Corporate tax in Kuwait

Summary
Corporate Income Tax Rate (%) 15 (a)
Capital Gains Tax Rate (%) 15 (a)
Branch Tax Rate (%) 15 (a)
Withholding Tax (%)
Dividends
15 (b)
Interest 0 (c)
Royalties 0 (d)
Management Fees 0 (d)
Branch Remittance Tax 0
Net Operating Losses (Years)
Carryback 0
Carryforward 3 (e)

a) Under Law No. 2 of 2008, for fiscal years beginning after 3 February 2008, the tax rate is a flat 15%. Before the approval of this new law, Amiri Decree No. 3 of 1955 had provided that the maximum tax rate was 55%. The maxi­mum rate under Law No. 23 of 1961, which applies to profits derived from the operations in the Divided Neutral Zone, is 57%. For further details, see Section B.

b) This rate applies only to dividends distributed by companies listed on the Kuwait Stock Exchange (see Section B).

c) Under Article 2 of the Bylaws, income derived from the granting of loans by foreign entities in Kuwait is considered to be taxable income in Kuwait, which is subject to tax at a rate of 15%. Previously, foreign banks that solely granted loans in Kuwait were not taxed on the interest income received with respect to these loans.

d) This income is treated as ordinary business income and is normally assessed on a deemed profit ranging from 98.5% to 100%.

e) Article 7 of the Bylaws provides that losses can be carried forward for a maximum of three years (as opposed to an unlimited period under the prior tax law) if the entity has not ceased its operations in Kuwait.

Taxes on corporate income and gains

Corporate income tax. Foreign “bodies corporate” are subject to tax in Kuwait if they carry on a trade or business in Kuwait, directly or through an “agent” (see below), in the islands of Kubr, Qaru, and Umm Al Maradim or in the offshore area of the parti­tioned neutral zone under the control and administration of Saudi Arabia. Kuwaiti-registered companies wholly owned by Kuwaitis and companies incorporated in Gulf Cooperation Council (GCC) countries that are wholly owned by GCC citizens (GCC entities) are not currently subject to income tax. The members of the GCC are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates.

However, the Kuwait Ministry of Finance (MOF) is working closely with the International Monetary Fund (IMF) on imple­menting a new business profits tax law in Kuwait, which may apply to both foreign companies and GCC entities. The IMF has presented an analysis to the Financial and Economic Affairs Committee, recommending that Kuwait impose a 10% business profits tax, effective from 1 April 2016.

The term “body corporate” refers to an association that is formed and registered under the laws of any country or state and is rec­ognized as having a legal existence entirely separate from that of its individual members. Partner ships fall within this definition.

Law No. 2 of 2008 includes a definition of an “agent.” Under this definition, an “agent” is a person authorized by the principal to carry out business, trade or any activities stipulated in Article 1 of the law or to enter into binding agreements with third parties on behalf and for the account of the person’s principal. A foreign principal carrying on business in Kuwait through an agent (as defined in the preceding sentence) is subject to tax in Kuwait.

Foreign companies carrying on a trade or business in Kuwait are subject to income tax under Amiri Decree No. 3 of 1955 and its amendments contained in Law No. 2 of 2008.

Foreign companies carrying on a trade or business in the islands of Kubr, Qaru and Umm Al Maradim are subject to tax in Kuwait under Law No. 23 of 1961.

Foreign companies carrying on a trade or business in the off­shore area of the partitioned neutral zone under the control and administration of Saudi Arabia are subject to tax in Kuwait on 50% of the taxable profit under Law No. 23 of 1961. In practice, the tax department computes the tax on the total income of the taxpayer and expects that 50% of such tax should be settled in Kuwait. Many taxpayers are currently contesting this practice. Law No. 2 of 2008 and Law No. 23 of 1961 differ primarily with respect to tax rates.

Foreign companies can operate in Kuwait either through an agent or as a minority shareholder in a locally registered company. In principle, the method of calculating tax is the same for compa­nies operating through an agent and for minority shareholders. For minority shareholders, tax is levied on the foreign company’s share of the profits (whether or not distributed by the Kuwaiti company) plus any amounts receivable for interest, royalties, tech­nical services and management fees.

Virtual permanent establishment. Kuwait’s tax authorities have recently changed their approach to the interpretation of the per­manent establishment (PE) concept with respect to services ren­dered by nonresidents in Kuwait. The tax authorities have now introduced the concept of a Virtual Service PE, which may result in the denial of income tax relief claimed by nonresidents under the applicable double tax treaties of Kuwait.

The tax authorities’ approach does not consider the physical pres­ence of employees or contractors of a nonresident service pro­vider for establishing the nexus to the source country, even though such threshold condition is clearly provided by both the Organisa­tion for Economic Co-operation and Development and United Nations Model Conventions, and applied in many countries.

Tax rates. Under Law No. 2 of 2008, the tax rate is 15%, The following are the tax rates under Law No. 23 of 1961.

