Doing Business In Kuwait

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Ernst & Young

18-21 Floor
BAITAK TOWER
P.O Box:74
Safat 13001
Kuwait

Fax: +965 22456419
www.ey.com/me

Contact person:

Alok Chugh | Tax Partner

Mobile: +965-97223004
Tel: +965 22955104
Email : alok.chugh@kw.ey.com

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Introduction

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Ernst & Young's worldwide partnership is one of the leading integrated professional services firms in the world. Our firm employs more than 141,000 people in 140 countries.

Our integrated structure is an important differentiator and it facilitates seamless services and consistent performance everywhere in the world. Our global infrastructure is supported by industry experience, clearly articulated engagement roles and world-class methodologies. We support 26 industry sectors including airlines, financial services, government and public sector, oil and gas, mining and metals, power and utilities, real estate, technology and telecommunications.

In 2008, Ernst & Young integrated 87 countries into one Europe, Middle East, India and Africa (EMEIA) area. The new EMEIA Area brings together over 62,000 people and 3,400 partners to create an US $11bn organization, making us the first of the Big 4 to achieve integration on this scope and scale.

Ernst & Young Middle East

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The Middle East practice has been present in the region since 1923 and is a member firm of Ernst & Young International.  During the last 85 years, we have evolved to meet the developments within the area and today our clients are served by over 4,400 professionals, out of 19 offices in 15 countries in the Middle East. A significant number of these staff, including partners, are bilingual in Arabic and English.

Our Middle East practices are part of the Europe, Middle East, India and Africa (EMEIA) integrated firm, which covers 87 countries, including practices in 19 countries in Eastern Europe, 15 countries in the Middle East and 28 countries in Africa.

The practice's industry specialties include oil and gas, aviation, other transport, health, utilities, manufacturing and industrial services, financial / banking sectors and hotel and leisure, consumer products and allied sectors. Its major clients include government ministries, major oil companies in the public as well as private sectors, airlines, central banks and major financial institutions.

Ernst & Young Kuwait

Present in Kuwait since 1952, we are the largest professional services firm in Kuwait with over 350 professional staff. Our Kuwait office offers a wide variety of professional services including Assurance, Transaction Advisory Services, Business Advisory services and Tax.

Service line integration within the firm and transfer of knowledge to clients are key features of our client service approach. This, along with our ability to call upon our international network of transaction and business advisory professionals and industry experts from other practices around the world, enables us to be a trusted business advisor of our clients. We are recognized market-leaders in creating innovative and achievable solutions to business problems. Our working relationships with other Ernst & Young practices enables Ernst & Young to have rapid access to international leading practices.

Ernst & Young in Kuwait has been operating since 1952 and is the largest accounting and consulting firm in the country. Our 400 professionals are available to serve clients anywhere in Kuwait working in both Arabic and English. Ernst & Young professionals in Kuwait can provide expert advice on every business issue. We are fully integrated with Ernst & Young Middle East in terms of methodology, training and quality control. The Kuwait office is supported by resources of Ernst & Young Global which has over 141,000 professionals working out of 700 offices in over 140 countries.

Ernst & Young's Tax services

In Kuwait, prior to starting operations particular emphasis must be given to strategic planning to ensure that eventual taxes are minimized to the fullest extent possible. Such planning must take into account the tax payer's operations in the Middle East region, the tax effect in the taxpayer's home country, transfer pricing implications, obtaining benefits of tax treaties, evaluating the tax effects of major business decisions, etc. All tax affairs of Ernst & Young's clients in Kuwait are therefore handled by two specialist tax partners supported by a team of dedicated tax staff members.

Our approach to client relationships and service delivery requires direct "hands on" involvement of our team of resident partners. This team shares the knowledge gained from over 160 years of combined experience with Ernst & Young in Kuwait and the Middle East. We commit the best resources and expertise for providing specialist taxation advice and for dealing with the DIT. This ensures that our clients obtain the full benefit of our specialist tax expertise and our many years of professional and industry related experience. Furthermore, because such resources are based locally in Kuwait, the services and advice our clients receive are timely and practical from professionals who know the local environment and have an excellent track record of helping multinationals in dealing with their tax affairs in Kuwait.

