Overview

• The Kuwaiti income tax legislation framework is governed by the following laws:
  • Kuwait Decree No. 3/1955 on Kuwait Income Tax;
  • Kuwait Law No. 2/2008 Amending Some Provisions of Kuwait Decree No. 3/1955;
  • Kuwait Ministerial Decision No. 29/2008 on the Executive Regulations of Kuwait Decree No. 3/1955 as amended by Kuwait Law No. 2/2008; and Kuwait Administrative Decision No. 875/2013 on Issuing the Rules and Instructions Implementing the Kuwaiti Income Tax Decree, Kuwait Decree No 3/1955 Amended by Kuwait Law No 2/2008.

These regulations describe various income tax requirements with respect to businesses undertaken within Kuwaiti territory. In particular, they include detailed rules regarding the determination of the taxable base for corporate income tax purposes.

• There is no personal income tax (PIT) imposed on individuals in Kuwait.
• Kuwait does not impose corporate income tax (CIT) on companies wholly owned by the nationals of Kuwait or other Gulf Cooperation Council (GCC) countries. However, GCC companies with foreign ownership are subject to taxation to the extent of the foreign ownership.
• The Current corporate income tax rate in Kuwait is a flat rate of 15%.
• The Kuwait tax law does not define a ‘permanent establishment’. In practice, even a single-day presence of a representative/employee of a foreign entity in relation to business is considered to have created a taxable presence of the foreign company in Kuwait. Further, certain types of Kuwait source income such as royalties, licenses, fees, interest, etc.) are subjected to tax filing by foreign companies irrespective of their physical presence in Kuwait.
• There is no withholding tax (WHT) in Kuwait. However, all public bodies and private entities are required to retain 5% on all payments to any beneficiary until a tax clearance certificate provided by the recipient of such payment from the Ministry of Finance (MOF), confirming that the respective company has settled all of its tax liabilities in Kuwait.

Personal Income Tax:

Kuwait does not impose personal taxes on income earned by individuals including non-Kuwaiti employees. However, the existence of a representative/employee of a foreign company in relation to a business or contract in Kuwait may trigger the taxable presence of the company in Kuwait for corporate income tax purposes.

Kuwaiti nationals, however, are subject to social security contributions under Kuwait’s Social Security Law. These contributions are paid monthly by both the employer and employee: the employer contributes 11.5% of the employee’s monthly salary, and the employee contributes 8%, with contributions capped at 2,750 Kuwaiti dinars (KWD). This social security program provides benefits such as retirement pensions and allowances for disability, sickness, and death.

Currently, expatriate workers in Kuwait are not subject to social security contributions. However, the Kuwait Labour Law mandates terminal indemnity payments for expatriates who have completed three years of service. This indemnity is calculated at 15 days’ pay per year for the first three years of service and one month’s pay per year thereafter.”

Corporate Taxation:

Foreign business entities (other than those owned by GCC citizens) undertaking trade or business in Kuwait are subject to the Kuwaiti corporate income tax (CIT). The current standard corporate income tax rate is set at 15%, according to Article 9 of Kuwait Law No. 2/2008 Amending Some Provisions of Kuwait Decree No. 3/1955. For GCC companies with foreign ownership, such companies are subject to taxation to the extent of the foreign ownership.

Taxable presence and permanent establishment

A company is resident in Kuwait for CIT purposes if it earns income from Kuwait, directly or indirectly. Given that CIT in Kuwait does not apply to Kuwaiti entities, only foreign entities earning income from Kuwait would be subject to tax. In addition, any foreign corporate body that is a shareholder in a Kuwaiti limited liability company would be subject to tax to the extent of the foreign ownership.

A place of business or the presence of company employees/representatives in Kuwait, even if for short-term visits, can trigger a Permanent Establishment (PE) in Kuwait. If the company is proven to have a PE in Kuwait, the Kuwait Tax Authority can subject to tax either the profit attributable to the PE or the full value of the contract, including the value of work performed outside Kuwait. The interpretation and application of the tax law by the Kuwait Tax Authority are usually inconsistent with international standards and are subject to the widest possible interpretation in order to tax all income from Kuwait.