Taxable profits Rate
Exceeding (KWD) Not exceeding (KWD) %
0 500000 20
500000 57

Investment incentives. Kuwait offers the investment incentives described below.

Industry Law. To encourage investments in local industrial under­takings, Industry Law No. 56 of 1996 offers the following incen­tives:

  • Reduced import duties on equipment and raw materials
  • Protective tariffs against competing imported goods
  • Low-interest loans from local banks
  • Export assistance
  • Preferential treatment on government supply contracts

Law for the Promotion of Direct Investment in the State of Kuwait. The Law for the Promotion of Direct Investment in the State of Kuwait (PDISK; Law No. 116 of 2013) was published in the Kuwait Official Gazette on 16 June 2013 and took effect six months from the date of issuance (that is, in December 2013). PDISK replaced the Direct Foreign Capital Investment Law (DFCIL; Law No. 8 of 2011). Under PDISK, the Kuwait Direct Investment Promotion Authority (KDIPA) is established. The KDIPA will take over from its predecessor, the Kuwait Foreign Investment Bureau. The new authority is a part of the Ministry of Commerce and Industry.

The Executive Regulations to PDISK were issued on 14 December 2014 through Ministerial Decision No. 502 of 2014.

PDISK adopts a negative-list approach to determine the applica­bility of the law. Under this approach, PDISK provides a list of business activities and sectors that are not eligible for benefits under it. All business sectors and activities not on the negative list are entitled to the benefits of PDISK. PDISK maintains the cur­rent incentives for investors including, but not limited to, the following:

  • Tax incentives for a maximum period of 10 years from the date of commencement of the licensed entity
  • Customs duty exemptions for the importation of materials and equipment if the material and equipment is held for a period of five years from the date of obtaining the incentive
  • Protection from Kuwaitization requirements
  • Allocation of land and real estate to investors

In addition, PDISK provides that all foreign investors may take advantage of double tax treaties and other bilateral treaty benefits.

In addition to a 100% foreign-owned Kuwaiti company, PDISK introduces two new types of investment entities, which are a licensed branch of a foreign entity and a representative office. The representative office may only prepare marketing studies and may not engage in any commercial activity.

Kuwait Free Trade Zone. To encourage exporting and re-exporting, the government has established the Kuwait Free Trade Zone (KFTZ) in the vicinity of the Shuwaikh port. The KFTZ offers the following benefits:

  • Up to 100% foreign ownership is allowed and encouraged.
  • All corporate and personal income is exempt from tax.
  • All imports into and exports from the KFTZ are exempt from tax.
  • Capital and profits are freely transferable outside the KFTZ and are not subject to any foreign-exchange controls.

Public Private Partnership Law. The Public Private Partnership Law (Law No. 116 of 2014), which was published in the Official Gazette on 17 August 2014, provides incentives for investors in private public partnership projects including exemptions from in­come tax and other taxes, customs duties and other fees. The new law also improves corporate governance and investment security by providing protection for the intellectual property rights of a concept or idea originator. The Executive Regulations to the Pub­lic Private Partnership Law were issued on 29 March 2015.

Capital gains. Capital gains on the sale of assets and shares by for­eign shareholders are treated as normal business profits and are subject to tax at the rates stated above.

Article 1 of Law No. 2 of 2008 and Article 8 of the Bylaws pro­vide for a possible tax exemption for profits generated from deal­ing in securities on the Kuwait Stock Exchange (KSE), whether directly or through investment portfolios. However, no further clarifications have been provided regarding the definitions of “profits” and “dealing.”

Administration. The calendar year is generally used for Kuwaiti tax purposes, but a taxpayer may request in writing for permis­sion to prepare financial statements for a year ending on a date other than 31 December. For the first or last period of trading or carrying on a business, a taxpayer may be allowed to file a tax declaration covering up to 18 months.

Accounting records should be kept in Kuwait, and it is normal practice for the tax authorities to insist on inspecting the books of account (which may be in English) and supporting documentation before agreeing to the tax liability.

The tax authorities have issued notifications restating the require­ment that taxpayers comply with Article 13 and Article 15 of the Bylaws, which relate to the preparation of books and accounting records and the submission of information together with the tax declaration.

Article 13 requires that taxpayers enclose the prescribed docu­ments, such as the trial balance, list of subcontractors, list of fixed assets and inventory register, together with the tax declaration.

Article 15 requires that taxpayers prepare the prescribed books of accounts, such as the general ledger and the stock list.

The tax authorities recently issued Executive Rules for 2013, which are effective for fiscal years ending on or after 31 December 2013. These rules require analyses of contract revenues, tax reten­tions, expenses, depreciation rates and provisions included in the tax declaration. In addition, they require that these analyses and the financial statements contain comparative figures for the pre­ceding year.

In the event of non-compliance with the above regulations, the Department of Income Taxes (DIT) may finalize an assessment on a basis deemed reasonable by the DIT. The Bylaws provide that a taxpayer must register with the DIT within 30 days after signing its first contract in Kuwait. The prior tax law did not specify a period. In addition, a taxpayer is required to inform the MOF of any changes that may affect its tax status within 30 days after the date of the change. The taxpayer must also inform the MOF of the cessation of activity within 30 days after the date of cessation.

