The Decree-Law No. 157 of 2024 introduces a significant update to Kuwait’s tax system, specifically targeting multinational enterprises (MNEs) to comply with international tax standards, particularly the OECD’s Pillar II framework. This law mandates a Domestic Minimum Top-up Tax (DMTT) of 15% on MNEs whose effective tax rate (ETR) in Kuwait is below the minimum threshold. The legislation states that further guidance through Executive Regulations is expected within 6 months.

Key Provisions of the Decree-Law

Introduction of the DMTT: The DMTT will apply to MNEs whose total annual revenue exceeds EUR 750 million. The law aims to impose a minimum tax rate of 15% on profits, aligned with the OECD’s global minimum tax framework. The tax will apply to the income of Kuwaiti constituent entities (CEs) and joint ventures where MNEs operate.

•    As stipulated in the Decree-Law, the following entities (“Taxable Entities”) are subject to the global minimum tax rate of 15% on their profits. This applies to:
•    Any entity in the State that is a member of an MNE, whether it is an ultimate parent entity or a participating entity.
•    Any joint venture where the ultimate parent (the entity that prepares the MNE Group’s Consolidated Financial Statements “CFS”) or subsidiary entity operating in the State, if either of the following conditions are met:
•    If the ultimate parent entity directly or indirectly owns at least 50% of the joint venture, and meets the Revenue Threshold.
•    If the total revenues of the joint venture and its subsidiaries meet or exceed the Revenue Threshold, making the joint venture an ultimate parent entity and its subsidiaries participating entities.

Taxable Activities/Sources of Income:

•   Taxable activities include trade in goods, services, industry, profession, craft, agency, brokerage, real estate development, exploitation of movable or immovable properties, speculation, or any activity with a commercial or investment nature.
•   Tax rate: The tax rate is the difference between the minimum tax rate (15%) and the effective tax rate (“ETR”) if it is less than 15%

Taxable Entities:

•    MNEs: Entities with total revenue exceeding the EUR 750 million threshold, including joint ventures with at least 50% direct or indirect ownership by the MNE.
•    Permanent Establishments (PEs): Non-resident entities conducting business activities in Kuwait, including physical locations, construction sites, and service provision lasting over six months within any twelve-month period.

1.    Physical Locations: Premises such as management headquarters, branches, stores, offices, factories, workshops, sales outlets, warehouses, mines, oil or gas wells, quarries, or any other place used for exploring, extracting, or exploiting natural resources.
2.    Construction or Installation Sites: A construction site, installation project, assembly project, or related supervisory activities, provided these activities continue for more than six months within any 12-month period.
3.    Service Provision: Providing services within the state, provided these activities continue for a total period of more than six months within any 12-month period.
4.    Agent Activities: Activities performed by an agent, subject to conditions and controls defined by the Executive Regulations.
5.   Other Places of Work: Any other place through which the non-resident entity carries out operations in the state, provided the income from such operations is exempt from tax in either the state or the jurisdiction of the non-resident entity.
6.    In summary, a non-resident entity will be considered to have a PE in the state if it has a physical presence or ongoing activities in the state under the conditions listed above.
7.    There’s a provision in the Law that establishes a PE if the foreign entity’s Kuwait-sourced income is exempt from tax in the foreign jurisdiction. This aims to close any gaps that might have existed where certain foreign income was exempt from taxes abroad but still generated through operations in Kuwait.

Tax Residency: The Law defines a tax resident entity as an entity that either:

1. is established in the country, or
2.  has its place of effective management in the country.

• The newly introduced concept of tax residency is important as it determines the location of the entity for the purposes of the DMTT.
• Groups will need to consider how the Law will interact with the tax residency provisions under double tax treaties once the Executive Regulations are issued.

Zero tax due: the due tax on the taxpayer will be zero for any tax period if:

1.  The average total revenue of the Taxable Entities in the group is less than 10 million euros.
2.  The average total net income of the Taxable Entities in the group is less than 1 million euros. The average is calculated for the current and preceding two tax periods. This exemption does not apply to investment entities or entities unaffiliated with any jurisdiction.

Exemptions from Taxation:

1.  Exemptions: Local businesses with no international operations are exempt.
2.  Government entities, nonprofit organizations, international organizations, pension funds, and certain types of investment funds are exempt such as Investment funds that are Ultimate Parent Entities (“UPEs”) and  Real estate investment entities that are UPEs.
3.  Entities that are at least 95% owned by one or more exempt organizations are also exempt (excluding retirement service entities) and operate primarily to hold assets or invest funds for them.
4.  Entities at least 85% owned by one or more exempt entities (excluding retirement service entities), provided most of their income is from dividends, equity gains, or losses.

Unapplicable laws and decrees:

Starting from 1 January 2025, the DMTT Law will apply to multinational entities for tax purposes, and as a result, the following laws and decrees will no longer be applicable to these entities:

1.  Corporate Income Tax Law – Decree No. 3 of 1955 and its amendments
2.  Zakat Law – Law No. 46 of 2006
3.  Divided Neutral Zone Tax Law – Law No. 23 of 1961
4.  However, Law No. 19 of 2000 concerning the National Labour Support Tax (“NLST”) on Kuwait Shareholding Companies is expected to remain in force, with the exclusion of Paragraph (1) of Article (12) and Paragraph (2) of Article (14). This means that Kuwaiti multinational entities listed on the Kuwait Boursa will likely not be subject to the 2.5% NLST in addition to the DMTT.

