Kuwait
Sahid Daud Senior Tax Advisor
The Kuwaiti Cabinet recently approved a draft bill imposing a 15% tax on multinational entities, resident companies and individuals engaging in activities, effectively modernizing the tax framework of the oil rich state and bringing it in line with BEPS Pillar 2 principles.
In this article, we provide a snapshot some of the key principles which have been introduced in the new law and what this means for businesses which have a presence in the state.
Who is impacted?
The new tax will be applicable to (i) companies which are resident in Kuwait (ii) natural persons resident in Kuwait who conduct activities in the state and (iii) permanent establishments of foreign companies.
The concept of tax “residency” or “permanent establishment” does not exist under the Kuwait Income Tax Law of 1955 (as amended) and so this is addition should introduce more clarity on the persons which will be subjected to the new tax.
Which tax periods are impacted by the new law?
The tax will apply to tax periods commencing on or after 1 January 2025 for multinational groups with an annual revenue exceeding Euro 750 million.
Other taxpayers will be subject to the tax for tax periods commencing on or after 1 January 2027.
Which profits are subject to the new tax?
A company which is resident in Kuwait will be subject to the tax on its worldwide income.
An individual who is resident in Kuwait and engaged in a trade or business activities is subject to the tax on income generated from the activities both within and outside the state.
A Permanent Establishment in Kuwait is subject to the tax on income generated in the state.
Are there any exemptions under the new law?
Tax exemptions will be granted for dividends received by Kuwaiti residents from participation interests (broadly, a 10% shareholding held for a period of at least 12 months and other conditions). An exemption will also be granted for capital gains earned by a resident from the disposal of participation interests.
Taxpayers will also be exempt from the new tax provided their business profits (defined as actual revenues from conducting the business) do not exceed 1.5 million Kuwait Dinars during the tax period.
Exemptions will also be granted to Kuwaiti government entities and non-profit organisations.
As the new law will be introduced in phases, multinational enterprises with a presence in Kuwait will be at the forefront of a transformed fiscal system. The new law will have a sweeping impact on all businesses operating in Kuwait (including individual owned establishments) from January 2027.
Are withholding taxes payable?
Withholding tax will be imposed at 5% on amounts originated from within Kuwait and paid to a non-resident person. These include interest, royalties, dividends and service fees.
How does the new business profits tax comply with BEPS Pillar 2?
The new law appears to be a Domestic Minimum Top-up Tax in that a supplemental tax is imposed on the income of multinational enterprises. The supplemental tax is the difference between the effective tax rate and the global minimum tax rate of 15% as determined by the OECD Pillar 2 rules.
The executive regulations that will be issued in connection with to the new law will provide details on the method of calculating the supplemental tax and its application to multinational enterprises.
What are the compliance requirements and deadlines?
Registration with the tax administration
A taxpayer must register with the tax administration within 30 days of commencing an activity. Where a taxpayer ceases to carry on the activity permanently, a deregistration application must be made within 30 days of cessation.
Taxpayers of multinational enterprises are granted a 6-month period from 1 January 2025 to apply for registration with the tax administration.
Filing tax declarations
Taxpayers are required to file their tax declaration for business profit tax with the tax administration (along with audited financial statements) within 6 months from the end of the tax period.
A taxpayer which is subject to the supplemental tax must submit a tax declaration (along with audited financial statements) within 15 months from the end of the tax period.
A withholding agent is required to file a withholding tax declaration to the tax administration within 15 days from the end of the month on which the tax is due to be deducted.
What does the new law mean for businesses which have a presence in Kuwait?
Early preparation and professional advice will be critical in navigating the new landscape to ensure taxpayers are compliant and penalties are not incurred. Whilst increased focus will be multinational enterprises in the short term, all businesses with a presence in Kuwait should be proactive in understanding their tax and legal obligations and how the imposition of the new tax will impact their profitability.
The contents of this article should not be relied upon as legal or tax advice. Businesses are encouraged to seek professional guidance in understanding their obligations
Aaron Dikos Partner
Back in 2014, the Kuwait government embarked on an ambitious program to promote collaboration between the public and private sectors to develop the infrastructure of Kuwait and the services available to Kuwaiti citizens and residents. In order to improve and develop its prior initiatives in this area, Kuwait re-engineered its public-private partnership (“PPP”) program and introduced Law No. 116 of 2014 (the “PPP Law”) in order to provide a clearer and more developed regulatory framework for the implementation of PPP projects in Kuwait. The PPP Law replaced the previous law and was seen as imperative to accommodate the ambitious and ongoing PPP program and also to codify some of the techniques applied in the Az-Zour North Independent Water and Power Project (Phase 1), which reached financial close in January 2014. As a result, a variety of PPP projects touching on a number of infrastructural sectors were tendered, and some were awarded.
