Simple Tax Guide for Americans in Kuwait
US Expat Taxes - Kuwait
At Taxes for Expats we have been preparing U.S. tax returns for U.S. Citizens and green card holders working in Indonesia for over 8 years. Our clients hail from all parts of the country - As Salimiyah and Saba? as Salim, Al Fa?a?il and Al Farwaniyah, Kuwait and Ar Riqqah.
As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of whether you already pay taxes in your residence country.
We offer professional tax services. That means we figure out the best and most optimal way to file your U.S. tax return and avail you of all possible exclusions and deductions. But just as importantly - avoid the errors that would allow IRS to disallow your return and levy fines & penalties on top. You can also do them yourself - not that we recommend it. For more information please see IRS.
The expatriate Foreign Earned Income Exclusion can only be claimed if you file your tax return on a timely basis. It is not automatic if you fail to file and can even be lost.
We have many clients living in Kuwait and know how to integrate your U.S. taxes into the local income taxes you pay. Any Kuwait income tax you already pay can be claimed as against the tax liability on your U.S. return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the calendar year as is standard in Kuwait for U.S. tax purposes). You must, however, pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these form or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
We have helped hundreds of expats around the world catch up with their past U.S. taxes because they have failed to file U.S. tax returns for many years. This is, in fact, our specialty and we offer a 10% discount to clients to wish to file multiple tax returns at once and get in full compliance with the IRS.
Work with a recognized expert to help you prepare your American tax return. We can also provide tax planning and advice with other expatriate tax; we look forward to working with you.
Below we include information on the Kuwait Tax System for the American Expatriates.
There is no personal income tax (employment tax), wealth tax in Kuwait.
Social security contributions – Kuwaiti employees must contribute 7% of salary to the Public Institution for Social Securities; the employer also contributes 11%.
Kuwait Corporate income Tax
Kuwait corporate income tax is a flat 15%.
Residence – The taxable presence of a foreign entity is determined by whether it carries on a trade or business in Kuwait and not on whether it has a permanent establishment or place of business in Kuwait.
Basis – In practice, the income tax law is applied only on foreign entities carrying on a trade or business in Kuwait, with the exception of entities that are registered in Gulf Cooperation Council (GCC) countries and fully owned by Kuwaiti/GCC citizens.
Although the term "taxable activities" is explained in the law, the term "carrying on a trade or business in Kuwait" is still interpreted in the widest possible sense by the tax authorities, and is generally interpreted as arising on all Kuwait-based sources of income.
Taxable income – Income tax is levied on the net profit (i.e. revenue less allowable expenses) earned from the carrying on of a trade or business in Kuwait. Royalties and franchise, license, patent, trademark and copyright fees received by overseas foreign entities from Kuwait are subject to income tax in Kuwait. A tax exemption is possible for profits earned by entities from trading operations on the Kuwait stock exchange, whether directly or through portfolios of investment funds.
Taxation of dividends – Dividends paid by investment fund managers or investment trustees to foreign companies are subject to a 15% tax, which must be withheld at source and forwarded to the Kuwait tax department as an advance payment of the tax due on such dividends.
Capital gains – Capital gains on the sale of assets are treated as normal business profits and are subject to income tax at the standard rate of 15%.
Losses – Losses arising in any taxable period may be carried forward for 3 years to be offset against future taxable profits. Carryforward losses will not be permitted if the entity ceases its activities in Kuwait (unless the cessation is mandatory). Tax losses may not be carried back.
Social security – Social security for Kuwaiti employees is payable by both the employer and the employee based on the employee's salary (up to a ceiling of KWD 2,500 per month). The contribution rates are 11% and 7% of the employee's salary for the employer and the employee, respectively.
Other – All entities operating in Kuwait are required to withhold 5% of the total contract value from a contractor or subcontractor until the contractor or subcontractor settles his tax liabilities with the Kuwait tax authorities and obtains a certificate from the authorities.
KSCs (listed and closed) are required to pay 1% of their profits after the transfer of the statutory reserve and the offset of losses brought forward to the Kuwait Foundation for the Advancement of Science to support scientific progress.
Kuwaiti shareholding companies listed on the KSE are required to pay a 2.5% annual tax on net profits under Law No. 19 of 2000, relating to the support of employment in nongovernment agencies.
Kuwaiti shareholding companies (both listed and non-listed, but excluding government companies) are required to pay 1% of net profits for Zakat / contribution to the state's budget. The company has an option whether to consider the 1% as Zakat or the contribution to the state's budget.
Transfer pricing – The tax authorities deem the following profit margins on materials imported by foreign entities operating in Kuwait: 10% to 15% on materials imported from the head office; 6.5% to 10% on materials imported from related companies; and 3.5% to 6.5% on materials imported from different companies.
Other – The maximum deduction for head office expenses for foreign companies operating in Kuwait through a local agent is 1.5% and 1% for foreign companies that are shareholders in a KSC or WLL.
Administration and compliance:
Tax year – The taxable period is normally the calendar year. However, a taxable entity may, with permission from the Director of the Income Tax Department, keep its books on a different basis (e.g. if the overseas parent follows a financial year end other than 31 December).
Consolidated tax returns– Consolidated returns are not permitted; each company must file a separate tax return.
Tax Filing requirements – The tax declaration for each taxable period must be submitted within 3 1/2 months of the end of the taxable period.