Under the Bylaws, a new system of tax cards is introduced. The information required to be included in the tax card application form is generally the information that is provided to the MOF at the time of registration. Currently, applications for tax cards are being accepted and the MOF is updating its database. However, as of the time of writing, the DIT had not yet issued any tax cards.

A tax declaration must be filed on or before the 15th day of the 4th month following the end of the tax period (for example, 15 April in the case of a 31 December year-end). Tax is payable in 4 equal installments on the 15th day of the 4th, 6th, 9th and 12th months following the end of the tax period, provided that the tax declaration is submitted on or before the due date for filing. The Bylaws provide that a request for extension of time for the filing of the tax declaration must be submitted to the DIT by the 15th day of the 2nd month (the 3rd month under the prior law) after the fiscal year-end. The maximum extension of time that may be granted is 60 days (75 days under the prior law).

In the event of a failure to file a tax declaration by the due date, a penalty that equals 1% of the tax for each 30 days or fraction thereof during which the failure continues is imposed. In addition, in the event of a failure to pay tax by the due date, a penalty that equals 1% of the tax payment for each period of 30 days or frac­tion thereof from the due date to the date of the settlement of the tax due is imposed.

The tax authorities have also issued Circular No. 1 of 2014. This Circular applies to all taxpayers filing tax declarations after the issuance of the Circular.

If tax declarations are prepared on an actual-accounts basis, the Circular requires that they be prepared in accordance with the tax laws and the Executive Rules issued by the tax authorities. For these types of declarations, the Circular also requires the submis­sion of a draft income and expense adjustment (self-assessment) computed in accordance with the last assessment finalized by the tax authorities within three months after the date of submission of the tax declaration.

If tax declarations are prepared on a deemed-profit basis, the circular requires that the percentage applied in the tax declaration be the same as the percentage that was applied in the last assess­ment. It also requires that details regarding all subcontractors and certain supporting documents be provided together with the tax declaration.

Articles 24 to 27 of the Bylaws provide for the filing of objections and appeals against tax assessments.

Article 24 of the Bylaws provides that an objection may be filed against an assessment within 60 days after the date of the assess­ment. The tax department must consider and issue a revised assessment with in 90 days from the date of filing of the objec­tion. If the department fails to issue a revised assessment during this period, the objection is considered to be rejected.

The Bylaws allow companies to submit a revised tax declaration if a tax assessment has not yet been issued by the DIT.

If the DIT accepts the amended tax declaration, the date of filing of the revised tax declaration is considered to be the actual date of filing the declaration for the purpose of imposing delay fines.

Law No. 2 of 2008 introduced a statute of limitation period of five years into the tax law. The prior Kuwait tax law did not provide a statute of limitations for tax. However, under Article No. 441 of the Kuwait Civil Law, any claims for taxes due to Kuwait or appli­cations for tax refunds may not be made after the lapse of five years from the date on which the taxpayer is notified that tax or a refund is due.

Article 13 of the Bylaws provides that companies that may not be subject to tax based on the application of any tax laws or other statutes or based on double tax treaties must submit tax declara­tions in Kuwait.

Dividends. Under the prior tax law, no tax was imposed on divi­dends paid to foreign shareholders by Kuwaiti companies. How­ever, tax was assessed on the share of profits attributable to for eign shareholders according to the audited financial statements of the company, adjusted for tax purposes.

Under Law No. 2 of 2008, dividends received by the investors in companies listed on the KSE are subject to a 15% withholding tax. The tax must be withheld by the foreign investor’s custodian or broker in Kuwait. The MOF requires the local custodian or broker of the foreign investor to provide information about the foreign investor, deduct 15% tax on payments of dividends to the foreign investor and deposit the tax with the MOF.

Recently, the MOF began requiring companies listed on the KSE to provide the following information for 2008 and subsequent years:

  • Minutes of the Annual General Assembly meetings
  • Shareholder records of non-GCC foreign entities and non-GCC foreign funds, to ensure compliance with the 15% withholding requirement

One hundred percent GCC-owned investors are also subject to withholding tax in Kuwait by local custodians or brokers until they are able to obtain a tax clearance certificate indicating that they are not subject to tax in Kuwait.

The MOF has issued forms to allow 100% GCC-owned investors and investors from countries with which Kuwait has a double tax treaty to obtain a tax-clearance certificate for exemption or reduction of withholding tax on dividends received from compa­nies listed on the KSE.

An entity that wants to claim a lower withholding tax rate in ac­cordance with a tax treaty needs to approach the MOF and apply for a refund.

Article 46 of the Bylaws provides that investment companies or banks that manage portfolios or funds or act as custodians of listed shares for foreign entities must withhold corporate tax due from amounts paid to such foreign entities. The amount withheld must be deposited within 30 days after the date of withholding, together with a list showing the names of the foreign entities and the amounts of corporate tax withheld. The DIT requires invest­ment companies or banks that manage portfolios or funds to com­ply with this rule.

