Kuwait

For expenses to be deductible, they must be incurred in the generation of income in Kuwait. Such expenses must be supported by adequate documentary evidence.

Depreciation

Depreciation is taken on a straight-line basis at specified rates. However, within 90 days prior to submission of the tax declaration, the taxpayer may request that the tax department calculate the depreciation using a different method than the straight-line method. The tax department shall accept this request if it is based on a reasonable basis in accordance with the tax accounting principles and rules.

The principal depreciation rates are specified in the law, as follows:

Goodwill

In accordance with Executive Rule No. 30, amortisation of incorporated body goodwill is not allowed as a tax deductible expense.

Start-up expenses

Expenses incurred prior to signing of the contract are not allowed as tax deductible costs.

Interest expenses

Interest expenses are deductible if they are related to operations in Kuwait and are paid to a local bank.

Bad debt

Bad debt is deductible if it is related to operations in Kuwait and a final decision by the court is available.

Charitable contributions

Grants, donations, and subsidies paid to licensed Kuwaiti public or private agencies are deductible.

Fines and penalties

Fines and penalties are not tax deductible.

Taxes

Taxes and fees, except income tax, are deductible in Kuwait.

Subcontract costs

A subcontractor is any third party, provider, or beneficiary that in any way executes a portion of the contract or any phase thereof.

As per Executive Rule No. 28, subcontract costs are deductible if the following conditions are met:

• The work performed by the subcontractor is related to the main contract.
• The cost of the subcontractor’s work does not exceed the revenue for such work.
• The necessary documents (e.g. the contract, invoices, settlement documents) are available.
• In the event that the incorporated body implementing the contract sells or assigns it to the subcontractor or any other party, official written approval from the contracting body is provided.
• In the event that the subcontractor sells or assigns the contract to another subcontractor, official written approval from the contracting body and the incorporated body implementing the contract is provided.

During inspection, the tax department shall disallow the amounts paid to subcontractors if the incorporated body does not notify the tax department of the subcontractors or does not withhold 5% of the contract value signed with the subcontractor as income tax retention.

Net operating losses

As per the amended tax law, losses may be carried forward for a maximum of three years, provided that the following situations do not arise in the fiscal period following the period in which the loss was recorded:

• The tax declaration does not include any revenue from the business activities of the taxpayer in Kuwait.
• Change in the legal structure of the taxpayer.
• Merger of the taxpayer with another entity.
• Liquidation or ceasing of the activities of the taxpayer in Kuwait.

Please note that losses cannot be carried back under the Kuwait tax law.

Head office expenses/payments to foreign affiliates

The deduction of head office expenses (the overhead or the indirect expenses) is limited to 1.5% of the company's Kuwait revenue after deducting the subcontractors’ shares (if any).

The direct costs allocated by the head office (e.g. supply of goods, design and consultancy costs) are regulated as follows.

For costs of supply from outside Kuwait:

For design costs incurred outside Kuwait:

For consultancy costs incurred outside Kuwait:

In case there is no separate revenue for consultancy, design, or supply work, although the nature of the contract requires the existence of such work, the following formula shall be applied:

Consultancy, design, or supply revenue = (consultancy, design, or supply costs / total direct costs) x contract revenue