In Kuwait there are no personal income taxes, property, gift or inheritance taxes. Nor are there any sales or value added taxes. The only tax paid by Kuwaiti shareholding companies is a 2.5% levy for the Kuwait Foundation for the Advancement of Sciences (KFAS).
Kuwaiti Manpower Law which was introduced in May 2001 applies a 2.5% tax on the net profits of Kuwaiti companies listed on the Kuwait Stock Exchange (KSE). This tax may be imposed on all local companies in the near future.
But corporate income tax is levied on the net income of foreign firms.
The Liability to Corporate Income Tax
Corporate income tax is governed by Law #3 of 1955, as supplemented by directives issued by the Director of Income Taxes, i.e. the Minister of Finance, from time to time. The filing of tax declarations and accounts, the assessment of liabilities and the payment of taxes are administered by the Tax Department in the Ministry of Finance. All tax declarations, supporting schedules, financial statements, and correspondence must be in Arabic.
All foreign corporate bodies carrying on a trade or business in Kuwait are liable to income tax, with the exception of companies incorporated in the GCC that are wholly owned by GCC citizens. A foreign corporate body means any business entity, formed under the laws of any state, which has a legal existence separate from that of its owners. The term includes foreign partnerships. Where a foreign firm operates through a local service agent, it is taxed on its income arising in Kuwait. Where it is a shareholder in a local company, it is taxed on its share of the company's profit.
Taxable income includes net profits, whether distributed or not, and amounts receivable on account of interest, royalties, technical services and management fees, etc, whether actually paid or not. Where the foreign firm is a shareholder in a local company, the foreign entity bears the tax and the Kuwaiti company has no liability. There is no withholding tax on dividends, interest payments and royalties.
Net taxable income is computed on the basis of the net profits disclosed in audited financial statements as adjusted for tax purposes. Where the taxpayer is a shareholder in a local company, the foreign element in total adjusted profits is isolated.
Tax Reduction Plan
Kuwait's Cabinet approved in May 2006 a bill to reduce the tax on foreign firms to a flat 15 per cent from the current levels of upto 55 per cent to attract more foreign investors.
Gross income is all income from business and trade, including amounts receivable as rents, royalties, premiums, dividends and interest, as well as capital gains on the sale of assets and on the sale of shares by a foreign shareholder, where the source is in Kuwait. The source of income is Kuwait if the place where the services are performed is in Kuwait. Work done outside Kuwait is deemed to be performed in Kuwait where it is part of a contract that includes activities within Kuwait; e.g., in a supply and installation contract, the full value of the contract including the foreign-supply element is assessable.
Gross billings, excluding advance payments, less the costs of work incurred in an accounting period are used to assess income from contract work and percentage accounting or completed contract accounting methods are usually not acceptable.
Where a foreign firm has more than one activity in Kuwait, its income from all activities must be aggregated for tax purposes, even if its different activities are organised through separate local companies.
All normal business expenses are allowable on an accruals basis provided they are incurred in the generation of income in Kuwait. But the following may be noted:
- Accounting provisions, whether specific or general, are not allowable. Bad debts are only allowed once they have proved irrecoverable. Other provisions, such as labour indemnities, are only allowed when they are actually paid.
- Depreciation of fixed assets is allowable but only at particular rates (box A) for different classes of assets on a straight-line basis. Losses on the disposal of fixed assets below their tax written-down value are allowable
- Interest charges are allowable provided they are payable to a Kuwaiti bank and are reasonable in relation to the business activities carried out in Kuwait.
- Commissions paid to the taxpayer's local agent are limited to 3% of revenue.
- Losses brought forward are allowable. Losses may be carried forward indefinitely and deducted from income in later periods, provided there has been no intervening cessation of activities. But losses in a later period cannot be carried back to an earlier period.
- Management fees receivable by a foreign corporate shareholder in a local company and expensed in the latter's books are not allowable. But direct expenses incurred by the foreign taxpayer are allowable provided they are supported by adequate documentation.
- As a contribution to a foreign corporate body's head office expenses, deductions may be claimed as follows:
- by foreign consultants or contractors operating through a local agent: 3.5% of revenues (net of amounts payable to subcontractors and reimbursable costs)
- by foreign shareholders in a WLL or KSC: 2% of revenues (net of amounts payable to subcontractors and reimbursable costs)
- by foreign insurance companies: 3.5% of net premiums.
Inventory is usually valued at weighted average cost, though FIFO (first-in, first-out) is becoming more popular, but any valuation method in general use is acceptable.
Tax declarations and supporting documentation must be in Arabic and must be certified by a practising accountant who is registered with the MCI. The law is unclear on a number of issues and final assessments are usually agreed by negotiation. There is no special appeals process.
Tax must be paid in Kuwaiti Dinar by certified cheque, in four equal instalments on the 15th day of the 4th, 6th, 9th and 12th months following the end of the tax period. No payment is required until accounts have been filed. The tax is payable in a single lump sum where payments are delayed and also where an extension of 75 days has been allowed for the filing of audited accounts.
Tax Clearance Certificates
The final payment due to a foreign contractor, which must not be less than 5% of the total contract value, must be retained by all ministries, public authorities and private companies (including foreign firms) operating locally until the contractor has produced a tax clearance certificate from the Ministry of Finance confirming that all tax liabilities have been settled.
All ministries, public authorities and private companies operating in Kuwait must submit the names and addresses of all companies with which they are doing business as contractors, subcontractors or in any other form, together with a copy of the contracts, to the Tax Department. When assessing liability to tax, the Director of Taxes may disallow payments to subcontractors which have not been reported.
Kuwait is a signatory to the GCC Joint Agreement and to the Arab Tax Treaty. Kuwait also has double taxation treaties with Belgium, China, Cyprus, France, Germany, Hungary, Italy, Romania, South Africa and Thailand, and is negotiating treaties with Australia, Austria, Canada, Finland, India, Japan, Malaysia, Singapore, Switzerland, Turkey and the USA.
Tax on all companies
A draft law submitted to the National Assembly imposes a 15% income tax on all companies operating in Kuwait. Currently the Tax Law imposes tax on foreign companies. However, the Finance and Economic Committee of the National Assembly has suspended its decision on the Income Tax Law 3 of 1955 until a more comprehensive draft law is presented.