This Briefing describes the implications for foreign companies with agents or distributors in Kuwait of Law No. 2 of 2008 and the application of flat rate of income tax of 15% on the net profits earned in the course of trade or business in the State of Kuwait. This is pertinent in view of the highly pro-active approach seen from the Department of Income Tax (DIT) to the collection of income tax from foreign entities with business in this jurisdiction.
A foreign entity appointing an agent (with full authority to bind) in Kuwait for the purposes of carrying on any trade or business stipulated in Article 1 of the Law (the list is extensive) will be subject, as principal, to Kuwait income tax on the net profits realised from that trade or business in the same way as if they operated directly in Kuwait.
It is widely believed that, by appointing a Kuwait distributor to sell its goods in this country, rather than an agent, a foreign company or business may avoid the problems with tax that it would encounter with the appointment of an agent. That may not necessarily be so, however, and again the DIT's adoption of a substance over form, case-by-case approach may lead to what in name is described as a distributorship being found instead to be an agency.
Once more, the DIT has yet to issue any clarification on what could tip an assumed distributorship over the line to becoming an agency (no mechanism for it to do so is provided for under the Law), but the following characteristics of any particular distributorship agreement may lead to closer inspection by the DIT:
- An authority to bind (even limited) on the part of the distributor;
- A high degree of control by the supplier on the distributor's operations (price control, product line selection or personnel selection, for example);
- The exclusivity of the appointment; or
- The extent that the supplier is 'hands on' in the operation of the relationship (distributor staff training, supplier regular visits to Kuwait, for example)
It seems that no amount of careful drafting, to exclude perceptions of agency, will deflect the DIT's focus in its appraisal.
Anthony J Coleby