27 December 2018 Global Tax Alert Jordan amends Income Tax Law NEW! EY Tax News Update: Global Edition EY s new Tax News Update: Global Edition is a free, personalized email subscription service that allows you to receive EY Global Tax Alerts, newsletters, events, and thought leadership published across all areas of tax. Access more information about the tool and registration here. Also available is our EY Global Tax Alert Library on ey.com. Executive summary The Jordanian Parliament has approved modifications to Jordan s current Income Tax Law No. 34 of 2014. The modifications were published in the Official Gazette on 2 December 2018 with an effective date of 1 January 2019, putting into effect Jordan s new Income Tax Law No. 38 of 2018 (the New Income Tax Law). The New Income Tax Law affects a broad range of tax aspects applicable to corporations and individuals. This includes changes to corporate income taxes, withholding taxes, personal income taxes, penalties, and taxation in the Development Zones and Free Zones. The New Income Tax Law also imposes a new national contribution tax that will be levied upon the income of corporations and certain high-earning individuals in conjunction with income taxes. This Alert summarizes the key changes.
2 Global Tax Alert Detailed discussion Corporate income tax Tax rates The New Income Tax Law maintained the current tax rates for most sectors, except for companies engaged in certain industrial activities. Under the New Income Tax Law, certain industrial activities which were previously taxed at a flat rate of 14% will now be subject to varying tax rates that will gradually increase with the passage of time as shown in the table below: Tax year Industrial, pharmaceutical and clothing activities Effective tax rate All other industrial activities Effective tax rate 2019 10% 15% 2020 14% 16% 2021 16% 17% 2022 18% 18% 2023 19% 19% 2024 20% 20% Furthermore, activities in the agricultural sector that were previously tax-exempt will now be subject to tax at a rate of 20% as follows: For corporations, net income exceeding JOD50,000 will be taxable. For natural persons, sales exceeding JOD1 million will be taxable. For completeness, the tax rates applicable to the remaining sectors which were kept the same are as follows: Sector Tax rate Banking 35% Electricity generation 24% Basic mining companies 24% Finance, financial intermediary and financial leasing 24% Telecommunication 24% Insurance and reinsurance 24% Other sectors 20% Tax rates in the Development Zones Under the current Jordanian Investment Law No. 30 of 2014 (the Investment Law), income generated by an entity registered in the Development Zones in respect of activities undertaken inside the Development Zone is subject to a unified tax rate of 5%. However, the New Income Tax Law modifies the tax rates applicable to entities operating in the Development Zones depending on the source of the income, as follows: Transformational industrial activities with a total local value-added of at least 30%: 5% Other projects and activities: 10%
Global Tax Alert 3 Tax rates in the Free Zones Under the Investment Law, entities registered in the Free Zones benefited from a tax exemption in respect of income earned from: (i) activities conducted within the borders of the Free Zones; (ii) the export of goods and services outside the Kingdom; and (iii) transit trade. However, under the New Income Tax Law, profits earned by entities registered in the Free Zones that undertake an industrial activity or any other activity pertaining to the sale, disposal, or importation of goods and services within the borders of the Free Zones will now be subject to tax based on the normal income tax rates applicable to each entity depending on its status (corporation or individual). The New Income Tax Law does not remove the tax exemptions applicable to the export of goods and services outside the Kingdom and transit trade; therefore, these tax exemptions should continue to apply. National contribution tax applicable to corporations A new national contribution tax will now be imposed on the taxable income of all corporations in Jordan, with the resulting additional tax collections designated to paying off the national debt. The national contribution tax rates vary from 1% to 7% and will be levied in conjunction with the standard corporate income tax as shown in the table below. Sector National contribution tax Standard corporate income tax Effective corporate tax rate Basic mining companies 7% 24% 31% Finance, financial intermediary and financial leasing 4% 24% 28% Banking 3% 35% 38% Electricity generation 3% 24% 27% Telecommunication 2% 24% 26% Insurance and reinsurance 2% 24% 26% Other sectors 1% 20% 21% Transfer of shares Capital gains realized from the transfer of shares by a corporate entity will be subject to the applicable corporate income tax rate depending on the type of activity in which the company engages. In addition, except for the first sale, capital gains derived from the sale of shares of Information Technology companies and institutions that deal with creating, processing, and storing information using electronic means and software are subject to tax at the applicable corporate income tax rate if the sale occurs after the lapse of 15 years from the date of establishment of such companies. The mechanism for application of this tax, including the tax rate, is expected to be clarified in forthcoming instructions. Capital gains resulting from such share transfers were previously not subject to tax. Dividends or profit distributions Under the New Income Tax Law, dividends received by banks, main telecommunication companies, basic mining companies, insurance companies, reinsurance companies, financial intermediary companies, financial companies, and legal persons engaged in financial leasing activities will be taxable at the corporate income tax rate that corresponds to the recipient s industry. However, if a company owns at least 10% of another company s capital, distributions of profits will be subject to tax at a rate not exceeding 10%. Distributions to other shareholders will remain exempt from tax. The New Income Tax Law is silent on whether profit distributions made by a branch to its foreign head office will be subject to tax.