However, foreign shareholders in unlisted Kuwaiti companies continue to be assessed on the share of profits attributable to for­eign shareholders according to the audited financial statements of the company, adjusted for tax purposes.

Determination of trading income

General. Tax liabilities are generally computed on the basis of profits disclosed in audited financial statements, adjusted for tax depreciation and any items disallowed by the tax inspector on review.

The tax declaration, supporting schedules and financial state­ments, all of which must be in Arabic, are to be certified by an accountant in practice in Kuwait who is registered with the Ministry of Commerce and Industry.

Foreign-currency exchange gains and losses. Under Executive Rule No. 37 of 2013, gains and losses on foreign currency con­version are classified into realized gains and losses and unreal­ized gains and losses.

Realized gains and losses resulting from the fluctuation of ex­change rates are considered taxable gains and allowable losses if the taxpayer can substantiate the basis of the calculations and provides documents in support of such transactions.

Unrealized gains are not considered to be taxable income, and un­realized losses are not allowed as deductible expenses.

Design expenses. Under Executive Rule No. 26 of 2013 (appli­cable for fiscal years ending on or after 31 December 2013), costs incurred for engineering and design services provided are re­stricted to the following percentages:

  • If design work is carried out in the head office, 75% (previously 75% to 80%) of the design revenue is allowed as costs.
  • If design work is carried out by an associated company, 80% (previously 80% to 85%) of the design revenue is allowed as costs, provided the company complies with the regulations for retention of 5% and submission of the contract with the associ­ated company to the DIT.

 

  • If design work is carried out by a third party, 85% (previously 85% to 90%) of the design revenue is allowed as costs, pro­vided the company complies with the regulations for retention of 5% and submission of the contract with the third company to the DIT.
  • If the design revenue is not specified in the contract, but design work needs to be executed outside Kuwait, tax authorities may use the following formula to determine the revenue:

Design revenue for the year =

Design costs for the year x annual contract revenue

Total direct costs for the year

Consultancy costs. Under Executive Rule No. 26 of 2013, costs incurred for consultancy costs incurred outside Kuwait are re­stricted to the following percentages:

  • If consultancy work is carried out in the head office, 70% (pre­viously 75% to 80%) of the consultancy revenue is allowed as costs.
  • If consultancy work is carried out by an associated company, 75% (previously 75% to 80%) of the consultancy revenue is allowed as costs if the company complies with the regulations for the 5% retention on payments and the submission of the contract with the associated company to the DIT.
  • If consultancy work is carried out by a third party, 80% (previ­ously 80% to 85%) of the consultancy revenue is allowed as costs if the company complies with the regulations relating to the 5% retention and the submission of the contract with the third party to the DIT.
  • If the consultancy revenue is not specified in the contract, but consultancy work needs to be executed outside Kuwait, the tax authorities may use following formula to determine the revenue:

Consultancy revenue for the year =
Consultancy costs for the year x annual contract revenue
Total direct costs for the year

Imported material costs. Under Executive Rule No. 25 of 2013, the Kuwaiti tax authorities deem the following profit margins for imported materials and equipment:

  • Imports from head office: 15% of related revenue (previously 10% to 15%)
  • Imports from related parties: 10% of related revenue (previ­ously 6.5% to 10%)
  • Imports from third parties: 6.5% of related revenue (previously 3.5% to 6.5%)

The imputed profit described above is normally subtracted from the cost of materials and equipment claimed in the tax declara­tion. If the revenue from the materials and equipment supplied is identifiable, the DIT normally reduces the cost of such items to show a profit on such materials and equipment in accordance with the percentages described above. If the related revenue from the materials and equipment supplied is not identifiable or not stated in the contract, the following formula may be applied to determine the related revenue:

Material and equipment revenue for the year =

Material & equipment costs for the year x annual contract revenue Total direct costs for the year

Interest paid to banks. Interest paid to local banks relating to amounts borrowed for operations (working capital) in Kuwait may normally be deducted. Interest paid to banks or financial institu­tions outside Kuwait is disallowed unless it is proven that the funds were specifically borrowed to finance the working capital needs of operations in Kuwait. In practice, it is dif ficult to claim deduc­tions for interest expenses incurred outside Kuwait. Interest paid to the head office or agent is disallowed. Inter est that is directly attributable to the acquisition, construction or production of an asset is capitalized as part of the cost of the asset if it is paid to a local bank.

Leasing expenses. The Kuwait tax authorities may allow the deduc­tion of rents paid under leases after inspection of the supporting documents. The deduction of rent for assets leased from related parties is restricted to the amount of depreciation charged on those assets, as specified in the Kuwait Income Tax Law. The asset value for the purpose of determining depreciation is based upon the supplier’s invoices and customs documents. If the asset value cannot be determined based on these items, the value is deter­mined by reference to the amounts recorded in the books of the related party.

