials and partial tax relief.

SMEs benefit from simplified tax filing and grants, while technology businesses can deduct research expenses. Agriculture also receives support through tax exemptions on farming income and machinery.

Regional incentives offer extended tax holidays and customs exemptions, with even more favourable terms in the Kurdistan Region of Iraq, such as ten-year corporate tax exemptions and reduced regulations to encourage investment.

The basic rules on loss relief are as follows:

• loss carry forward – losses incurred in a tax year can be carried forward and offset against taxable profits in future years (limited to five years);
• loss carry back – Iraq does not allow businesses to carry losses back to offset profits from previous tax years;
• offset of losses – business losses can generally be offset against business income in future years, but cannot typically be offset against capital gains as these are treated separately; and
• restrictions – loss relief may be disallowed if there is a significant change in ownership or business activity based on specific circumstances.

Concerning limits imposed generally on the deduction of interest by local corporations, the following applies:

• business purpose requirement – interest is only deductible if a loan was taken for business purposes and directly relates to generating taxable income;
• documentation – proper documentation, including loan agreements and payment proofs, is required to support the deduction;
• thin capitalisation rules – while there are no strict thin capitalisation rules, interest payments to related parties may be audited to ensure alignment with transfer pricing principles; and
• capitalisation of interest on loans used for acquiring or constructing capital assets must be capitalised as part of the asset’s cost, rather than deducted immediately.

Iraq does not allow consolidated tax grouping, meaning each company in a group is taxed separately. Losses from one company cannot offset the profits of another within the same group. Instead, companies must handle losses and profits independently, using loss carry forward rules to offset future income. The following applies in Iraq:

• loss carry forward – losses can be carried forward for up to five years and used to offset future taxable profits of the same company;
• intra-group transactions – transactions between group companies must comply with the arm’s length principle and be reported independently; and
• strategic structuring – companies can strategically allocate income-generating and loss-incurring activities to minimise tax liabilities.

Corporate taxation on capital gains depends on the nature of the assets sold and the company’s activities:

• depreciable assets – gains from the sale of depreciable assets are taxed at the standard CIT rate of 15%;
• shares and bonds – for non-trading activities, gains from the sale of shares and bonds not part of regular trading may be exempt from tax, whereas for trading activities, if the sale is part of regular trading, gains are taxed at the standard CIT rate of 15%; and
• oil and gas sector – companies in the oil and gas industry are taxed at a higher CIT rate of 35%, including on capital gains.

Incorporated businesses in Iraq may face various additional taxes and levies depending on the nature of the transactions and the business sector, as follows:

• WHT – payments to non-residents for services in Iraq are subject to WHT, ranging from 3% to 15%, with a standard rate of 7% for oil and gas contracts;
• stamp duty – imposed at 0.2% of the transaction value on certain legal documents and contracts;
• real estate transfer – 3% tax applies to real estate transactions when businesses buy or sell property;
• customs duties – customs duties on imported goods vary, typically ranging between 0% and 30% depending on the classification of the goods;
• sales tax – Iraq does not have VAT, but some goods and services, like telecommunications and hotel accommodations, are subject to a 5% sales tax;
• municipality taxes – renting or leasing property may incur municipal taxes, such as 10% on hotel accommodations;
• social security contributions – employers must contribute 12% of employees’ salaries to social security for payroll or employment contracts; and
• sector-specific levies – higher taxes and levies apply in the oil and gas sector (35% CIT), and specific transaction taxes or fees may apply in the banking and insurance sectors.

Incorporated businesses in Iraq face several key taxes and obligations:

• CIT – 15% on most businesses, 35% for those in the oil and gas sector;
• payroll taxes – personal income tax withheld from employee salaries, ranging from 3% to 15%;
• social security – employers contribute 12%, and employees 5%;
• customs duties – vary from 0% to 30% for imported goods;
• sales tax – 5% on certain goods and services (eg, telecommunications, hospitality);
• stamp duty – 0.2% on legal documents;
• real estate taxes – 3% transfer tax on property sales, plus annual property taxes;
• WHT: 3% to 15% on payments to non-resident entities;
• sector-specific taxes – additional taxes in the oil and gas and telecom sectors;
• municipal taxes – taxes on property leases, advertising and permits; and
• licensing fees – fees for operational licences and compliance.

Most small businesses in Iraq operate in non-corporate forms, although some opt for corporate structures depending on their size, industry and growth goals.

