Kuwait

Where is Kuwait located?

Kuwait is a country located in Western Asia.

It is situated in the northern edge of Eastern Arabia at the tip of the Persian Gulf, bordering Iraq to the north and Saudi Arabia to the south.

Kuwait also shares maritime borders with Iran.

Capital: Kuwait City
Area: 17,818 Km2
Currency:  Kuwaiti dinnar

Features:

Kuwait is one of six-member states of the Gulf Cooperation Council (GCC) and a member state of the League of Arab States.

The majority of Kuwait’s population resides in Kuwait City the capital and the largest city.

Al Ahmadi, the next largest city which is located along the coastline of the country and the headquarters of the Kuwait Oil Company and the Kuwait National Petroleum Company.

Doing Business in Kuwait

Kuwait has been attracting international attention for the momentum of its transformation taking place under the ‘Vision 2035’ initiative which aims to transform Kuwait into a world-class financial and commercial center. In line with ‘Vision 2035’, Kuwait has streamlined its regulations to attract foreign capital to invest in the non-hydrocarbon sectors.

Business Environment

As a resource-rich economy, Kuwait is diligently looking to deploy its oil wealth to develop and diversify the economy. The nation aims to attract more than $200bn in foreign direct investment (FDI) between 2020 and 2035 in order to become a global centre for trade and finance. The government is taking concrete steps towards achieving its ambitions to boost private sector investment in key sectors.

According to Kuwait’s Central Statistical Bureau, Kuwait’s nominal Gross Domestic Product (GDP) for 2020 was $118.8 billion US dollars according to Kuwait Central Statistical Bureau.  In 2021, the Central Bank of Kuwait announced that Kuwait’s GDP had contracted 9.9% in 2020 from 2019 mainly due to sharp decrease in oil prices.  Kuwait’s current oil production capacity is estimated at 3.15 million barrels per day. The government hopes to increase production capacity to 4.75 million barrels per day by 2040. In order to reach this goal, Kuwait must continue spending and investing in upgrading downstream facilities as well as on upstream oil development.

Type of Companies

The Kuwaiti legal system allows for the establishment of a wide range of commercial entities and business structures. The following are some of the most common business structures in Kuwait:

1.     Limited Liability Company (W.L.L)

·       This is the easiest to incorporate and administer, and the most common form adopted by foreign investors entering Kuwait. A limited liability is a company where the members of the company shall only be responsible for their share of capital contribution in the entity.

·       Number of members: between a minimum of 2 and a maximum of 50 members. A corporate body may be a member. The process of forming a W.L.L. is simple, and it takes approximately three months.

·       W.L.L. entities require a minimum of 51% Kuwaiti shareholding unless the venture receives approval under the Foreign Direct Investment or Public Private Partnerships regulations allowing up to 100% foreign ownership after certain conditions are fulfilled.

·       The actual capital costs will depend on the objects chosen for any such company and the approval by the Ministry of Commerce and Industry (MOCI).

2.     Kuwaiti Shareholding Company (K.S.C.)

·       The liability of a shareholder in a K.S.C. is limited to the value of their subscribed shares. Shares cannot be disposed of prior to three years from the date of inception.

·       K.S.C. entities require a minimum of 51% Kuwaiti shareholding.

·       A longer time is required to form a K.S.C. company compared to a W.L.L. company.

·       The actual capital costs will depend on the objects chosen for any such company and approval by the MOCI.

·       K.S.C.s are required to transfer 10% of their annual net profits to a statutory reserve.

·       Following this transfer, 1% is required as contribution to the Kuwait Foundation for the Advancement of Sciences (KFAS). Public K.S.C.s must also pay 2.5% of net profits towards Kuwait’s National Labor Support Tax and 1% of net profits towards Zakat/Contribution to the State’s Budget (CSB).

3.     Partnerships

·       This form is applicable to non-corporate investors (individuals) and there are two types of partnerships that can be established under the Companies Law as follows:

o   General partnership: consists of two or more persons who are jointly liable for partnership liabilities to the extent of their personal wealth (unlimited liability).

o   Limited partnership: can have two types of partners, general partners with unlimited liability and partners with limited liability. These partnerships are considered to have a separate legal entity for any business transaction.

Legal and regulatory framework

1.     Foreign direct investment

The Foreign Direct Investment (FDI) Law promotes direct foreign investment in the State of Kuwait and allows foreign investors to own up to 100% of business entities in some sectors.