4 Global Tax Alert Deemed corporate income tax liability According to the New Income Tax Law, the Income and Sales Tax Department (ISTD) may apply, on a deemed basis, a tax retention of at least 1% of the sales proceeds or revenues of any taxpayer whose sales or revenues do not exceed JOD150,000 in a tax year. The interpretation and treatment of this principle should be elaborated in forthcoming instructions. In addition, if a partnership does not maintain proper accounting books and records and audited financial statements, the ISTD will deem a corporate income tax liability at a minimum of JOD500. Taxation of e-commerce The New Income Tax Law makes income generated from the electronic trade in goods and services one of the sources of income taxable in Jordan. Thin capitalization rules Under the New Income Tax Law, a 3:1 debt-to-equity ratio rule will apply to related-party debt. Accordingly, interest paid on related-party debt exceeding this ratio will not be deductible for tax purposes. Withholding tax on interest The withholding tax rate applicable to interest paid by banks to corporate depositors, except for interest on local interbank deposits, has increased from 5% to 7%. For natural persons, the withholding tax rate applicable remains at 5%. Personal income tax The New Income Tax Law has reduced the amount of exemptions available to natural persons and adjusted the treatment of the end of service benefit and pension in arriving at taxable income. Furthermore, modifications have been made to the tax brackets and rates applicable when calculating the personal income tax liability, and a new national contribution tax has been introduced and made applicable to the net income of high-earning individuals. Exemptions Category Previous exemptions (JOD) New exemptions (JOD) 2019 2020 onwards Personal exemption 12,000 10,000 9,000 Dependents exemption 12,000 10,000 9,000 Additional exemptions for medical expenses, educational expenses, rent, home loan interest, and murabaha 4,000 1,000 for each child up to 3,000 1,000 for the individual, 1,000 for the spouse, and 1,000 for each child up to 3,000 End of service benefit and pension The New Income Tax Law changes the tax treatment of the end of service benefit (EOSB) paid to an employee upon termination of service as follows: EOSB in respect of services provided before 31 December 2009: 100% is tax-exempt EOSB in respect of services provided between 1 January 2010 and 31 December 2014: 50% is tax-exempt, and 50% is taxable at 9% EOSB in respect of services provided from 1 January 2015 onwards: 100% of the first JOD15,000 is tax-exempt, and the remaining amount is taxable at 9%
Global Tax Alert 5 In addition, the New Income Tax Law exempts from tax the first JOD2,500 of an individual s monthly pension. Brackets and rates of personal tax Previous law 7% on the first JOD10,000 14% on the next JOD14,000 20% on amounts exceeding JOD20,000 New law 5% on the first JOD5,000 10% on the next JOD5,000 15% on the next JOD5,000 20% on the next JOD5,000 25% on amounts exceeding JOD20,000 and up to JOD1 million Net income of a natural person exceeding JOD1 million will be taxed at a flat rate of 30%. National contribution tax applicable to individuals A new national contribution tax at a rate of 1% will now be imposed on the taxable income of natural persons exceeding JOD200,000. Penalties Late filing penalties The New Income Tax Law applies the following penalties for each late annual tax filing: JOD100 for natural persons (unchanged from previous law) JOD1,000 for private and public shareholding companies (previously JOD500) JOD300 for all other entities (previously JOD200) Understatement of income penalties The New Income Tax Law increases the penalties and the imprisonment period pertaining to the recurrent understatement of income by taxpayers. For additional information with respect to this Alert, please contact the following: Ernst & Young (Jordan), Amman Bishr Baker Ali Samara Jacob Rabie, MENA Tax Quality Leader Yousef Al-Hasani Mohammad Freihat bishr.baker@jo.ey.com ali.samara@jo.ey.com jacob.rabie@jo.ey.com yousef.al-hasani@jo.ey.com mohammed.freihat@jo.ey.com Ernst & Young LLP, Middle East Tax Desk, Houston Gareth Lewis gareth.lewis1@ey.com
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