Successful tax functions recognize the potential of business change and build sustainable tax strategies that help your business achieve its ambitions. Ernst & Young's tax advisory team is dedicated to responding to that challenge. Our corporate and international tax professionals help structure transactions tax-effectively, manage the tax burden and improve sustainable growth. We tailor our advice to your business needs, from planning through to helping with implementation, reporting and maintaining effective relationships with the tax authorities.

Kuwait Taxation

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The Kuwaiti Government favours a free market, with little official intervention. Kuwait has a small, open economy that is dominated by its oil industry, because of which other non-oil sectors of the economy, such as agriculture and manufacturing, play a lesser role in the economy.

Corporate income tax

Decree No. 3 of 1955 (Decree No. 3) as amended by Law No. 2 of 2008 (Law No. 2) and the Executive Bylaws (the Bylaws) thereto (hereafter referred to as the "income tax law") provide that everybody corporate should pay tax in Kuwait on the income earned from 'carrying on trade or business in Kuwait either directly or through an agent'. 

Kuwaiti-registered companies wholly owned by Kuwaitis and companies incorporated in Gulf Cooperation Council (GCC) countries that are wholly owned by GCC citizens are not subject to income tax.

Foreign companies can operate in Kuwait either through an agent or as a minority shareholder in a locally registered company. In principle, the method of calculating tax is the same for companies operating through an agent and for minority shareholders. For minority shareholders, tax is levied on the foreign company's share of the profits (whether or not distributed by the Kuwaiti company) plus any amounts receivable for interest, royalties, technical services and management fees.

With effect from the fiscal periods commencing after 3 February 2008 the tax rate is reduced to a flat 15% of taxable income.

Personal income tax

No personal income tax is levied in Kuwait either on salaries or on income from commercial activities.

Social security

There are no social security obligations for expatriate workers. However, for foreign employees it is generally necessary to make terminal indemnity payment calculated at 15 days pay per year for the first five years of service and one month's pay per year thereafter.

For Kuwaiti employees, contributions are payable monthly by both employer and employee under the Social Security Law. The employer's contribution is 11% and the employee's is 7.5% of the monthly salary, up to a salary ceiling of KD 2,250 per month.

National labour support tax (NLST)

As per Law No. 19 of 2000, Kuwaiti companies quoted on the Kuwait Stock Exchange (KSE) are required to pay an employment tax of 2.5% of the net profits per financial statements (before payments for KFAS/NLST/Directors fees) less cash dividends from companies listed on KSE and profit share from companies listed on KSE, whether or not such annual profits are distributed to shareholders.

All companies subject to the provisions of the Law are required to submit a declaration audited by one of the accounting and auditing offices approved by the Ministry of Finance on or before the 15th day of the fourth month following the end of the fiscal period.

Zakat

The Ministry of Finance has issued the executive bylaws (in the form of Ministerial Order 58 of 2007) for implementation of Zakat in Kuwait. According to the above-mentioned executive bylaws, public and closed Kuwait Shareholding Companies (KSC's) are subject to Zakat on the basis of 1% of gross income of operations of the company after deduction of costs incurred by the company.

Contribution to KFAS

Kuwaiti Shareholding Companies and Closed Shareholding Companies in Kuwait are required to pay 1% of their profits after transfer to the statutory reserve and the offset of loss carry forwards, to the Kuwait Foundation for the Advancement of Sciences (KFAS), which supports scientific progress. The KFAS provides sponsorship and grants for many types of scientific research projects in Kuwait.

Direct foreign capital investment law

The Direct Foreign Capital Investment Law provides the following benefits to new and existing foreign capital investment projects:

►     Opportunity for investment in excess of 50% (up to 100%) in Kuwaiti companies by non-Kuwaitis.

►     Full or partial exemption from customs duties on certain imports and other government charges for approved projects.

►     A tax holiday of up to 10 years with respect to non-Kuwaiti shareholders' shares of the profits from qualifying projects.

►     A guarantee of repatriation of profits and capital invested in the project.

►     Long-term leases of land in industrial estates at low rents.

►     Employment of required foreign manpower without being subject to the restriction contained in Law No. 19 of 2000 concerning employment of Kuwaiti manpower.

Licences under DFCIL are awarded in cases where projects of strategic importance to Kuwait (such as projects involving the transfer of technology or technical expertise or those which create job opportunities for Kuwaiti Nationals and contribute to the training of Kuwaiti Nationals) are undertaken in Kuwait.

