The State of Kuwait imposes a tax on income earned by the foreign companies operating in the State of Kuwait at 15% of the annual net profits. The Decree No (3) of 1955 as amended by Law No (2) of 2008 and its Executive Regulations regulates Kuwaiti income tax on foreign companies.
Baker Tilly provides its services to foreign companies to manage their income tax file within the State of Kuwait including:
- Submit an application for registration
- Submit the application for approval of first financial period
- Review and audit the tax declaration
- Attend the documentary inspection on behalf of the incorporated body
- Follow up the issuance of the tax assessment decision
- Follow up obtaining the tax clearance certificate
- Follow up obtaining the tax retention release certificate
- Assist the incorporated body in preparing the tax objection and its documents
- Assist the incorporated body in preparing the tax appeal and its documents
Below are some significant information and frequently asked questions pertaining to income tax in Kuwait:
What is the competent authority to manage income tax in the State of Kuwait?
The competent authority is the Ministry of Finance – Tax Department.
What is the definition of the incorporated body (i.e., the foreign company) subject to income tax in the State of Kuwait?
Any business entity that carries on business or trade in Kuwait including any incorporated body, wherever it is established, that carries on business or trade either directly or through an agent, as well as any incorporated body that carries on business or trade in Kuwait as an agent. Therefore, the practicing of any activity generating income whether the contract is concluded inside or outside Kuwait and whether the obligations are implemented inside or outside Kuwait, or the supply of goods is made directly, through an agent, distributor or exclusive distributor, then the incorporated body is subject to income tax within the State of Kuwait.
The taxable incorporated body includes, but not limited to, the following:
- Foreign companies that directly enter into contracts with a local company to provide services and supply materials
- Foreign companies that hold an equity stake in a Kuwaiti company pursuant to the Companies Law No. 1 of 2016, as amended
- Foreign companies that operate in the State of Kuwait through a local agent in accordance with Kuwait Trade Law No. 69 of 1980, as amended
- Foreign companies established pursuant to Law No. 116 of 2013 on the Promotion of Direct Investment in the State of Kuwait and its Executive Regulations, as amended, which is handled by the Kuwait Direct Investment Promotion Authority.
What is the definition of taxable income?
An annual income tax shall be levied on the income earned by any incorporated body engaged in business or trade, based on its activities in the State of Kuwait, wherever it is established, including the following:
- Any activities or works carried out wholly or partially in the State of Kuwait whether the respective contract is made inside or outside Kuwait as well as the income generated from supply or sale of goods or provision of services;
- Proceeds from the sale, lease, grant of franchise to use or utilize any trademark, design, patent, intellectual property, copyright or other intangible rights or related to intellectual property rights in consideration for the use of any copyright of literary, art or scientific works in any form whatsoever;
- Commissions due or arising from representation or commercial brokerage agreements including cash or in-kind commissions;
- Profits generated from any industrial or commercial activity in the State of Kuwait;
- Profits generated from disposal of assets including the sale of an asset in whole or part, conveyance of its title to third parties and other acts including disposal of shares in a company whose assets mainly comprise immovable property existing in the State of Kuwait;
- Income generated from money lending in the State of Kuwait;
- Profits generated from purchase and sale in the State of Kuwait of properties, goods or related rights, whether such rights are associated with a tangible asset or intangible rights including mortgage and franchise rights;
- Maintaining a permanent office in the State of Kuwait where sale and purchase contracts are made. It serves as the place of business where activity or contracts are carried out or made whether such place is owned by the taxpayer or leased from a third party, or the activity is performed at a third party’s head office;
- Profits generated from the leasing of any property including movable and immovable properties used in the State of Kuwait; and
- Profits generated from performance of business in Boursa Kuwait, directly or through investment portfolios or funds.
The taxable income shall be determined on the basis of gross income after deduction of all expenses and costs incurred to realize such income, including, but not limited to, the following:
- Raw materials, consumables and services required by the business purposes
- Payments of salaries, wages, end of service indemnity and the like
- Tax and fees save income tax paid under the Decree
- Depreciation of assets used in business according to the set rates;
- Donations or gifts to the government authorities in the State of Kuwait
- Donations, gifts and subsidies paid to Kuwaiti private licensed bodies in the State of Kuwait such as charity and social organizations and societies, provided that the deduction shall not exceed 2.5% of the net income of incorporated body before the allowance of such deduction
- The head office overhead allowance according to the set rates
What is the impact of the avoidance of double taxation treaties between Kuwait and the countries of the incorporated bodies?