Non-corporate forms include:

• sole proprietorship – a simple form for small, family-run businesses, where the owner is fully liable for debts and obligations;
• general partnership – two or more individuals share resources but are personally liable for the business’s obligations; and
• limited liability partnership (LLP) – provides limited liability for some partners and is often used by professional services and family-run businesses.

Corporate forms include:

• LLC – a form used by medium-sized businesses for limited liability protection, requiring at least two shareholders; and
• JSC – a common form for larger, more capital-intensive businesses in sectors like oil and gas; JSCs are complex to manage due to stricter regulations.

There are no specific rules preventing professionals (eg, architects, engineers, consultants) from incorporating to benefit from lower corporate tax rates. However, certain general principles may apply:

• substance over form – tax authorities may challenge arrangements designed solely to reduce tax liability without a legitimate business purpose;
• corporate tax filing – incorporated businesses must comply with corporate filing requirements, maintain proper accounts and pay 15% CIT on profits;
• WHT – payments to incorporated professionals may be subject to WHT, especially for contract-based services; and
• personal income tax – salaries or dividends drawn by a professional from the company are taxed at individual rates (3–15%).

There are no specific rules preventing closely held corporations from accumulating earnings for investment purposes, but certain considerations apply.

• CIT: Closely held corporations are taxed on profits, whether earnings are retained or distributed.
• Dividends and profit distribution: Shareholders are taxed on dividends at individual income tax rates. Retaining earnings may avoid immediate dividend taxes, but could raise audits if it seems the purpose is to avoid personal income tax.
• Justification for retained earnings: Retained earnings should be for legitimate business purposes, like growth or debt repayment. Excessive accumulation without a clear reason could be questioned.
• Investment income taxation: Income from retained earnings invested in assets (eg, interest, rents, capital gains) is still subject to CIT.

Individuals are taxed on dividends and gains from the sale of shares in closely held corporations as follows.

• Dividends: Gains from selling shares are usually exempt unless part of regular trading or business activities.
• Gains on the sale of shares:
1. exempt from tax – gains from selling shares are usually exempt unless part of regular trading or business activities; and
2. taxable – if the individual is regularly trading shares as a business, the gains are subject to individual income tax at progressive rates (3% to 15%).

Individuals are taxed on dividends and gains from publicly traded corporations as follows:

• dividends – generally, dividends received by individuals from publicly traded corporations are exempt from tax; and
• gains on the sale of shares – gains from the sale of shares in publicly traded corporations are typically tax-exempt for individuals.

WHTs in Iraq apply to payments made to non-residents for interest, dividends and revenues as follows:

• WHTs:
1. interest – generally 15%, unless reduced by an income tax treaty;
2. dividends – there is no WHT on dividend payments, even for non-residents; and
3. revenues – 15% WHT on payments to non-residents.
• Reliefs available:
1. income tax treaties – reduced WHT rates or exemptions may apply if a treaty exists; and
2. exemptions for local transactions – certain local transactions may not attract WHT.
• Focus areas for enforcement:
1. oil and gas – strict enforcement, especially for international contracts; and
2. large construction and service contracts – payments to foreign contractors are audited for WHT compliance.

Concerning WHT collection, the following applies:

• strict audits – tax authorities audit payments to ensure proper WHT deduction;
• payment withholding – payments to non-residents may require proof of WHT deduction before processing; and
• fines and penalties – non-compliance can lead to penalties, fines and delays in transactions.

Iraq has a limited number of tax treaties, and foreign investors often use bilateral agreements to optimise tax treatment when investing in Iraq. Key treaty countries include:

• United Kingdom – reduces WHTs on interest, revenues and other income;
• France – offers tax relief on cross-border transactions and investments;
• Turkey – popular for regional investors due to economic ties;
• Jordan and Egypt – frequently used by Middle Eastern investors due to strong trade relationships; and
• United Arab Emirates – encourages investment in Iraq’s corporate and debt markets.

Benefits of tax treaties include:

• reduced – or exemption from – WHTs on interest, dividends and revenues; and
• avoidance of double taxation, ensuring income is not taxed in both Iraq and the investor’s home country.

Local tax authorities may challenge the use of treaty country entities by non-treaty country residents if they suspect such use is solely for tax benefits. Iraq lacks anti-avoidance laws, and authorities rely on the following general principles.

