| Taxation |
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| Introduction |
In an apparent effort to attract foreign investment to and stimulate commerce within
Kuwait, The Kuwaiti National Assembly approves a bill that was subsequently
issued by the Amir of Kuwait Sabah Al-Ahmed Al-Jaber Al-Sabah in January 2008
as Law No. (2) of 2008 concerning the amendment to certain provisions of Kuwait
Income Tax Decree No. (3) of 1995. On 20th July 2008, the Ministry of Finance
issued the regulations implementing the New tax regime.
As a general rule, individuals (Kuwaiti or foreign nationals) are not subject to taxes
on income. Also, Kuwaiti companies are not subject to taxes on income. A foreign
company engaged in commercial activities in Kuwait (in a direct or indirect way) is
subject to income tax. Corporate income tax is not levied on the income of
companies incorporated in the Gulf Cooperation Council (GCC) countries from
their operations in Kuwait. |
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| Sources of Tax Law |
| Law No. (2) of 2008 concerning the amendment to certain provisions of Kuwait
Income Tax Decree No. (3) of 1995.Taxation in Kuwait is governed by the Tax
Decree (Decree No.3 of 1995) and various tax treaties with foreign countries
covering income. The Tax Decree is supplemented by several directives issued by
the Director of Income Taxes. |
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| Tax Authority |
| The Director of Income Taxes administers the tax law in Kuwait. |
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| Filing, Payment and Assessment Procedures |
The Gregorian calendar year, which ends 31 December, is generally used for
Kuwaiti tax purposes, but a taxpayer may request in writing to prepare financial
statements for a year-end other than 31 December. For the first or last period of
trading or carrying on a business, the taxpayer may be allowed to file a tax declaration for a period of up to 18 months. For this purpose, the formal approval of
the Director of Income Taxes should be obtained well in advance.
A tax declaration must be filed on or before the fifteenth day of the fourth month
following the end of the tax period (for example, 15 April in the case of a 31
December year-end). Tax is payable in four equal installments on the fifteenth day
of the fourth, sixth, ninth and twelfth months following the end of the tax period. In
exceptional cases, an extension of up to 75 days may be granted for the purpose
of filing audited accounts. Consequently, for companies with a 31 December yearend
an extension may be granted until 30 June. If such an extension is granted, no
tax payment is necessary until the declaration is filed, and payment must then be in
one lump sum and not in installments. The tax is payable in KDs with a certified
cheque drawn on a Kuwaiti bank.
The tax declaration, supporting schedules and financial statements, all of which
must be in Arabic, are to be 'reported on' by a Kuwait-based accountant who is
registered with the Ministry of Commerce and Industry (that is, the accountant
indicates that the tax declaration is in compliance with the tax law and prepares an
audit report). |
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| A. Taxes payable |
| Federal taxes and levies |
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| Corporate taxation: |
The Tax Decree of 1955 (Amiri Decree No 3 of 1955) as amended by Law
No 2 of 2008 and the Executive Byelaw issued by the ministerial order No
29 of 2008 governs taxation in Kuwait along with various tax treaties with a
number of foreign nations. These decrees are supplemented by Directives
issued by the Director of Income Taxes. Under the above, foreign
companies described in the decree as ‘bodies corporate’ which carry on
business or trade in Kuwait are taxable.
The term ‘bodies corporate’ refers to an association that is formed and
registered under the laws of any country or state and is recognized as
having a legal existence entirely separate from that of its individual
members. Partnerships fall within this definition. No income tax is imposed
on companies incorporated either in Kuwait or in other Gulf Co-operation
Council (GCC) countries and wholly owned by nationals of Kuwait or other
GCC countries. The members of GCC are Bahrain, Kuwait, Oman, Qatar, Kingdom of Saudi Arabia and United Arab
Emirates. Under Law No 19 of 2000, a 2.5% tax is imposed on the annual
net profits of Kuwaiti companies listed on the Kuwait Stock Exchange as
National Labour Support Tax.
