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There is no personal income tax system in Kuwait either on salaries or on income from commercial activities. Corporate income tax is levied only on foreign companies operating in Kuwait. There are no other taxes of any consequence, such as sales or value added taxes, estate taxes etc Taxation Law & Administration The Tax Decree of 1955 (Amiri Decree No. 3 of 1955) governs taxation in Kuwait along with various tax treaties (dealing with income tax), with a number of foreign nations. These decrees are supplemented by Directives issued by the Director of Income Taxes. Payment, filing and assessment procedures are covered by tax administration. A taxpayer may request in writing to have a year end other than the 31st December. The Gregorian calendar year is used for tax purposes. An eighteen month accounting period is allowed initially, thereafter twelve-month accounting periods are required. The deadline for tax declarations is the fifteenth day of the fourth month following the end of the taxable period (e.g. the 15th April in the case of 31st December year-end). Tax is payable in four equal installments on the fifteenth day of the fourth, sixth, ninth and twelfth months following the end of the taxable period. When filing audited accounts an extension of a maximum of 75 days may be granted. Remember, no tax payment is necessary until the accounts are filed. This applies particularly when an extension has been granted. However, it is important to remember that if the payment has been left to the last moment it must then be in one lump sum, no installments will be allowed. The method of payment will be cash or a certified Cheque drawn on a Kuwaiti bank. Internationally recognised firms of accounts which are approved by the Director of Taxes may certify accounts. This is provided for in Article 9 of the Tax Decree. The Director of Taxes will require that the declaration and supporting financial statements must be in Arabic and are to be certified by an accountant in practice in Kuwait who is registered with the Ministry of Commerce and Industry. Profit disclosed by audited financial statements and adjusted for tax depreciation and any items disallowed by the tax inspector are used to assess tax liabilities. It is sometimes possible to negotiate a deemed profit basis of assessment, however, this would need special circumstances. Appeals There is no appeals process laid down in the tax law, and any dispute between the Director of Income Taxes and the taxpayer needs to be referred to civil courts for resolution. It is, however, virtually unknown for tax persecutions to reach the court. All assessments are normally, agreed through negotiation with the tax department. Audits Normal accounting records need to be kept as the Income Tax department, will often insist on inspecting the books and original supporting documentation before agreeing the tax liability. Accounting records may be kept in English, or Arabic or both, but when kept in both languages they must be complete. Penalties In an event that a declaration is overlooked or payment not made by a due date, 1% of the tax is payable as a fine. This fine will apply for each 30 days or fraction of, during which either the payment has not been made or the declaration overlooked. It is important to cooperate fully with the Director of Income Taxes and to ensure prompt filing of tax declarations. It goes without saying that this also applies to the payment of any tax liability. Limitations There is no specific provision regarding the statute of limitation and, therefore reliance needs to be placed in the Civil Law (No 67 of 1980). In brief, this law allows that no claim or other annual charge due to the state may be enforced after a period of 5 years. It is, however, the option of the authors of this report that non submission of tax declarations or non payment of taxes for five years would not exonerate the taxpayer from any claims since the law specifies that the onus to file a tax declaration and make liable payments lies with the taxpayer. Resident Corporations Under the current application to the Tax Decree of 1955, foreign companies described in the decree as "bodies corporate" which carry on trade in Kuwait are taxable. It would appear that the term "body corporate" means an association formed and registered under the laws of any other country or state. In other words any organization which is recognised as having a legal existence which is separate from that of its owners. It is worth noting that Partnership will fall within this definition. Profits earned in Kuwait by foreign companies owned by nationals of the Gulf Cooperation Council are not taxed. There is little difference in principle between the taxation of profits of a Joint Venture or a locally registered Shareholding Company. Tax is however levied on the proportion of the company owned by a foreign investor, this applies to the case where a foreign investment is held in a company which is partially owned by a resident of one of the Gulf Co-operation Council states. It is normal for management fees to be added to the revenue in the case of a tax declaration. A shareholding in a Limited Liability Company must be held in the name of an individual; if a foreign company wants to buy shares, it can only do so through a nominee arrangement. Individuals are not liable to taxation in Kuwait, therefore, it would appear to be a method of legally avoiding liability. The Director of Income Taxes has not, so far, been willing to challenge these arrangements. It is abundantly clear, however, that if the tax authorities in Kuwait become aware of the foreign companies interest in a Limited Liability Company a tax would be made through the nominee on the foreign interest. Rates Rates of tax range from none at all on profits of upto KD 5,250 to 55% on profits over KD 375,000. No progressive charges on bands of income are made. The total profit is charged at the rate applicable to the band within which it falls. For example, on an income of KD 375,000 the tax payable is 45% which equals KD 168,750. Relief is often granted in cases where the taxable profit is only marginally higher than the previous level. Territoriality Kuwait is always considered as the source of income, i.e. if the performance of the services or manufacture of the goods takes place within the borders of the state. Where, in a supply and installation contract, the taxpayer is required to account to the Kuwait tax authorities the place of performance is interpreted to include work carried out outside Kuwait normally under a contract which also involves onshore activity. The relevance of the tax assessment which includes an assessment of an entire contract, when only a small percentage is carried out inside Kuwait, means that applications for specific exemptions under a double taxation treaty should take place before any contract is agreed. Gross Income Gross income will include revenue from dividends, interest, business, discounts, trade, rents, and premiums, as well as any other profits from either an income or a capital gain. Tax is assessed on contract work on the gross billing, which excludes the advance payment. Completed contract or percentage accounting methods are unlikely to be accepted by the tax authorities. Deductions Agent's Commission : The tax deduction for commissions paid to a local agent or sponsor is limited to 3% of revenue. Business Expenses : For expenses to the deductible, they must be incurred in the production of income in Kuwait. Such expenses must be supported by adequate documentary evidence. Capital Losses : Losses incurred on the disposal of capital assets are allowed as deductions from income. Depreciation : The permissible rates of depreciation for tax deduction purposes are available in detail from the Ministry of Finance-Tax Department. Head Office Overheads : The tax authorities allow the following deductions from income as a contribution towards expenses incurred by the head office of a foreign company:
