Kuwait Income Tax Laws and Practices

Only Foreign Companies operating in Kuwait are subject to income tax as per Income Tax Decree No. 3 of 1955 as amended by Law No. 2 of 2008. Law No. 2 of 2008 virtually considers all activities to be subject to income tax in Kuwait. Law No. 2 of 2008 is applicable to all taxable periods commencing after 3 February 2008 and applies a new flat tax rate of 15% is applicable.

Companies that are incorporated in GCC countries and fully owned by GCC citizens are not subject to income tax.

In cases where a Foreign Company operates in Kuwait through a joint venture or consortium partner as a shareholder in a limited liability company (W.L.L) or a closed shareholding company (K.S.C), then only the Foreign Company’s share of profits earned is subject to income tax.

Foreign Registered partnerships are deemed to be “Foreign corporate bodies” and are accord-ingly taxable. The text of these Decrees encompasses any Kuwaiti as well as non-Kuwaiti body corporate. However, in more than fifty two years of practice, the law has not been applied to Kuwaiti Companies. All Foreign Companies carrying on operations in the neutral zone are liable to income tax under Income Tax Law No. 23 of 1961.

In practice, income tax authorities consider any income earned from Kuwait as liable to income tax even if the Foreign Company does not have a permanent establishment or place of business in Kuwait.

• Any activity or business wholly or partially executed in the State of Kuwait, whether the contract has been concluded inside Kuwait or abroad, and also the income realized from the supply and sale of goods, or from provision of services.
• The amounts earned on selling, leasing, or granting of franchise rights for using or utilizing any trademark, design, patent, copyrights, or other corporate rights, or relative to Intellectual Property rights in consideration for using any copyright for literary, technical or scientific works of whatsoever form.
• The commissions due or emerging from representation or commercial brokerage agreements, in whatever form, monetary or in kind.
• The profits resulting from any industrial or commercial activity in the State of Kuwait.
• The profits realized from disposal or sale of an asset, or a part thereof, or assignment of property to third parties or other disposals, including disposal of shares in a Company whose assets are principally formed from immovable funds available in the State of Kuwait.
• The income resulting from money loans inside the State of Kuwait.
• The profits resulting from buying and selling in the State of Kuwait of property, goods, or the rights related thereto, whether these rights are associated with a material asset or moral rights, including the right to mortgage and the right to franchise.
• Open a permanent office in the State of Kuwait where sale and purchase contracts are concluded. It represents the place of work where activity is carried out or contracts are concluded, whether such place belongs to the taxpayer, or the tenant who leases from a third party or it is to be carried out at third party place of work in the State of Kuwait.
• The profits resulting from leasing of any property, including movable and immovable property used in the State of Kuwait.
• The profits resulting from the provision of services, including the consideration for administrative, technical or consulting services, or the contracts to be wholly or partially performed in the State of Kuwait, whether the contract is concluded inside Kuwait or abroad.
• The profits resulting from doing business in Kuwait Stock Exchange Market, whether the same are directly made, through portfolios, or investment funds.

In addition to the required self-reporting by each body corporate subject to tax, the tax department is informed in several other ways about the identity of taxpayers.

When a ministry or agency of the Kuwaiti Government negotiates a contract with the Foreign Company, it does so generally through the Central Tendering Committee. When the contract is awarded, the tax department is normally provided with such information.

The existence of a taxpayer often comes to the notice of the tax authorities as a result of a third party declaration under Ministerial Order No. 44 of 1985. This order requires that any establishment doing business in Kuwait must submit copies of all contracts to the income tax department together with the names and addresses of the contractor or subcontractor. The order also prevents final payment (which must be at least 5% of the contract value) without a tax clearance certificate. Most government and semi- government establishments, as well as other taxpayers, comply with this order.

Registration with the tax department is mandatory within thirty days from the date of signing the contract in the State of Kuwait or from the date of starting the activities.

In order to register with the tax department, a registration form must be completed and signed and submitted along with the following documents:

• A copy of the articles of association and any amendments thereto;
• A copy of the agency contract;
• Agency registration certificate;
• Company’s address both inside and outside Kuwait;
• A copy of the exemption certificate;
• Authorization letter duly signed by authorized signatory of the Company.