The State of Kuwait has signed treaties for avoidance of double taxation and prevention of income tax evasion with many countries whereby any incorporated body that does not meet the definition of a permanent establishment shall be exempted from the income tax in the State of Kuwait. However, the incorporated body is still required to file its annual tax declaration along with an acknowledgement that it is exempted from paying the income tax in Kuwait.
What is the tax retention?
Pursuant to the Law, all ministries, authorities, public institutions, companies, individual firms (and equivalent entities), who have entered into contracts with any foreign companies through contracts, agreements or any transactions, are required to withhold a 5% of the value of the contract, agreement, transaction or each payment paid to the incorporated body. Such 5% is income tax retention.
Amounts retained with these bodies shall be considered as held in trust for the benefit of the State Public Treasury until settlement of the due tax. The retention amounts shall be released based on a letter issued by the Tax Department stating the release of the dues.
What are the procedures that the incorporated body should undertake immediately after doing business in Kuwait?
Every incorporated body shall file application with Tax Department within (30) thirty days from the date of signing its contract or commencement of its activity in the State of Kuwait to register with Taxation and Planning Department through submitting the Registration Form approved by the Ministry of Finance accompanied by all the required documents.
Are there any fines imposed on foreign companies doing business in Kuwait, which did not register with Taxation Department of the Ministry of Finance?
No fines will be imposed in case of delay in finalizing the registration. However, the delay in the registration process will lead to a delay in examining the incorporated body’s first tax declaration, which in return will result in a delay in issuing the release of tax retention letter.
Should the incorporated bodies doing business in Kuwait engage a licensed auditor registered with the Ministry of Finance – Tax Department? What are the services rendered by the auditor to those bodies to help them comply with the requirements of the Ministry of Finance- Tax Department?
Yes, the incorporated bodies should appoint an auditor registered with the Ministry of Commerce and Industry and approved by the Ministry of Finance to audit the tax declaration submitted by the incorporated body.
The auditor can provide a number of services that assist the incorporated body with following up all the procedures with the Ministry of Finance. Such services include:
- Submission of the registration application
- Submission of the application for approval of the first financial period
- Attending the documentary inspection on behalf of the incorporated body
- Following up the issuance of the tax assessment decision
- Following up obtaining the tax clearance certificate
- Following up obtaining the tax retention release certificate
- Assisting the incorporated body with preparing the tax objection and its documents
- Assisting the incorporated body with preparing the tax appeal and its documents
What is the due date for submission of the tax declaration?
The incorporated body shall file the tax declaration not later than the fifteenth day of the fourth month following the end of the taxable period.
What are the procedures that the incorporated body shall undertake annually?
- The incorporated body shall file a tax declaration in Arabic language as per the form approved for such purpose. The tax declaration shall be accompanied by a report certified by an auditor registered with the Ministry of Commerce and Industry and approved by the Ministry of Finance.
- The incorporated body shall provide the documents needed for the tax inspection by the Ministry of Finance.
Based on the results of the tax inspection, the Ministry of Finance shall issue:
- Tax assessment decision
- Tax clearance certificate
- Release of tax retention certificate
What is the taxable period?
The tax declaration shall be filed for the taxable period. The tax period shall be specified in accordance with any of the below options:
- Gregorian year commencing from January 1st to December 31st of the same year; or
- Financial year pursuant the incorporated body’s articles of association in the place of incorporation.
The first financial period shall be excluded as the incorporated body shall submit an application for the approval of its first financial period within three (3) months from the date of signing the contract or the commencement date of activity provided that such taxable period does not exceed eighteen (18) months.
What are the methodologies acceptable to the Ministry of Finance to calculate the income tax?
The incorporated body shall keep regular accounting books and file the tax declaration based on the actual profits. If the head office expenses can not be separated from those relating to the income generated from the operations in the State of Kuwait, the tax declaration shall be filed based on the deemed profits.