• The substance over form principle: authorities may investigate whether the treaty country entity has a legitimate business purpose and real economic substance or is just a shell for tax benefits.
• Beneficial ownership: authorities may challenge treaty benefits if the entity receiving income is not the beneficial owner, but rather just a conduit for a non-treaty resident.
• Focus areas: payments such as dividends, interest and revenues are audited to ensure proper treaty benefits. The oil and gas sector is a key focus for tax rule enforcement, including treaty abuse prevention.
• Consequences of challenges: If misuse is detected, the entity may lose treaty benefits, and WHT could be charged at full domestic rates.

Transfer pricing regulations in Iraq are underdeveloped compared to global standards, which may create challenges for inbound investors. Transfer pricing issues include the following.

• Lack of formal transfer pricing rules: Iraq does not have transfer pricing regulations aligned with global frameworks, creating uncertainty regarding how related-party transactions are assessed.
• Key issues:
1. related-party transactions – payments for goods, services or revenues between local corporations and foreign affiliates may be audited;
2. management fees and revenues – authorities may challenge excessive charges for management or IP; and
3. intercompany financing – interest rates on loans from parent companies must be justifiable, or deductions may be disallowed.
• Enforcement risks: Enforcement is inconsistent but tax authorities may audit intercompany pricing, especially in sectors like oil and gas and large-scale infrastructure, and adjust taxable income.
• Documentation challenges: There are no formal requirements for transfer pricing documentation.

Iraq’s tax authorities do not have detailed transfer pricing rules to specifically challenge related-party limited risk distribution (LRD) arrangements, but general principles could lead to audits:

• key concerns – profit shifting, arm’s-length principle, tax base erosion;
• areas of auditing – management fees and revenues, pricing of goods/services;
• enforcement practices – inconsistent approach, focus on high-value industries; and
• risk mitigation – making sure the local entity’s role and risk match its profits, keeping contracts and documents showing fair pricing and following global guidelines, like OECD rules.

Iraq’s transfer pricing rules differ from global standards, like the OECD standards, due to the lack of formal regulations:

• no detailed rules – Iraq lacks specific laws or guidelines for transfer pricing;
• arm’s-length principle – this is not strictly applied, and tax authorities may challenge related-party transactions based on fairness;
• enforcement – typically triggered by audits, especially in sectors like oil and gas, with no set methods applied;
• no documentation requirements – Iraq does not require detailed records, unlike the OECD, but companies should still keep internal documentation to defend their pricing if challenged; and
• focus on profit allocation – tax authorities may review whether profits are reasonable based on the company’s activities, without following detailed OECD analysis methods.

Iraq’s tax authorities are not very aggressive with respect to transfer pricing due to a lack of detailed rules, though audits are increasing in some sectors. However, tax authorities can use new information found during audits to re-assess past years, especially if profit shifting is suspected.

Mutual agreement procedures (MAPs) are infrequently used in Iraq because there are few tax treaties and a lack of transfer pricing frameworks. While Iraq may sometimes participate in MAPs, it prefers handling disputes locally and is not proactive in initiating MAPs.

Due to limited enforcement and tax treaties, MAPs are rare in Iraq. However, if transfer pricing enforcement increases and cross-border transactions grow, MAPs could become more relevant.

In Iraq, compensating adjustments for related-party pricing discrepancies are not explicitly addressed in tax laws:

• lack of specific rules – there are no formal transfer pricing regulations in Iraq that require or allow compensating adjustments;
• practical approach – any adjustments are made on a case-by-case basis during audits or disputes;
• double tax risk – without compensating adjustments, there is a risk of double taxation if another jurisdiction does not recognise Iraq’s adjustments; and
• MAP – if a tax treaty exists, the taxpayer may attempt to resolve double taxation via a MAP, though such cases are rare in Iraq.

In Iraq, local branches and local subsidiaries of non-local corporations are taxed differently:

• local branches of non-local corporations – Iraq-sourced income is taxed at 15% (standard rate) or 35% (in the oil and gas sector), and there may be additional WHT when profits are transferred to the foreign parent; and
• local subsidiaries of non-local corporations – taxed on global income sourced in Iraq (15% standard rate, 35% in the oil and gas sector), and there may be WHT on dividends to the foreign parent.

Regarding key differences, branches are taxed on Iraqi income, while subsidiaries are taxed on global income. Branches transferring profits directly to the parent may be subjected to local tax, as well as subsidiaries distributing profits as dividends.

