Kuwait Tax Law and Recent Developments
By Alok Chugh
Posted: 1st September 2015 12:04The Kuwaiti Government favours a free market, with little official intervention. Kuwait has a small, open economy that is dominated by its oil industry, because of which other non-oil sectors of the economy, such as agriculture and manufacturing, play a lesser role in the economy.
Currently, the following taxes are imposed by the Ministry of Finance on companies operating in Kuwait:
|1||Corporate income tax at on foreign entities||15%|
|2||National Labor Support Tax on entities listed on the KSE||2.5%|
|3||Zakat on Kuwait Shareholding Companies||1%|
Corporate Income Tax and Related Developments
Decree No. 3 of 1955 (Decree No. 3) as amended by Law No. 2 of 2008 (Law No. 2) and the Executive Bylaws (the Bylaws) thereto (hereafter referred to as the “income tax law”) provide that every corporate entity should pay tax in Kuwait on the income earned from ‘carrying on trade or business in Kuwait (including the Neutral Zone between Kuwait and Saudi Arabia) either directly or through an agent. In case of mixed ownership of a GCC incorporated company, tax is imposed on the share of the non-GCC shareholders share of profit earned from Kuwait operations.
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.
Subsequent to the issuance of Law No. 2, the Ministry of Finance (MOF) has issued further regulations in the form of Executive Bylaws and Executive Regulations (the Bylaws) for implementation of amendments in 2013.
National Labour Support Tax (NLST)
As per Law No. 19 of 2000, Kuwaiti companies listed on the Kuwait Stock Exchange (KSE) are required to pay an employment tax of 2.5% of the net annual profits per financial statements, whether or not such annual profits are distributed to shareholders.
All companies subject to the provisions of the Law are required to submit a declaration audited by one of the accounting and auditing offices approved by the Ministry of Finance on or before the 15th day of the fourth month following the end of the fiscal period.
The Ministry of Finance has issued Law No. 46 of 2006 for the implementation of Zakat in Kuwait.
According to the law, public and closed Kuwait Shareholding Companies (KSC’s) are subject to Zakat on the basis of 1% of gross income of operations of the company after deduction of costs incurred by the company.
Changing landscape of Foreign investment in Kuwait
Kuwait Direct Investment Promotion Authority (KDIPA)
KDIPA was established as an independent public authority in accordance with the new Law No. 116 of 2013 (“new law”) regarding the Promotion of Direct Investment in the State of Kuwait, which repealed its predecessor Law No. 8 of 2001 regarding the regulation of Direct Investment of Foreign Capital in the State of Kuwait.
This new law replaced the Direct Foreign Capital Investment Law (DFCIL; Law No. 8 of 2011). The new law calls for the establishment of the Kuwait Direct Investment Promotion Authority, which will take over from its predecessor, the Kuwait Foreign Investment Bureau. The new authority will be part of the Ministry of Commerce and Industry. The MOF has recently issued further regulations in the form of Executive Bylaws and Executive Regulations (the Bylaws) for implementation of amendments.
The New law adopts a negative-list approach to determine the applicability of the law. Under this approach, the new law 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 the new law.
There are certain incentives and exemptions under the new law such as:
- Tax exemptions for a maximum period of 10 years from the date of commencement of operations of the licensed entity
- Customs duty exemptions for the importation of materials/equipment provided certain conditions are met
- Protection from Kuwaitization requirements
- Allocation of land and real estate to the investors
The criteria for granting incentives depends on:
- Development of technology and modern management methods
- Economic diversification
- Creation of job opportunities for the local workforce
- Increase in use/export of national products/services
- Projects which have a favourable environmental impact for Kuwait
The negative list consists by KDIPA consists of companies who’s major business in Kuwait involves:
- Extraction of crude oil.
- Extraction of natural gas.
- Coke oven products industry.
- Fertilisers and nitrogenous compounds industry.
- Coal gas and the distribution of gaseous fuels through pipes.
- Real estate activities.
- Security and investigations.
- Public administration and defence, mandatory social security.
- Membership organisations.
In addition, the new law 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, the new law 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.
Law no. 116 of 2014 - Public Private Partnership (“ New PPP law”)
The new PPP law published in the official gazette on 17 August 2014 provides incentives for investors of PPP 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.
PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project
Earlier PPP projects were regulated by Law No. 7 of 2008 under which Build-Operate-Transfer (B.O.T) and the similar types of projects were carried out. Currently Law no. 7 of 2008 is replaced by Law no. 116 of 2014.
Under the new PPP law, PPP contracts concluded prior to the implementation of Law No. 116 of 2014 shall be regulated by the earlier law under which such contracts were concluded. The contracts shall remain valid until the expiry of the project term and may not be extended or renewed in violation of the provisions of the PPP law.
Incentives and exemptions provided under the law:
- Provides incentives for the investors including exemption from
- Income tax
- Customs duties
- Other taxes
- Other fees as per a decision issued by the Supreme Committee
- Allocation of land and real estate for the project
- Protection of the intellectual property right of the project concept/idea originator
Key features of the law:
- Correction of generic title of the law for e.g. BOT etc.
- Formation of Supreme Committee on PPP projects and defining its functions
- Creation of a Public Authority named PPP projects authority and defining its functions
- Regularisation of the status of projects existing prior to effective date of the law
- Offering PPP projects with total cost not exceeding KD 60mn through competition
- An investor may hold the entire share capital of the project company
- Transparent process for project procurement considering various criteria
- Term of the investment in projects procured shall not exceed 50 years
- Benefits provided under KDIPA law available for the investor
- Provision for re-procurement of project after termination subject to certain conditions
About Ernst and Young in Kuwait:
EY in Kuwait has been operating since 1952 and is the largest accounting and consulting firm in the country. Our 340 professionals are available to serve clients anywhere in Kuwait working in both Arabic and English. EY professionals in Kuwait can provide expert advice on every business issue. We are fully integrated with Ernst & Young Middle East in terms of methodology, training and quality control. The Kuwait office is supported by resources of Ernst & Young Global which has over 152,000 professionals working out of 700 offices in over 140 countries.
Ernst & Young, Kuwait enjoys the premier position as tax advisers in Kuwait. With a specialist tax partner, three directors and a team of 35 tax specialist staff we service approximately 70% of registered tax payers in Kuwait. We have an extensive experience of assisting companies in managing their tax compliance in Kuwait in the most efficient manner, advising on tax treaty matters and providing for entry level strategies to foreign companies intending to carry on business in Kuwait.
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Partner - Tax Advisory Services
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Alok is a Partner with EY’s Middle East practice and is based in Kuwait. Alok has lived and worked in Kuwait for over 20 years and has an expert’s knowledge of the business and taxes in Kuwait. Alok has extensive experience in advising entry level strategies for foreign multinationals wishing to do business in Kuwait. He has been involved in a number of consulting assignments (including cross border planning, application of double tax treaties and handling of tax and commercial affairs efficiently) for project due diligence, business paper preparation/review, structuring operational activities,the Ministry of Finance and the Kuwait Direct Investment Promotion Authority (KDIPA)
Through his past experience in dealing with the Kuwait Foreign Investment Bureau (KFIB), Alok has developed excellent relations with the officials at KDIPA and have been advisor to KDIPA and assisted them in the by-laws, completing necessary forms and procedures for license application and tax incentives.
Alok is a member of the Institute of the Chartered Accountants of India and is an active member and frequent lecturer at the American Business Council, French Business Council, British Business Forum and the Canadian Business Council in Kuwait. Alok is also on the Board of the American Business Council in Kuwait.