KUWAIT CITY: A draft law currently under review in Kuwait reveals a proposal to impose an income tax of at least 15% on all Kuwaiti businesses, including multinational corporations and locally operating companies. However, businesses with an annual revenue below 1.5 million dinars would be exempt from this tax. While the law does not include a tax on individual income, it specifies that business profits will be calculated based on actual revenues, after deducting the costs necessary for operations. In cases where related parties set conditions that differ from standard market rates, the tax administration has the authority to adjust profits to reflect fair market value, which may affect the tax base.

The proposed tax law applies to both resident legal entities, including multinational companies, and resident individuals carrying out business activities. Additionally, the law applies to permanent establishments within the country, regardless of whether the income is generated inside or outside Kuwait. There are certain exceptions, including legal entities wholly owned by the state, and businesses operating in the divided zone. For companies in the divided zone, the tax rate would be 30%, with a provision allowing for a 50% reduction if taxes are paid to Saudi Arabia.

A supplementary tax is proposed for multinational companies whose effective tax rate falls below 15%. This tax would align with the global minimum tax rate set under the OECD's Pillar 2 rules. Local companies included in the tax base will be given a two-year grace period to prepare for the changes, with the implementation expected to begin in 2027. However, Kuwaiti multinational companies are expected to comply by January 2025, in line with the OECD rules to protect Kuwait’s tax revenues.

The draft law also outlines a 5% withholding tax on payments made to non-residents, covering a range of income types such as royalties, rent, dividends (excluding those from companies listed on the Kuwait Stock Exchange), and insurance premiums. The tax applies to these payments when they are not tied to a permanent establishment in Kuwait. Specific exemptions are granted for government entities, non-profit organizations, and certain international organizations.

Taxpayers will be allowed to deduct actual costs incurred to generate taxable income, including donations to the Kuwait Foundation for the Advancement of Sciences, goods and services necessary for the activity, salaries, and depreciation of assets. However, costs that are not related to the business activity or linked to income exempt from tax will not be deductible. Losses incurred in one tax period can be carried forward to offset future income, but the total amount of losses that can be deducted is capped at 75% of the taxable income in any given period.

Exemptions are provided for specific cases, such as dividends and capital gains from participation shares, provided certain conditions are met, including a minimum participation percentage and tax rates in the foreign country where the shares are held. Other exemptions apply to income generated by non-residents through international transport operations or aircraft/ship leasing activities, provided reciprocity is granted to Kuwaiti businesses operating in the non-resident’s home country.

The draft also stipulates that taxpayers must keep relevant records and documents for 10 years to ensure compliance and facilitate tax calculations. The Tax Administration has the right to assess a taxpayer’s tax based on available data in cases of non-compliance. A Tax Grievances Committee will be established to handle disputes, with penalties and fines for late tax submissions and incorrect tax returns.

Late submission penalties are tiered based on the length of delay. For example, fines of 5% of the final tax will be imposed if the tax return is less than one month late, increasing to 20% if the return is more than one year overdue. If a tax return is not submitted by the assessment date, a fine of 25% of the final tax, with a minimum of 5,000 dinars, will apply.

Additional penalties will be levied for delayed payments, incorrect tax returns, or failure to meet withholding obligations, with fines ranging from 1% to 25% depending on the nature and timing of the violation. Taxpayers who take the initiative to correct errors before they are discovered may benefit from reduced penalties.

The draft law is a significant step in Kuwait’s efforts to align with international tax standards and improve tax collection efficiency, while also providing incentives and exemptions to encourage key activities within the country. The government has indicated that it plans to implement the new tax system in stages, with multinational companies expected to begin complying with the new regulations by 2025.

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