Agency commissions. The tax deduction for commissions paid to a local agent is limited to 2% of revenue, net of any subcontractors’ costs paid to the agent and reimbursed costs.

Head office overhead. Article 5 of the Bylaws provides that the following head office expenses are allowed as deductions:

  • Companies operating through an agent: 1.5% (previously 3.5%) of the direct revenue
  • Companies participating with Kuwaiti companies: 1% (previ­ously 2%) of the foreign company’s portion of the direct revenue generated from its participation in a Kuwaiti company
  • Insurance companies: 1.5% (previously 2%) of the company’s direct revenue
  • Banks: 1.5% (previously 2%) of the foreign company’s portion of the bank’s direct revenue

Article 5 of the Bylaws also provides that for the purpose of computation of head office overheads, direct revenue equals the following:

  • For companies operating through an agent, companies partici­pating with Kuwaiti companies and banks: gross revenue less subcontract costs, reimbursed expenses and design cost (except for design cost carried out by the head office)
  • For insurance companies: direct premium net of share of rein­surance premium, plus insurance commission collected

Reimbursed costs. For deemed profit filings, reimbursed costs are allowed as a deductible expense if the following conditions are satisfied:

  • Such costs are necessary and explicitly mentioned in the contract.
  • Such costs do not exceed 30% of gross revenues.
  • Supporting documentation is available for such costs.

In addition, if reimbursable costs exceed 30% of gross revenues, the taxpayer must file its tax declaration on an accounts basis instead of on a deemed-profit basis.

Inventory. Inventory is normally valued at the lower of cost or net realizable value, on a first-in, first-out (FIFO) or average basis.

Provisions. Provisions, as opposed to accruals, are not accepted for tax purposes.

Tax depreciation. Tax depreciation is calculated using the straight-line method. The following are some of the permissible annual depreciation rates.

Asset Rate (%)
Buildings 4
Prefabricated buildings 15
Furniture and office equipment 15
Drilling equipment 25
Electrical equipment and electronics 15
Plant and equipment 20
Computer and its accessories 33.3
Software 25
Trucks and trailers 15
Cars and buses 20

Relief for losses. Article 7 of the Bylaws provides that approved losses can be carried forward for a maximum of three years (as opposed to an unlimited period under the prior tax law) if the entity has not ceased its operations in Kuwait.

Aggregation of income. If a foreign company has more than one activity in Kuwait, one tax declaration aggregating the income from all activities is required.

Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate
Social security contributions; levied only
with respect to Kuwaiti employees and
employees who are citizens of other GCC
countries; payable monthly by employers
and employees; for Kuwaiti employees,
social security is payable on monthly salary
up to KWD2,750 at the following rates
Employer (payable on monthly salary
up to KWD2,750)
11.50%
Employee
If monthly salary does not exceed KWD1,500 10.50%
If monthly salary exceeds KWD 1,500 but
does not exceed KWD2,750
2.5% of
KWD1,500 plus 8% of total salary
If monthly salary exceeds KWD2,750 2.5% of
KWD1,500
plus 8% of
KWD2,750
(Different monetary ceilings and percentages
are prescribed for citizens of other GCC
countries who are employed in Kuwait.)
Contribution to the Kuwait Foundation for
the Advancement of Sciences (KFAS);
contribution payable by Kuwait shareholding
companies; contribution levied on profits
after transfer to the statutory reserve and
offset of loss carryforwards
1.00%
National Labour Support Tax; imposed annually
on the profits derived from activities in Kuwait
by a Kuwaiti Company listed on the KSE;
Ministerial Resolution No. 24 of 2006 provides
rules for the application of the tax
2.50%
Zakat; imposed on annual net profits of public
and closed Kuwaiti shareholding companies;
Ministerial Order 58 of 2007 provides rules
for the application of zakat
1.00%

Miscellaneous matters

Foreign-exchange controls. No foreign-exchange restrictions exist. Equity capital, loan capital, interest, dividends, branch profits, royalties, management and technical services fees, and personal savings are freely remittable.

Supply and installation contracts. In supply and installation con­tracts, a taxpayer is required to account to the tax authorities for the full amount received under the contract, including the offshore sup­ply element, which is the part of the contract (cost, insurance and freight to the applicable port) pertaining to the supply of goods.

Contractors’ revenue recognition. Tax is assessed on progress bill­ings (excluding advances) for work performed during an ac­counting period, less the cost of work incurred. Previously, the authorities did not accept the completed contract or percentage-of-completion methods of accounting. However, the new Execu­tive Rules of 2013 do not specifically prohibit the percentage-of-completion method in determining the revenue to be offset against the cost recognized.

Subcontractors’ costs. The Kuwait tax authorities are normally stringent with respect to the allowance of subcontractors’ costs, particularly subcontractors’ costs incurred outside Kuwait. Sub­contractors’ costs are normally allowed if the taxpayer provides the related supporting documentation (contract, invoices, settlement evidence and other documents), complies with the regulations for the 5% retention on the payments made to the sub contractors and the submission of the contracts to the DIT (see Retention on pay­ments to subcontractors) and ful fills certain other conditions. The tax authorities have also taken the view that they no longer accept losses from work that is subcontracted to other entities.