Any direct expenses fully supported by documentation will be allowed by the tax authorities in addition to the percentages stated above. Interest : This is only usually accepted if it is paid directly by the branch to a bank in Kuwait and is reasonable in relation to the activities of the business in Kuwait. Provisions : Provisions, as opposed to accrues, are not accepted for tax purposes. Thus, terminal benefits are only deducted when paid out, and debts may only be written off for tax purposes once they are proved irrecoverable. Inventory : Any inventory valuation method that is in general use is acceptable for tax purposes. Tax Incentives It is not possible for a foreign corporation to obtain tax exemption except under Government-to-Government contracts, e.g. defense purposes. A ten years tax holiday can be arranged for a new industrial project. Occasionally, it is possible to negotiate a tax-reimbursable contract, particularly with a Ministry or other Government agency. In such a case the foreign taxpayer needs to file a tax declaration, pay tax and agree to the assessment in the normal way. The tax paid is then recovered from the contract owner. Loss Carryovers Losses may be carried forward and deducted from subsequent profits without Limitation as to period, provided there is no cessation of activities i.e. the absence of revenue generating activities for a year; they may not be carried back. Treatment of Group of Companies If a foreign company has more than one activity in Kuwait, including that through separate subsidiaries in the same line of business, a single tax declaration is required, aggregating income from all activities. Dividends, Interests and Royalties to Foreign Affiliates : Where a foreign company has a minority shareholders interest in a locally registered company, tax is levied on the foreign company's income (whether distributed or not) plus any amounts receivable for interest, royalties, technical services or management fees. Non Resident Companies : Kuwait tax laws do not distinguish between resident companies, non-resident companies and branches of foreign companies. Partnerships : Although a partnership is an association of individuals who are not subject to taxation in Kuwait, the Director of Income Taxes treats a foreign partnership as if it were a body corporate and levies taxes on its operations in Kuwait in the normal way. Joint Ventures : A Joint Venture or Consortium has no legal status in Kuwait, and the tax department normally raises assessments on the following basis:- l Consortium involving joint performance of the contract - a combined tax declaration for the total earnings from the contract. Each partner's share of taxable profit may then be taxed individually.l Consortium involving separate performance by the partners - each partner to account for his share of revenue in a separate tax declaration. Withholdings : There are no withholding taxes in Kuwait. There are, however, retentions made on payments due to foreign companies until such time as they satisfy their Kuwait customer that they have dealt with their Kuwaiti tax obligations. A directive issued by the Director of Income Taxes in January 1980 requested all Ministries, Government departments, and public and semi-public establishments to withhold final payments due to foreign entities until such entities present a tax clearance issued by the Director of Income Taxes. The scope of this request was broadened by the Ministry of Finance on 30th December 1985 by Order No. 44 which stated that:
The final payment due to the contractor or sub-contractor must be withheld until the When inspecting the tax declaration filed with the Director of Income Taxes, the Ministry of Finance will disallow all payments made to sub-contractors that have not been reported. Treaties Kuwait has signed double taxation treaties with Cyprus, France, Germany and Italy. Treaties with Belgium and China await ratification. Treaties are also in final draft form or are being negotiated with Australia, Austria, Canada, Finland, Hungary, India, Malaysia, Singapore, Switzerland, Turkey and the United States. Because Kuwait does not withhold tax on dividends, interest or royalties, these treaties do not provide special withholding rates for payments from Kuwait to residents of these countries. There are also double taxation agreements with certain countries relating solely to international air and / or sea transport. Kuwait is a signatory of the Arab Tax Treaty and the GCC Joint Agreement, both of which allows for the avoidance of double taxation in most areas. Accounting Standards : Compliance with the standards promulgated by the International Accounting Standards Committee (IASC) is mandatory for Shareholding and Limited Liability companies for accounting periods starting on / after 1st January 1991. Prior to that date there was board compliance with most International Accounting Standards. Areas where there has been an important impact, now full compliance is obligatory, are in respect of:
Consolidated Financial Statements and Accounting for Investments in Subsidiaries. Disclosures in the Financial Statements of Banks and similar Financial Institutions - There has been a significant improvement in the disclosures of banks financial statements as a result of the introduction of this standard. The Government has proposed a long list of drastic measures including income tax, sales tax, levying customs duty on imports, charging for employment of expatriate labour as part of the plan to bridge the growing budget deficit. The Finance Minister, affirmed that diversification of revenues is essential for narrowing the budget deficit. This would entail a comprehensive taxation reform plan which would primarily aim at achieving four major targets:
It aims at introducing sale tax on local services to complement the customs duty on imports. It aims at imposing taxes on individuals including expatriates. This form of taxation It aims at collecting income tax from Kuwaiti companies, and not only from foreign companies. Currently, Kuwaiti companies are not required to pay any form of taxation or charges. |