Further to our earlier alerts, a draft copy of the Business Profits Tax Law (the “Tax Law”) is available in the public domain1. This draft legislation signifies a substantial transformation in Kuwait's tax framework, aiming to broaden the tax base and increase the number of companies subject to tax. The Tax Law is expected to bring extensive changes, impacting multinational corporations, resident entities, and individuals (establishments) engaged in business operations.
The draft Tax Law aligns with our earlier expectations
of a wider corporate income tax regime being implemented in two phases. The first phase targets multinational companies (“MNE”) with revenues over EUR 750 million (currently approx. KD 242 Million), aligning with companies subject to Base Erosion and Profit Shifting (BEPS) Pillar 2 framework. The second phase will apply to all Kuwaiti businesses, including corporate entities, partnerships, and individuals (establishments) engaged in business operations that have turnover exceeding KD 1.5 Million annually.
The draft Tax Law states that Executive Regulations would be issued within 6 months from the date of issuance of the Tax Law, meaning that these would be expected by the end of June 2025 subject to the Tax Law being officially published in the local gazette by end of December 2024.
We set out below a summary of key points based on informal translation of the Arabic draft Tax Law currently available in the public domain. Provisions of the final law may differ from what is stated below and hence this summary is not for reliance purposes.
Key Highlights from the proposed law
- Resident legal persons (including companies under Law No. (1) of 2016, Partnerships, any authority, public institution, fund, or any legal person established under laws or resolutions) for their income sourced inside and outside Kuwait;
- Resident natural persons engaging in activities (commonly known locally as establishments) for their income sourced inside and outside Kuwait; and
- Permanent Establishments for their income derived within Kuwait.
- Applies to MNEs (with revenues exceeding EUR 750 Million, in line with BEPS Pillar 2 requirements) from 1 January 2025
- All remaining in scope taxpayers that exceed annual turnover of KD 1.5 Million from
1 January 2027
The following activities are expected to be considered as taxable:
- Income from a permanent establishment
- Income from sports and artistic activities in Kuwait
- Income from real estate and equivalent assets within Kuwait
- Dividends from shares in resident legal persons
- Capital gains from securities in resident legal persons
- Interest paid by the government, residents, or permanent establishments
- Rent, licensing fees, and royalties paid by the government, residents, or permanent establishments
- Insurance premiums for risks within the State
- Income from any other activities within the State
The following tax rates and exemptions are applicable in the draft BPT:
- Entities in scope: A flat tax rate of 15% is expected to apply to all entities in scope.
- Small Businesses: Companies with annual revenues below KD 1.5 Million will be exempt.
- State-Owned Entities: Legal entities wholly owned by the state will not be taxed.
- Businesses in the Divided Zone: These will have a specific tax rate of 30%, with a provision for a 50% reduction if taxes are paid to Saudi Arabia.
- Applicability: Imposed if the effective tax rate for MNE is below 15%, based on OECD
Pillar 2 rules. - Calculation: Based on the difference between the effective tax rate and the global minimum tax rate.
The following are expected to be exempt from DMTT:
- Government entities
- Non-profit organizations
- International organizations
- Pension funds
- Investment funds
- Real estate investment vehicles
- Rate: A 5% withholding tax will be applied to payments made to non-residents.
- Applicable Payments: This includes dividends (excluding those from companies listed on the Kuwait Stock Exchange), royalties, rent for movable and immovable property, technical services and insurance premiums.
- Scope: These payments are subject to WHT when they are not connected to a permanent establishment in Kuwait.
The taxpayer must register with the Tax Department within 30 days of starting their activity. If they fail to do so, the Tax Department can register them based on available information and notify them appropriately.
The taxpayer must inform the Tax Department of any changes to their activity or registration details within thirty days of the change. They must also request deregistration within thirty days if they permanently stop their activity.
The Executive Regulation will outline the registration mechanism, notification procedures, and related provisions.
Given that the law is expected to be applicable on MNEs from 1 January 2025, MNEs have 6 months from the enactment of the Tax Law to register with the Tax Department without facing administrative penalties.
- Business Profits Tax: Taxpayers must submit a tax declaration, including audited financial statements, within 6 months from the end of the tax period.
- Supplementary Tax: Taxpayers subject to this tax must submit a tax declaration, including audited financial statements, within 15 months from the end of the tax period.
- Withholding Tax: Withholding tax agents must submit a tax declaration for tax deducted at source within 15 days from the end of the month in which the tax deduction becomes due.
Companies should conduct a comprehensive review of the Tax Law to understand its implications, including:
- Assess the impact on your current tax liabilities and financial statements.
- Understand what tax compliance will be required moving forward and the respective deadlines.
- Determine how to apply WHT and communicate with stakeholders.
- Review your tax strategies to align with the new tax rates and exemptions.
- Determine any changes to systems required to support new data points that will be required.
- Understand changes to staffing requirements within the finance function.
