Ahmed Barakat and Ramy Shehata of ASAR - Al Ruwayeh & Partners offer legal and practical insights into the status of income tax in Kuwait

As an oil-rich state, income regarding the precious resource is a major cause of disputes. Kuwait started to search for so-called black gold in its soil in the mid 1930s. On June 30 1946, Kuwait's first crude oil shipments were exported. This was celebrated on the same day in a grand ceremony held under the auspices of the late Sheikh Ahmed Al-Jaber al Sabah (the then Amir of Kuwait). From this point on, international companies started to show more interest in investing in Kuwait and benefiting from its rising economy.

In view of this growth in Kuwait's economy, it was necessary to have legislation to protect the country's economic interests and regulate commercial work in Kuwait. Among which, income Tax Law 3 of year 1955 was promulgated.

Law 3/1955

The Kuwait legislator has imposed income taxes on any company that conducts business in Kuwait either directly or through an agent. On the other hand, no income taxes are applied on individuals working in Kuwait regardless of their nationality.

Although there is no explicit provision in the law that exempts Kuwaiti companies from taxes, the established practice is that Kuwaiti companies are not subject to income taxes. However, if a foreign entity is a shareholder in a Kuwaiti company, then said entity would have to pay taxes on its dividends and capital gains. Also, Kuwaiti Companies listed on the Kuwaiti Stock market pay 2.5% tax under Law 19/2000 on National Labour Support.

According to the tax law, and prior to its amendment in 2008, the tax rate was dependent on the income value. As such, different income tax rates were used and sometimes the foreign entity was exposed to 55% income tax.

Further, the agent definition for tax purposes was debatable. The Kuwaiti legislator indicated that foreign corporate entities may conduct business in Kuwait either directly or through an agent, but no definition was provided for an agent. Thereafter, on October 10 1955, a resolution was issued by the Tax Director defining an agent.

As such, an agent according to law 3/1955 is 'a person/entity authorised by a principal to enter into a binding contract with a third party on the principal's behalf within the scope of its authority'.

This definition was re-affirmed by the Kuwaiti Cabinet in its resolution 387/2006. This resolution states that even an exclusive distributor should not be considered an agent, as the distributor usually lacks the representative authority required in the above definition for an agent.

In this regard, the main question is how the controversy regarding the definition of an agent has impacted tax enforcement in Kuwait.

Foreign companies usually appoint Kuwaiti entities or individuals as agents to be able to conduct business in Kuwait. According to Kuwaiti law, the agent is viewed as the local representative of the foreign principal and may be served with notices and legal summons on the latter's behalf. Therefore, instead of chasing foreign entities for any taxes due, the Kuwaiti Ministry of Finance has started to sue local companies in their capacity as agents of foreign entities.

Even though local companies are not obliged to pay taxes on behalf of the foreign principal, the Ministry has started to claim tax from agents. As there is no reference in Kuwaiti law to the responsibility of an agent for the principal's tax dues, the Court of Cassation in Kuwait (the high court in the land) has refrained from adopting such approach in a number of recent cases.

The Ministry's approach included various miscalculations as the Ministry has started to chase local companies without seriously investigating whether they are really an agent or not. The aim here is to collect the tax amounts from any party even if it is a local company.

In this regard, the Ministry has started a number of legal actions against local companies, ignoring the clear definition of the agent in the tax law. The Ministry also invoked article 286 of the Law of Commerce in an attempt to convince the courts that an exclusive distributor is an agent for tax purposes, even though the article assimilates an exclusive distributor to an agent only for the limited purpose of claiming statutory compensation in the event the agency or distribution agreement were terminated without cause. Although the Ministry was aware that article 286 is irrelevant for tax purposes, the Ministry has tried to rely on it to escape the definition of agent under the tax law.

In summary, the Ministry of Finance in Kuwait wanted to apply two theories: (i) most, if not all, local companies should be considered agents even if they are only distributors or exclusive distributors; and (ii) the Kuwaiti party should act as a guarantor and pay taxes on behalf of the foreign principal.

The New Tax Law of 2008 has touched on these points, but even before the promulgation of said law, Kuwaiti courts had refused to adopt the Ministry's approach and arguments.

