Kuwait’s Finance Ministry has told international banks that it has postponed a measure to abolish the 55 per cent rate of capital gains tax that it charges on all share sales made by foreigners.

The ministry has referred the measure to its lawyers in a move that could delay the abolition of capital gains tax for foreigners by up to six months.

Central Bank of Kuwait officials have warned foreign bankers that their clients could still be liable to pay the 55 per cent tax on any stock market profits as late as January 2009.

The news is likely to continue to deter foreigners from investing in companies that are listed in Kuwait.

“We had news from Kuwait. [The tax] is still there and it is still under official legal review,” says Julian Bruce, director of insti-tutional equity sales at Egyptian investment bank EFG-Hermes.

The regulation that abolishes capital gains tax received approval from Kuwait’s parliament in January and gained final approval from Emir Sabah al-Ahmad al-Jaber al-Sabah in February.

Since then, the Finance Ministry has delayed the introduction of the regulation. Investors from outside the GCC are expected to avoid the Kuwait Stock Exchange for as long as the abolition of the tax remains uncertain. “Foreign funds will have to continue to make provision for capital gains tax, or their compliance procedures will prevent them from operating there,” says Bruce.

The Finance Ministry has never collected the tax, even though it has been able to do so for decades. “It has never been applied since it was introduced because the authorities have never established a vehicle for the collection of capital gains tax,” says Bruce.

The uncertainty over whether the tax would be collected has deterred some investors, according to Monica Malik, director of economics at EFG-Hermes.

“Although it has not been enforced, it has meant that people have not turned to the Kuwait stock market because it might happen in the future,” she says.

The Kuwaiti equities market is potentially more attractive to foreigners than the other major GCC stock markets because there are no restrictions on foreign ownership of companies.

The Kuwait Stock Exchange’s rules allow foreigners to hold as much of companies as they wish. The government also prevents companies from individually deciding that they will not accept foreign investors, a practice that is common in the UAE.

Despite this, Kuwait has the lowest level of foreign direct investment (FDI) in the GCC.

“There are other factors that stymie FDI more than tax,” Malik says. “It is more to do with bureaucratic deficiencies and the difficulties getting projects passed by parliament, especially where foreign investors are involved.”

The Kuwait Stock Exchange has grown by 15 per cent since the beginning of the year.

The Central Bank of Kuwait and the Finance Ministry could not be reached for comment.