How favourable is the tax regime in Kuwait?

Historically, Kuwait’s tax regime was not viewed as favourable due to corporate income tax rates as high as 55 per cent and limited deductibility of costs and expenses arising outside Kuwait, which stifled foreign investment. In an effort to attract foreign investors and stimulate commerce, Law No 2 of 2008 was adopted. Among other changes, the amendment abolished the phased tax rates ranging from 5 per cent to 55 per cent and replaced them with a flat tax rate of 15 per cent of annual net profits for foreign corporate entities operating in Kuwait.

There is no group consolidation or relief for foreign corporate taxpayers

Although the flat rate was well received, the other changes were largely unfavourable for foreign taxpayers. In particular, all parties in Kuwait doing business of any kind with a foreign party must retain 5 per cent of every payment made to that party or risk taking on the foreign party’s tax liability. In addition, a withholding tax was introduced for dividends of listed companies, and lending activities from outside Kuwait became subject to corporate income tax for the first time.

Is there personal income tax in Kuwait?

There are no personal taxes in Kuwait.

If I establish a company in Kuwait, will it have to pay corporation tax?

There is no corporation tax in Kuwait. There are various other corporate taxes that apply only to Kuwaiti shareholding companies, specifically:

Zakat Tax: This generally equates to 1 per cent of gross income from operations less costs.

An annual contribution to the Kuwait Foundation for the Advancement of Science: This equates to 1 per cent of annual profits net of statutory reserve and loss carry-forwards.

National Manpower Tax: This applies only to Kuwait shareholding companies listed on the Kuwait Stock Exchange and equates to 2.5 per cent of annual net profits, less certain dividends and profit shares.

Foreign corporate shareholders of a company established in Kuwait are also liable for corporate income tax on dividends of listed companies, and those annual net profits – whether distributed or not – that are allocable to the foreign shareholder’s ownership percentage.

If I do business in Kuwait as a foreign company, will I be subject to corporate income tax?

All foreign companies carrying on a trade or business in Kuwait – except for those incorporated in other Gulf countries that are wholly owned by GCC citizens or GCC companies that are in turn wholly GCC-owned – are taxed on income earned with respect to their activities. This includes direct revenues, in addition to passive investment income in Kuwait. Companies are also required to register with the tax authority and obtain tax cards.

Taxable income includes Kuwait-sourced income from trade, business, dividends, interest, rents, royalties and premiums, as well as other gains or profits of an income or capital nature.

Every company doing business in Kuwait, or resident in Kuwait, has various obligations to the tax department at the Ministry of Finance, whether or not it is ultimately liable for corporate income tax. Most tax-exempt companies are required to file tax declarations annually to claim the exemption. There is a regulatory requirement to notify the tax authority of any business with a foreign party; to commence activities with the foreign party in Kuwait only if it has a tax card; to retain 5 per cent of the total value of any transaction, or 5 per cent of every payment made to any foreign party, in trust for the state as security for tax liability; to report the value of that tax retention to the tax authority; and remit the tax retention to the tax authority upon its request. Failure to comply with these rules risks assumption of the tax liability of the foreign party and disallowance of otherwise allowable costs for which retentions were not made.

The 2008 law replaced the phased tax rates with a flat rate of 15 per cent

Tax liability is calculated based on net annual profits, supported by locally prepared and audited financial statements, adjusted for depreciation and for items disallowed by the tax authority through the tax inspection. The tax authority has wide latitude, based on alleged deficiencies in local bookkeeping or the tax declaration supporting documentation, to discard the actual accounts and determine deemed profits for the purpose of calculating the tax liability.

Corporate tax rates

The 2008 tax law amendment repealed the previous phased tax rates and replaced them with a flat tax rate of 15 per cent of annual net profits for foreign corporate entities conducting business in Kuwait. Annual net profits from carrying out work on certain offshore islands of Kuwait or from performing work in the shared marine zone between Kuwait and Saudi Arabia (the Divided Zone), are taxed at tax rates of either 20 or 57 per cent. Only one-half of the tax is owed for profits arising solely from work in the Divided Zone.

Are there any capital gains taxes?

Capital gains, apart from certain gains made as a result of trading in securities listed on the Kuwait Stock Exchange, are treated as normal business profits and, aggregated with other income, are subject to the corporate income tax. There is no separate tax on capital gains.

Are there any tax implications for entering into transactions with related parties?

Related companies are required to maintain separate books and records and submit separate annual tax declarations. There is no group consolidation or relief for foreign corporate taxpayers.

The tax authority is entitled to inspect related companies to confirm that inter-company transactions are not for the purpose of tax avoidance. The inter-company transactions of related companies are compared with transactions between companies that are not legally or financially associated.

The tax regulations provide for deemed profits in specified ranges of percentages of revenue on materials and supplies imported from head offices and related companies, and on design and consultancy expenses from head offices and related companies. Declared costs and expenses from the head office or related parties must be fully documented for the tax inspection. Except in cases where a tax treaty applies, the deemed profits are determined by the tax authority based on documentary inspection.

Tax is calculated on either actual or deemed profits, whichever is the larger amount. The actual costs or expenses claimed in the tax declaration are reduced by the tax authority according to its profit determination. The revenue, if not identifiable in the contract documentation, is calculated by a prescribed formula. Losses on imported materials and supplies are not accepted.

Are there any indirect taxes?

There are no indirect taxes in Kuwait at this time, although the GCC is planning to introduce a value-added tax in the near future in each of its six member countries, including Kuwait.

The customs tariff is generally 5 per cent of the CIF (costs, insurance and freight) value of the import, in accordance with the uniform tariff of the GCC Customs Union.

Are there any withholding taxes?

There is a withholding tax applicable only to dividends issued by companies listed on the Kuwait Stock Exchange. The withholding tax must be applied by the issuer, the custodian or the broker that distributes the dividends to foreign corporate shareholders, regardless of the residence of the corporate shareholder. The amount withheld must be remitted to the tax authority in the name of the corporate shareholders. Kuwaiti corporate shareholders with direct or indirect investments in the Kuwait Stock Exchange are required to obtain tax clearance certificates.

Although the tax treaties with Kuwait provide for withholding tax rates on dividends, interest and royalties, there are no such withholding taxes in Kuwait, apart from the limited exception outlined above. In all other cases, the tax authority treats the dividends, royalty and/or interest income as normal business profits. If the taxpayer properly claims the benefits of an applicable tax treaty in its tax declaration, the tax authority permits the application of the treaty withholding tax rate as the effective tax rate on such income.