Taxation Of Foreign Entities Under The New Tax Law

Foreign entities are taxed on income earned while conducting business in Kuwait . Kuwait 's longstanding tax regulations placed a heavy tax burden on foreign investors' business activities in Kuwait and caused confusion as to the types of income that can be subject to tax.

In a move designed to make Kuwait more attractive to foreign investors, Kuwait's National Assembly approved the passing of Law No. 2 of 2008 Amending Certain Provisions of the Kuwait Income Tax Decree No. 3 of 1955 (the "Tax Law"), which came into effect on February 3, 2008. The Tax Law amends the previous regulations to ease the heavy tax burden on foreign entities' business activities in Kuwait .

The Tax Law applies to foreign entities that are not incorporated in Kuwait or any other GCC country and does not apply to foreign individuals or Kuwaiti companies that have non-Kuwait partners or shareholders (in which case the tax is imposed on the foreign company's share of the earnings).

Conducting business in Kuwait

The Tax Law expands upon the previous regulations' definition of conducting business in Kuwait and indicates that profits realised from the following activities are subject to tax:

Contracts totally or partially executed in Kuwait Selling, leasing, or granting concession to use or exploit any trademark, or copyright Representation agreements or commercial brokerage agreements Industrial and commercial enterprises Disposing of assets Buying and selling assets, as well as opening a permanent office in Kuwait where sale and purchase contracts are concluded Leasing property Rendering services The previous regulations were vague as to what constitutes taxable income, which resulted in disputes between foreign entities and the tax authorities. The Tax Law works to eliminate such confusion by elaborating on the activities that constitute conducting business in Kuwait to increase foreign companies' confidence in conducting business activities in Kuwait .

Exemptions

The Tax Law exempts from taxation profits that foreign entities earn by trading on the Kuwait Stock Exchange (either directly through portfolios or indirectly through investment funds), thereby encouraging international companies and funds to invest in Kuwaiti shares.

A Kuwaiti commercial agent's earnings are also exempt from taxation under the Tax Law, provided that such profits were earned by the sale of goods for the agent's own account. Furthermore, only commissions paid to foreign companies as a result...