contract is more than the PE threshold under the applicable tax treaty, which has resulted in the denial of tax exemption/relief claimed by nonresidents under the applicable double tax treaties entered into by Kuwait.
Tax rates. Under Law No. 2 of 2008, the tax rate is 15%.
In November 2023, the KTA announced its plans to introduce a new Business Profits Tax (BPT), which may apply to GCC/ Kuwaiti companies in 2025 or 2026 instead of the existing corporate income tax, zakat and National Labour Support Tax (NLST). See Section D for further details regarding zakat and the NLST.
The following are the tax rates under Law No. 23 of 1961, which applies to profits derived from the operations in the Partitioned Neutral Zone.
Taxable profits
Investment incentives. Kuwait offers certain investment incentives that are 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. PDISK replaced the Direct Foreign Capital Investment Law (DFCIL; Law No. 8 of 2011). Under PDISK, the Kuwait Direct Investment Promotion Authority (KDIPA) was established. The KDIPA took over from its predecessor, the Kuwait Foreign Investment Bureau. The new authority is a part of the Ministry of Commerce and Industry.
PDISK adopts a negative-list approach to determine the applicability of the law. 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.
116 of 2014 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 corporate income tax 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.” On 3 January 2016, the Kuwait Ministry of Finance (MOF) issued Administrative Resolution No. 2028 of 2015, which amended certain executive regulations. It includes an amendment with respect to the tax exemption on listed securities. This amendment reconfirms the tax exemption for capital gains on the disposal of Kuwaiti listed securities.
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 KTA to insist on inspecting the books of account (which may be in English) and supporting documentation before agreeing to the tax liability.
The KTA has 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 taxpayers to enclose the prescribed documents, such as the trial balance, list of subcontractors, list of fixed assets and inventory register, along 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 KTA issued Executive Rules in 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 noncompliance with the above regulations, the KTA may finalize an assessment on a basis as deemed reasonable by them. The Bylaws provide that a taxpayer must register with the KTA within 30 days after signing its first contract in Kuwait. In addition, a taxpayer is required to inform the KTA of any changes that may affect its tax status within 30 days after the date
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 the design work is carried out in the head office, 75% of the design revenue is allowed as costs.
• If the design work is carried out by an associated company, 80% 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 KTA.
• If the design work is carried out by a third party, 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 third company to the KTA.
• If the design revenue is not specified in the contract, but design work needs to be executed outside Kuwait, the KTA 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 services incurred outside Kuwait are restricted to the following percentages:
• If the consultancy work is carried out in the head office, 70% of the consultancy revenue is allowed as costs.
• If the consultancy work is carried out by an associated company, 75% 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 KTA.
• If the consultancy work is carried out by a third party, 80% 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 KTA.
• If the consultancy revenue is not specified in the contract, but consultancy work needs to be executed outside Kuwait, the KTA 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 KTA deems the following profit margins for imported materials and equipment:
• Imports from head office: 15% of related revenue
• Imports from related parties: 10% of related revenue
• Imports from third parties: 5% of related revenue
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 KTA 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 difficult to claim deductions for interest expenses incurred outside Kuwait. Interest paid to the head office or agent is disallowed. Interest 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 KTA may allow the deduction of rent 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 Law No. 2 of 2008. 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 subcontractor 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% of the direct revenue
• Companies participating in Kuwaiti companies: 1% of the foreign company’s portion of the direct revenue generated from its participation in a Kuwaiti company
• Insurance companies: 1.5% of the company’s direct revenue
• Banks: 1.5% 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
work that is subcontracted to other entities (that is, any subcontract costs in excess of related revenue are disallowed).
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 KTA.
• It must submit copies of all the contracts and subcontracts to the KTA.
• 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 KTA.
In the event of noncompliance with the above rules, the KTA may disallow the related costs from the contract or subcontract.
Article 39 of the Bylaws empowers the MOF 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.
The KTA recently issued Circular No. 8 of 2023 (the Circular), introducing updates on the tax retention process for eligible companies licensed under the KDIPA. As per the Circular, eligible entities licensed under the KDIPA are entitled to obtain a release of 80% of the 5% tax retention amount withheld by the contract owner(s) based on a Tax Retention Release Certificate (TRRC) issued by the KTA. The remaining 20% of the tax retention would be released on the completion of the tax compliance process and discharge of tax liability, if any.
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 accounts in Kuwait. These penalties apply from 1 October 2003. This requirement has been legislated through the labor law issued in 2010. The KTA may disallow payroll costs if employees do not receive their salaries in their bank accounts in Kuwait.
BEPS Pillar Two. On 15 November 2023, Kuwait joined the Organisation for Economic Co-operation and Development/G20 Inclusive Framework (IF) on Base Erosion and Profit Shifting (BEPS) and has committed to implementing the minimum standards of the BEPS project and Pillar Two. For the latest information, please see the BEPS 2.0 – Pillar Two Developments Tracker (https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/ tax/tax-pdfs/ey-beps-2-0-pillar-two-developments-tracker.pdf).
F. Treaty withholding tax rates
Kuwait has entered into tax treaties with several jurisdictions for the avoidance of double taxation. Treaties with several other jurisdictions are at various stages of negotiation or ratification.
Disputes with the KTA 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 jurisdictions 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.
There is no withholding tax regime in Kuwait. However, the KTA considers the withholding tax rates provided in tax treaties, as outlined in the table below, as the corporate income tax rates for the respective sources of income.
(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.
• Any entity established, all the capital of which has been provided by that state or any political subdivision or local authority thereof or any local governmental institution as defined in the second bullet above, together with other states
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. The 10% rate applies in all other cases.
(mm) The 10% rate applies if the beneficial owner of the interest is a resident of the other contracting state. 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 interest is one of the following in the other contracting state:
• The government or any political subdivision or local authority thereof
• Any governmental institution created in that contracting state under public law such as a corporation, central bank, fund, authority, foundation, agency or other similar entity
• Any entity established in that state, all the capital of which has been provided by that state or any political subdivision or local authority thereof
(nn) The 0% rate applies if the beneficial owner of the dividend or interest is a government entity of Kuwait, which is defined as the following:
• The government of Kuwait or a local authority thereof
• Any governmental institution created under public law such as a corporation, central bank, fund, authority, foundation, agency or other similar entity
• Any entity established in Kuwait, all the capital of which has been provided by Kuwait or local authority thereof or any governmental institution as defined in the second bullet above, together with other states
The 5% rate applies in all other cases.
(oo) Interest arising in a contracting state is exempt from tax in that state if derived by the following from the other contracting state:
• Political subdivision
• Local authority
• The government
The 10% rate applies in all the other cases.
(pp) The 0% rate applies if the beneficial owner is a contracting state, including in the case of Kuwait, the central bank, the general investment authority and any entity carrying on a similar activity and wholly owned by the same as well as any legal entity wholly or mainly owned by the government of Kuwait as may be agreed from time to time by the competent authorities. The 5% rate applies if there is a holding of at least 10%. The 10% rate applies to all other cases.