Foreign companies can carry on business in Kuwait either through an agent
or joint venture or as a minority shareholder in a locally registered
shareholding company. Tax is levied on the foreign company’s share of the
profit plus any amounts receivable for interest, royalties, commissions,
technical services, management fees etc. Upon commencement of
business, foreign companies are required to register themselves with
Director of Income Taxes within 30 days and apply for a Tax Card. A
taxpayer may follow one calendar year comprising 12 consecutive months
as the first accounting period. For the first and last accounting periods, it is
possible to obtain approval for a period shorter or longer than 12 months up
to a maximum period of 18 months.
A tax declaration is to be submitted in Arabic to the Director of Income
Taxes in a specified format, accompanied by audited financial statements
and other specified documents. The Director of Income Taxes requires that
the declaration and the supporting statements are certified by an accountant
in practice in Kuwait who is also registered with the Ministry of Commerce
and Industry.
If a foreign company has more than one activity in a similar line of business
in Kuwait, either directly or indirectly through subsidiary companies, income
from all activated is to be aggregated for tax purposes. |
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| Taxation
Dividends |
| Dividends paid by investment fund managers or
investment trustees to foreign companies are
subject to a 15% tax, which must be held at a
source and forwarded to the Kuwait tax
department as an advance payment of the
tax due on such dividends. |
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| Capital Gains |
| The applicable flat tax rate is 15% on taxable
income. However, no tax is payable if the
taxable income is below KD 5,250. It is possible
to pay the tax due in four equal installments if
not paid as one deposit together with the Tax
Declaration. |
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| Losses |
| Business losses can not be carried forward for
more than three years. |
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| Rate |
| Under the new tax law, a flat rate of 15% applies
(instead of a range of 0% to 55% ) |
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| Social Security |
| Social security for Kuwaiti employee is payable
by both the employer and the employee based
on the employee’s salary (up to a ceiling of KD
2,500 Per month) the contribution rates are 11%
and 7% of the employee’s salary for the
employer and employees, respectively. |
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| Personal taxation: |
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There is no personal income/wealth tax in Kuwait. |
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Social Security Kuwaiti employees must contribute 7 % of salary to
the Public Institution for Social Security, the employer also contributes
11%. |
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| B. Determination of taxable income |
| Tax liabilities are generally computed on the basis of profits disclosed in
audited financial statements adjusted for tax depreciation and other
deductions of all expenses and costs spent on realizing such income. The
tax inspector has a right to disallow any expenses that are deemed
excessive on inspection conducted during assessment. |
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| Gross income: |
| Gross Income will include: |
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income derived from rendering of services in Kuwait |
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Income from leasing of property located in Kuwait |
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Income from operating any manufacturing, industrial, or commercial
enterprise in Kuwait |
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Income from purchasing and selling property, goods and maintaining a
permanent office in Kuwait where contracts of purchase and sale are
executed |
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Income earned from selling, renting etc any trade mark, design or
copyright |
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Profits from disposal of assets |
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Commissions from representation or brokerage |
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Profits from any contracts performed in Kuwait. |
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| Deductions: |
Tax Depreciation: The permissible rates of depreciation, applied using the
straight-line method, include 4% a year for building, 20% for plant and
machinery, 15% to 20% for motor vehicles and 15% for office furniture.