The taxation card is issued by the tax department. In order to obtain a taxation card, the Company must file a completed and signed taxation card registration form with the tax de-partment and submit the following documents:

• A copy of the articles of association and any amendments thereto;
• A copy of the agency contract;

Yes, the Company is free to choose any accounting period, however they need to apply and obtain an approval from the tax department. The period must exceed 6 months and may not exceed 18 months.

Under Law No. 2 of 2008, any body corporate that is subject to tax in Kuwait is required to maintain separate books of account in respect of its operations in Kuwait. The resolution requires that the following books of accounts and records be maintained by such body corporate:

• General journal
• Inventory sheets
• General ledger
• Expenses analysis journal
• Stock records (showing the quantities and values of materials received, materials issued and party or project issued to).

In practice, the tax department expects to verify the revenues and costs disclosed in the tax declaration with a detailed general ledger together with original vouchers and supporting documents, including cash and bank statements. Computer based accounts are accepted by the tax department.

• The balance sheet and final accounts for the taxable period the return is presented for.
• A statement of assets, showing the purchase date of an asset, its value, used depreciation rate, premium of depreciation, additions and the disposal of assets.
• A statement of subcontractors and the last certificate of payment to each of them; provided such statement shall show the works performed during the taxable period the return is presented for, and those withheld as per the stipulation of article 37 thereof.
• A stocktaking statement for the closing inventory in quantity and value.
• Copies of contracts under performance and amount of revenue and expenditure of each contract according to the information mentioned in the tax return.
• Trial balance with totals and balances, mainly taken to prepare final accounts and tax return.
• Last certificate of payment issued by the organization owning the project.
• Insurers must attach a detailed statement of documents reinsured and associated conditions with their balance sheets and tax return.

Yes. Under article 13 of Law No. 2 of 2008, tax return shall be accompanied with a report certified by an auditor registered at the Ministry of Commerce and Industry and recognized by the Ministry of Finance.

Taxable income is derived by deducting all costs, expenses and losses incurred in connection with carrying on trade or business in Kuwait from gross revenue, and after adjustment for certain costs such as provision for staff indemnities, depreciation as per tax rates, head office administrative overhead allowance etc.

The records must be certified by an internationally recognized firm of accountants approved by the tax department. In practice the tax department requires the tax declaration and financial statements (which must be in Arabic) to be certified by an accountant in practice in Kuwait who is registered with the Ministry of Commerce and Industry.

Taxable profit on the Foreign shareholder’s participation in local Companies is determined as its share of taxable profit, whether distributed or not, plus any management fees etc. paid to the Foreign shareholder.

Where a Foreign Company has more than one project/ contract in Kuwait, the total income is computed by aggregating the income from all the projects/ contracts.

However, if a foreign entity operates under two different legal entities, such as through an agent and through a limited liability company or a closed shareholding company, the tax department shall require two different declarations as both relate to different forms of operating in Kuwait.

Capital gains are not separately taxed. These are included as part of the business income.

The profits of Foreign Companies generated only from trading operations in Kuwait Stock Exchange Market, either performed directly or through investment portfolios or funds. The income realized by a natural person from doing business or trade in the State of Kuwait, unless it is established that it represents the share of a Foreign Company.

Yes. Under rule 43 of the executive bylaws, 1% of tax on revenues not disclosed in the tax declaration shall be levied.

Any delay in the submission of the tax declaration is subject to tax penalties at the rate of 1% of the assessed tax for each thirty days delay or part thereof. Additionally, penalty is charged for any delay in payment of tax, at the rate of 1% of the assessed tax for each thirty days delay or part thereof.

In case of tax assessment not disputed by the taxpayer, any additional tax must be paid within thirty days from the date of tax assessment. Failure to settle within thirty days will result in additional penalties at 1% for each period of thirty days or fraction thereof.