Income Determination:

In Kuwait, income tax is levied on business profits, determined according to standard commercial practices and in alignment with Generally Accepted Accounting Principles (GAAP), including the accrual basis. However, it is important to note that provisions, unlike accruals, are non-deductible for tax purposes. For contract-based revenue, the percentage of completion method is applied for revenue recognition.

Under Article 2 of Kuwait Ministerial Decision No. 29/2008, tax is levied on various income categories, including:

• Income from activities or work conducted wholly or partly within Kuwait, regardless of where the contract is made, along with income from the sale or supply of goods and services;
• Proceeds from sale, rental, or licensing of trademarks, designs, patents, copyrights, or other intellectual property rights, as well as for using copyrights in any literary, artistic, or scientific works;
• Commissions (cash or in kind) from representation or brokerage agreements;
• Profits from industrial or commercial activities conducted in Kuwait;
• Capital gains from the transfer of assets, including the sale or transfer of ownership of property, shares in companies with substantial immovable assets in Kuwait;
• Income from loans granted within Kuwait;
• Profits from property transactions in Kuwait, whether tangible or intangible, including rights like mortgages and franchises;
• Establishment of a permanent office in Kuwait through which sales and contracts are conducted, regardless of ownership of the premises;
• Profit from leasing movable or immovable properties used in Kuwait; Profit from services, including fees for administrative, technical, or consultancy services executed in whole or in part in Kuwait, regardless of where the contract is signed; and
• Profits from operations in the Kuwait Stock Exchange Market, whether through direct investments or investment portfolios or funds.

Tax Deductions:

As a general rule, for expenses to be deductible, the expenses must be those that are necessary for the carrying out of the business and which are incurred during the taxable period in question. They should be of an actual nature and supported with relevant evidences.

Expenses incurred on cross-border operations may be exposed to the risk of being challenged by tax authorities particularly when such costs result in losses incurred by the taxpayer. In most cases, the tax deductibility of such costs is subject to restrictive conditions detailed under Kuwait Ministerial Decision No. 29/2008 and Kuwait Administrative Decision No. 875/2013.

The allowable deductions are as follows:

• Depreciation:

Depreciation is calculated on the straight-line method at specified rates. Nevertheless, the taxpayer can request the tax department within 90 days prior to submission of the tax declaration to use a different method of calculation. The tax department may accept this request if it is based on a reasonable basis in accordance with the tax accounting principles and rules.

The depreciation rates as specified in the law are as follows:

• Buildings – 4%
• Pre-fabricated buildings, furniture, and office equipment – 15%
• Electronics and electrical equipment – 15%
• Transportation and freight vehicles (trucks) – 15%
• Tools and equipment – 20%
• Cars and buses – 20%
• Drilling equipment – 25%
• Software – 25%
• Computer equipment and peripherals – 33.3%

• Start-up expenses

Expenses incurred prior to the signing of a contract are not eligible for tax deductions. This means that any costs associated with preparing a business for operation before a formal agreement is executed cannot be deducted from the business’s taxable income.

• Goodwill

In accordance with Executive Rule No.30, amortization of incorporated body goodwill is not allowed as a tax-deductible expense.

• Bad debts

Bad debts may be deducted if they relate to transactions in Kuwait and a final decision is made by a court of competent jurisdiction over the dispute.

• Charitable Contributions/Donations

Donations, grants, and amounts paid to licensed Kuwaiti public or private agencies are deductible.

• Fines and penalties

Fines and penalties are not tax deductible.

• Loan Interests

Interest expenses are deductible if they are related to operations in Kuwait and are paid to a local bank. Further, interest expenses incurred on loans from abroad are deductible subject to the provision of relevant evidence supporting that the loan is allocated to finance the business operations in Kuwait. In many cases, the tax deduction of such cross-border interest expenses has been challenged by tax authorities.

