The Kuwait tax law states that “every body corporate, wherever incorporated”, that carries on a trade or business in Kuwait shall be subject to income tax, at a rate of 15%. However, in practice, only foreign companies are subject to tax. For this purpose, this includes foreign companies conducting business directly or through an agent in Kuwait, and Kuwait companies to the extent that their net profits are distributable to foreign shareholders. There is no concept of a permanent establishment in Kuwait tax law. Tax liability is based on whether profits are considered to be sourced in Kuwait.
Tax returns should be submitted within three months and 15 days from the end of a taxable period, which is typically a 12-month accounting period ending on December 31st. They should be based on accounts and accounting records that are maintained in Kuwait and subject to inspection by the Tax Department. Generally, a tax liability is finalised once the Tax Department has inspected the records. If the records are considered inadequate, or if the return is disputed by the Tax Department, the latter may issue an arbitrary assessment.
If the taxpayer does not agree with an assessment issued by the Tax Department, they may object to the assessment within 60 days of its issuance. The Tax Department should try to resolve the dispute within 90 days of the objection and issue a revised assessment. If the Tax Department fails to respond to the objection, it is deemed to be a rejection of the objection.
A taxpayer may appeal a revised assessment or a rejected objection to the Tax Appeals Committee, established by the Ministry of Finance, within 30 days of the issuance of the revised assessment or the expiry of 90 days of the submitted objection if no response is received from the Tax Department. The matter should be resolved through appeal hearings, but further appeal to the Civil Courts is also possible. This is usually a lengthy process, partly due to the lack of tax expertise. Both the Tax Appeals Committee and the Civil Courts often rely on appointing external tax experts to consider the technical aspects of a case.
There is no withholding tax on cross-border payments, but payments on all contracts should be subject to a 5% retention by the payor until the payee is able to arrange a tax clearance letter issued by the Tax Department. The purpose of the retention is to enforce tax compliance by foreign companies that do not have a physical presence in Kuwait.
Generally, Kuwait’s tax treaties follow the OECD Model, with elements of the UN Model being included in some treaties. Foreign companies wishing to do business in Kuwait often find that the Kuwait tax inspectors interpret the provisions of Kuwait’s tax treaties inconsistently and in ways that differ from the commentaries on the OECD and UN Models. Examples include the following.
The tax exposure for foreign companies can be greater because home tax authorities are increasingly refusing tax relief for the profits taxed or the taxes incurred in Kuwait if they believe that Kuwait has wrongly applied the provisions of a tax treaty. An increasing cause of tax controversy is when foreign companies find themselves caught between the Tax Department’s application of a tax treaty and the home tax authority’s refusal to give tax relief. The onus is placed on the foreign company to ensure that the Tax Department properly applies a tax treaty, otherwise it will suffer the double taxation that the treaty is meant to prevent. The only practical recourse for the foreign company is to use Kuwait’s tax appeal process. There is no formal process available in Kuwait for the mutual agreement procedure nor commitment to expedite the procedure.
Foreign companies are subject to tax on trade or business activities carried on through an Agent, which is defined in the law as a person who is authorised to carry out a trade or business on behalf of a principal or someone authorised to enter into a binding agreement with a third party on behalf and for the account of the principal. Consequently, the law explicitly states that the profit of Kuwait merchants resulting from the resale of goods bought and transported for their own account shall not be taxable.
Despite the apparently clear definition of an Agent, the Tax Department often takes an inconsistent approach. In particular, the Tax Department sometimes tries to characterise franchise and distribution agreements as creating an agency. They will then issue arbitrary and excessive assessments on the Kuwait franchisee or distributor, in the name of the foreign franchisor or retailer, that bear little relationship to the actual return being made by the foreign company.
In other cases, the Tax Department will focus on trade marks, know-how and other intellectual property rights granted to a franchisee or distributor, and consider whether adequate taxable payment has been made for these rights. For example, if a distributor has the right to use a retail trade mark and branding but makes no separate payment for this, the Tax Department may consider part of the payment for retail goods to include a royalty. An arbitrary assessment may be raised for the deemed royalty, on which the foreign company is expected to pay 15% tax.
Foreign companies entering into franchise or distribution agreements should ensure that these are detailed documents that clearly state the obligations and responsibilities of both parties and, as appropriate, confirm the limitations on the franchisee or distributor to act on behalf of the principal. In addition, consideration for intellectual property rights should be clearly stated, even if it is nil consideration. If challenged by the Tax Department, robust and detailed documentation will be important should the matter have to go to appeal.
Virtual Services Permanent Establishment
The Tax Department may consider a Virtual Services Permanent Establishment to be created when a non-resident service provider “furnishes services” in connection with another person’s activity in Kuwait for a period of at least 183 days (or whatever threshold is provided by an applicable tax treaty). No physical presence or delivery within Kuwait is necessary to create a Virtual Services Permanent Establishment. The service provider will be expected to file a Kuwait tax return for the deemed Virtual Services Permanent Establishment, and this is enforced by the 5% retention mentioned above.
It is not clear how this approach is consistent with the Kuwait income tax law and executive regulations as they do not contain a definition of a permanent establishment. A reasonable interpretation of the law would be that profits are taxable if they are derived from the rendering of services wholly or partly within Kuwait, implying an in-country physical presence. The Tax Department approach also contradicts both the OECD Model and the UN Model Tax Treaties.
It has been noted that several of Kuwait’s tax treaties include elements of the UN Model Tax Treaty. In particular, they include reference in the permanent establishment article to the “furnishing of services including consultancy services, by an enterprise”. The Tax Department interpretation of this phrase appears to arise from discussions at meetings of the United Nations Committee of Experts for Tax Cooperation. A minority view was that “furnishing” was different from “performing” or “rendering”, and did not require a physical presence in the recipient country.
However, this minority view was rejected by a majority of the Committee of Experts, and the UN continues to take the same position as the OECD that a physical presence within the country is required in order for a permanent establishment to exist.
Kuwait domestic law requires transactions between related parties to be the same as between unconnected persons without any formal recognition of approved methodologies. Kuwait does not recognise the OECD transfer pricing methodologies and is not a signatory to the Base Erosion and Profit Shifting (BEPS) framework. However, Kuwait is a signatory to the Multilateral Instrument, so that it has a general commitment to BEPS minimum requirements, although BEPS Action 13 on documentation has not been enacted.
The Tax Department will give consideration to evidence that the transfer price is calculated on a sound basis and in accordance with internationally recognised practice. Furthermore, the Tax Department will take a positive view of a Kuwait price being in accordance with a global transfer pricing policy. However, due to the lack of experience and a general suspicion of related-party transactions, the Tax Department will subject all documentation to very close scrutiny. Accordingly, documentation must be developed carefully to demonstrate the relevance of any transfer price methodology used. The use of benchmarking studies will be particularly problematic in Kuwait. Largely due to lack of experience, the Tax Department may challenge the relevance of a study based inevitably on data published outside Kuwait.
“Kuwait's 2035 vision aims on transforming Kuwait into a financial and trade hub regionally and internationally and becoming more attractive to investors, where the private sector leads the economy, creating competition and promoting production efficiency” (Ministry of Foreign Affairs website). One of the continuing barriers to this objective is the lack of consistency in the application of Kuwait’s tax laws and tax treaties on key issues, leading to tax controversy between foreign investors and the Tax Department. The primary message to foreign companies wishing to do business in Kuwait is that commercial contracts must be carefully drafted with adequate supporting documentation and the full support of expert Kuwait tax advisers.