Registration & Compliance:

•     Deadline for Registration: MNEs and joint ventures must register by 30 September 2025, with penalties for non-compliance.
•     Entities entering the scope later must register within 120 days of becoming subject to the law.
•     Tax Return Deadline: Tax returns must be submitted within 15 months from the end of the tax period.

Deregistration:

• Deregistration is required within 120 days of completely ceasing activity or losing the conditions for being subject to tax.

Penalties:

 An administrative penalty of KWD 3,000 will be imposed in the following cases:

1.  Failure to register within the specified deadlines.
2.  Failure to notify the tax authority of any changes within the specified deadlines.
3.  Failure to submit any documents or information requested by the tax authority within 30 days from the date of request.
4.  Obstructing or interfering with tax authority officials in performing their duties.
5.  Failure to retain records and accounting books for the period specified.

Delay in submitting the tax return or payment deadlines results in fines amounting to KWD 1,000, with escalating penalties for delayed payments and tax evasion. Along with the following penalties to be imposed:

1.  5% of the final tax amount if the delay is 30 days or less.
2.  10% of the final tax amount if the delay is more than 30 days and up to 90 days.
3.  15% of the final tax amount if the delay is more than 90 days and up to 365 days.
4.  20% of the final tax amount if the delay exceeds 365 days but occurs before the issuance of the tax assessment.
5.  Additionally, a penalty of 25% of the final tax amount, with a minimum of 5,000 Kuwaiti Dinars, shall be imposed if the Taxable Entities fail to submit the tax return until the issuance of the tax assessment.

•   Late Payment Penalties: A 1% penalty for every 30 days the tax is unpaid after the deadline.

Criminal Penalties for Tax Evasion:

• Tax evasion, including falsification or destruction of records, can lead to up to 3 years imprisonment and fines up to three times the evaded tax.
• Repeat offenses within five years result in up to five years imprisonment or a fine up to five times the evaded tax.

Record Keeping Requirements:

• The Law outlines that Taxable Entities are required to retain their books, records, and financial documents for a period of 10 years from the end of the relevant tax period.
• Including books, invoices, contracts, and other relevant documents, for 10 years from the end of the relevant tax period.
• The limitation period can expire in various situations, such as the issuance of a tax assessment, the submission of an objection or appeal, or the issuance of a decision on the objection or appeal.
• Additionally, the period for a taxpayer or withholding tax agent to claim a refund of overpaid taxes expires 5 years from the date the claim is due.

Legal Action:

• Tax authority officials are granted judicial seizure powers to inspect premises and seize evidence of tax violations. They can seek police assistance when necessary.

Tax Objections and Appeals Process:

• Taxpayers can object to tax assessments within 60 days from the date of notifications. The tax administration is required to respond within 90 days, and if no response is provided, the objection is deemed implicitly rejected.
• If the objection is rejected, taxpayer may appeal to the Tax Complaints Committee within 60 days. The committee must issue a decision within 90 days, though this can be extended up to 365 days.
• Both the tax administration and the taxpayer can further appeal the committee’s decision to the competent court within 60 days.

Executive Regulations:

• Further guidance on registration, compliance, and tax administration will be provided in the Executive Regulations, expected within six months from December 31, 2024.

Impact for Businesses

• Preparation for Registration: Businesses must ensure they meet the registration deadline and submit the required tax returns within the prescribed time.
• Tax Residency: Entities must assess their tax residency status, as the law introduces the concept of tax residency for determining the scope of DMTT.
• Increased Scrutiny: Taxable entities must maintain detailed records for 10 years and cooperate with tax authorities during audits.
• Risk of Penalties: Failure to comply with registration, filing, and payment deadlines can lead to significant fines and penalties, including for late payment.

What This Means for Multinational Enterprises in Kuwait

Entities operating in Kuwait or having a presence there should start reviewing their tax obligations under the new law. They will need to:

• Confirm their eligibility as taxable entities.
• Update their global transfer pricing policies to comply with the arm’s length principle.
• Prepare for registration with the tax authorities by September 30, 2025, and consult tax professionals to navigate the new compliance landscape.

The implementation of the DMTT and other provisions of the law reflects Kuwait’s commitment to aligning its tax regime with international standards and improving its compliance with OECD tax reforms.

Conclusion

The introduction of Pillar II (DMTT) in Kuwait under Decree-Law No. 157 of 2024 represents a significant shift in the country’s tax landscape. By aligning with the OECD’s global tax standards, Kuwait aims to curb tax avoidance by multinational corporations and ensure a fair tax environment.

Key aspects to focus on:

• MNEs with substantial revenues must ensure they are compliant with the 15% minimum tax on profits.
• Businesses must be diligent in record-keeping and adhere to registration deadlines to avoid penalties.
• Understanding the effective tax rate calculation and ensuring all related entities comply with the arm’s length principle for transfer pricing will be crucial.

As the Executive Regulations are expected to be issued within 6 months of the Decree-Law’s publication, businesses should begin preparing by reviewing their operations, registering with the tax authorities, and consulting tax professionals to ensure full compliance.

Overall, the law aligns Kuwait with international tax standards, and its successful implementation will likely enhance the country’s attractiveness as a business hub while ensuring it remains compliant with global tax norms.