By Atyab Al-Shatti
It is well known that Kuwait does not impose tax on personal income and Kuwaiti companies, while other financial transactions are subject to taxes according to the income tax department of the Ministry of Finance in Kuwait. Despite the fact that Kuwaiti companies, including companies in which a foreign partner owns 49 percent of the capital, are not subject to taxation by the law, yet in practice we find that Kuwaiti companies are actually withholding five percent of the net income from their partnership and business executed with other Kuwaiti companies.
This means that consideration should be given to decree No 3 of 1955 regarding issuing legislation for Kuwaiti income tax amended in legislation No 34 for year 1970 and legislation No 2 for year 2008 according to Kuwaiti Cabinet resolution. This contractual relationship is crucial to secure and safeguard each company’s interest even if it doesn’t apply on certain legal structures.
While any foreign investor, business counterpart or partner doing business in Kuwait is obligated to follow the tax law to legalize their activity here, registering each agreement or business partnership before the Ministry of Commerce is the starting point for the Ministry to monitor and supervise foreign investments in Kuwait.
If it’s not registered, then no court will consider this document as a valid document to structure a contractual relationship, furnish rights and obligations or even to secure financials. Moreover, the process of registering the agreement before the Ministry of Commerce will include the evaluation executed by the income tax department of the Ministry of Finance, which will consider at its sole discretion whether taxes shall apply on a certain transaction or not.
If the department sees that a certain transaction is subject to taxation, then the foreign partner, irrespective of whether he has his own establishment in Kuwait or not, will pay 15 percent out of the net income as income tax. This can only be evaluated through auditing firms, which will audit the company’s financials and come up with the net income. It is important to say here that the Kuwaiti partner will withhold the five percent out of the net income till the foreign partner presents a tax clearance certificate issued by the Ministry of Finance. The Kuwaiti partner will then release the five percent.
The avoidance of double taxation will work in the favor of the foreign partner, as they need to open a file at the Income Tax Department at the Ministry of Finance to file returns on an annual basis. If the foreign investor is subject to tasks in their jurisdiction, they have to submit the tax returns filed in their jurisdiction to the audit firm in Kuwait to reconcile taxes. They will only be responsible to pay the difference.