Retention on payments to subcontractors. Article 37 of the By­laws and Executive Rules Nos. 5 and 6 of 2013 require that every business entity operating in Kuwait must take all of the following actions:

  • It must notify the names and addresses of its contractors and subcontractors to the DIT.
  • It must submit copies of all the contracts and subcontracts to the DIT.
  • It must retain 5% from each payment due to the contractors or subcontractors until the contractor or subcontractor provides a valid tax-clearance certificate issued by the DIT.

In the event of non-compliance with the above rules, the DIT may disallow the related costs from the contract or subcontract.

Article 39 of the Bylaws empowers the Ministry of Finance to demand payment of the 5% retained amount from the entities hold­ing the amounts, if the concerned contractors or subcontractors fail to settle their taxes due in Kuwait. It also provides that if business entities have not retained the 5%, they are liable for all of the taxes and penalties due from the contractors and subcon­tractors.

Work in progress. Costs incurred but not billed by an entity at the end of the fiscal year may be carried forward to the subsequent year as work in progress. Alternatively, revenue relating to the costs incurred but not billed may be estimated on a reasonable basis and reported for tax purposes if the estimated revenue is not less than the cost incurred.

Salaries paid to expatriates. In a press release issued on 23 Sep­tember 2003, the Ministry of Social Affairs announced that it would impose stiff penalties if companies fail to comply with the requirement to pay salaries to employees in their local bank ac counts in Kuwait. These penalties apply from 1 October 2003. This requirement has been further emphasized through the new labor law issued in 2010. The DIT may disallow payroll costs if employees do not receive their salaries in their bank ac counts in Kuwait.

Offset program. The MOF had issued Ministerial Order 13 of 2005 to reactivate the offset program. In 2006, the National Offset Company (NOC) was formed to manage and administer the im­plementation of the offset program on behalf of the Kuwait gov­ernment and the MOF. Under Decision No. 890 of the Council of Ministers, which was taken in their session No. 2014/2-30 on 7 July 2014, the offset program was officially suspended in Kuwait. The offset program has now been cancelled with respect to all tenders issued after Decision No. 890 on 7 July 2014 and all other tenders that were issued earlier but had not closed as of the date of the decision.

The following were significant aspects of the earlier offset pro­gram:

  • All civil contracts with a value of KWD10 million or more and defense contracts with a value of KWD3 million or more attract­ed the offset obligations for contractors. The obligations became effective on the signing date of the contract.
  • Contractors subject to the offset obligation were required to in­vest 35% of the value of the contract with Kuwaiti government bodies.
  • Contractors subject to the offset obligation were allowed to take any of the following actions to fulfill their offset obligation:

— Option 1: equity participation in an approved offset business venture (direct participation in a project company)

— Option 2: contribution of cash and/or in-kind technical support

— Option 3: participation in any of the offset funds managed by certain banks or investment companies in Kuwait

— Option 4: purchase of commodities and services of Kuwaiti origin

  • Contractors covered by the offset obligation were required to provide unconditional, irrevocable bank guarantees issued by Kuwaiti banks to the MOF equal to 6% of the contract price. The value of the bank guarantee was gradually reduced based on the actual execution by the foreign contractor or supplier of its work. The MOF was able to cash in the bank guarantee if the company subject to the offset obligation failed to fulfill such obligation.

The following were practical considerations:

  • Option 3 above was not a viable option because the NOC has indicated that investment in funds is not considered for the completion of offset obligations.
  • The NOC insisted that every offset venture have a local equity partner and had issued guidelines in this respect.
  • A combination of Options 1, 2 and 4 was being used.

The offset program was implemented through the inclusion of clauses in supply contracts that referred to an offset obligation of the foreign contractor.

Treaty withholding tax rates

Kuwait has entered into tax treaties with several countries for the avoidance of double taxation. Treaties with several other countries are at various stages of negotiation or ratification.

Disputes about the interpretation of various clauses of tax treaties between taxpayers and the DIT are not uncommon. Disputes with the DIT regarding tax treaties normally arise with respect to the following issues:

  • Existence of a permanent establishment
  • Income attributable to a permanent establishment
  • Tax deductibility of costs incurred outside Kuwait

Kuwait has also entered into treaties with several countries relat­ing solely to international air and/or sea transport. Kuwait is also a signatory to the Arab Tax Treaty and the GCC Joint Agreement, both of which provide for the avoidance of double taxation in most areas. The other signatories to the Arab Tax Treaty are Egypt, Iraq, Jordan, Sudan, Syria and Yemen.

The domestic tax law in Kuwait does not provide for withholding taxes except in the case of dividend income received by investors in companies listed on the KSE (see Sec tion B). As a result, it is not yet known how the Kuwaiti government will apply the with­holding tax procedures related to interest and royalties included in the treaties listed in the table below. The withholding rates listed in the table are for illustrative purposes only.

