Splitting supply and installation contracts in Iraq is a familiar structuring technique for foreign companies that sell equipment and related services to Iraqi customers. Instead of a single lump-sum contract, the parties sign separate contracts, or a single contract with separately priced components, for offshore supply of equipment, onshore installation and commissioning, and ongoing support or maintenance. The aim is to align the tax treatment of each component with where and how it is performed, so that the offshore supply of goods is not taxed as if it were Iraqi service income.
The technique is legitimate when it reflects commercial reality. It becomes risky when the split is artificial: when the supply price is inflated to reduce the value of onshore services, when the same entity performs all components in Iraq or when the documents do not match what actually happens. The Iraqi tax authority may then disregard the split and tax the whole contract value on a less favourable basis.
The Income Tax Law No. 113 of 1982, as amended, taxes income arising in Iraq, including income from services performed in Iraq, and is administered by the General Commission for Taxes. Customs legislation governs the import of goods, and customs records may be compared with contract prices. The Foreign Oil Companies Income Tax Law No. 19 of 2010 applies to oil and gas contracts. Kurdistan Region applies its own instructions, including deemed profit rates that vary by contract type. Public procurement rules may influence how contracts with government entities are structured.
Why splitting supply and installation contracts in Iraq matters
Different components of a contract may be taxed differently. Income from the sale of goods delivered from abroad may not be treated as Iraqi-source business income in the same way as fees for services performed in Iraq. Installation, commissioning and training performed by personnel in Iraq are more clearly connected with Iraq. Support services may be performed partly remotely and partly on site. Where a single price covers everything, the tax authority may apply the treatment applicable to services to the whole amount, or apply a deemed profit rate to total revenue.
The requirement of commercial substance
A split is defensible only if it reflects how the transaction really works. Indicators of substance include:
- Separate obligations. Distinct deliverables, acceptance procedures and warranties for each component.
- Separate performance. Supply performed outside Iraq, with title and risk passing as specified; installation performed in Iraq by identified personnel.
- Market-based pricing. Prices for each component consistent with what independent parties would agree, supported by price lists, quotations or benchmarks.
- Separate invoicing and payment. Invoices and payments that follow the split.
- Consistent documents. Customs declarations, shipping documents and project records that match the contract.
Pricing evidence
Pricing is the most frequent point of challenge. If equipment is priced well above its usual market price while installation is priced at a nominal amount, the authority may conclude that part of the equipment price is really payment for services. Companies should retain evidence supporting each component's price, such as published price lists, comparable sales, cost build-ups and margins. Customs values for imported equipment should be consistent with the supply price.
Choice of contracting entities
Some companies use different entities for each component: a foreign entity for offshore supply and a local branch or subsidiary for installation and support. This can reinforce the split, but only if each entity genuinely performs its component. If personnel of the foreign entity perform installation, the foreign entity may have a taxable presence regardless of the contract structure. Corporate advice in Iraq can help structure contracting entities.
Support and maintenance contracts
Support services often combine remote assistance, software updates and on-site visits. The contract should describe each element and how it will be delivered, and records should show where support was actually performed. Software licences included in support may raise separate characterisation questions.
Customer perspective
Iraqi customers, particularly public bodies, may have their own procurement rules and may prefer a single contract or a particular structure. They may also deduct retentions on the total value. Negotiating the structure early, and explaining its basis, helps align the customer's processes with the split. Commercial contract advice in Iraq can assist with negotiation and drafting.
Records during performance
The split must be supported throughout performance. Shipping documents, customs clearances, delivery and acceptance certificates for supply, timesheets and site records for installation, and service logs for support should be retained and organised by component. These records will be the basis of any defence if the authority questions the split.
Kurdistan Region considerations
In Kurdistan Region, deemed profit rates may differ by type of contract or component, so the characterisation of each component directly affects the tax due. Companies should confirm how the Region's authority will classify each component.
When splitting is not appropriate
Splitting is not suitable for every transaction. Where the equipment is customised and cannot function without installation by the supplier, where the customer contracts for a turnkey result with a single performance guarantee, or where the supplier's personnel perform most of the value in Iraq, an artificial split is likely to be disregarded. In those cases, the supplier may be better served by registering locally, accepting that the contract will be taxed in Iraq on an appropriate basis, and focusing on maintaining accounts that support taxation on actual profit rather than deemed profit.
Practical checklist
- Confirm that each component is a distinct obligation with its own deliverables.
- Price each component using market evidence, consistent with customs values for imported goods.
- Assign each component to the entity that will actually perform it.
- Align invoices, payment milestones and acceptance certificates with the split.
- Keep shipping, customs, site and timesheet records organised by component.
- Discuss the structure with the customer early, particularly public bodies with fixed procurement forms.
- Review the split if the scope or delivery model changes during the project.
Illustrative example. A foreign manufacturer sells a water treatment plant to a governorate. Its first draft contract shows a single price covering equipment, installation and two years of maintenance. On advice, it restructures into three priced components: equipment supplied from abroad at its standard export price, installation by its Iraqi branch at a price based on labour and cost, and maintenance through the branch with a defined schedule of on-site visits. Customs declarations reflect the equipment price, and the branch keeps timesheets for installation and maintenance. When the tax authority reviews the branch, it accepts the split, taxing the branch on the installation and maintenance income.
Key takeaways
- Splitting supply and installation contracts in Iraq is defensible only when it reflects commercial substance.
- Pricing of each component should be supported by market evidence and consistent customs values.
- Each component should be performed, invoiced and documented as the contract describes.
- The entity performing work in Iraq may have a taxable presence regardless of contract structure.
How Etihad Can Help?
Properly structured, splitting supply and installation contracts in Iraq aligns tax with the reality of performance. The key is substance: separate obligations, market-based pricing and consistent records.
Etihad Law Firm advises foreign suppliers and contractors on contract structuring, tax analysis and documentation for Iraqi projects. We help clients design splits that hold up under review.