Kuwait overhauls tax system and signs UAE treaty

Shutterstock/Besides The Obvious

• 15% business profit tax
• Double taxation treaty with UAE
• VAT still ‘some way off’

Kuwait, which has developed a reputation as an economic laggard among wealthy Gulf states, is undertaking an overhaul of its tax regime to meet global standards and reduce reliance on oil revenues. 

The Gulf state plans to introduce a 15 percent business profits tax, new rules on transparency and compliance with international agreements, and an excise tax, according to analysts.

The emirate, where parliament is now suspended, is also addressing gaps identified by the Organisation for Economic Cooperation and Development (OECD), which sets benchmarks for trade and investment standards across countries.

---

---

Simultaneously, Kuwait has signed a double taxation treaty with the UAE – its first such treaty with another Gulf state – in preparation for the anticipated impact of these changes.

Kuwait is one of only two GCC states that has yet to introduce a value added tax in accordance with commitments.

Critics have also long called for a law that would allow the central government to borrow to smooth revenue and expenses when oil prices soften. But the analysts said that the introduction of VAT is still some way off.

“The government is working on several initiatives to reduce its budget deficits and to increase its non-oil revenue – increasing tax revenue is one [way],” Rami Alhadhrami, partner in tax and regulatory services at consultancy BDO in Kuwait City, told AGBI.

The strategy aligns with regional trends to diversify away from hydrocarbons, as seen in the recent implementation of a 9 percent corporate tax in the UAE, which Alhadhrami said makes the treaty “timely” to prevent or minimise double taxation between the nations.

• Comment: Kuwait’s political crisis adds to economic uncertainty
• Kuwait PM’s in-tray: public debt and budget reform
• Kuwait playing catch-up with ambitious green energy plans

Such treaties provide tax clarity and predictability, which can help boost investment, he said.

Kuwait has a 15 percent tax on business income but, in practice, the tax is only applied on non-Gulf foreign companies and on non-Gulf foreign corporate shareholders in a GCC company doing business in Kuwait. 

However, the business profits tax will now apply to all companies, Alhadhrami said. 

In a note to clients, law firm DLA Piper described Kuwait’s proposed business profits tax as a “major policy shift” for Kuwait and a step towards creating “a more equitable tax system, where businesses contribute more significantly to the national revenue”.

Tim Dopmeijer, senior director at consultancy Alvarez & Marsal, added that the UAE’s drive to set up double tax treaties with other Gulf countries helps to shape better economic conditions to do business within the region for cross-border investment and operations.

A spokesperson from Aurifer, a Middle East tax consultancy, pointed to the international implications of a new Exchange of Information law.

“It regulates the exchange of information between Kuwaiti tax authorities and their international counterparts to combat tax evasion and promote tax fairness,” the spokesperson said.

New clients at financial institutions must now complete self-certification forms in line with anti-money laundering regulations before opening an account.

“Where the client fails to provide such information, the institution must refuse to open the account,” Aurifer’s spokesperson said.

BDO’s Alhadhrami said previously Kuwait imposed no specific penalties on financial institutions that failed to obtain self-certifications from customers, nor were there penalties for customers who provided inaccurate information. 

The decree now grants authorities access to the records that financial institutions are required to keep and introduces fines of up to KD20,000 ($60,000) for non-compliance. 

“I also expect Kuwait to introduce a transfer pricing regime as well as country-by-country reporting legislation in the near future,” Alhadhrami added. 

The Aurifer spokesperson said the law resolves inconsistencies flagged by the OECD in its previous peer review and is expected to strengthen Kuwait’s OECD Global Forum rating, which is based on a jurisdiction’s compliance standards in its next review.

In 2023 Kuwait joined the OECD collaboration on base erosion and profit shifting, an international collaboration against tax avoidance with more than 140 member countries and jurisdictions to ensure multinational enterprises pay a fair share of tax wherever they operate.

The country has also committed to an OECD-approved global Common Reporting Standard, which calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis.

Kuwait is also expected to introduce an excise tax, which would be levied on specific goods considered harmful to health or the environment such as tobacco and soft drinks. But analysts said that is some way off, as is VAT.

“I don’t expect VAT to be introduced in Kuwait during the next year or two,” Alhadhrami said. 

“A significant shift in tax regime requires significant investment in IT infrastructure and resources by the tax authority, which may require time,” he said.

DLA Piper said in its note that Kuwait’s decision to prioritise excise tax over VAT aligns with its economic and fiscal policy goals. 

“This strategic choice reflects a preference for a simpler, more targeted tax regime that directly addresses health and environmental concerns, potentially offering immediate revenue generation with less administrative complexity and broader public acceptability than VAT,” the firm said.