Tax News update 24 May 2006

Subject: Foreign principals having Distributors/ Exclusive agents in Kuwait not taxable with effect from 20 April 2006

Taxation of exclusive distributorship relationships: The Kuwait tax department assumes that foreign companies with exclusive/ sole distributors in Kuwait are subject to taxation on the basis of exclusive / sole distributorship relationships are tantamount to an agency relationship indicative of a foreign principal carrying on business in Kuwait and on that basis payments to a foreign principal are taxable. In this regard, the tax department relies on Article 286 of the Law of Commerce, which states that the distributor is obliged to promote and distribute industrial or commercial products in a particular area and is entitled to certain rights afforded to contract agents set out in the provisions stated in that Article (for example, receipt of compensation upon termination or expiration of the distributorship relationship). This interpretation expands the definition of agent in the Tax Law. This interpretation is formalized by issuing circular 34 of 2002. Most of the distributors opposed this interpretation and are fighting their cases in the courts.

Council of Ministers resolution no 287 : The council of ministers through this resolution, ruled that the definition of agent must be interpreted as defined in the tax decree no 2 of 1957 i.e, the person authorized by the principle to conclude agreement on his behalf with third party within the given authority, which will exclude the sole or exclusive distributors from the scope of implementation of Income Tax Decree mentioned above.

Conclusion: The tax department is currently in discussions at various levels on how to react to this resolution.