Non-residents are taxed on capital gains from the sale of stock in local corporations, and gains are taxed at the 15% CIT rate for non-residents.

Concerning indirect capital gains, Iraq does not specifically tax capital gains from the sale of shares in a non-local holding company that owns stock in a local corporation; tax authorities may challenge such structures if they believe they are designed to avoid local tax.

Tax treaties with Iraq may offer exemptions or reduced rates on capital gains from local stock, depending on the treaty’s terms. Most treaties do not cover indirect capital gains, so these may not benefit from treaty provisions.

Changes in ownership of a company may trigger tax or duty charges.

Direct Change of Control

A direct sale of shares in a local corporation may trigger a 15% capital gains tax for the seller (if taxable in Iraq). Legal documents related to the transfer may incur a stamp duty (eg, 0.2% of the transaction value).

Indirect Change of Control

Iraq may not tax the indirect transfer of ownership through a sale of shares in an overseas holding company. However, authorities may investigate if such structures are used to avoid local taxes, though enforcement is limited.

Key Focus Areas

Transactions in the oil and gas sector may face additional auditing to ensure local tax obligations are met. Authorities may challenge indirect transfers if structured solely for the purpose of tax avoidance.

Iraq does not use fixed formulas to determine the income of foreign-owned local affiliates, but may estimate income if records are insufficient.

Simplified Methods

If documentation is lacking, tax authorities may estimate taxable income using practical or negotiated methods.

Arm’s-length principle

Although transfer pricing rules are not in place, Iraq expects related-party transactions to reflect market-based pricing.

Case-specific adjustments

During audits, authorities may use rough calculations or local data to assess income, particularly if profits seem artificially low. Proper documentation is important to avoid disputes.

Deductions for management and administrative expenses paid by local affiliates to non-local affiliates are allowed under certain conditions.

• Reasonableness standard: Expenses must be reasonable and reflect the actual benefit to local affiliates. Excessive charges may be disallowed.
• Documentation: For deductions, local affiliates must provide proof, such as invoices, agreements and payment evidence. Without documentation, deductions are likely to be denied.
• Arm’s-length principle: Payments should be made at market rates for similar services, even though Iraq lacks formal transfer pricing rules.
• Auditing: Tax authorities may audit payments to confirm they are being used to shift profits out of Iraq.

Related-party borrowing by foreign-owned local affiliates from non-local affiliates is generally allowed in Iraq considering the following:

• arm’s-length principle – interest rates must be reasonable and reflect market rates;
• deductibility of interest – interest payments are deductible for tax purposes if directly related to business and properly documented with loan agreements and payment records;
• no thin capitalisation rules – Iraq does not have formal thin capitalisation rules, so there is no strict debt-to-equity ratio limit for related-party borrowing; and
• potential auditing – tax authorities may review loans for profit shifting.

Foreign income of local corporations is not exempt from corporate tax.

• Tax on global income: Local corporations are taxed on their worldwide income, including foreign income.
• Tax rate: The standard rate of 15% applies to foreign income. For oil and gas companies, the rate is 35%.
• Relief for double taxation: If foreign income is also taxed in another country, Iraq may allow a tax credit or deduction to avoid double taxation, depending on the circumstances.

Foreign income is taxable in Iraq, meaning there are no special rules for non-deductible expenses attributed to foreign income. Local expenses related to foreign income are generally deductible if they are directly related to generating taxable income and properly documented.

Dividends from foreign subsidiaries of local corporations are treated as taxable income. Income received by a local corporation from its foreign subsidiaries is included in the corporation’s worldwide taxable income. The tax rate is 15%, except for oil and gas companies, where it is 35%.

If dividends were taxed in the foreign subsidiary’s country, Iraq may allow a tax credit or deduction to avoid double taxation, up to the amount of tax payable in Iraq on the same income.

Intangibles developed by local corporations have potential tax implications if used by non-local subsidiaries.

• Any revenue from licensing an intangible to a non-local subsidiary is taxed at 15%.
• If an intangible is sold or transferred, the local corporation is taxed on capital gains at 15%. The gain is the difference between the sale price and the intangible’s book value.
• If the intangible is shared without payment or commercial benefit, there may be immediate tax, but tax authorities could investigate potential profit shifting.

Iraq does not have controlled foreign corporation (CFC) rules. Local corporations may be taxed on the income of their non-local subsidiaries when earned.

