Law No. 2 of 2008 introduced a flat rate of income tax of 15% on the net taxable profits earned by foreign entities in the course of trade or business in Kuwait. This came as a welcome replacement of the sliding scale of tax of up to 55% that had originally been applied by the Amiri Decree (No.3) of 1955. However, there are several significant pitfalls under the new law in the extent and the manner in which its provisions are applied by the Kuwaiti Ministry of Finance, through its agency, the Department of Income Tax (DIT).
There is reference to money lending activities within the new law, and income derived from those activities is subject to Kuwait income tax. The DIT has not issued any guidance as to what exactly amounts to "money lending" and therefore any foreign bank or financial institution with financing to customers in Kuwait may be required to register with the DIT and duly make the required declaration of income derived from its Kuwait business.
The borrower will technically be required to retain 5% of any payment due to the lender under the financing and this may not be released by the borrower until the DIT, at the application of the lender, has issued a tax clearance certificate permitting this, on the grounds that the foreign bank has fulfilled its Kuwait tax compliance obligations and settled any Kuwait taxes due.
Foreign banks seeking to enforce gross-up obligations on their customers should bear in mind that any compensatory payment received on account of the original withholding will be treated in turn as subject to the same retention obligation, and this may make it more practical for them to secure appropriate balancing tax credits from their domestic tax authorities.
Technically, there are significant sanctions that may be imposed upon a bank customer not complying with the requirement to make the 5% retention, and this may serve as an additional justification for the foreign bank to consider this alternative.