The costs and expenses include the following:

• Raw materials, consumables and services required for business purposes.
• Salaries, wages and end of service benefits paid or the like.
• Depreciation of assets used in business as per the rates specified in appendix 1.
• Donations or contributions paid to governmental organizations in the State of Kuwait.
• Contributions, donations and subsidies paid to Kuwaiti private licensed organizations in the State of Kuwait, such as charities and social associations, provided that deduction shall not exceed 2.5% of the net income of the established organization before allowing such deduction.
• Expenses of Head office as per the rates specified in appendix 2.

Costs and expenses must satisfy the following conditions, they must be:

• Necessary for realizing income.
• True and supported by documents.
• Related to the taxable period.

The following costs and expenses are disallowed:

• Personal and private expenses.
• Disciplinary penalties.
• Indemnified losses.
• All provisions and reserves (except for banks and insurance Companies)
• Any costs or expenses which are deemed excessive and unreasonable or not supported.

Tax is applied at a flat rate of 15% of net taxable income. This rate is applicable for all taxable periods after 3 February 2008.

Depreciation rates are applied to cost and computed on a straight-line basis at the rates detailed in appendix 1.

Losses can be carried forward for a maximum of three years; first year losses are carried forward to offset profits of the second year, the remaining losses are carried forward to offset profits of the third year. The balance loss cannot be carried forward beyond the third year.

Losses cannot be carried forward if:

• The taxpayer ceases activities in Kuwait. The business is deemed to be ceased if it does not have revenues from its core activities. Compulsory period of cessation can be ex-cluded in case of force majeure or emergencies.
• Change in the legal structure of tax. (Foreign entity is liquidated/ changed its legal form).
• Merger with or acquisition of the taxpayer by another Company.

The tax declaration of each taxable period is required to be submitted within three and a half months of the end of the taxable period. It is possible to seek an extension up to sixty days in filing of the tax declaration. It is at the discretion of the Director of Income Tax to grant an extension. Taxes have to be paid in four equal installments as follows:

• 1st installment- within three and a half months of the year end;
• 2nd installment- within five and a half months of the year end;
• 3rd installment- within eight and a half months of the year end;
• 4th installment- within eleven and a half months of the year end.

In case an extension is granted, tax has to be paid fully at the time of filing the tax declaration.

Yes, it is possible to obtain an extension for submitting the tax declaration. However, an application must be filed with the tax department no later than one and a half months following the end of the financial year stating the reasons for such an extension. The extension is granted up to sixty days and may only be granted if the application satisfies the tax department.

The corporate body shall be entitled to request the extension of the first tax declaration when the tax department approves the first fiscal period of the corporate body. The corporate body shall submit the application for the extension by a date not later than 15th of the second month following the end of the taxable period. The request for the extension shall be based on necessary and reasonable causes. The tax department may decide on the extension request within thirty days of submitting the application. In case of approval, the extension period shall not exceed sixty days and taxes must be paid in one lump sum. No reply from tax department to the corporate body request shall be considered an implicit refusal of the request.

If the tax assessment is not acceptable to the taxpayer, the taxpayer has the option to file an objection within sixty days from the date of the tax assessment letter. If the tax issue is not satisfactorily resolved within ninety days of raising the objection letter, the taxpayer has the right to have their case heard by the Tax Appeal Committee. The tax appeal has to be filed within thirty days from the date of the tax department’s letter in response to the tax objection or, in case of no response from the tax department; the tax appeal has to be filed within thirty days after the end of the ninety day period from the date the objection letter was filed.

If the taxpayer is not satisfied with the outcome of the Appeal Committee’s decision, then the taxpayer has the option to refer the case to the Settlement Division. If the taxpayer is still not satisfied with the decision of the Settlement Division, then has right to pursue their tax dispute through civil courts for adjudication within sixty days from the date of rejection by the Tax Appeal Committee.

Yes. It is possible to file revised tax declaration to correct an error or mistake provided the original tax declaration was filed before the due date and a tax assessment is not issued for that year. However, there will be delay fines due to the revised filing.