• Subcontract costs

A subcontractor is defined as any third party, provider, or beneficiary engaged in performing a portion of the contract by the principal contractor.

Under Executive Rule No. 28, subcontractor costs may be deductible if the following conditions are met:

The subcontracted work is directly related to the main contract.

• The cost associated with the subcontractor’s work does not exceed the corresponding revenue for such work.
• All requisite documentation (e.g., the contract, invoices, and settlement records) is properly maintained.
• If the contracting party sells or assigns the contract to the subcontractor or another party, formal written approval from the contracting authority must be secured.
• If the subcontractor subsequently sells or assigns the contract to another subcontractor, formal written approval from both the contracting authority and the initial contracting party is required.

During the inspection, the tax department may disallow payments to subcontractors if the contracting party fails to notify the tax department of subcontractor involvement or neglects to withhold 5% of the subcontract value as an income tax retention.

• Overhead or Indirect Expenses:

In accordance with article 5 of Kuwait Ministerial Decision No. 29/2008, the overheads (the allocation of the head office indirect expenses) are deductible up to 1.5% of the company’s direct revenues realized in Kuwait after deducting:

• subcontractors ‘costs;
• incidental revenues;
• reimbursed costs; and
• Design costs (except for the design costs conducted by the head office).

The direct costs allocated by the head office (e.g. supply of goods, design, and consultancy costs) are regulated as follows:

For costs of supply sourced from outside Kuwait:

Supply origination	Maximum Allowable Costs as a Percentage of the Revenue
Head office	85%
Affiliated Companies	90%
Third parties	95%

 

For design costs incurred outside Kuwait:

Work conducted by	Maximum Allowable Costs as a Percentage of the Revenue
Head Office	75%
Affiliated companies	80%
Third parties	85%

 

For consultancy costs incurred outside Kuwait:

Work conducted by	Maximum Allowable Costs as a Percentage of the Revenue
Head Office	70%
Affiliated companies	75%
Third parties	80%

 

In the event there is no separate revenue for consultancy, design, or supply work, although the nature of the contract requires the existence of such work, the following formula shall be applied:

Consultancy, design, or supply revenue = (consultancy, design, or supply costs/total direct costs) x contract revenue.

• Net operating losses

As per the tax law, losses may be carried forward for a maximum of three years, provided that none of the following circumstances occur in the fiscal period immediately following the year in which the loss was incurred:

• The tax declaration does not report any revenue from the taxpayer’s business activities in Kuwait.
• There is a change in the taxpayer’s legal structure.
• The taxpayer undergoes a merger with another entity.
• The taxpayer liquidates or ceases operations in Kuwait.

• Other taxes and fees

Taxes and fees, except the income tax, are deductible in Kuwait.

Group taxation

If a foreign company conducts more than one business activity in Kuwait, one tax declaration aggregating the income from all activities is required to be submitted in Kuwait. In addition, in case two affiliates are involved in similar lines of business or work on the same project, their taxable results may be aggregated for the assessment of tax by the Department of Inspection and Tax Claims (DIT), a department of the Kuwait Tax Authority.

Transfer pricing

There is no Transfer Pricing Law in Kuwait. However, Executive Rule No. 49 to the Kuwait Tax Law states that inter-company transactions should be comparable to transactions among companies that are not legally or financially associated. It also states that the Kuwait Tax Authority is entitled to inspect such transactions to ensure that they are made on an arm’s-length basis and not made for obtaining illegal tax privileges.

Thin capitalization

Executive Rule No. 38 deals with the tax treatment of interest and letters of credit. Through this rule, the DIT will accept the interest paid by a company, provided it is fully supported, paid to a financial institution, and related to the Kuwait operations. However, the tax law provides the DIT with the right to determine the proper tax treatment on a case-by-case basis (if required).

