How to calculate taxable income?

With the UAE implementing CIT from 1 June 2023, we have entered a new era for tax in the region. Given the Kuwait CIT is likely to apply to all commercial activities with limited exclusions, this will be a paradigm shift for Kuwait businesses. Key stakeholders in Kuwait businesses will need to ensure their business and systems are ready for the introduction of CIT in Kuwait.

Corporate Income Tax, also referred to as Business Profits Tax, is a direct tax levied on the ‘taxable income’ earned by a taxable person during an annual tax period. CIT liability is generally calculated on a self-assessment basis by filing an annual CIT return which may be audited by the tax authority.

In a Kuwait context, a taxable person could include a company, an establishment, a Kuwait branch of a foreign company, an individual (with or without a commercial registration) carrying on a business.

Under the current regulations, CIT is imposed on the foreign (non-GCC) corporate bodies earning Kuwait sourced income at 15% of the net profits. 

The starting point for calculating taxable income is a taxable person’s accounting profit/loss as per the financial statements.

The accounting profit/loss is then subjected to certain adjustments (additions & deductions) to determine the taxable income.

These adjustments fall under two categories - timing differences and permanent differences.

Timing differences are differences between taxable profit and accounting profit that are given effect in one period and reversed in subsequent periods whereas permanent differences are given effect in one period but are not reversed in subsequent periods.

We have outlined below some key adjustments to the reported accounting profit/loss which may increase or decrease the taxable income along with an overview of the CIT treatment based on general principles and what is prescribed under the CIT laws of some of the other GCC countries.