It is a normal practice for the income tax department to carry out field inspections of every taxpayer’s books and records to verify the income and expenses reported in the tax declara-tion with the supporting documents for all the years without any exception. Based on the findings from the tax inspection, adjustments are normally made to the taxable profit e.g. if expenses are not supported they are disallowed at the time of the tax inspection. Following the tax inspection, a formal tax assessment is issued.

Under article 22 of Law No. 2 of 2008, it is possible to rectify any mistakes/ errors before expiry of statute of limitations (5 years). This rectification can be done by the tax authorities or at the request of the Company.

The tax authorities have the right to:

• Issue an order from the competent court to withhold the taxpayer’s properties and possessions.
• Issue an order to ban the taxpayer from leaving the State of Kuwait until taxes are settled or bank guarantees are provided.

Under the following circumstances the tax department has the right to assess the tax on a deemed profit basis:

• Violation of Article 15 of the executive regulations which stipulates book keeping in accordance with the laws of the State of Kuwait and such books shall be organized in a formal and objective manner (approved by the Ministry of Justice and recorded item by item).
• Non availability of documents in support of accounts, or a large gap in them, or inconsistency of the documents with the records.
• Not declaring taxable revenues in tax declaration, which has a material impact on the business results.
• The auditor has substantial reservations on the accounts of the corporate body.
• Substantial weakness of the internal control system.
• Tax declaration does not include the required attachments, in accordance with Article 13 of the regulations.
• Non compliance of the corporate body with providing the necessary books and records for inspection after determining two appointments via official letters.

Under article 41 of Law No. 2 of 2008, the tax authorities have the right to collect taxes up to 5 years after the submission of the tax declaration or upon notifying the Company through a tax assessment. Under article 441 of the Civil law, any claims for taxes shall not be entertained after the lapse of 5 years. The same period applies for tax refunds as well.

The tax department shall have the right to re-issue the tax assessment on the taxpayer in re-spect of the previously assessed years in the following cases:

• If the tax department discovered information related to the revenues of the taxpayer not disclosed by the taxpayer.
• If the taxpayer uses either means of fraud, including:
• To conceal information or mention untrue information, either in the return or in the papers submitted to the tax department in respect of specifying the taxable income.
• To fabricate accounts, books, records or documents, destroy or conceal the true part thereof.
• To conceal one taxable business or more.
• However, such re-assessment has to be done within 5 years from the date of discovering such information.

Under Article 42 of Law No. 2 of 2008, it is possible to claim a refund for taxes paid in ex-cess. However, such claims must be made within 5 years from the date of excess payment. In practice, the tax department allows a tax credit which can be adjusted against any future tax liabilities.

Under rule 9 of the executive bylaws, investment Companies and banks that manage portfolios or funds or act as custodians, are require to deduct 15% of dividends and profits of Foreign Companies and deposit them with the tax department within thirty days from the date of deduction together with a listing of all amounts deducted against each Company separately.

Under Ministerial Order (MO) No. 44 of 1985 the final payment to the contractor or sub-contractor is required to be withheld until the contractor or subcontractor settles their tax liabilities and obtains a certificate in this regard from the tax department. The final payment withheld should not be less than 5% of the total contract. In practice, contractors withhold 5% of all payments made. The tax department interprets the requirements of MO in the widest possible sense. Accordingly, it expects that the requirements of the MO are complied with for all contracts including contracts for hire of manpower and hire of equipment. The tax department expects compliance with the MO even for contracts signed with Kuwaiti Companies.

The payments to subcontractors will be disallowed as a cost in case 5% retentions are not withheld. Additionally under MO 8 of 2003, the tax department has the right to request through a letter to transfer 5% retained by all the ministries, government and private Companies in connection with settlement of taxes due from foreign entities.

All ministries, authorities, public institutions, Companies and private entities or natural persons that contracted with any foreign corporate body, whether through contracts, agreements or any transactions shall retain 5% of the contract, agreement or transaction value or from each payment to the corporate body.

These retentions shall not be released unless under a certificate from the tax department issued to the corporate body evidencing release of its amounts withheld.

Amounts withheld with these bodies shall be considered on trust for the interest of the State Public Treasury until settlement of tax due.

