Kuwait – updates on declarations & assessments, Zakat & contracts in the PNZ

The Kuwait tax law is brief and its application very much depends on the practice of the Kuwait Tax Authority (KTA). In the past, the KTA has issued Circulars and Executive Rules that set out guidance on tax administrative matters and the deductibility of expenses allowed for Kuwait tax purposes during the mandatory annual tax inspection, which is carried out on all tax declarations submitted. The most recent set of Executive Rules and Regulations was issued by the KTA in 2010. However, the KTA is known to be inconsistent in its practices, which change from time to time without prior notice.

Recently, the KTA issued a new Circular setting out new guidance regarding the submission of tax declarations in Kuwait. Overall, the circular appears to shift the burden of tax inspection work that would typically be carried out by the tax inspector to the taxpayer. The circular appears to impose greater requirements at the time of filing the annual tax declaration. In return, taxpayers’ tax assessments should be issued more quickly, allowing companies to obtain release of their tax retentions earlier.

The regulations appear to supply the KTA with more information (especially on subcontractors used) in order to identify companies that may not be currently complying with their tax obligations in Kuwait, potentially leading to higher tax collections. There is also greater emphasis on reviewing the application of the tax retention regulations, which are inconsistently applied in practice.

The Circular also requires companies that file their tax declaration on an actual basis to formally submit a report to the KTA within three months of filing their tax declaration. The report should provide a computation of tax and incorporate adjustments applied by the KTA in its most recent tax assessment for the company (for 2009 or later). The KTA will review this report during the tax inspection process for potential increases or decreases in the amounts disallowed in the past assessment, and this review will form the basis of the final tax assessment for the current year.

Contact your KPMG adviser in Kuwait for more details about the Circular.

Zakat on government shareholdings
In the past, we have seen the KTA issue assessments that exempt from Zakat the share of profit of a Kuwait shareholding company attributable to a shareholder that is a Kuwait governmental authority. This was considered to be in accordance with the Zakat law, which appeared to provide an exemption from Zakat to the Kuwait government.

The KTA has been reviewing this matter, and we are now receiving rulings from the KTA stating that a company must be entirely owned by the Kuwait government in order to be exempt from Zakat. As a result, companies that are partially owned by the Kuwaiti government do not qualify for any exemption from Zakat for their share of profit attributable to the Kuwait government shareholding.

Taxability of contracts related to the Partitioned Neutral Zone (PNZ)
The KTA is currently reviewing the taxability of contracts undertaken in the partitioned neutral zone between Kuwait and Saudi Arabia with the goal of issuing formal guidance. When the guidance will be issued is uncertain. In the meantime, companies should consider discussing with the KTA the taxability of specific contracts signed for work to be conducted in the PNZ on a case-by-case basis.

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1Kuwait tax law is defined by Decree No. 3 of 1955 as amended by Law No. 2 of 2008 and the Executive Bylaws to Law No. 2 of 2008.
2 Circular No. 1 of 2013.
3Under Article 37 of the Executive Bylaws of Law No. 2 of 2008.
4Article 4 of Law No. 46 of 2006.