KUWAIT Law and Practice Contributed by: Sam Habbas, Luis Cunha, Hisham Al-Quraan and Mustafa Sayed, ASAR – Al Ruwayeh & Partners
cluding SMEs) for the provision of local prod - ucts and services – equivalent to the value of the annual contracts with local suppliers; and (c) raw material and other material from local sources – double the annual value of inputs used from local sources. Article 8 of the executive regulations to the Corporate Income Tax Law is also significant, as it provides that the profits accrued by corporate bodies from trad - ing on the Kuwait Stock Exchange are exempt from taxation. 5.4 Tax Consolidation While there is no express rule restricting tax consoli - dation, the Corporate Income Tax Law provides that every taxpayer must file an income tax declaration (Articles 1 and 8 of the Corporate Income Tax Law), and this requirement is applied in practice by the DIT. In practice, consolidation is permitted in relation to affiliates and is expected to develop further with the introduction of the MNE Tax Law and its requirements. 5.5 Thin Capitalisation Rules and Other Limitations The Corporate Income Tax Law does not expressly address thin capitalisation (where a company is pri - marily financed by debt rather than equity) or the tax consequences thereof; however, it is of possible sig - nificance that Executive Rule No 38 provides that the DIT may scrutinise financial costs/expenses to detect whether a taxable transaction has occurred (consid - ering, amongst other things, the necessity of loans/ interest in relation to loans from banks and related parties, and the surrounding documents, inter-group interest charges and interest paid in relation to foreign financing). Executive Rule No 38 provides as follows The interest locally paid on bank facilities and loans used in the main activity of the incorporated body shall be accepted after ensuring the necessity of the loan and also the supporting documents. The interest on the loans utilised in financing the capital operations shall be capitalised and added to the asset value. (informal translation). First: Bank Interest
All interest charged by the head office for its current account in the incorporated body’s branch in the State of Kuwait shall be discarded. The same applies to the interest charged by the agent. The interest paid abroad shall be discarded unless it is proved that such interest has been paid for loans and bank facilities to finance the incorporated body’s activities in the State of Kuwait. Second: Letter of Guarantee’s Commission Paid Abroad This commission shall be allowed if it is only paid to a foreign bank to issue a letter of guarantee from a local bank and the letter of guarantee is related to a taxable project in Kuwait. Commissions related to a letter of guarantee where the revenue is not taxable Save for certain limited guidance in the executive regulations (see Article 5) and the Executive Rules, little is expressly provided in the tax laws/regulations on how taxes should be treated between a branch and its head office. That being said, Executive Rule No 38 does provide that no interest charged by a head office in relation to its account with the Kuwaiti branch shall be deduct - ible. In practice, however, such interest charges may be allowed if the Kuwaiti tax authorities are satisfied that the interest is a legitimate charge that relates to a Kuwaiti project. Also of significance, Executive Rule No 49 provides that the tax authorities may inspect intergroup transactions to ensure that such transac - tions are not concluded for illegal tax purposes. Exec - utive Rule No 49 goes on to provide that each entity is responsible for its own taxes but that, in special cases, related entities can be treated differently after consulting with the tax authorities. shall not be allowed. 5.6 Transfer Pricing It is also understood that, in practice, the DIT applies limits on the deductibility of expenses incurred outside Kuwait in relation to a head office, related entities and third parties to varying degrees. The following are pro - vided as examples:
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