Dividends

%

Interest

%

Royalties

%

Austria 0 0 10
Belarus 5 (c) 5 (c) 10
Belgium 10 0 10
Brunei Darussalam 15 (x)
Bulgaria 5 (j) 5 (f) 10
Canada 5/15 (m) 10 10
China 5 (a) 5 (a) 10
Croatia 0 0 10

 

Cyprus 10 10 (b) 5
Czech Republic 5 (j) 0 10
Denmark 0 (s) 10
Egypt 10 (t) 10 (z) 10 (t)

 

 

Ethiopia 5 (c) 5 (b) 30
France 0 0 0
Georgia 0/5 (l) 0 10
Germany 5/15 (e) 0 10
Greece 5 (c) 5 (c) 15
Hong Kong SAR 0/5 (u) 0/5 (v) 5 (w)
Hungary 0 0 10
India 10 (n) 10 (n) 10
Indonesia 10 (c) 5 (b) 20
Iran 5 (w) 5 (w) 5 (w)
Ireland 0 0 5 (w)
Italy 5 0 10
Japan 5/10 (y) 10 (z) 10
Jordan 5 (c) 5 (b) 30
Korea (South) 5 5 15
Latvia 5 (w) 5 (w) 5 (w)
Lebanon 0 0 30
Malaysia 0 10 15 (q)
Malta 10/15 (d) 0 10
Mauritius 0 0 (f) 10
Moldova 5 (w) 2 (dd) 10
Morocco 2.5/5/10 (bb) 10 (z) 10
Netherlands 10 (i) 0 5
Pakistan 10 10 (g) 10
Philippines 10/15 (ff) 10 20
Poland 5 (j) 5 (j) 15
Portugal 5/10 (ee) 10 10
Romania 1 1 20
Russian Federation 5 (c) 0 10
Serbia and Montenegro (hh) 5/10 (aa) 10 (z) 10
Singapore 0 7 (b) 10
Slovak Republic 0 10 10
South Africa 0 0 0
Spain 5 (w) 5 (w)
Sri Lanka 5/10 10 20
Sudan 5 (h) 5 (h) 10
Switzerland 15 10 10
Syria 0 10 (k) 20
Thailand 10 10/15 (o) 20
Tunisia 10 (c) 2.5 (b) 5
Turkey 10 10 10
Ukraine 5 (f) 0 10
United Kingdom 5/15 (e) 0 10
Uzbekistan 5/10 (aa) 8 20
Venezuela 5/10 (p) 5 20
Vietnam 10/15 (d) 0/15 (gg) 20
Zimbabwe 0/5/10 (cc) 10
Non-treaty
countries
15 (r) 0 0

 

a) The rate is 0% for amounts paid to a company of which the government owns at least 20% of the equity.

b) The rate is 0% for interest paid to the government of the other contracting state. Under the Ethiopia treaty, the rate is also 0% for interest paid to entities in which the government owns a specified percentage of the equity and for interest paid on loans guaranteed by the government.

c) The rate is 0% for dividends and interest paid to the government of the other contracting state. Under the Ethiopia treaty, the rate is also 0% for dividends paid to entities in which the government owns a specified percentage of the equity.

d) The rate is 10% for dividends paid to the government of Kuwait or any of its institutions or any intergovernmental entities. The rate is 15% for other divi­dends.

e) The 5% rate applies if the recipient of the dividends owns directly or indi­rectly at least 10% of the capital of the company paying the dividends. The 15% rate applies to other dividends.

f) The rate is increased to 5% if the beneficial owner of the interest carries on business in the other contracting state through a permanent establishment and the debt on which the interest is paid is connected to such permanent estab­lishment.

g) The rate is 0% for amounts paid to the government of the other contracting state and to entities of which the government owns at least 51% of the paid up capital.

h) For dividends and interest, the rate is 0% if the payments are made to the government or a governmental institution of the other contracting state, or to a company that is a resident of the other contracting state and is controlled by, or at least 49% of the capital is owned directly or indirectly by, the govern­ment or a governmental institution. A 0% rate also applies to interest arising on loans guaranteed by the government of the other contracting state or by a governmental institution or other governmental entity of the other contracting state.

i) A 0% rate applies if the beneficial owner of the dividends is a company that holds directly at least 10% of the capital of the company paying the dividends.

j) The rate is 0% if the payments are made to the government or a governmental institution of the other contracting state, or to a company that is a resident of the other contracting state and is controlled by, or at least 25% of the capital is owned directly or indirectly by, the government or a governmental institu­tion of the other contracting state.

k) The rate is 0% if the beneficial owner of the interest is a resident in the other contracting state and the loan is secured or financed directly or indirectly by a financial entity or other local body wholly owned by the government of the other contracting state.

l) The 0% rate applies if the beneficial owner of the dividends is a company that has invested more than USD3 million or its equivalent in local currency. The 5% rate applies in all other cases.

