According to the Kuwait Tax Law (Decree 3 of 1955), every body corporate carrying on business in Kuwait should pay tax on its Kuwait operations. The tax is calculated at an increasing rate depending on levels of profit, up to a maximum of 55%.
In practice tax is imposed on foreign non-GCC corporate bodies only. GCC corporate bodies are companies that are incorporated in countries comprising the Gulf Cooperation Council (GCC). The Department of Income Tax (DIT) seeks to tax not only non-Kuwaiti corporate bodies, but also foreign corporate shareholders in Kuwait (and GCC) companies. The DIT taxes the percentage interest of the foreign corporate shareholders.
Carrying on business: The term carrying on business in Kuwait is interpreted in a broad manner by the DIT and the full value of operations related to Kuwait are subject to tax even if the services performed in Kuwait are relatively insignificant. The term is defined in the Tax Law to include:
- purchasing and selling property or goods, or rights to them, in Kuwait and maintaining a permanent office in Kuwait where the contracts of purchase and sale are executed;
- operating of other manufacturing, industrial, or commercial enterprise in Kuwait;
- letting any property in Kuwait; and
- rendering services in Kuwait.
However, it does not include merely purchasing property or goods, or rights to them, in Kuwait.
The Tax Law also provides that companies operating in Kuwait through an agent are subject to tax. An agent for the purposes of the Tax Law has been defined as: "a person authorized by a principal to enter into a binding contract with a third party on the principal's behalf within the scope of that authority." However, the DIT does not restrict itself to assessing tax based on this narrow definition of agent. Increasingly, the DIT has endeavoured to tax foreign companies despite the fact that the local party might not have the authority to bind the foreign principal contractually.
Taxation of exclusive distributorship relationships: the DIT asserts that foreign companies with exclusive distributors in Kuwait are subject to taxation on the basis of exclusive distributorship relationships are tantamount to an agency relationship indicative of a foreign principal carrying on business in Kuwait (and on that basis payments to a foreign principal are taxable). In this regard, the DIT seeks to rely on Article 286 of the Law of Commerce, which is limited in application to confirming that an exclusive distributor is entitled to certain rights afforded to contract agents set out in the provisions stated in that Article (for example, receipt of compensation upon termination or expiration of the distributorship relationship). This interpretation expands the definition of agent in the Tax Law.
Some of the grounds the DIT seeks to rely on (including the exclusive distributorship interpretation of the DIT) in determining what constitutes carrying on business in Kuwait are increasingly being challenged. These issues have not yet been fully tested before the courts. However, in recent years, as the DIT has become more proactive in pursuing foreign companies, an increasing amount of tax cases are being litigated.
Tax treaties: Double-taxation treaties have been signed and ratified between Kuwait and a number of countries and the DIT has been increasingly applying these treaties.
Ministerial Order 44 of 1985: Although, strictly speaking, there is no withholding tax in Kuwait, according to Ministerial Order 44 of 1985 there is a requirement for government agencies and private entities in Kuwait to notify the DIT of all contracts entered into by them and to retain 5% of the payments due to contractors or subcontractors until the contractor is able to provide a tax-clearance certificate or until the DIT demands the 5%.
The DIT has interpreted the term contractor in a broad manner to the extent that any foreign party conducting business in Kuwait, regardless of its characterization, could be subject to Ministerial Order 44 of 1985.
Challenging a tax assessment: If the DIT issues a tax assessment against a foreign company, the company has to object to the assessment through various bodies in accordance with a prescribed administrative process, culminating with taking action before the Administrative Court.
It has been common practice for foreign companies not to initiate this administrative process and take action before the Administrative Court but instead wait until the Ministry of Finance takes action, demanding payment of unpaid taxes. However, the Court of Appeals recently decided that a taxpayer's failure to challenge the DIT's assessment in accordance with the administrative challenge procedures and before the Administrative Court represents a waiver by the taxpayer to challenge the DIT's assessment.
Potential tax exemptions: Subject to certain conditions being met, tax exemptions may be obtained for foreign non-GCC companies establishing their operations within the Kuwait Free Trade Zone and/or in accordance with the Direct Foreign Capital Investment Law. Foreign companies intending to conduct business operations in Kuwait should assess whether they can benefit from either of these possibilities.
Government initiatives on income taxation: The Kuwaiti government is reportedly considering a new income tax law that would expand the scope of income taxation to apply to individual and non-employment income earned by both individuals as well as corporate bodies of whatever nationality. It is reported that the maximum tax rate on income would be 25%.
Sam Habbas and Paul Day
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