Kuwait – Business profits tax, PE determinations and foreign investment incentives

Kuwait – Business profits tax, PE determinations

KPMG in Kuwait discusses plans to implement a tax on business profits, changes to the Kuwait tax authority’s (KTA) approach to deemed permanent establishments, and Kuwait’s shift away from tax holidays toward tax credits to attract foreign direct investment.

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Taxation of commercial profits

Based on recent local media reports1,  KPMG in Kuwait understands that the International Monetary Fund (IMF) plans to submit a draft tax law to the Ministry of Finance (MOF) in December 2015. The proposal will be designed to implement the IMF’s recommendation that Kuwait impose a 10 percent tax on business profits annually. 

The IMF’s draft tax law would be jointly reviewed by the Kuwait Chamber of Commerce and Industry, Kuwait Banking Association, the Union of Investment Companies and other local authorities. The law is expected to be implemented in the first half of 2016.

Currently, Kuwait imposes a 15 percent corporate income tax on foreign (non-GCC) companies earning income of a Kuwait source, while Kuwaiti and GCC companies operating in Kuwait are not considered subject to corporate income tax.

Permanent establishment determinations

Kuwait domestic tax law does not define “permanent establishment” or “taxable presence”. In practice, the KTA considers taxable presence to arise even where a company’s officials are in Kuwait for a single day or where income is earned from a source in Kuwait, irrespective of any physical presence in Kuwait.

Taxpayers claimed treaty-based tax exemptions in their tax declarations on the basis that they have no PE in Kuwait because the number of days spent by the taxpayer’s representative in Kuwait were less than the period stipulated in the relevant tax treaty.

Alternatively, where a PE was created in Kuwait, under the terms of a tax treaty, Kuwait source income attributable to the PE in Kuwait would be offered for tax in Kuwait, while income attributable to the taxpayer's PE outside Kuwait would be claimed as exempt from Kuwait taxation.

In the experience KPMG in Kuwait, the Kuwait tax authority (KTA) has for some time looked at whether the duration of contracts deriving Kuwait source income exceeds the period specified in tax treaties for determining a PE in Kuwait, rather than the physical presence in Kuwait of a representative. However, this approach typically was applied to service contracts on a case-by-case basis.  Recently, KPMG in Kuwait has observed the KTA applying this approach to more taxpayers, with more deemed PEs in Kuwait being determined as a result.

In the past, where the KTA deemed a PE to exist in Kuwait or where the period of in-country services lasted for a period longer than that stipulated in the relevant tax treaty, the KTA accepted taxpayers’ claims that revenue from services performed and material supplied from outside Kuwait was treaty-exempt.

However, based on recent practices, the KTA is now attributing income to a PE in Kuwait such that all Kuwait source income is typically considered connected to the Kuwait PE. It is increasingly difficult to obtain the KTA’s agreement on exemptions from Kuwait tax.

Kuwait foreign direct investment

KPMG in Kuwait participated in a workshop in which the Kuwait Direct Investment Promotion Authority (KDIPA) presented their methodology for applying tax incentives. KTA representatives also attended the workshop. Based on their presentations, it appears that KDIPA and the KTA are moving away from the concept of tax holidays and toward a tax credit system. 

According to the KDIPA, it appears that the business plan presented at the application stage will be considered primarily for the purpose of deciding whether an investor is eligible for tax incentives (based on the defined criteria) through the proposed tax credit system. The quantum of tax credit will be determined based on actual achievements by the investor each year vis-à-vis the defined criteria, as supported by an auditor’s certificate.  

These defined criteria include the following actual expenditures: • value of equipment purchased

  • number of Kuwaiti employees
  • payroll costs for National Labour
  • training expenses on Kuwaiti employees
  • rent expenditure
  • expenditure on local subject matter experts• procurement of local raw materials. 

KDIPA has proposed applying multipliers to the above actual expenditure to arrive at a tax credit value. KPMG in Kuwait understands that the tax credit computed would be compared to the investor’s taxable income as stated in its tax declaration to arrive a tax credit percentage. 

1 “Tax Law may generate billion dinars for the State,” Al Jarida, 5 October 2015.

MENASA Tax Update - November 2015

The latest news in tax from the Middle East, North Africa and South Asia (MENASA) region.

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