m) The rate is 5% if the beneficial owner of the dividends is a company that owns 10% or more of the issued and outstanding voting shares or 25% or more of the value of all of the issued and outstanding shares. The 15% rate applies to other dividends.

n) Dividends or interest paid by a company that is a resident of a contracting state is not taxable in that contracting state if the beneficial owner of the dividends or interest is one of the following:

  • The government
  • A political subdivision or a local authority of the other contracting state
  • The Central Bank of the other contracting state
  • Other governmental agencies or governmental financial institutions as may be specified and agreed to in an exchange of notes between the competent authorities of the contracting states

o) The rate is 10% in the case of financial institutions (including insurance companies) and 15% in all other cases.

p) The rate is 5% if the beneficial owner of the dividends is a company that holds directly at least 10% of the capital of the company paying the dividends. The rate is 10% in all other cases.

q) The rate is 15% for the use of, or the right to use, cinematographic films, tapes for radio or television broadcasting and copyrights of literary or artistic works. The rate is 10% for the right to use patents, trademarks, designs, models, plans, secret formulas or processes, copyrights of scientific works and industrial, commercial or scientific equipment.

r) This rate applies only to dividends distributed by companies listed on the KSE (see Section B).

(s)     The 0% rate applies if either of the following circumstances exists:

  • The beneficial owner of the dividends is a company (other than a partner­ship) that holds directly at least 25% of the capital of the company paying the dividends, such holding is possessed for an uninterrupted period of at least one year, and the dividends are declared within that period.
  • The beneficial owner is the other contracting state, a governmental institu­tion or an entity resident in the other contracting state.

t) The 10% rate applies if the beneficial owner of the dividends or royalties is a resident of the other contracting state.

u) The 0% rate applies if the beneficial owner of the dividends is the govern­ment of the other contracting state or an institution or other entity wholly owned directly by the government of that other contracting state. The 5% rate applies in all other cases.

v) The 5% rate applies if the beneficial owner of the interest is a resident of the other contracting state. In the case of the Hong Kong Special Administrative Region (SAR), the 0% rate applies if the interest is paid to the following:

  • The government of the Hong Kong SAR
  • The Hong Kong Monetary Authority
  • An institution set up by the government of the Hong Kong SAR under statutory law, such as a corporation, fund, authority, foundation, agency or other similar entity
  • An entity established in the Hong Kong SAR, all the capital of which is provided by the government of the Hong Kong Special SAR or any institu­tion as defined in Subparagraph (a)(3) of Paragraph 3 of Article 11 of the tax treaty

In the case of Kuwait, the 0% rate applies to interest paid to the following:

  • The government of Kuwait
  • A governmental institution created in Kuwait under public law, such as a corporation, central bank, fund, authority, foundation, agency or similar entity
  • An entity established in Kuwait, all the capital of which is provided by the Kuwaiti government or a governmental institution

w) The 5% rate applies if the beneficial owner of the dividends, interest or royalties is a resident of the other contracting state.

x) The 15% rate applies if the beneficial owner of the royalties is a resident of the other contracting state.

y) The 5% rate applies if the beneficial owner is a company that has owned directly or indirectly for the period of six months ending on the date on which entitlement to the dividends is determined at least 10% of the voting shares of the company paying the dividends. The 10% rate applies in all other cases.

z) The 10% rate applies if the beneficial owner of the interest is a resident of the other contracting state.

(aa) The 5% rate applies if the beneficial owner is a company (other than a partnership) that holds directly at least 25% of the capital of the company paying the dividends. The 10% rate applies in all other cases.

(bb) The 2.5% rate applies if the beneficial owner of the dividends is the govern­ment of the other contracting state. The 5% rate applies if the beneficial owner of the dividends is a company that holds directly at least 10% of the capital of the company paying the dividends. The 10% rate applies in all other cases.

(cc) The 0% rate applies if the beneficial owner of the dividends is an entity mentioned in Paragraph 2 of Article 4 of the treaty. The 5% rate applies if the beneficial owner of the dividends is a company that controls directly or indirectly at least 10% of the capital of the company paying the dividends. The 10% rate applies in all other cases.

(dd) The 2% rate applies if the beneficial owner of the interest is a resident of the other contracting state.

(ee) The 5% rate applies if the beneficial owner is a company (other than a partnership) that holds directly at least 10% of the capital of the company paying the dividends or if the beneficial owner of the dividends is a resident of the other contracting state. The 10% rate applies in all other cases.

(ff) The 10% rate applies if the beneficial owner is a company (other than a partnership) that holds directly at least 10% of the capital of the company paying the dividends. The 15% rate applies in all other cases.

(gg) The 0% rate applies if the beneficial owner of the interest is the government or the central bank of the other contracting state or an institution or other entity wholly owned directly by the government of that other contracting state. The 15% rate applies in all other cases.

(hh) This treaty applies to the separate republics of Montenegro and Serbia.