Withholding taxes:

Kuwaiti tax legislation does not establish a withholding tax (WHT). However, all public agencies and private organizations are mandated to withhold 5% from the value of contracts, agreements, or transactions, as well as from each payment made to any incorporated entity. This withholding continues until the recipient presents a tax clearance certificate from the Ministry of Finance (MoF), verifying that the respective company has fulfilled all its tax obligations in Kuwait. Additionally, the final payment should not fall below 5% of the total contract value.

Tax benefits and incentives:

Leasing and Investment Companies Law No. 12 of 1998 allows the formation of investment and leasing companies having their principal place of business in Kuwait, with Kuwaiti or foreign shareholders. The law grants a five-year tax relief to non-Kuwaiti founders and shareholders of such companies, beginning on the date of establishment of the companies.

Foreign Direct Investment Law No. 116 of 2013 (FDI Law)

The FDI Law provides foreign companies with several incentives, including:

• Expedited process by introducing a one-stop-shop authority, the Kuwait Direct Investment Promotion Authority (KDIPA) that is responsible for evaluating and granting the licence and approval for foreign companies operating in Kuwait (compared to the old committee and Council of Ministers).
• Added flexibility of allowing foreign companies the possibility of establishing and operating through a 100% foreign-owned ‘branch’ or ‘representative office’ in Kuwait.
• Allowable tax credit for a certain number of years.
• Total or partial exemption from customs duties on imports.
• Recruitment of required foreign labour.
• The incentives granted to foreign investors in Kuwait under the FDI Law are applicable to activities in certain economic sectors and subject to the fulfilment of certain requirements including:
• The transfer of advanced technology to Kuwait.
• Stimulation of the local market through engagement of local suppliers for operational purchases.
• Creation of job opportunities for Kuwaiti nationals.

Kuwait Free Trade Zone (KFTZ)

Businesses set up in the KFTZ for carrying on specified operations are exempt from taxes on operations conducted in the zone. Foreign entities can own 100% of such businesses. Currently, the government of Kuwait has stopped issuing KFTZ licenses.

Circular No. 50 of 2002

As per Circular No. 50 of 2002 issued by the DIT regarding treatment of tax-exempted companies under the tax law, other special laws, and/or tax treaties, exempted companies shall comply with submitting a tax declaration, the inspection process, and the assessment procedures like other companies in order to be eligible for exemption.

Tax treaty relief

Kuwait has established tax treaties with various countries to prevent double taxation, and negotiations or ratifications are ongoing with several other nations.

However, the Kuwait Tax Authority’s interpretation of these treaties does not always align with the views of taxpayers and often deviates from the OECD guidelines or international norms regarding tax treaty interpretation. Consequently, disagreements over the interpretation of different treaty provisions between taxpayers and the Department of Income Tax (DIT) are common. Such disputes typically arise on issues related to:

• The existence of a Permanent Establishment (PE).
• Income attributed to a PE.
• The tax deductibility of expenses incurred outside of Kuwait.

According to Article 13 of the Executive Bylaws of Law No. 2 of 2008, foreign companies which are subject to treaty exemptions/reliefs are still required to file their tax declaration to claim such exemptions. Therefore, even where the company may apply treaty benefits which results in no tax payable or a reduced tax amount, it would still be required to submit the tax declaration reporting all the income related to Kuwait agreements and claim an exemption/relief under the relevant tax treaty for the revenue which it believes is not taxable in Kuwait.

The revenue claimed as exempt under treaty benefits would be later substantiated by the KTA when it confirms that a company is eligible for such treaty benefits as claimed and is satisfied with the documents supporting the exemption of certain revenue from tax in Kuwait.

Based on our experience, the Kuwait Tax Authority (KTA) demonstrates inconsistency in applying tax treaties, with interpretations that frequently diverge from international standards. In practice, the KTA tends to adopt an aggressive stance when interpreting Kuwait’s tax treaties, leading to frequent disputes, especially regarding exemptions and reliefs sought by taxpayers.