2.     Investing under Foreign Direct Investment Law No.8 of 2001

This Law, later updated by Law No. 116, issued in June of 2013, promotes direct foreign investment in the State of Kuwait and allows foreign investors to own up to 100% of business entities in some sectors, provided the MOCI issues a license.

The Law is a welcome addition to a host of new economic laws and regulations that have been approved for the purpose of improving the overall investment climate, fostering competitiveness, encouraging more engagement in value added investment opportunities by both local and foreign investors, and contributing to achieving Kuwait’s economic and social objectives.

3.     Investment entities permitted under the FDI Law

The direct investment business shall be licensed in accordance with the provisions of the Law and its executive regulations, through an investment entity specified according to any of the following forms:

A Kuwaiti company, which will be incorporated for the purpose of direct investment. The foreign investor’s interest may amount to 100% of the capital of the company (whether shareholding, with limited liability or sole proprietorship)

·       A branch of a foreign company licensed to operate within Kuwait for the purpose of direct investment

·       Representative offices having the sole purpose of preparing market studies and production possibilities, without engaging in a commercial activity or the activity of a commercial agent

4.     Kuwait Direct Investment Promotion Authority

Kuwait Direct Investment Promotion Authority (KDIPA) established in accordance with Law No. 116 of 2013 regarding the promotion of direct investment in the State of Kuwait, as a specialized public authority with financial and administrative independence. H.E. the Minister of Finance and Minister of State for Economic Affairs and Investments is the Chairman of its Board of Directors.

The board of directors of the Kuwait Direct Investment Promotion Authority (KDIPA) has established the principles and rules for the licensing of each form of the investment entities referred to in the FDI Law.

Accounting and Audit Requirements

1.     Statutory Requirements

Business entities in Kuwait should maintain adequate financial records in Arabic.

2.     Accounting Standards

All companies in Kuwait are required to comply with International Financial Reporting Standards (IFRS) in the preparation of the financial statements in accordance with Ministerial Resolution No. 110 of 1991.

3.     Audit Requirements

Companies in Kuwait, both Shareholding and Limited Liability, must be audited annually. The auditor should be independent, and registered with the Ministry of Commerce and Industry (MOCI) and Capital Markey Authority (CMA), and must be a member of the Kuwait Association of Accountants and Auditors.

Kuwait Tax

There is no personal income tax or wealth tax in Kuwait. However income tax rate is enforced on foreign entities operating in the State of Kuwait.

Income tax is governed under Law No. 3 of 1955, which has been amended by Law No. 2 of 2008 and applies to foreign companies doing business in Kuwait. The only exceptions to this condition are companies incorporated in the GCC and fully owned by GCC citizens, which are operating in Kuwait, will not be subject to any taxes, and income exempted under double taxation avoidance treaties.

The current income tax rate is a flat 15% of:

·       Net Profit based on actual reported profit or

·       Deemed Profit when a foreign company is unable to maintain separate accounting books for its operations in Kuwait

The Department of Income Tax (DIT) under the MOF enforces Kuwait tax laws. Kuwait’s tax system is comprised of the following taxes, each regulated by a separate legislation in the Amiri Decree:

·       Corporate Income Tax on Foreign Business Entities

·       Zakat (Islamic Tax) or Contribution to the State’s Budget (CSB) on Kuwaiti Shareholding Companies

·       National Labor Support Tax (NLST) on Kuwaiti Listed Companies

·       Custom Duties

There is also an annual compulsory contribution to the Kuwait Foundation for the Advancement of Sciences (KFAS) imposed on Kuwaiti shareholding companies.

1.     Who is taxed?

Income tax in Kuwait is administered by Kuwait Tax Decree No. 3 of 1955 (“the Decree”). Some provisions of this Decree have been amended through the issuance of Tax Law No. 2 of 2008, which started to apply to the fiscal periods commencing after 3 February, 2008. In practice, the Law applies only on foreign entities carrying on trade or business in Kuwait, with the exception of entities registered in Gulf Cooperation Council (GCC) countries and fully owned by Kuwaiti/GCC citizens.

There is a special law applied on the income earned from business carried out in the Divided Neutral Zone between Saudi Arabia and Kuwait.

In case of mixed ownership, tax is imposed only on the share of profits attributable to non-GCC ownership. Moreover, individuals and their shareholdings in a corporate body are not subject to tax in Kuwait.

2.     What is Taxed?

As per the Law, the income of a corporate body carrying on activities in Kuwait is considered as realized from inside Kuwait in cases when it is generated as a result of any of the following:

·       Any activity or business executed in whole or in part in Kuwait, whether the contract is concluded inside or outside Kuwait, as well as income realized from supply or sale of goods or rendering services.