Legal precedents (Law 3/1955)

On December 28 2012, the Court of Cassation, in challenge 1697/2010, upheld the appellate and first instance judgments that confirmed the Ministry's wrong application of the law. In this case, the local company defended its position and highlighted that it had no authority to enter into binding agreements on behalf of the principal and, therefore, should not be considered an agent according to the definition stated in the tax law. Accordingly, the Court decided that the case was filed against the wrong party, as the Kuwaiti party had no standing as an agent of the foreign principal for tax purposes.

This approach by the Court has been confirmed in different judgments issued by the Court of Appeals and the Cassation Court.

On April 21 2015, the Appellate Court in appeal 244/2014 decided to uphold the first instance judgment that refused to apply the law of commerce provisions, considering the exclusive distributor to be an agent. The Court announced that the case was filed against the wrong party, as the local company had no capacity to represent the foreign company. The Court endorsed the local company's defence that tax issues are governed only by the Income Tax Law. Under Kuwaiti law, it is not possible to refer to provisions of another law unless the relevant law has no stipulations that deal with the subject matter. However, as the Kuwait Income Tax Law included a clear definition of an agent, which was added by the Tax Director in 1955, the Court did not endorse the reliance on other provisions in the Kuwaiti Law of Commerce dealing with agents.

On April 26 2015, the Cassation Court issued its judgment in the two appeals (1581 and 1600/2014) confirming that the Court had discretion to decide, upon reviewing the documents, whether or not a relationship could be considered an agency. This practical approach by the Court indicates that even if the parties referred in their contract to an agency relation, it is for the Court to investigate this issue and arrive at the proper classification of the commercial relation. As such, if the Court discovers that the local party, in practice, has no authority on behalf of the local party, the latter would not be considered an agent.

Statute of limitations

The statute of limitations rule in the tax context means that the Ministry would not be in a position to claim taxes after the lapse of a certain period of time. In other words, the Ministry is bound to proceed with its claim for taxes during a certain period starting from the date the tax becomes due.

Tax Law 3/1955 did not include any reference to such rule and its implementation. Therefore, according to Kuwaiti Law, the general rules on time (bar in the Kuwaiti Civil Law) were applied in this regard.

Under article 441 of the Kuwaiti Civil Law, the Ministry's claim for taxes would be time-barred after five years. However, the main question is when should we start calculating the five-year period?

According to the law, the statute of limitations should start running from the date the tax payer is to submit its tax declaration, which should be no later than April 15 of the year following the fiscal year subject to tax. In other words, for taxes for 2004, the tax declaration should be submitted no later than April 15 2005. In this regard, there was a lot of debate before the courts as to cases where the tax payer does not submit its tax declaration.

The Tax Department argued that the non-submission of the tax declaration indicates that it was not aware of the foreign company's activity in the country. Therefore, the Ministry asserted that it would be unfair to be deprived of the right to claim taxes in such circumstances.

However, in a number of cases, the Cassation Court has decided to apply the statute of limitations rules although the tax payer did not submit the tax declaration. The court decided that the limitations statute should start running from the date the tax had become due, regardless of whether or not a declaration was submitted; the rationale being that the Ministry should be proactive in following up all tax issues and seeking out those who try to evade taxes.

However, in some other cases, the Court has investigated this issue factually, as the Ministry used to issue tax assessments arbitrarily even if no tax declaration was submitted by the tax payer. In such cases, the Court has decided to calculate the five-year period from the date the tax assessment was issued, as this constituted a proof of the Ministry's awareness of the taxes due.

Law 2/2008

After half a century, it was essential to have a new legislation to answer the questions raised during the implementation of Law 3/1955. Therefore, a new law was enacted amending some of the articles of Law 3/1955.

Under article 1 of the new law (Law 2/2008), the legislator clarified the implementation of tax rules in Kuwait. It states that:

An annual income tax is hereby imposed on the income of everybody corporate, wherever incorporated, carrying on trade or business activity in the State of Kuwait, particularly:

The profits realised from any contract that may be totally or partially completed in the State of Kuwait.
The amounts collected from the sale, lease, granting franchise to use or exploit any trade mark, patent design or copyrights.
Commissions due or resulting from representation agreements or commercial mediation.
The profits of industrial and commercial business.
Profits realised from disposing of assets.
Profits resulting from purchase and sale of properties, goods, related rights and opening a permanent office in the State of Kuwait wherein sale and purchase contracts are concluded.
Profits resulting from the lease of any properties in Kuwait.
Profits resulting from rendering any services in Kuwait.
The profits of an incorporated entity resulting from trading operations at the Kuwait Stock Exchange shall be exempted from tax imposed under this law, whether it has been executed directly or via portfolios or investment funds.