A foreign entity can request an extension of up to 30 days for filing the tax declaration. Tax must be paid in 4 instalments on the 15th day of the 4th, 6th, 9th and 12th month following the end of the tax year. If an extension is granted, no tax payment is necessary until the declaration is filed. However, payment must then be made for the first and second instalment.
Penalties – Delays in the submission of the tax declaration are subject to penalties at the rate of 1% of the tax payable for each 30 days of delay or part thereof. A penalty also is charged for delay in payment of tax, at the rate of 1% of the tax due for each 30 days delay or part thereof.
Disclosure requirements – No
Thin capitalisation – No
Controlled foreign companies – No
Alternative minimum tax – No
Participation exemption – No
Holding company regime – No
Capital duty – No
Payroll tax – No
Real property tax – No
Stamp duty – No
Transfer tax – No
TAX INCENTIVES IN KUWAIT
Kuwait has a number of tax incentives as follows:
- (a) Leasing and Investment Companies Law No 12 of 1998 allows the formation of investment and leasing companies having their principal place of business in Kuwait, with Kuwaiti or foreign shareholders. The law grants a five-year tax holiday to non-Kuwaiti founders and shareholders of such companies, beginning on the date of establishment of the companies.
- (b) Direct Foreign Capital Investment Law (DIFCL) No 8 of 2001 provides a tax holiday up to ten years with respect to non-Kuwaiti shareholders shares of the profits from the qualifying projects. An additional tax holiday for a similar period is granted for further investment in an already approved project.
- (c) Businesses set up in the Kuwait free trade zone for carrying on specified operations are exempt from taxes on operations conducted in the zone and foreign entities can own 100% of such businesses.
- (d) Kuwait has begun to use build, operate, and transfer (BOT) method in respect of some large infrastructure projects. Tax and tariff concessions may be built into a BOT contract.
As per circular No 50 of 2002, issued by the DIT regarding treatment of exempted companies, the exempted companies shall, however, comply with the provisions of submission of tax declaration, inspection and assessment procedures like other companies in order to be eligible for exemption.
DETERMINATION OF TAXABLE INCOME
Tax liabilities are generally computed on the basis of profits disclosed in audited financial statements adjusted for tax depreciation and other deductions of all expenses and costs spent on realising such income. The tax inspector has a right to disallow any expenses that are deemed excessive on inspection conducted during assessment.
Gross Income will include:
- a) Income derived from rendering of services in Kuwait
- b) Income from leasing of property located in Kuwait
- c) Income from operating any manufacturing, industrial, or commercial enterprise in Kuwait
- d) Income from purchasing and selling property, goods and maintaining a permanent office in Kuwait where contracts of purchase and sale are executed
- e) Income earned from selling, renting etc any trade mark, design or copyright
- f) Profits from disposal of assets
- g) Commissions from representation or brokerage
- h) Profits from any contracts performed in Kuwait.
The permissible rates of depreciation, applied using the straight-line method, include 4% a year for building, 20% for plant and machinery, 15% to 20% for motor vehicles and 15% for office furniture.
For expenses to be deductible, they must be incurred in the generation of income in Kuwait. Such expenses must be supported by adequate documentary evidence.
Such expenses include:
- (a) Salaries, wages and end of service benefits
- (b) Taxes and fees except Income Tax
- (c) Grants, donations and subsidies paid to licensed Kuwaiti public or private agencies
- (d) Expenses of Head Office.
The following expenses are normally disallowed for tax purposes:
- (a) Personal or private expense or any other expense not related to business
- (b) Criminal penalties
- (c) Reimbursable Losses
- (d) Provisions as opposed to accruals are not accepted for tax purposes. Thus terminal benefits are only deducted when paid out and debts are only being written off for tax purposes once they are proved irrecoverable
- (e) Interest is accepted if it is paid directly by the branch to a bank in Kuwait and is reasonable in relation to the activities of business in Kuwait
- (f) Salaries paid outside Kuwait to staff working abroad, except where the contract specifically requires technical work to be performed abroad
- (g) Transfer pricing of materials and equipment imported.
HEAD OFFICE OVERHEADS
The tax authorities allow the following deductions from income as a contribution towards expenses incurred by the head office of a foreign company:
- (a) For contractors and consultants operating through an agent: 1.5% of revenue, reduced by any amounts paid or payable to sub-contractors
- (b) For foreign companies participating with Kuwait companies in the execution of a contract: 1% of the foreign company's share of the contract revenue reduced by amounts paid to sub-contractors
- (c) For insurance companies: 1.5% of the net premiums
- (d) For banking Institutions: 1.5% of direct revenue realised in Kuwait.
FOREIGN TAX RELIEF
No specific unilateral measures exist for the avoidance of double taxation but, if taxable income has suffered foreign tax, the foreign tax will usually be allowed as a deduction from income.
There are no withholding taxes in Kuwait. There are, however, retentions made on payments due to foreign companies until such time as they satisfy their Kuwait customer that they have dealt with their Kuwaiti tax obligations. Under Ministerial Order No 44 of 1985, all government departments, public bodies and privately owned and government owned companies are required to withhold final payments due to entities, which should not be less than 5% of the total contract value, until such entities present a tax clearance from the DIT. Failure to comply with these rules could result in disallowance of the related contract costs by DIT.
Kuwait VAT (value added tax) Rate
There is no VAT or sales tax in Kuwait.