Tax is imposed on profits arising in a taxable period, which is defined as the accounting period of the taxpayer and further assumed to be one calendar year. The first taxable period can, however, be a minimum of six months and a maximum of 18 months. The DIT may also agree to a written request from the taxpayer to change the year-end to a date other than 31 December.
The taxpayer must submit a tax return, based on the taxpayer’s books of account, within three months and 15 days from the end of the taxable period. Taxpayers can, in certain cases, request an extension of up to 60 days to file the tax return. If such an extension is granted, no tax payment is necessary until the tax declaration is filed, and payment must then be in one lump sum.
The taxpayer must maintain certain accounting records in Kuwait, which are subject to inspection by the tax department’s officials after submission of the tax declaration. Accounting records can be in English and may be in a computerised system used to prepare financial statements if the system includes the required records and the tax department is previously informed.
The tax return should be supported by the following:
- Audited balance sheet and profit-and-loss account for the period.
- Detailed list of fixed assets (e.g. additions, disposals).
- List of inventory (e.g. quantities and values).
- List of subcontractors and the latest payments to them.
- Copies of current contracts and a statement of income and expenditure for each.
- Trial balance, forming the basis of the accounts.
- Last payment certificate from the client.
- Insurance companies must attach to the Public Budget and the tax declaration a detailed statement with the reinsured documents and the related terms and conditions.
As a general rule, an assessment is finalised only after inspection of the client’s records by the tax department. As indicated above, proper documentation must be maintained to support expenditures and to avoid disallowances at the time of tax inspection. If support is considered inadequate, the assessment is apt to be made on the basis of deemed profitability. This is computed as a percentage of turnover and is fixed arbitrarily, depending on the nature of the taxpayer’s business.
Payment of tax
Tax is payable in four equal instalments on the 15th day of the fourth, sixth, ninth, and 12th months following the end of the tax period. If an extension is granted by the DIT, all of the tax is payable upon the expiration date of the extension. Failure to file or pay the tax on time attracts a penalty of 1% of the tax liability for every 30 days of delay or part thereof.
If a company disagrees with an assessment issued by the DIT, the company should submit an objection within 60 days from the date of the assessment. The DIT is required to resolve the objection within 90 days of the filing of the objection, after which a revised tax assessment is issued by the DIT. Upon issuance of a revised tax assessment, any additional tax is payable within 30 days. If the DIT issues no response within 90 days of filing the objection, this implies that the taxpayer’s objection has been rejected.
In case the objection is rejected or the taxpayer is still not satisfied with the revised tax assessment, the company may contest the matter further with the Tax Appeals Committee (TAC) by submitting a letter of appeal within 30 days from the date of the objection response or 30 days from the expiry of the 90 days following submission of an objection if no response is provided by the DIT.
The matter is then resolved through appeal hearings, and a final revised assessment is issued based on the decision of the TAC. Tax payable per the revised assessment must then be settled within 30 days from the date of issuance of the revised assessment. Failure to do so results in a delay penalty of 1% of the amount of the tax due per the final assessment for each period of 30 days or part thereof of the delay.
Statute of limitations
The statute of limitations period is five years. Moreover, under Article No. 441 of the Kuwait Civil Law, any claims for taxes due to Kuwait or applications for tax refunds may not be made after the lapse of five years from the date on which the taxpayer is notified that tax or a refund is due.
Topics of focus for tax authorities
The DIT has implemented an active approach to ensure the compliance of local companies with the tax retention mechanism in order to ensure that foreign entities earning income from Kuwait are subject to tax on such income. The DIT’s attention is often directed to local companies having franchise operations and agreements with foreign franchisors in Kuwait. In some cases, the DIT has asked the Kuwaiti companies to settle the 5% retention where the franchisors have failed to comply with the tax law requirements.