Kuwait: Taxation Of Foreign Entities Under The New Tax Law

Last Updated: 25 March 2010
Article by Kuwait Office

Foreign entities are taxed on income earned while conducting business in Kuwait . Kuwait 's longstanding tax regulations placed a heavy tax burden on foreign investors' business activities in Kuwait and caused confusion as to the types of income that can be subject to tax.

In a move designed to make Kuwait more attractive to foreign investors, Kuwait's National Assembly approved the passing of Law No. 2 of 2008 Amending Certain Provisions of the Kuwait Income Tax Decree No. 3 of 1955 (the "Tax Law"), which came into effect on February 3, 2008. The Tax Law amends the previous regulations to ease the heavy tax burden on foreign entities' business activities in Kuwait .

The Tax Law applies to foreign entities that are not incorporated in Kuwait or any other GCC country and does not apply to foreign individuals or Kuwaiti companies that have non-Kuwait partners or shareholders (in which case the tax is imposed on the foreign company's share of the earnings).

Conducting business in Kuwait

The Tax Law expands upon the previous regulations' definition of conducting business in Kuwait and indicates that profits realised from the following activities are subject to tax:

  • Contracts totally or partially executed in Kuwait
  • Selling, leasing, or granting concession to use or exploit any trademark, or copyright
  • Representation agreements or commercial brokerage agreements
  • Industrial and commercial enterprises
  • Disposing of assets
  • Buying and selling assets, as well as opening a permanent office in Kuwait where sale and purchase contracts are concluded
  • Leasing property
  • Rendering services

The previous regulations were vague as to what constitutes taxable income, which resulted in disputes between foreign entities and the tax authorities. The Tax Law works to eliminate such confusion by elaborating on the activities that constitute conducting business in Kuwait to increase foreign companies' confidence in conducting business activities in Kuwait .

Exemptions

The Tax Law exempts from taxation profits that foreign entities earn by trading on the Kuwait Stock Exchange (either directly through portfolios or indirectly through investment funds), thereby encouraging international companies and funds to invest in Kuwaiti shares.

A Kuwaiti commercial agent's earnings are also exempt from taxation under the Tax Law, provided that such profits were earned by the sale of goods for the agent's own account. Furthermore, only commissions paid to foreign companies as a result of an agency agreement are subject to taxation.

Deductibles

The Tax Law identifies the following expenses which may be deducted from income that is subject to tax:

  • Raw materials, consumables, and services required to conduct activities
  • Salaries, wages, and end of service indemnities
  • Taxes and fees other than income tax to be paid according to the Tax Law
  • Depreciation of assets in an amount in accordance with implementing regulations
  • Grants, donations, and subsidiaries paid to Kuwaiti public or private authorities in an amount accordance with the implementing regulations
  • Expenses incurred by the head office in an amount in accordance with implementing regulations

Taxable Amount

Previously, the tax regulations charged foreign companies between 5% (for earnings starting at KD 5,250) and 55% (for earnings exceeding KD 375,000). Under the new Tax Law, foreign entities engaging in the activities listed above will be levied a flat rate of 15% on their net taxable profits.

Despite claims that this new scheme hurts smaller investors, specifically companies that earn below KD 37,500, the majority of foreign companies conducting business in Kuwait are large-scale investments, and thus the 15% flat rate does not hurt Kuwait's foreign investment overall.

Furthermore, the flat tax rate provides a clearer and more predictable basis on which foreign entities can make investment decisions. Previously, an increase in a foreign firm's earnings would raise it to a higher tax bracket where the entire earnings would be taxed at the new, higher rate. Under such a system, it was difficult to determine future tax liability and caused uncertainty among potential investors.

Statute of Limitation

The Tax Law limits the government's right to make a claim for due taxes. This statute of limitations expires five years from the date on which the foreign entity submits its tax statement or from the date the tax authorities become aware that the entity has failed to disclose statements relating to its tax obligations. This provision gives potential foreign investors a degree of assurance that they will not be indefinitely liable to claims from the Kuwaiti tax authorities.

Losses

Under the previous tax regulations, foreign companies had an unlimited period of time in which to defer their losses to be offset against future taxable profits. The Tax Law amended this provision to allow foreign entities to carry forward their losses for only three years.

Conclusion

In light of the above, the new Tax Law encourages foreign investment in Kuwait by easing the heavy tax burden on foreign entities doing business in Kuwait and by providing much-needed clarity as to what constitutes taxable income.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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