Income from non-local branches is included in the local corporation’s global income and taxed in Iraq at the standard tax rate of 15% (35% for oil and gas companies). There is no deferral; income is taxed as it is earned.

Iraq does not have specific rules requiring non-local affiliates to maintain a certain level of substance. However, under general principles, tax authorities may challenge transactions with non-local affiliates if they believe any such affiliate lacks economic substance and is being used for tax avoidance.

Key focus areas include payments to non-local affiliates, such as management fees or interest, which may be audited if the affiliate lacks real operations. There are no transfer pricing rules, but related-party transactions must be reasonable and commercially justifiable.

Local corporations in Iraq are taxed on gains from the sale of shares in non-local affiliates as follows.

• Taxable as income: Gain is included in the corporation’s worldwide taxable income, calculated as the sale price minus the cost basis of shares.
• Tax rate: Gain is taxed at the standard tax rate of 15%. For oil and gas corporations, the rate is 35%.
• Relief for double taxation: If gain is taxed in the country where the affiliate is located, Iraq may allow a tax credit or deduction to avoid double taxation, subject to limits.

Iraq does not have formal anti-avoidance provisions, but certain general principles apply:

• tax authorities may disregard arrangements that lack economic substance or are structured solely for tax avoidance purposes, focusing on the true economic intent of transactions;
• there are no transfer pricing rules, but related-party transactions must reflect reasonable market terms; and
• deliberate misrepresentation or hiding of income can lead to penalties or criminal charges under general tax laws.

Iraq does not have a fixed routine audit cycle; tax authorities audit based on triggers or priorities.

• Audit triggers: Industries like oil and gas and construction are more likely to be audited. Large deductions, related-party transactions or tax return irregularities may trigger audits. Some audits may be conducted randomly.
• Audit process: Tax authorities issue a notice requesting records and explanations. Authorities examine financial statements, contracts and other documents. If discrepancies are found, adjustments and additional taxes or penalties may apply.

• Frequency: Audits occur periodically based on the company’s profile and risk factors.

Iraq’s tax system is still developing, and while it has not fully implemented BEPS recommendations, some of its practices align with BEPS principles:

• transfer pricing – Iraq expects related-party transactions to reflect market-based pricing;
• tax treaty use – Iraq’s tax treaties may include measures to prevent treaty abuse;
• profit allocation – authorities may review profit allocation, especially in key sectors; and
• ongoing improvements – Iraq has not yet adopted some key BEPS measures, such as country-by-country (CbC) reporting and interest deduction limitations.

Concerning the government’s approach to base erosion and profit shifting (BEPS), Iraq has not fully implemented BEPS recommendations yet, as its tax system is still evolving. The government is focused on ensuring compliance and enforcement.

Iraq is unlikely to adopt Pillar One soon, as it requires advanced systems to allocate taxing rights for multinational corporations. Regarding Pillar Two, Iraq may consider implementing a global minimum tax if international pressure increases.

The adoption of Pillar One or Two in Iraq is likely to occur several years after global implementation, as the country updates its laws and systems. Changes could impact the oil and gas sector by increasing taxes on multinational companies, which may raise revenue but could also affect foreign investment.

The Iraqi government aims to prevent tax evasion and profit shifting, especially in critical sectors. It plans to gradually align with international tax standards to improve co-operation and transparency.

International tax attracts limited attention in Iraq, so the implementation of BEPS is unlikely to be driven by public demand. The government’s focus will likely remain on revenue collection from key industries rather than aligning fully with BEPS reforms.

International tax issues, including BEPS, have a low public profile in Iraq; the focus is on domestic tax collection and compliance. There is limited pressure for quick BEPS adoption as international tax is not a significant public concern. The government’s priorities, such as taxing multinational corporations, may influence the pace of BEPS implementation more than public opinion.

Iraq’s tax policy will likely slow full BEPS adoption as it focuses on attracting investment. Iraq wants to attract foreign investment by keeping corporate tax rates low, and will focus on tax policies that are friendly to investors while slowly adopting BEPS measures. Iraq will gradually implement BEPS changes, balancing the need for tax revenue with the desire to remain attractive to foreign investors.

Iraq’s tax system has some vulnerabilities, especially in terms of sector-specific incentives and weak transfer pricing enforcement. While there are no formal state aid rules, tax incentives could be questioned internationally as Iraq moves towards global tax standards.