Kuwait free trade zone

To encourage exporting and re-exporting, the government has established the Kuwait Free Trade Zone (KFTZ) in the vicinity of the Shuwaikh port. The KFTZ offers the following benefits:

►     Up to 100% foreign ownership is allowed and encouraged;

►     All corporate and personal income is exempt from tax;

►     All imports into and exports from the KFTZ are exempt from tax; and

►     Capital and profits are freely transferable outside the KFTZ and are not subject to any foreign-exchange controls.

Dividend or distribution of profits

15% withholding tax on dividends earned by entities investing in securities listed in Kuwait Stock Exchange (KSE).  As per the legislation. Kuwait based investment companies or banks who manage or act as custodians for portfolios or funds must deduct (withhold) corporate tax of 15% on the profits and distributions on behalf of the foreign investors and deposit the tax within 30 days from the date of deduction of tax together.

Furthermore, the amendments also require custodians/portfolio managers to register with the tax authorities and submit information relating to their investors.

Retention Requirements

Under Article 37 of the Bylaws of Law No.2 and Executive rules 5 and 6 of 2010, all government bodies and private companies are required to comply with the following rules:

►     Notify names and addresses of their contractors and subcontractors and send copies of the contractors and subcontractors and submit copies of the contracts and subcontracts to the DIT; and

►     Retain 5% of the payment due to the contractors or subcontractors, payment related to a contract or subcontract or services until they provide valid tax clearance certificates issued by the DIT.

Failure to comply with these rules may result in disallowance of the related contract, subcontract or services cost by the DIT.

Ministerial Resolution No. 8 of 2003 also entitles the DIT to recover from the contract owner, the amount of tax payable by the contractor, to the extent of 5% of the contract value expected to be retained by the contract owner as retention for tax purposes as per the above rules.

Administrative Requirements

All taxpayers in Kuwait are required to abide by the tax compliance obligations in Kuwait, which include: 

►     Register with the DIT within 30 days of signing the first contract in Kuwait and select a fiscal period. The tax authorities normally require a fiscal period of 12 months, however, for the first fiscal period allows a period of up to 18 months from the commencement of activities in Kuwait.  The DIT normally considers the date of signing the contract as the commencement date of the activities in Kuwait unless the contract specifically states the commencement date.

►     Obtain a tax card; and

►     File a tax declaration within 105 days of the taxpayer's fiscal year end.

Offset program

The Ministry of Finance issued Ministerial Order 13 of 2005 to reactivate the offset programme. In 2006, the National Offset Company (NOC) was formed to manage and administer the implementation of the offset programme on behalf of the Kuwait government and Ministry of Finance.

The following are significant aspects of the programme:

►     All civil contracts with a value of KD 10 million and more, and defence contracts with a value of KD 3 million and more attract the offset obligations for contractors. The obligations become effective on the signing date of the contract.

►     The contractors covered by the offset obligation are required to invest 35% of the value of the contract with Kuwaiti government bodies.

►     Offset obligators have the following options for fulfilling their Offset obligation:

1.        Implement investment projects suggested by the Offset Programme Management;

2.        Propose their own investment projects, and seek approval of the Offset Programme Management, or

3.        Purchase of commodities and services of Kuwaiti origin.

Contractors covered by the offset obligation must provide unconditional, irrevocable bank guarantees issued by Kuwaiti banks to the Ministry of Finance equal to 6% of the contract price. The value of the bank guarantee submitted will be reduced gradually based on the actual execution of its work by the foreign contractor/supplier. The MOF has the right to cash in the bank guarantee if Offset obligor fails to respect their offset obligation.

The NOC is currently studying their above mentioned guidelines and it is possible that the guidelines may be changed in the coming few months.

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Tax treaties

Kuwait has entered into double tax treaties with approximately 40 countries including United Kingdom.  Further treaties with several other countries are at various stages of negotiations or ratification.

Kuwait has also entered into treaties with several countries relating solely to international air and/or sea transport.

Kuwait is a signatory of the Arab Tax Treaty and the GCC Joint Agreement, both of which provide for the avoidance of double taxation in most areas. The other signatories of the Arab Tax Treaty are Egypt, Iraq, Jordan, Sudan, Syria and Yemen.