Therefore, treaty relief should not be assumed based on international interpretations and robust documentation is required to support any treaty relief claims.

Other taxes/levies

Zakat

According to Law No. 46 of 2006, Kuwaiti shareholding companies are required to pay Zakat at 1% of the net profit Zakat is imposed on all publicly traded and closed Kuwaiti shareholding companies at a rate of 1% of the companies’ net profits.

Contribution to the Kuwait Foundation for the Advancement of Sciences (KFAS)

All Kuwaiti shareholding companies are required to pay 1% of their net profits, after transfer to the statutory reserve and the offset of losses carried forward, to the KFAS, which supports scientific progress.

Tax administration

Taxable period

Tax is imposed on profits arising in a taxable period, which is defined as the accounting period of the taxpayer and further assumed to be one calendar year. The first taxable period can, however, be a minimum of six months and a maximum of 18 months. The Department of Income Tax (DIT) may also agree to a written request from the taxpayer to change the year-end to a date other than 31 December.

Tax returns

The taxpayer must submit a tax return, based on the taxpayer’s books of account, within three months and 15 days from the end of the taxable period. Taxpayers can, in certain cases, request an extension of up to 60 days to file the tax return. If such an extension is granted, no tax payment is necessary until the tax declaration is filed, and payment must then be in one lump sum.

The taxpayer must maintain certain accounting records in Kuwait, which are subject to inspection by the tax department’s officials after submission of the tax declaration. Accounting records can be in English and may be in a computerized system used to prepare financial statements if the system includes the required records and the tax department is previously informed.

The tax return should be supported by the following:

• Audited balance sheet and profit-and-loss account for the period.
• Detailed list of fixed assets (e.g. additions, disposals).
• List of inventory (e.g. quantities and values).
• List of subcontractors and the latest payments to them.
• Copies of current contracts and a statement of income and expenditure for each.
• Trial balance, forming the basis of the accounts.
• Last payment certificate from the client.
• Insurance companies must attach to the Public Budget and the tax declaration a detailed statement with the reinsured documents and the related terms and conditions.

As a general rule, an assessment is finalized only after inspection of the client’s records by the tax department. As indicated above, proper documentation must be maintained to support expenditures and to avoid disallowances at the time of tax inspection. If support is considered inadequate, the assessment is apt to be made on the basis of deemed profitability. This is computed as a percentage of turnover and is fixed arbitrarily, depending on the nature of the taxpayer’s business.

Payment of tax

Tax is payable in four equal instalments on the 15th day of the fourth, sixth, ninth, and 12th months following the end of the tax period. If an extension is granted by the DIT, all of the tax is payable upon the expiration date of the extension. Failure to file or pay the tax on time attracts a penalty of 1% of the tax liability for every 30 days of delay or part thereof.

Objection process

If a company disagrees with an assessment issued by the DIT, the company should submit an objection within 60 days from the date of the assessment. The DIT is required to resolve the objection within 90 days of the filing of the objection, after which a revised tax assessment is issued by the DIT. Upon issuance of a revised tax assessment, any additional tax is payable within 30 days. If the DIT issues no response within 90 days of filing the objection, this implies that the taxpayer’s objection has been rejected.

Appeals process

In case the objection is rejected or the taxpayer is still not satisfied with the revised tax assessment, the company may contest the matter further with the Tax Appeals Committee (TAC) by submitting a letter of appeal within 30 days from the date of the objection response or 30 days from the expiry of the 90 days following submission of an objection if no response is provided by the DIT.

The matter is then resolved through appeal hearings, and a final revised assessment is issued based on the decision of the TAC. Tax payable per the revised assessment must then be settled within 30 days from the date of issuance of the revised assessment. Failure to do so results in a delay penalty of 1% of the amount of the tax due per the final assessment for each period of 30 days or part thereof of the delay.

Statute of limitations

The statute of limitations period is five years. Moreover, 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.