Kuwait Tax Alert - November 2023

Business Profit Tax (“BPT”) would impose a 15% tax on the profits of covered entities (see below) established, incorporated or operating in Kuwait. Currently, corporate tax is only applicable on foreign companies.

BPT proposes to include a wide range of operating structures, including corporate entities, partnerships, and other businesses with separate legal existence.

However, individuals, small and medium-sized entities are initially expected to be exempt from the tax law.

The Kuwait government's vision includes an ambition for an increase in non-oil revenue and tax transparency. Hence, in the upcoming Parliamentary session, corporate tax is expected to be among the 14 priorities the government intends to discuss in the Parliament.

Kuwait is currently the only GCC state that has not signed the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), required to implement minimum tax initiative under Pillar Two. In order to implement BPT/ minimum tax, the Kuwait Government is required to approve the legislation for signing the said framework agreement with the OCED and then implement BPT.

Subsequent to the introduction of the law, Ministry of Finance will be required to update their internal systems and form tax rules to register Kuwaiti companies and monitor their tax compliance. 

Given the proposed adoption of Pillar Two from 1 January 2025 and the proposed new tax law from 1 January 2026, we expect the following, we expect the following. (1) large Kuwaiti multinationals have approx. 1 year to understand the impact, decide any necessary actions and implement any changes, and (2) all Kuwaiti-covered entities covered entities under Phase 2 have approx. 2 years.

While we await further details from the Kuwait Ministry of Finance in the coming months, it is recommended for Kuwaiti companies to plan ahead as follows to prepare for the upcoming changes to the tax regime as it will have implications for the business.

• Undertake an impact assessment to evaluate at high-level implications for change in the tax landscape to shareholders' returns
• Consider factoring in 15% tax costs for future pricing of contracts 
• Review the finance function structure for roles and responsibilities for tax matters and establish a tax function, if not already present.
• Review books of accounts and accounting records to understand if these are sufficient for tax audit purposes

The existing Kuwait corporate income tax law (Decree No. 3 of 1955 as amended by Law No. 2 of 2008) imposes a tax on the income of any body corporate, wherever incorporated, earning income from Kuwait source.

In practice, no income tax is currently imposed on companies incorporated in the Gulf Cooperation Council (“GCC”) comprising of Saudi Arabia, Kuwait, Bahrain, United Arab Emirates, Oman and Qatar and entirely owned by citizens of the GCC.  Corporate income tax is currently only imposed on income earned by non-GCC (foreign) companies.

Due to globalization and the digitalization of businesses, tax authorities observed that multinational corporations were shifting their profits from countries with a high corporate tax rate to countries with a low tax rate, in order to reduce their global effective tax rate.

To combat the above, base erosion and profit shifting 2.0 (BEPS 2.0) initiative of the Organisation for Economic Cooperation and Development (OECD) and G20 was introduced, which proposes a set of rules (Global Anti Base Erosion rules) to ensure that large multinational enterprises (MNEs) pay a minimum level of tax regardless of where they are headquartered (referred as Pillar Two under BEPS 2.0).

It appears the above BPT is a consequence of the global changes driven by Pillar Two.