4 February 2025 • 5 minute read
Kuwait issues Domestic Minimum Top-Up to Tax for large Multinational Enterprises
Introduction
On 30 December 2024, Kuwait published MR. No 157 of 2024 on the Taxation of MNE Groups ("Law"). The Law is set to introduce a domestic minimum top-up tax ("DMTT") of 15% on the profits of Kuwaiti constituent entities of large Multinational Enterprises ("MNEs"). The Law comes into effect for financial years starting on or after 1 January 2025.
This move follows on from Kuwait's position as a member of the OECD Inclusive Framework, and its broader commitment to international tax cooperation. The introduction of a DMTT is meant to be a partial adoption of Pillar II (or Global Minimum Tax) rules of the OECD Base Erosion and Profit Shifting ("BEPS") 2.0 projects, which aims to ensure that large MNEs – broadly those with consolidated revenue exceeding EUR 750m – are subject to a minimum global tax rate of 15% on their profits.
Scope and interplay with existing tax rules
The Law applies to Kuwaiti constituent entities of MNE groups with annual consolidated revenue of more than EUR 750m in at least two of the four preceding years. In-scope entities broadly include corporate and non-corporate entities (including permanent establishments of a non-resident in Kuwait), joint-ventures (meeting certain criteria) and state-less entities with business activities in Kuwait.
Government bodies, international Organizations and investment funds that are the ultimate parent entity, are generally excluded from these rules.
It should be noted that Kuwait has various pre-existing fiscal levies on businesses, including:
- Corporate Income Tax, as per Decree No. 3 of 1955;
- Corporate Income Tax on Operations in the Neutral Zone, as per Income Tax Law No. 23 of 1961;
- Paragraph 1 of Article 12, and paragraph 2 of Article 14 of the Law to Support and Encouragement of National Manpower Employment in Non-Governmental Entities (also referred to as ‘National Labor Support Tax’), as per Law No. 19 of 2000; and
- Zakat and Contribution of Public and Closed Shareholding Companies in the State’s Budget, under Law No. (46) of 2006.
As of 1 January 2025, in-scope entities of the Law will not be subject to the above regulations. This should provide helpful simplification to in-scope entities of the new rules in Kuwait.
Key features of the Law
The rules provided in the Law are broadly consistent with those of the Global Anti-Base Erosion ("GloBE") Model Rules of Pillar II. Implementing regulations to the Law are expected to be issued within 180 days from the official publication of the Law and these are expected to further clarify and align the application of the rules with the GloBE Model Rules.
The computation of the profits/losses and the covered taxes paid by the Kuwaiti constituent entity for the purpose of determining the applicable top-up tax takes the figures reported for financial accounting purposes as a starting point. Certain adjustments will then need to be made to the figures which the forthcoming Regulations are expected to further set out.
The Law also provides to exclude from the share of profits subject to the top-up tax, an amount determined by the tangible assets and payroll costs as indicators of substance of the Kuwaiti Constituent entities. This is known as the Substance Based Income Exclusion (SBIE).
The Law also establishes a transitional safe harbor as well certain exclusions from the application of the top-up tax in Kuwaiti for constituent entities that are part of an MNE that is in its initial phase of international activity, subject to certain conditions set out in the Law and the forthcoming Regulations.
It is noteworthy that the Law does not provide for an Income Inclusion Rule ("IRR") or Under-Taxed Payment Rule ("UTPR") which are also part of the OECD's GloBE Model Rules, but which have a lower priority in applying to under-taxed income of a non-resident constituent entity based on the rule order for the collection of top-up taxes.
Given the interlocking nature of the Pillar II rules, the introduction of a DMTT seeks to safeguard against the situation that other countries might end up taxing profits of Kuwaiti constituent entities, specifically countries who have implemented an IRR or UTPR.
Compliance obligations
In-scope entities in Kuwait are required to register with the Kuwait Tax Authority within 120 days of becoming subject to the Law, which could be as soon as 31 April 2025, for some entities. Returns should also be submitted, and the due tax settled, within 15 months from the end of the relevant financial year. The Law further deals with the maintenance of books and records and penalties for non-compliance.
Dispute prevention and management
The Law introduces special provisions on the process and the timelines of handling tax disputes, including appealing to a specialized Tax Objection Committee. Decisions of the Tax Objection Committee may be further appealed before the relevant courts in Kuwait.
There does not (yet) seem to be a formal avenue to obtain advance clarifications on the application or interpretation of the Law (or forthcoming regulations), specific to the circumstance of taxpayers, which may pose some challenges for taxpayers in practice. The FAQs published on the Kuwaiti Ministry of Finance website stipulate that general queries in relation to the DMTT may be directed here.
Conclusion
The Law on the Taxation of Multinationals represents an important development for Kuwaiti Constituent entities of in-scope MNEs. These entities should closely monitor further updates, most notably, for the release of the forthcoming implementing regulations to the Law, and plan accordingly.