However, only one major PPP infrastructure project actually reached a financial closing aside from the Az-Zour North Phase 1 Project: the Umm Al Hayman Wastewater Project. Around 2019, for a variety of reasons, Kuwait’s PPP program went dormant for several years. Alas, in light of recent developments (particularly in relation to Kuwait’s energy production and needs), new life has been injected into the government’s PPP initiative and several projects are now either being tendered or are intended for tendering in 2025 (including, but not limited to, projects in sectors such as energy (conventional and renewable), transportation, water, telecommunications, real estate sector, waste treatment sector). As such, now is a good time to revisit exactly how PPP projects are intended to work under the PPP Law.
Initiating and overseeing PPP projects in Kuwait is the responsibility of the Kuwait Authority for Partnership Projects (“KAPP”). While KAPP is the primary driver of the project implementation process, its governing board (the “Higher Committee”) will have broad authorities in the implementation of the PPP process.
Under the PPP Law, each project is to be implemented by a Project Company which must be established in the form of a Kuwaiti public joint stock company pursuant to the terms of the Kuwait Commercial Companies Law. Prior to the PPP Law, it was unclear whether the Partnerships Technical Bureau (KAPP’s predecessor) or the investor would be responsible for the incorporation of the Project Company and the shareholding structure. Each Project Company will be owned in part by KAPP and/or any public entities chosen by the Higher Committee, as well as one or more Consortium Companies.
At the outset of each PPP project, KAPP, the Consortium Companies and potentially the relevant public authorities involved in the relevant project will enter into a variety of agreements, including a shareholders’ agreement pertaining to the ownership, governance and operations of the Project Company, pursuant to which managerial control of the Project Company may be granted to the relevant Consortium Company. Such agreements will also clearly stipulate when and how the shares in the Project Company that are owned by KAPP will be transferred to public entities and the Kuwaiti citizens who are invited to invest in the project. As such, the participation of KAPP is instrumental in the successful implementation of PPP projects in Kuwait.
The law goes a long way towards enhancing the bankability of PPP projects in Kuwait, which will pave the way for Kuwait’s exciting and ambitious plans for the development of Kuwait.
Perhaps most importantly, the PPP Law ensures that Kuwaiti citizens will have an opportunity to directly benefit from PPP projects by allowing them to participate in the equity ownership of the relevant Project Company. To that end, the PPP has provisions pertaining to the public offering of shares in Project Companies to Kuwaiti citizens once the project in question reaches a state of commercial operations. During the developmental stages of each project, KAPP will own the shares reserved for public offering and will exercise all of the rights and obligations attached to those shares in accordance with the Commercial Companies Law as well as in accordance with what has been agreed in the relevant shareholders agreement. Once the project reaches a state of commercial operations, KAPP will offer the warehoused shares to Kuwaiti citizens. Any shares that are not subscribed to by Kuwaiti citizens may then be offered to the public entities and/or the Consortium Companies. Pursuant to the relevant shareholders agreement, the Consortium Companies will generally be ensured managerial control of the Project Company by having the right to nominate a majority of the directors to be elected to the Project Company’s board of directors. KAPP and any public entities involved in the project will be contractually obliged under the shareholders agreement to vote at assembly meetings in the manner necessary to give effect to such elections.
Prior to the PPP Law, Kuwait law was seen by many as too restrictive and uncertain because it prohibited the mortgage of land as well as the buildings and possibly even the equipment situated on the land. Lenders were effectively prevented from being able to take effective security over the material assets of the project which diminished lenders’ willingness to provide the necessary financing for carrying out the project. Due to the nature of limited recourse financing, lenders need to ensure that any and all security available to them is properly registered and perfected. The PPP Law has relaxed such restrictions and prohibitions and clarified what may be pledged as security.
While the PPP Law is not perfect, in comparison to its predecessor laws and regulations, it creates a greater degree of certainty, reliability and flexibility for foreign contractors, investors and lenders that intend to participate in PPP projects in Kuwait. The law goes a long way towards enhancing the bankability of PPP projects in Kuwait, which will pave the way for Kuwait’s exciting and ambitious plans for the development of Kuwait.
