Income tax is imposed on the profit of a business in Kuwait as calculated by the normal commercial criteria, using generally accepted accounting principles (GAAP), including the accrual basis. Note that provisions, as opposed to accruals, are not deductible for tax purposes. In addition, for contract accounting, revenue is recognised by applying the percentage of completion method.
Article 2 of the Executive Bylaws to the Kuwait Tax Law provides that income earned from the following activities in Kuwait shall be considered subject to tax in Kuwait:
- Any activities or business carried out either entirely or partially in Kuwait, whether the contract has been signed inside or outside Kuwait, as well as any income resulting from the supply or sale of goods, or from providing services.
- The amounts collected from the sale, rent, or granting of a franchise to utilise any trademark, design, patent, copyright, or other moral rights, or those related to intellectual property (IP) rights for the use of rights to publish literary, arts, or scientific works of any form.
- Commission earned or resulting from agreements of representation or commercial mediation, whether such commission is in cash or in kind.
- Having a permanent office in Kuwait where the sale and purchase contracts are signed and/or where business activities are performed.
- Profits resulting from the following:
- Any industrial or commercial activity in Kuwait.
- Disposal of assets, either through the sale of the asset, part of the asset, the transfer of the asset’s ownership to others, or any other form of disposal, including the disposal of shares in a company whose assets mainly consist of immovable capital existing in Kuwait.
- Granting loans in Kuwait.
- Purchase and sale of property, goods, or related rights in Kuwait, whether such rights are related to monetary assets or moral rights, such as mortgage and franchise rights.
- Lease of property used in Kuwait.
- Providing services, including profits from management, technical, and consultancy services.
- Carrying out trading activities in the KSE, whether directly or through portfolios or investment funds.
Inventory is normally valued at the lower of cost or net realisable value, on a first in first out (FIFO) or average basis.
Capital gains on the sale of assets and shares by foreign shareholders are treated as normal business profits and are subject to tax at a 15% rate. The tax law provides for a tax exemption for profits generated from dealing in securities on the KSE, whether directly or through investment portfolios.
Dividends declared by companies listed on the KSE after 10 November 2015 are exempt from tax in Kuwait.
In principle, tax is levied on the foreign company's share of the profits (whether or not distributed by the Kuwaiti company) plus any amounts receivable for any other income in Kuwait (e.g. interest, royalties, technical services, management fees). However, the Kuwait tax law will still subject the interest received from a Kuwaiti source to tax in Kuwait, whether this interest is the only source of income for the foreign entity in Kuwait or the foreign entity has more sources of income in Kuwait other than the interest income.
Royalty income earned from “the sale, lease, grant of franchise to use or utilise any trademark, design, patent, intellectual property, or copyright in Kuwait” is taxable in Kuwait. Kuwait tax law imposes a deemed profit of 98.5% on royalties earned from Kuwait (1.5% being an allowance for head office overhead), on which the prevailing flat corporate tax rate of 15% is applied.
Foreign currency exchange rates and related profits and losses
The tax treatment for realised and unrealised losses and gains related to foreign currency transactions are as follows:
- Unrealised foreign exchange gains are required to be reported in the tax declaration. However, unrealised gains may be excluded from taxable income for calculating the tax due for the fiscal year.
- Realised foreign exchange gains are taxable in Kuwait and are therefore added to calculate taxable profits.
- Unrealised losses are not considered as tax deductible costs and are therefore excluded for calculating taxable profits.
- Realised losses may be claimed as tax deductible costs, provided such losses are supported by adequate supporting information and documents.
The following sources of income are exempt from tax in Kuwait:
- Profit from the sale of goods to a buyer in Kuwait, where the supplier is not involved in any operations in Kuwait.
- Profits of a corporate body generated from dealing in or disposing of securities listed on the KSE, whether such activities are carried out directly or through investment portfolios or funds.
The Kuwait tax law does not clearly provide for the tax treatment of foreign income. Such income is currently treated on a case-by-case basis.