29 January 2025 Kuwait implements domestic top-up tax on MNEs
On 31 December 2024, the Kuwaiti Cabinet issued Decree-Law No. 157 of 2024, promulgating the Multinational Entity Group Tax Law (Law), as published on the Ministry of Finance website. The Law implements a Domestic Minimum Top-Up Tax (DMTT), with an effective tax rate (ETR) of 15% imposed on multinational enterprises (MNEs)in Kuwait. The issuance of the legislation is aimed at diversifying the source of revenues for the State of Kuwait and preventing foreign tax leakage on Kuwait-sourced profits. The global minimum tax is part of Pillar Two of the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on the Base Erosion and Profit Shifting (BEPS) 2.0 project. The DMTT is effective for fiscal years starting on or after 1 January 2025 and applies to MNEs with a consolidated annual revenue of €750m or more in two of the last four fiscal years, operating in Kuwait through entities and/or permanent establishments (PEs). From 2025 onward, the tax laws and rates currently applicable in Kuwait — i.e., 15% corporate income tax, 1% zakat and 2.5% National Labor Support Tax (NLST) — will no longer apply to MNEs in scope of the Law. The Law represents Kuwait's commitment to the OECD/G20's Inclusive Framework (IF) on the BEPS 2.0 project and allows Kuwait to retain the right to tax Kuwait-sourced income and prevent tax leakage of such income to foreign jurisdictions. The introduction of the Law marks a significant milestone, as Kuwait joins other Gulf Cooperation Council (GCC) countries to legislate the implementation of BEPS 2.0 Pillar Two Rules (Global Anti-Base Erosion (GLoBE) Rules). The Law includes definitions of terms such as the State, MNEs, revenue threshold, joint ventures (JVs), resident entities, ultimate parent entity (UPE), constituent entity (CE), covered tax, top-up tax, government entities, transparent entity, nonprofit organizations and PEs, among other terms. It does not impose the Income Inclusion Rule (IIR) or the Undertaxed Profits Rule (UTPR), which would allow taxation of non-Kuwaiti profits under certain circumstances. The DMTT is effective for fiscal years starting on or after 1 January 2025 and applies to MNEs with a consolidated annual revenue of €750m or more in two of the last four fiscal years that are operating in Kuwait through an entity or a PE. The tax rate is the difference between the DMTT rate (15%) and the ETR (if ETR is less than 15%). The tax rate will be applied on the income as per the financial statements (based on all revenue and expenses), including related-party transactions and other adjustments as per the DMTT Law. The Law provides that the transactions between related parties must comply with the arm's-length principle. In case of noncompliance with transfer pricing requirements, the Kuwait Tax Authority (KTA) has a right to determine the net income based on the arm's-length principle. The Law includes Transitional Safe Harbor provisions, which provide for tax compliance relief for up to two years (subject to conditions). Further, the Law contains key provisions relating to taxable MNEs, excluded entities, location of the entity, ETR calculation, substance-based income exclusions (i.e., a carve-out (deduction) for expenditure on tangible fixed assets and payroll costs), tax periods, penalties, anti-avoidance rules and other relevant provisions. Excluded entities include government entities, nonprofit organizations, international organizations, pension funds, specific investment funds and certain real estate vehicles. In line with GloBE Rules, for initial phases of international operations, the Law provides that the DMTT of entities located in Kuwait shall be equal to zero if the MNE has CEs in no more than six jurisdictions and subject to meeting other prescribed conditions regarding the value of tangible assets and non-application of IIR by a parent entity. In-scope MNEs will be required to (1) register with the KTA within nine months from the date of implementation of the Law and (2) submit tax returns, accompanied by audited financial statements, within 15 months of the end of the tax period. In-scope MNEs are required to maintain accounting books and records for 10 years beginning from the end of the taxable period. The Minister of Finance will issue relevant Executive Regulations within six months from the date of publication of the Law in the Official Gazette. Fines range from 5% to 25% of the final tax value for delayed tax return filing, 1% of the value of the unpaid amounts for every 30 days or part thereof for delayed payment, and 25% of the value of the differences for incorrect returns, reduced to 10% if corrected before detection. Other fines include 3,000 Kuwaiti dinar (KWD3,000) for administrative violations (including failure to register within the prescribed timelines, etc.), KWD5,000 for unauthorized disclosure, and imprisonment and fines for tax evasion. The KTA is authorized to assess and modify tax returns by disregarding transactions aimed at reducing or deferring tax liability. Taxpayers may contest the tax assessment by filing an objection in an appeal to the Tax Grievance Committee and thereafter filing an appeal before a court of law. The KTA has the right to claim due taxes for up to 10 years (1) from the date of submitting the tax return, (2) from the date of the expiry of the period specified by law for submitting the return in the event of its non-submission, or (3) from the date on which the KTA becomes aware of the data and elements of the activities that have not been declared by the taxpayer. MNEs should consider whether they are in scope of the DMTT and perform appropriate impact assessments. Businesses may also want to assess the impact of the new rules on their financial statement tax provision requirements and monitor future developments. The anticipated detailed Executive Regulations may provide further clarity on compliance requirements. Covered MNEs should ensure that appropriate teams and procedures are in place to support compliance with the Law.
Document ID: 2025-0350 | ||||||