In 1955, Kuwait introduced corporate income tax for foreign corporations through a decree implementing tax rates ranging from 0% to 55% depending on the taxable profits. In 2008, the decree was amended to impose a flat tax rate of 15% instead. Although this rate might be considered low when compared with many European countries, it is not when compared with the accumulative rates imposed on Kuwaiti companies.
There are three types of taxes/contributions applicable to Kuwaiti companies as per the below.
- National labour support tax (NLST) at 2.5% of the profits of all listed Kuwaiti shareholding companies;
- Zakat/contribution to the State's Budget (Zakat/CSB) at 1% of the profits of the Kuwaiti closed shareholding companies; and
- The compulsory contribution to the Kuwait Foundation for the Advancement of Sciences (KFAS) at 1% of the profits of the Kuwaiti closed shareholding companies.
These taxes act as a source of revenue for government initiatives including the private sector employment incentive dedicated to Kuwaiti locals through the NLST, and financing scientific research and development projects through the KFAS.
As per the recent IMF report, there has been some debate regarding the introduction of a new corporate tax law reflecting a reduction in the applicable tax rate of 15% for foreign companies and an increase in the accumulative rate applicable for Kuwaiti companies leading to a common tax rate across both. These changes will require a shift in local business culture, recognising taxes as a means of funding the government.
In reality, this law may receive strong opposition starting from the parliamentary debate of the law, through to the shareholders in the WLLs (With Limited Liabilities), particularly with growing media coverage through press conferences hosted by the Minister of Finance and official releases from government representatives.
Therefore, depending on the provisions of the new law, several Kuwaiti companies with global operations might have already started planning to move their headquarters to more tax friendly countries in the region, such as the Kingdom of Bahrain or the United Arab Emirates. This may lead Kuwait to lose its competiveness for Kuwaiti businesses in the mid-term, but eventually attract more foreign investors.
That said, Kuwait has been trying to increase its competitiveness through the introduction of the Foreign Direct Investment (FDI) and Public Private Partnership (PPP) laws to encourage investment into Kuwait by foreigners, together with the exchange of information and the transfer of technology, which will diversify and advance the Kuwaiti economy. Through these laws certain incentives, including tax credits or holidays for a number of years, can be granted with more flexibility for establishing a business in Kuwait through the 'one-stop shop' approach, where foreign investors can liaise with only one authority under each law for all governmental procedures.
Meanwhile, Kuwaiti companies can counter the new law's influence by using the benefits of more than 70 effective tax treaties for tax planning, establishing more tax-efficient business structures, while still benefiting from subsided electricity prices and low government fees.
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