Shall the pre-operation and maintenance expenses be recognized in the expenses deducted from taxable income?
- Any costs and expenses incurred prior to signing the contract are not considered as expenses related to the activity in the State of Kuwait since it is attributable to the head office.
- Any costs and expenses incurred after signing the contract and prior to operations are treated as incorporation expenses and shall be allowed as deductibles after allocating the same over the contract implementation years pro rata the revenues for each year.
- Maintenance expenses are allowed in the period during which maintenance operations are carried out with no provision to be made for maintenance expenses. The maintenance period shall be included in the activity practice period.
What is the Tax Assessment Decision?
The tax assessment decision shall be issued by the Ministry of Finance based on the outcome of documentary inspection of the supporting documents attached to the declaration submitted by the incorporated body. The Ministry of Finance shall have the right to modify the taxable income or to deemed profit assessment (waste of the accounting records) in the event that the incorporated body’s breaches or refrains from providing the documents required for the document inspection.
What are the mode of payment of income tax to the Ministry of Finance?
The incorporated body may pay the due tax amount in one payment upon submitting the tax declaration. In addition, the incorporated body may pay the tax in four installments as follows:
- Before/ on the fifteenth day of the fourth month following the end of the taxable period.
- Before/ on the fifteenth day of the sixth month following the end of the taxable period.
- Before/ on the fifteenth day of the ninth month following the end of the taxable period.
- Before/ on the fifteenth day of the twelfth month following the end of the taxable period.
It should be noted that the Ministry of Finance will not issue the tax clearance certificate unless all the above mentioned installments have been fully settled.
What is the mechanism for releasing the tax retention?
Upon receipt of the assessment decision and payment of the full tax amount, the incorporated body shall file an application with the Ministry of Finance requesting the release of the income tax retention withheld by Kuwaiti companies dealing with the incorporated body. The application shall indicate the name of the Kuwaiti company and the retention amount. The retention amounts shall be released pursuant to a letter issued by the Tax Department indicating release of its dues.
What is the penalty charged in case of delay in submitting the tax declaration beyond the deadlines?
A penalty of 1% of the due tax is charged for each 30 days or part thereof of delay by the taxpayer in filing the tax declaration.
What is the financial penalty charged in case of delay of settling the due income tax amount?
A penalty of 1% of the due tax is charged for each 30 days or part thereof of delay by the taxpayer in settling the due installment prior to the respective deadline.
Does the incorporated body have the right to file an objection against the tax assessment decision?
Yes, the incorporated body shall have the right to file an objection against the tax assessment within 60 days from the date of the tax assessment letter. The incorporated body shall indicate the reasons for the objection and attach the supporting documents for review by the Tax Department. The Tax Department will determine the objection within (90) days from the filing date thereof. Absence of reply to the objection during this period shall be deemed an implicit rejection thereof.
Does the incorporated body have the right to file an appeal against the tax assessment decision?
In case of rejecting the objection or elapse of the period specified to determine the objection without any response, the incorporated body shall have the right to address a letter to the Chairperson of the Tax Appeals Committee within (30) days from the date of the rejection letter or elapse the period specified to reply to the objection. The appeal shall include the appeal elements and grounds thereof as well as all the supporting documents.
What is the statutory timeframe of prescription of tax claim by the State of Kuwait?
The State of Kuwait’s right to claim the due tax shall only forfeit pursuant to this law after elapse of five year from the filing date of the tax declaration, from the date on which the Ministry of Finance becomes aware of the activities which were not reported by the incorporated body in the tax declaration or of the date on which the Ministry of Finance becomes aware of the concealed data related to the tax liabilities.
The statute of limitation period shall be interrupted upon notifying the incorporated body by a registered letter of the tax assessment, notice to pay the due tax or a decision issued by the Tax Appeals Committee.
What are the procedures required to be taken by the incorporated body should it discontinue its activities in Kuwait?
The incorporated body shall notify the Ministry of Finance in case of discontinuing its business in the State of Kuwait either temporarily or permanently for a period exceeding one calendar year to exempt the incorporated body from submitting the tax declarations for the suspension periods.