Kuwait's recent tax changes and regulations

The question on the mind of many observers is what is next for tax in Kuwait and how will international tax regulations and practices impact business in Kuwait? As an expected outcome of the current economic changes, the geopolitical situation, the Arab Spring and the dramatic drop of oil prices, the GCC region has introduced new reforms. The proposed value-added tax (VAT) may compensate or at least mitigate the deficits and losses in the GCC government’s budget resulting from the reduction of oil prices.

Governments in the GCC and in Europe are following the lead of the US, and therefore have adopted new legislation with a view towards conserving their tax bases, preventing tax evasion, collecting adequate taxes and encouraging transparency in tax reporting.

In such an evolving regulatory environment, Kuwait has been robust in accommodating both global and regional legislation. Kuwait was one of the first countries in the Gulf region to introduce a corporate tax, when in 1955 it passed the Kuwait Income Tax Decree. The country has since consistently introduced changes intended to revamp its tax regime to remain in line with the global economic order.

Due to the recent developments in the global economic environment, a strong and sustained focus on base erosion, profit shifting and transparency in the sharing of financial information has led the Kuwaiti authorities to introduce several new laws, which have had a bearing on how business and investment activities are carried out in the country.

Corporate Income Tax

Law No. 2 of 2008 made several key changes to the Decree of 1955. The new law imposed an income tax on foreign corporate bodies that are carrying on trade or business in Kuwait at a flat rate of 15%. Kuwait has also introduced new executive regulations that deal with a wide range of taxation matters, including the imposition on deemed profits coming from the sale of materials, provision of design, consultancy services, tax retention on payments, pre-operating and maintenance expenses, taxation of royalties, management fees and so on. It is worth noting that Kuwait has entered into some 68 double-tax avoidance agreements, covering most of the key jurisdictions in Europe, North and South America, and Asia. These treaties, in most cases, help to alleviate the tax burden on foreign corporates conducting business in Kuwait.

While the law does not currently impose any corporate tax on local Kuwaiti companies, in light of the declining trend in the oil prices Kuwait has been considering various fiscal reforms to bridge the budgetary gap. There have been recent media reports in Kuwait citing possible draft legislation concerning the introduction of a business profit tax of 10% on the profit of local companies, individuals carrying on business and foreign companies that are permanently established in or earning certain income from Kuwait.

FATCA & CRS

As part of global tax development Kuwait has recently implemented several changes in terms of compliance and reporting standards that are in line with global developments.

In 2015 Kuwait officially signed the Model I Intergovernmental Agreement (IGA) with the US for the implementation of the Foreign Account Tax Compliance Act (FATCA). The main purpose of the IGA is to promote transparency and to address and deter tax evasion by US citizens. Although the primary objective of the FATCA is to detect tax evasion, it has also facilitated the enhancement of reporting and compliance standards. All new financial institutions in Kuwait have completed reporting for new financial accounts between 2014 and 2015. The reporting for 2016 is due between June 30, 2017 and August 30, 2017. An audit report from a certified auditor should be obtained by all financial institutions for reporting purposes.

In line with the reporting and compliance standards proposed by the OECD, Kuwait signed the Multilateral Competent Authority Agreement for Common Reporting Standard (CRS) in August 2016 alongside 83 other jurisdictions for the exchange of financial account information. Kuwait has thus confirmed that it would begin reporting in compliance with CRS in 2018. As signatory to the said agreement, the Ministry of Finance in Kuwait would be required to take several important and necessary steps, which include the issuance local legislation and guidelines for reporting purposes, preparing the financial sector for the expected changes, the implementation of CRS and building the necessary infrastructure needed for the exchange of information.

VAT: With a view towards diversifying revenue streams due to the declining oil prices, the GCC ministers of finance have approved and signed the treaty for a VAT to be implemented in the GCC in either 2018 or 2019. The anticipated VAT system will apply a rate of 5% on imports, exports, and local supplies of goods and services, with some goods being zero-rated and others exempt. The exact date of implementation of VAT in Kuwait is not yet known, though it is expected that it will be introduced by 2018 or in early 2019. VAT would be a broad-based tax, which would have a direct bearing on most aspects of the GCC economy. Most industries would have considerations specific to their operational nature, and businesses would be required to consider the commercial impact of the complexities that could arise with the imposition of VAT.

New Foreign Direct Investment Law

The new investment legislation, Law No. 116 of 2013, was introduced to improve the overall investment climate in Kuwait and encourage increased foreign direct investment (FDI) in certain sectors of the economy. The Kuwait Direct Investment Promotion Authority was established to help the state attract foreign investment by providing income tax and Custom duty exemptions, in addition to other non-tax benefits that would apply to certain categories of foreign investment under the investment law.

In order to create a more efficient and transparent tax credit system for qualified investors, tax benefits are linked to the performance of the investor in relation to the tax-exempted activity based on the following prescribed criteria and an assigned multiplier factor:

• The transfer and settlement of technology;

• Creating jobs;

• Providing accredited training programmes;

• Helping small and medium-sized enterprises; or

• Contributing to economic diversification. Given that investors are granted tax incentives, their performance would be evaluated by way of multipliers, which are assigned to each criterion stipulated under the new law. Such multipliers yield credits, which are accumulated by the end of the year, and used to offset the investor’s taxable income and thus reduce their tax liability. A key non-tax benefit of the investment law is the provision allowing qualified foreign investors to increase ownership of a Kuwaiti company up to of 100% (normally restricted to 49%) or operate through a 100% foreign-owned branch.

Exemptions

The Capital Markets Authority of Kuwait has introduced several laws in order to encourage investment in the Kuwaiti Stock Exchange and to help develop capital markets. Tax exemptions have been granted to profits gained from the disposal of listed securities and on any returns earned from listed securities, bonds, sukuk (Islamic bonds) and all other similar securities. The new incentives to foreign investors coupled with its wide tax treaty network and compliance with global reporting and accounting standards make Kuwait an attractive destination for investment and conducting business.

With the aforementioned changes in laws, and reporting and compliance standards, Kuwait is well on its way to dealing with taxation in a more efficient and effective manner in line with global standards. These changes would, however, add another layer of complexity in the conducting of business in Kuwait.