KUWAIT Law and Practice Contributed by: Sam Habbas, Luis Cunha, Hisham Al-Quraan and Mustafa Sayed, ASAR – Al Ruwayeh & Partners
5.6 Transfer Pricing Save for certain limited guidance in the execu - tive regulations (see Article 5) and the Execu - tive 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 deductible. In practice, how - ever, 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 transactions are not concluded for illegal tax purposes. Executive 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. 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 provided as exam - ples: • costs of imported materials to be resold in Kuwait – deductions cannot exceed 85–95% of the related value; • design costs incurred outside of Kuwait – deductions cannot exceed 75–85% of the related value; and • foreign consulting expenses – deductions cannot exceed 70–80% of the related value. Depending on an entity’s status (ie, whether it is a head office, a related party or a third party), the
financed by debt rather than equity) or the tax consequences thereof; however, it is of possi - ble significance that Executive Rule No 38 pro - vides that the DIT may scrutinise financial costs/ expenses to detect whether a taxable transac - tion has occurred (considering, 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 fol - lows (informal translation). First: Bank Interest The interest locally paid on bank facilities and loans used in the main activity of the incorpo - rated 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 capital - ised and added to the asset value. All interest charged by the head office for its cur - rent 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. Commis - sions related to a letter of guarantee where the revenue is not taxable shall not be allowed.
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