Business Expenses: For expenses to be deductible, they must be incurred
in the generation of income in Kuwait. Such expenses must be supported by
adequate documentary evidence. Such expenses include: |
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Salaries, wages and end of service benefits |
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Taxes and fees except Income Tax |
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Grants, donations and subsidies paid to licensed Kuwaiti public or private agencies |
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Expenses of Head Office. |
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| The following expenses are normally disallowed for tax purposes: |
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Personal or private expense or any other expense not related to business |
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Criminal penalties |
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Reimbursable Losses |
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Provisions as opposed to accruals are not accepted for tax purposes. Thus terminal benefits are only deducted when paid out and debts are only being written off for tax purposes once they are proved irrecoverable |
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Interest is accepted if it is paid directly by the branch to a bank in Kuwait and is reasonable in relation to the activities of business in Kuwait |
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Salaries paid outside Kuwait to staff working abroad, except where the contract specifically requires technical work to be performed abroad |
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Transfer pricing of materials and equipment imported. The tax authorities deem the following profit margins for the imported materials: |
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imports from head Office: 10% to 15% of related revenue |
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imports from related parties: 6.5% to 10% of related revenue |
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imports from third parties: 3.5% to 6.5% of related revenue. |
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| The deemed profit as above is normally subtracted from the cost of
materials and equipment claimed in the tax declaration. |
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| Head Office Overheads |
| The tax authorities allow the following deductions
from income as a contribution towards expenses incurred by the head office
of a foreign company: |
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for contractors and consultants operating through an agent: 1.5% of revenue, reduced by any amounts paid or payable to sub-contractors |
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for foreign companies participating with Kuwait companies in the execution of a contract: 1% of the foreign company’s share of the contract revenue reduced by amounts paid to sub-contractors |
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for insurance companies: 1.5% of the net premiums |
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for banking Institutions: 1.5% of direct revenue realized in Kuwait. |
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| Corporate Presence/
Industry Sector |
Contractors and others operating through an agent |
Foreign companies being shareholders in a Kuwaiti Company |
Insurance Companies |
Banking Institution |
% direct revenue
realized in Kuwait |
1.5% |
1 % of share
of direct
revenue |
1.5% |
1.5% |
1. additions |
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collected additions |
N/A |
N/A |
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N/A |
2. Deductions |
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Sub-contracting
costs |
√ |
√ |
√ |
√ |
Compensating Costs |
√ |
√ |
√ |
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Design costs |
√ |
√ |
√ |
√ |
Design costs (excl.
those of head office) |
√ |
√ |
√ |
√ |
Reinsurance
premiums |
N/A |
N/A |
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N/A |
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| C. Foreign tax relief |
| No specific unilateral measures exist for the avoidance of double taxation
but, if taxable income has suffered foreign tax, that foreign tax will usually be
allowed as a deduction from income. |
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| D. Withholding tax |
| There are no withholding taxes in Kuwait. There are, however, retentions
made on payments due to foreign companies until such time as they satisfy
their Kuwait customer that they have dealt with their Kuwaiti tax obligations.
Under Ministerial Order No 44 of 1985, all government departments, public
bodies and privately owned and government owned companies are required
to withhold final payments due to entities, which should not be less than 5%
of the total contract value, until such entities present a tax clearance from
the DIT. Failure to comply with these rules could result in disallowance of
the related contract costs by DIT. |
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| E. Other taxes |
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All entities operating in Kuwait are required to withhold 5% of total contract value from a contractor or subcontractor until the contractor or subcontractor settles his tax liabilities with the Kuwaiti Tax Authorities and obtain a certificate from the tax authorities. |
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KFAS was established to provide aid and assistance to science students and researchers for their education and training and for scientific research and development in general. Article 6 of the Memorandum of Association of KFAS provides that a source of KFAS’s funding shall be from the payment by all Kuwait Shareholding Companies KSCs ( listed and closed ) of 1 % of such companies’ net profits to KFAS.