• Vulnerable features:
1. Iraq offers tax breaks in specific sectors, but these could be questioned if seen as too preferential;
2. the lack of formal rules makes it easier for companies to shift profits and erode the tax base; and
3. inconsistent enforcement of tax rules could allow multinational companies to exploit loopholes.
• State aid: Iraq does not have state aid rules, but its tax incentives could be criticised if they unfairly favour specific investors.
• Experience with rules: Tax rules mainly support foreign investment in oil and gas. There have been few challenges to Iraq’s tax policies so far, as the system is still evolving.

Iraq currently does not regulate hybrid instruments, and implementing related BEPS recommendations is not a priority for the country. If adopted, these rules would likely first target specific high-priority sectors. Iraq has no specific laws for hybrid instruments, which are treated differently in various jurisdictions.

BEPS Actions recommend eliminating the tax advantages of hybrid instruments by ensuring consistent treatment. Iraq has not yet adopted this approach. If Iraq adopts BEPS changes, they will likely focus on sectors like oil and gas. The adoption will be gradual and may take years. Iraq lacks detailed frameworks for international tax issues, making it difficult to implement BEPS rules on hybrid instruments. Enforcement may also be inconsistent due to limited resources.

Iraq does not have a territorial tax system or specific rules on interest deductibility. If BEPS recommendations on interest deductibility are adopted, they could affect debt-financed investments. Iraq operates a worldwide tax system, taxing both domestic and foreign income for local corporations.

Iraq lacks specific restrictions on interest deductibility, such as thin capitalisation or EBITDA-based limits. For inbound investors, new interest deduction restrictions could make debt financing less attractive, whereas outbound investors – ie, Iraqi companies investing abroad, may face stricter audits on cross-border interest payments if other countries adopt BEPS recommendations.

Iraq does not have a territorial tax system, so CFC rules are not currently applicable. However, adopting CFC rules could help prevent tax avoidance. Concerning potential benefits, CFC rules could prevent profit shifting by taxing the undistributed foreign income of local corporations’ subsidiaries, helping protect the local tax base. As potential issues, Iraq lacks the infrastructure to implement and enforce CFC rules effectively. Overly complex rules could discourage foreign investment if they are seen as burdensome or unclear.

Iraq has a limited number of DTTs with countries like the UK, France and Turkey. These treaties have minimal limitation on benefits (LOB) or anti-avoidance rules, but these may apply in certain cases. The impact on inbound investors is minimal as LOB clauses in Iraqi treaties are not strict. Investors can usually access treaty benefits without issues. For Iraqi outbound investors, LOB or anti-avoidance rules in the treaties of other countries could limit access to reduced tax rates or exemptions.

BEPS changes have had minimal impact in Iraq due to the lack of formal transfer pricing rules. While the arm’s-length principle is informally expected, enforcement is inconsistent.

Iraq does not have specific rules for taxing IP. This creates challenges in regulating IP-related transactions.

Iraq has not yet implemented CbC reporting or detailed transparency measures – the focus remains on basic tax enforcement. CbC reporting could improve tax oversight by identifying profit shifting and ensuring multinationals pay taxes where profits are generated.

Iraq faces administrative capacity challenges, lacking the infrastructure and expertise for large-scale reporting systems. A more gradual approach could involve focusing on sector-specific audits and strengthening local tax enforcement in high-risk industries.

Iraq does not have specific tax rules for digital economy businesses. The tax system still focuses on businesses with a physical presence, like PEs, making it challenging to tax digital businesses without a local base.

There has been minimal discussion regarding taxing digital economy businesses, although Iraq may consider adopting international guidelines (such as BEPS Pillar One) in the future. Iraq’s tax authorities lack the infrastructure to monitor or tax foreign digital businesses.

Iraq has not yet addressed digital taxation, focusing instead on traditional businesses that require a physical presence. There have been no proposals or discussions regarding digital taxation.

Iraq lacks the capacity to monitor or tax digital transactions effectively, although it may adopt global standards in the future, like BEPS Pillar One.

Iraq applies a 15% WHT on revenue payments for the use of offshore IP. There are no special rules for taxing offshore IP or IP owners. WHT is applied at the point of payment, and the IP owner is taxed directly if they have a PE in Iraq. Double tax treaties may reduce or eliminate the WHT on revenues payments, depending on the treaty terms.