The tax department may accept a bank guarantee and issue a release of retentions letter. The Company must submit an application and obtain prior approval; however the following conditions must be satisfied:

• Contract has been completed.
• Tax declaration has been submitted and has been pending for tax inspection for more than one year.

Kuwait has signed and ratified double taxation treaties with the following countries:

Arab Economic Union Council, Austria, Belarus, Belgium, Bulgaria, Canada, China, Croatia Cyprus, Czech Republic, Egypt, Ethiopia, France, Germany, Greece, Hungary, India, Indonesia Tunis, Italy, Jordan, Korea, Lebanon, Malaysia, Malta, Mauritius, Mongolia, Morocco, Netherlands, Pakistan, Poland, Romania, Russia, Serbia and Montenegro, Singapore, Syria, South Africa, Sri Lanka, Sudan, Switzerland, Thailand, Tunis, Turkey, United Kingdom, Uzbekistan, Ukraine, Venezuela, Zimbabwe

The main benefits under the double taxation treaties are:

• Short-term projects, for a period from six months to one year, depending on the double taxation treaty, are not liable to Kuwait tax.
• All the expenses pertaining to Kuwait project are allowed even if these are incurred outside Kuwait, provided these expenses are charged in accordance with international practice.
• Profits made merely out of supply of materials are not taxable.
• Dividend, interest, royalties are subjected to lesser tax rates in certain countries with which Kuwait has signed double taxation treaty.

The disputes between tax department and the taxpayers arise in the interpretation of various clauses of treaties. These disputes are generally in respect of creation of permanent establishment, taxability of supply portion of the contracts, income that can be attributable to permanent establishment, and deduction of head office indirect costs/ costs incurred outside Kuwait etc. However, these disputes can be resolved through negotiations, objection and appeal process.

Yes. The exempt corporate body must submit a tax declaration with its attachments and shall commit to all the procedures of the inspection and assessment to determine the exempt tax amount.

If the corporate body’s account for one of the exempt years ends with a loss, it shall not be carried forward to the period subsequent to expiry of the exemption period.

Under article 44 of Law No. 2 of 2008, the tax authorities have the right to revoke any agree-ment or procedure intended for tax avoidance.

Under the Foreign Direct Investment Law No. 8 of 2001, the investment committee may grant foreign investments all or part of the benefits subject to certain conditions:

• Possibility of investment in excess of 50% (up to 100%) by non-Kuwaitis in Kuwaiti Shareholding Companies;
• Ten year tax holiday from the date of actual operations;
• Grant benefits under the double tax treaties;
• Total or partial customs exemption ;
• Allotment of land;
• Allow recruitment of Foreign labour; and
• Possibility of repatriation of profit and capital invested in the project.
• Under Law no 12 of 1998, foreign shareholders of Investment and Leasing Companies are not subject to tax for five years from the date of formation of such Companies.
• As per Ministerial Decision no 3 of 1989 any Company which is fully owned by the Gulf Cooperation Council (GCC) states and registered in a GCC country should be treated like Kuwaiti Company and hence not subject to tax in Kuwait.
• Kuwait has established a Free Trade Zone. This zone is situated in Shuwaikh port area. It permits 100% Foreign ownership and other benefits include exemption from income tax and customs duties. Foreign investors can obtain license for trading, manufacturing and service activities within the Free Trade Zone.

Profits from the neutral zone (the shared marine area between the State of Kuwait and the Kingdom of Saudi Arabia) are taxed as per Law No. 23 of 1961 at the following rates:

Marginal relief is applicable for Foreign Companies operating only in the neutral zone.

Marginal relief cannot be used if the Foreign Company has operations in both Kuwait and the neutral zone.

Tax rate shall be computed on the total income (full revenues from the neutral zone as well as Kuwait operations if any). The appropriate tax rate shall then be imposed and only 50% of this tax is payable in Kuwait.

If the Company incurs a profit in one region and a loss in another region, then taxes are computed in accordance with the law of each region. The losses incurred in one region can be set off against future profits of the same region.