The tax rate under the new law has been fixed at a flat rate of 15% of net taxable income. Further, the new law has touched on a number of issues that were debatable and needed clarification.

The agent

As opposed to the strict definition of an agent under the old law, the executive by-laws of the new law define an agent as:

every and each natural or corporate person authorised by his principal to carry out business, trade or any of the activities stipulated in the law or to enter into a binding agreement with a third party on behalf and for the account of his principal within the limits of his powers. Therefore, the profit of Kuwaiti merchants resulting from the resale of goods bought and transported for his own account shall not be taxable in this regard.

As such, the Kuwaiti legislator has adopted a wider definition of an agent while confirming the fact that Kuwaiti merchants are not subject to Kuwaiti tax in respect to products bought for their own account (not for the benefit of the foreign principal).

In this regard, it is also noteworthy that the by-laws of the new tax law suggest that the mere supply of goods to Kuwaiti merchants could give rise to income taxes on foreign suppliers. This could lead to unacceptable results as many products are imported into Kuwait from other countries and, as such, the tax net has been unreasonably extended to cover almost all types of transactions including cross-border transactions.


Based on ministerial resolutions, Kuwaiti parties that have contractual relationships with foreign entities doing business in Kuwait had to retain five percent of the value of the contract as a guarantee for paying taxes by the foreign party. However, this was not stated in the old tax law.

Confirming this retention obligation, the Executive Bylaws of Law 2/2008 state under article 37 that:

All Ministries, authorities, public bodies, companies, societies, individual firms, any natural person and others as specified by the Executive Rules and Regulations shall retain 5% of the contract price or each payment made with whom they entered into contracts, agreements or transactions.

Further, to give teeth to the obligation to retain, in case of violation of article 37, the above noted by-laws penalise a Kuwaiti party who fails to retain the five percent by making him responsible for the payment of the entire tax due from the foreign party. However, it remains to be seen how far the Tax Department will go in implementing such penalty on Kuwaiti companies who fail to retain and who are expected to resist the application of such penalty.

On paying taxes either by the foreign entity or the Kuwaiti party, a tax clearance certificate will be issued enabling the foreign entity to proceed with the recovery of any retention made by the local party.

Statute of limitations

In this regard, the new law has complied with the general rule in civil law that provides for a five-year period to consider the tax claim time barred.

According to the Civil Law, the statute of limitations may be interrupted or tolled only by filing a legal action before the court. Therefore, prior to issuance of the new tax law, the Ministry had in all cases to file its claims with the court before the expiry of the five years.

However, the new tax law under article 41 added that the statute of limitations would also be tolled by the Tax Department notifying the tax payer with the tax assessment, a request of tax payment or a decision by the Tax Appeal Committee through registered mail.

As such, starting from 2009, it has become difficult for companies to argue that tax claims are time barred. Also, it will no longer be feasible to invoke the time bar argument successfully in circumstances where the tax payer did not submit its tax declaration, unless it can prove that the Tax Department had actual knowledge of its taxable activities in Kuwait but still did not take any measures to claim the taxes due within five years of the date it had acquired such knowledge.

Legal precedents (Law 2/2008)

On June 8 2015, the Court of Appeals issued its judgment in appeal 789/2015 against the Ministry. It argued the existence of an agency relationship between a local company and a foreign entity. However, the Court indicated that the local company was purchasing the products and selling them for its own account. As such, the court applied a reasonable interpretation of the new law, preventing the imposition of taxes on all foreign suppliers of goods to Kuwait.

"The Kuwaiti legislator has adopted a wider definition of an agent while confirming the fact that Kuwaiti merchants are not subject to Kuwaiti tax"

The State of Kuwait has taken different measures to encourage foreign investment. One of these measures was signing treaties with different countries for the avoidance of double taxation. These countries include Arab and European countries like Switzerland, Cyprus, Egypt and Jordan. These treaties are endorsed by a law decree and considered part of the domestic laws of the land.

According to these treaties, if a foreign company is conducting business in Kuwait without having a permanent establishment, then taxes should be paid in the country where it has a permanent residence.

