The tax environment in Kuwait and in the rest of the Middle East and North Africa region is different from the rest of the world. Taxation in Kuwait consists primarily of corporate income tax, which is governed by Decree No 3 of 1955 as amended by Law No 2 of 2008.
The law does not impose taxes on income earned by individuals, whether they are Kuwaiti or foreign nationals. Kuwaiti financial entities are also not subject to corporate taxation. Only a foreign corporate body engaged in commercial or trade activities in Kuwait is subject to income tax. The former tax rates under a prior decree ranged from 5% to 55%.
In 2008 Kuwait amended taxation regulations and passed the new Income Tax Law No 2. As per the new law, which has been in effect as of February 2, 2008, a flat 15% tax rate on earnings above KD5250 ($18,750) per year is applied.
The much-awaited amendment to Kuwait’s tax regulations was welcomed by the business community. The new legislation positively affects foreign companies doing business in Kuwait, and the former heavy taxes imposed on foreign companies were seen as a hindrance to the flow of foreign investment into the country.
However, this has not been reflected by a substantial increase in the amount of foreign direct investment (FDI), as per the latest available data, which showed FDI totalling $398.6m in 2011, compared to an inflow of $110m in 2006.
There are several reasons as to why the change has not inspired a wholesale improvement in the volume of foreign investment entering Kuwait. The local industrial landscape remains very narrow and closed off to foreign competitors. There are plenty of non-tax barriers to foreign investment that still need to be addressed, from restrictive labour regulations and limited access to land to slow progress in privatisation and burdensome government bureaucracy.
Overall the amended law is expected to promote and encourage foreign investment by reducing tax liability in most cases. It is also expected to simplify matters for foreign companies by reducing the kind of disagreements that have tended to arise in the past as to what is or is not subject to tax. The new law hopes to deal with this issue by clarifying and explaining in more detail the types of income that are covered by the new regulations.
More importantly, the law includes a provision that income earned from trading shares on the Kuwaiti Stock Exchange is not subject to taxes. This is expected to promote investment in Kuwaiti shares by international funds and companies.
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