The six Gulf Co-operation Council (GCC) states comprising Saudi Arabia, Kuwait, Bahrain, Qatar, Oman and UAE announced the formation of the Customs Union with effect from 1 January 2003 eliminating customs duties for trade within GCC states as well as removing regulations and procedures which restrict trade within GCC. The new Customs Union results in unified customs duties.

The GCC states have approved a unified customs tariff of 5% on CIF invoice price subject to certain exceptions.

Collection of customs duty takes place at the first point of entry in the GCC. Subsequent movement of goods within the GCC states does not attract duties. A higher tariff of 100% is imposed on imports of tobacco and its derivatives.

Each GCC member state can continue to impose protective customs duty as per the list approved for each GCC country. If the goods covered by protection are imported first through another GCC state in which protective duty does not apply, then that country will levy only the normal duty of 5% and the final destination country where the protection duty applies, will recover the balance of the duty.

A unified list of goods comprising of over 400 items such as basic foodstuffs, personal effects and used household items has been approved by the GCC states to be exempt from customs duties.

Kuwait Shareholding Companies (KSC) and Kuwait Shareholding Companies (Closed) [KSC(C)s] are required to contribute 1% of net profits after transfer to the statutory reserve and the offset of losses brought forward, to KFAS which supports scientific progress.

There is currently no tax on personal income of individuals including salary income of employees.

There is no stamp duty, property tax, VAT or sales tax in Kuwait.

Social insurance for Kuwaiti employees is payable by both employer and employee based on the employee’s salary (up to a ceiling of KD 2,250 per month). The contribution rates for social insurance are 11% and 7% of the employee’s salary for employer and employee respectively, required to be deducted by the employer and paid monthly.

Non-Kuwaiti employees are entitled to end of service benefits in accordance with the Kuwait labour law calculated as follows:

• 15 days salary (including all cash allowances) for the first five years of service
• 1 month’s salary for each year after the first five years.

The total amount payable cannot, however, exceed 1.5 years salary based on the latest gross salary. An employee who resigns prior to completing five years of service is not entitled to end of service benefits. An employee who resigns after completing five years of service is entitled to one half of the end of service benefit as calculated above.

This is an obligation that Foreign Companies and institutions incur upon winning procurement contracts from the Government entities of Kuwait. It could be satisfied through the implementation of investment projects in Kuwait and offshore that add value to the national economy of Kuwait. National offset Company was incorporated in March 2006 to manage and administer the implementation of the offset program on behalf of Government of Kuwait.

• Facilitating technology transfer.
• Supporting educational and research & development projects.
• Creating job opportunities for Kuwaitis.
• Promoting joint venture projects between Kuwait private sector and Foreign Companies.

Contracts which are subject to offset:

• Civil contracts of a value equal to or greater than KD 10 million
• Defense contracts of a value equal to or greater than KD 3 million

The offset obligation is equal to 35% of the contract value. Foreign Companies that are subject to the offset Program will be given the choice of either implementing an investment project that is suggested by the offset Program Management, which meets the economic priorities of the Kuwaiti government, or propose their own investment projects, that meet requirements of the offset Program, or participate in one of the offset Funds that may be established by the offset Program.

Once a shortlist of Foreign Companies that are participating in government tenders is prepared by the Kuwaiti government, Companies on this list will be requested to present to the offset Program management their offset projects proposals. Such proposals should be presented before the Kuwaiti government takes its final decision with respect to granting the contract. The offset obligation becomes effective as of the date of signing the supply contract. A grace period of 6 months from the date of approving the business plan can be obtained.

The offset project multiplier system is devised to encourage offset obligators to initiate and establish offset projects that, when implemented, achieve the economic objectives of the offset program. Maximum multiplier that can be achieved will be from 5 to 5.5 depending on the actual offset project. It is possible to obtain offset credits under the new offset program no 9 of 2007. Both pre- contract offset credit (pre-emptive) and post contract offset credits can be generated as per the new guidelines. Upon fulfillment of offset obligation, an offset fulfillment certificate will be issued by National offset Company.