While, as a legal matter, a KSC is not strictly speaking obligated to pay 1 % of its net profits to KFAS (under Article 48 of the Kuwait Constitution, taxes may be levied only by a duly promulgated law), it has become the general and accepted practice in Kuwait for KSC’s to make such payments. |
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Kuwait Shareholding Companies listed on the stock exchange KSE are required to contribute 2.5 % of net profits to the National Labor Force Fund. |
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Kuwaiti Shareholding Companies (both listed and non listed, but excluding government companies) are required to pay 1% of net profit for Zakat or contribution to the state’s budget. The company has an option whether to consider the 1 % as Zakat or the contribution to the state’s budget. |
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Inheritance and gift taxes Not applicable |
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| F. Tax treaties |
| Kuwait has entered into tax treaties with several countries (more than 40 tax
treaties in force) for avoidance of double taxation. Kuwait is a signatory of
the Arab Tax treaty and the GCC Joint Agreement, both of which allow for
avoidance of double taxation in most areas. Comprehensive double taxation
treaties are available with Austria, Belarus, Belgium, Canada, China,
Cyprus, Croatia, Ethiopia, France, Germany, Hungary, Indonesia, Italy,
Jordan, Korea, Lebanon, Mauritius, Mongolia, Netherlands, Pakistan,
Poland, Romania, Russia, Serbia and Montenegro, Singapore, Switzerland,
Syria, Tunisia, Turkey, Ukraine and United Kingdom. With Algeria and South
Africa, treaties are under finalization. Kuwait has also concluded limited
double taxation agreements in respect of income arising from international
sea and/or air transport with several countries. |
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| G. Proposed amendments to tax law |
| Statutory approval of the new Law is obtained. |
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| H. Tax incentives |
| Kuwait has a number of tax incentives as follows: |
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Leasing and Investment Companies Law No 12 of 1998 allows the formation of investment and leasing companies having their principal place of business in Kuwait, with Kuwaiti or foreign shareholders. The law grants a five-year tax holiday to non-Kuwaiti founders and shareholders of such companies, beginning on the date of establishment of the companies. |
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Direct Foreign Capital Investment Law (DIFCL) No 8 of 2001 provides a tax holiday up to ten years with respect to non-Kuwaiti shareholders shares of the profits from the qualifying projects. An additional tax holiday for a similar period is granted for further investment in an already approved project. |
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Businesses set up in the Kuwait free trade zone for carrying on specified operations are exempt from taxes on operations conducted in the zone and foreign entities can own 100% of such businesses. |
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Kuwait has begun to use build, operate, and transfer (BOT) method in respect of some large infrastructure projects. Tax and tariff concessions may be built into a BOT contract. |
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| As per circular No 50 of 2002, issued by the DIT regarding treatment of
exempted companies, the exempted companies shall, however, comply with
the provisions of submission of tax declaration, inspection and assessment
procedures like other companies in order to be eligible for exemption. |
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| Appeals |
| The tax law does not provide for an appeals process, and consequently the civil
courts must resolve any dispute between a taxpayer and the Director of Income
Taxes. In practice, however, virtually all assessments are agreed through
negotiations. |
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| Filing Requirement |
| The tax declaration for each taxable period must be submitted within 3 ½ months
of the end of the taxable period. A foreign entity can request and extension of up
to 30 days for filing the tax declaration. Tax must be paid in four installments on
the 15th day of 4th , 6th, 9th and 12th month following the end of the tax year.
No tax payment is necessary until the declaration is filed if an extension is
granted. However, payment must then be made for the first and second
installment. |
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| Tax Audits |
| Accounting records should be maintained in Kuwait, and it is normal practice for
the tax authorities to insist on inspecting the books of account (which may be in
English) and supporting documentation before approving the tax liability. A tax
audit may take place a considerable amount of time after the relevant tax year. |
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| Penalties |
| In the event of failure to file a declaration or pay the tax on the due date, a penalty
is payable equal to 1 % of the tax for each 30 days or fraction thereof during
which the failure continues. |
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| Statute of Limitations |
| The tax law does not contain any specific provisions regarding the statute of
limitations for tax matters. The relevant law is the Civil Code (Law No. 67). This
law states that no claim for taxes or other annual charges due to the State may
be enforced after a period of five years. It is unlikely, however, that the passage
of five years after a failure to file a tax declaration or pay taxes will exonerate the
taxpayer from claims for income tax because the taxpayer remains obliged to file
a tax declaration and pay taxes. |
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| Value Added Tax (VAT) |
| There is no VAT or sales tax in Kuwait. |
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| Source of tax law |
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Amiri Decree No. 3 of 1995. |
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Law No. 2 of 2008 amendment of the Amiri Decree No. 3 of 1995. |
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The supplementary resolutions and circulars
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Law No. 19 of 2000 relating to National Labour support Tax, |
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Law No. 46 of 2006 regarding Zakat and Contribution to the state’s Budget. |
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