·       Amounts earned from the sale, lease or granting the concession to use or exploit any trademark or design or patent or copyright and printing or any other moral rights or those related to rights of intellectual property against use of any right to publish any form of literature, technical or scientific work.

·       Commissions due or derived from conventions of representation or trade brokerage, whether cash or in-kind commissions.

·       Profits of industrial and commercial activity in Kuwait.

·       Gains on assets disposal, including sale of the asset or a part thereof or transfer of its title to other parties or any other disposals as in shares of companies, whose assets consist of immovable funds located in Kuwait.

·       Income realized from lending funds inside Kuwait.

·       Profits from the purchase and sale of goods or property or rights thereto in Kuwait, whether such rights relate to tangible assets or moral rights including mortgage and franchise.

·       Opening a permanent office in Kuwait where contracts of sale and purchase are executed; i.e. the premises in which business is executed or contracts are concluded, whether these premises are owned by the taxpayer or leased from another party, or such business is executed in the premises of the other party inside Kuwait.

·       Profits from leasing of any property including movable and immovable funds used in Kuwait.

·       Profits resulting from the rendering of services including managerial, technical or consulting services or concluded contracts executed in whole or in part inside or outside Kuwait.

·       Profits realized from carrying on activity in the Kuwait Stock Exchange either directly or through investment portfolios or funds

3.     Who is exempted?

As per the Law, the income of a corporate body through carrying on activities in Kuwait, without prejudice to exemptions prescribed for entities subject to provisions of the Decree and any provisions stipulated in any other laws or international treaties, the following cases shall be exempted:

·       Profits of a corporate body arising only from dealing transactions in the Kuwait Stock Exchange, whether directly or through investment portfolios or funds.

·       Income earned by natural persons from carrying on trade or business in Kuwait unless it is proved that such income represents a share to a corporate body.

·       Profits generated from activity carried out in the FTZ are exempt from taxes under the Free Zone Law No. 26 of 1995.

·       Profits generated from activity under FDI Law No. 116 of 2013 (tax credit basis using certain multipliers).

·       Dividends earned by foreign corporate bodies in Kuwait under the CMA Law No. 22 of 2015

4.     Value added Tax

Currently, value added tax (VAT) is not levied in Kuwait. Based on local media, there are reports that VAT could be introduced in Kuwait during 2021. However, the government has not yet announced a firm date or issued regulations.

5.     ZAKAT Tax

Since 2006, a religious ‘Zakat’ tax has applied to public and closed shareholding companies wholly owned by Kuwaiti and other GCC member nationals of 1% on net income.

Kuwaiti shareholding companies (both listed and unlisted, but excluding government companies) must pay 1% of net profits for Zakat or as a contribution to the state’s budget.

6.     Transfer Pricing

There are no explicit transfer pricing rules in Kuwait. However, in practice, the KTA closely scrutinizes all inter-group transactions at the time of tax inspection.

Accordingly, KTA may disallow a portion of inter-group transactions if it does not consider the transaction to have been conducted on an arms-length basis. Furthermore, depending on the nature of the relationship between the supplier/service provider and the acquirer with respect to a transaction, the KTA deems a certain percentage of the costs or services rendered outside Kuwait as inadmissible.

Tax FAQs

What happens if the foreign companies does not file tax returns?

The Ministry will issue its own assessment of taxes due and may levy fines as seen appropriate by the Ministry.

Do foreign companies have to hire a tax consultant?

Yes, as the Ministry will only deal with and accept tax returns prepared by licensed tax auditors.

Do foreign companies have to file Tax Returns?

Despite the fact that clients of a Tax Payer have withheld 5% of payments, a tax return must be filed.

The 5% withheld by the foreign companies’ clients is a requirement set by Law as the law stipulates that any local body contracting with foreign corporate body (not an individual) must withheld 5% of all payments issued.

What happens to the 5%?

The 5% stays with local clients indefinitely until the company file taxes, after which they will release the 5% on submission of a tax clearance certificate.

What happens if foreign companies do not file?

The Ministry will continue requesting them to file and at some point, they will blacklist the company in their records. They could also collect the 5% from their clients if they cannot reach the foreign company, or they might issue their own assessment of taxes that Tax Payer should pay, plus the accumulation of 2% monthly fines.

For more information about Doing Business in Kuwait please visit,
https://www.kreston.com/doing-business-in/kuwait/