In this regard, the term permanent establishment is defined as a fixed place of business through which the business of an enterprise is wholly or partly carried on. Therefore, it includes: a place of management; branch; an office; a factory; a workshop; a mine; and oil or gas wells.

Further, most of the treaties consider the appointment of a distributor or an agent to be insufficient to constitute a permanent residence in the country. However, if such agent was dedicating the bulk of their time and effort to advance the interests of the foreign principal, then such relationship may be deemed to constitute a permanent presence in the host country.

As such, there appears to be a number of conflicts between the tax rules set out in the double taxation treaties and those stipulated in the Kuwaiti new tax law and its implementing by-laws. According to the new tax law, such conflict should be resolved in favour of the rules set out in the above noted treaties to ensure Kuwait's compliance with its international obligations. However, this unfortunately does not appear to be the developing practice by the Kuwaiti Courts, which have had difficulties in implementing the double taxation treaties due to their complex and technical nature and the courts' unfamiliarity with them. Still, in some few incidents (for example in appeal 213/2014) the court has upheld the first instance judgment that rejected the tax claim submitted by the Ministry. The court relied on the treaty with Cyprus as the foreign company had its permanent residence in Cyprus and provided evidence of paying taxes, even for its Kuwaiti activities, in Cyprus.

Tax law challenges

While the new tax law and its implementing by-laws have clarified some issues and strengthened the hands of the Tax Department in claiming and collecting due taxes, the practical realities on the ground have shown that there are still many challenges that need to be tackled promptly to ensure clarity and fairness in implementing tax rules in Kuwait. Among the more pressing challenges posed by the new tax law and its implementation, are, first, the importance of clearly defining business activities giving rise to paying taxes in Kuwait. In this regard, it is untenable to push for taxes on foreign suppliers of goods or international lenders of funds who do not have any business presence in Kuwait.

Second, it should be clarified that foreign principals who deal with distributors, as opposed to agents, should not be subject to Kuwaiti income taxes if their agreements are classic and true distribution agreements.

Third, the courts should delve more deeply into the proper interpretation and implementation of double taxation treaties to ensure that they will not be set aside in practice. In this regard, more training and consultation with countries with more developed tax systems should be made available to Kuwaiti tax officials to develop a better understanding of the double taxation treaties and how they are applied internationally.

While one can appreciate the Tax Department's inclination to apply the Tax Law broadly and assertively to fulfill its mandate in raising new revenues and to diversify the sources of national income, the success in carrying out this task in the long run is dependent on the fair and transparent implementation of the Tax Law. This will be guided by Kuwait's international treaties on the avoidance of double taxes and the internationally accepted mechanics of investigation, inspection and collection of taxes.


  First published by our sister publication IFLR magazine. Take your free trial today.


Ahmed Barakat
ASAR - Al Ruwayeh & Partners

About the author

Ahmed Barakat is managing partner at ASAR. He received his education at Cairo University, Egypt (Bachelor of Law with Honors, 1981) and at New York University, US (Masters of Law in international law and business transactions, 1984). He is admitted to the New York and Egypt Bar.

Prior to joining ASAR, Barakat worked as a lead counsel at the Kuwaiti Authority for Assessment of Compensation Resulting from Iraqi Aggression and at Baker & Mckenzie in New York.

Barakat specialises in commercial, construction and tax litigation, as well as local and international arbitration. He also advises clients on corporate and commercial matters, and Islamic banking and investment. He has been elected as a leading lawyer in litigation by a number of distinguished publications including the Best Lawyers International (US) and Legal 500. He has also written for publications such as the Oxford Business Group and the IFLR. He has lectured at various workshops, spoken at various conferences, and has also appeared on Kuwait TV speaking on various legal issues, including Kuwait's tax laws.

Barakat is fluent in English and Arabic.

Ramy Shehata
ASAR - Al Ruwayeh & Partners

About the author

Ramy Shehata is a partner at ASAR. He focuses on: commercial litigation; dispute resolution; arbitration; and commercial, construction, agency, insurance, tax and trade mark litigation.

Shehata has represented and provided legal advice to local and multinational companies relating to different litigation matters, including those relating to oil and gas projects. He was named in Legal 500 as a leading lawyer (2011).

Shehata has a Bachelor of Laws from Cairo University, Egypt (2002). He is admitted to the Egyptian Bar, and is fluent in English and Arabic.