Issuance of Tax Decree Law No. 157 of 2024

This note provides an overview of the key points concerning the applicability and implementation of the recently issued Tax Decree Law No. 157 of 2024 (the law) on Multinational Entities (MNEs) Group Tax. The law aims to align Kuwait’s tax system with international standards under the OECD’s Pillar Two framework and addresses the taxation of multinational entities with significant global revenues.

Key Highlights on Applicability

Effective Date:

– The law applies to multinational entity (MNE) groups for tax periods commencing on or after January 1, 2025.

Entities Subject to Tax:

– Multinational Entities: Groups conducting activities across multiple jurisdictions with consolidated annual revenues of €750 million or more in at least two of the four preceding tax periods.

– Permanent Establishments: Defined broadly to include locations such as offices, factories, and oil wells, as well as services provided within Kuwait for more than six months in a 12-month period.

– Resident Entities in Kuwait: Entities meeting the definition of residency, whether incorporated in Kuwait or having an effective management in Kuwait.

Repealed Laws and Provisions:

As part of the new regulatory framework, several prior decrees and laws will no longer apply to MNEs starting from the tax periods commencing on or after January 1, 2025. The repealed provisions include:

– Decree No. 3 of 1955.

– Law No. 23 of 1961.

– Clause 1 of Article 12 and paragraph 2 of Article 14 of Law No. 19 of 2000.

– Law No. 46 of 2006.

This repeal ensures that the taxation of MNEs is governed solely by the new law, creating a unified and updated framework.

Excluded Entities:

Government entities, non-profit organizations, international organizations, pension funds, and certain investment or real estate investment entities, subject to conditions outlined in the Executive Regulations.

Minimum Revenue Threshold for Exclusion:

Tax is not due if:

– The average total revenue of taxable entities in the group is less than €10 million; and

– The net income of those entities in the group is less than €1 million.

The average is calculated for the tax period referred to and the two periods preceding it.

Registration Requirements:

– The main rule under Article 19 of the law is that MNEs must register voluntarily with the Tax Administration within 120 days of becoming subject to taxation. If entities fail to register, the Tax Administration may register them mandatorily and notify them accordingly.

– However, as an exception due to the law being recently issued, the law grants a nine-month compliance period from its effective date, to comply without incurring administrative fines.

Conflict of Laws:

The provisions of this law prevail over any conflicting laws or decrees, ensuring a unified framework for MNE taxation.

Tax Rates and Adjustments:

– The tax rate is based on the difference between the Domestic Minimum Tax (DMT) and the Effective Tax Rate (ETR) if the ETR is below 15%.

– Adjustments for income exclusions, including substance-based income exclusion, ensure alignment with the OECD’s GloBE rules.

Transitional and Safe Harbor Provisions:

– Transitional safe harbor provisions apply until the end of 2026, making the tax deemed as zero for taxpayers if certain revenue or effective tax thresholds are met.

– Simplified calculation methods may also be used to achieve a zero-tax liability under specific conditions.

Taxpayer Obligations

Compliance Deadlines:

– Tax returns must be submitted within 15 months from the end of the tax period.

– Books and records must be retained for 10 years.

Arm’s Length Principle:

– Transactions between related entities must comply with the arm’s length principle, with the Tax Administration empowered to adjust taxable income where necessary.

Administrative Fines and Penalties:

– Late filings and payments attract fines ranging from 5% to 25% of the tax due, depending on the delay.

– Incorrect tax filings may result in fines of 25% of the discrepancy, reduced to 10% for voluntary corrections.

Tax Evasion Penalties:

– Severe penalties, including imprisonment and fines up to five times the evaded tax, apply for deliberate non-compliance or fraudulent activities.

Executive Regulations

The executive regulations of the law (the Executive Regulations), expected to be issued within six months of the law’s publication, will provide detailed implementation guidance, including:

– Conditions for exemptions and exclusions.

– Rules for calculating the ETR.

– Procedures for registration, deregistration, and record-keeping.

Implications for Multinational Entities

Entities operating in Kuwait should review their structures and operations to assess their tax exposure under the new framework. Key action points include:

– Assessing eligibility under the €750 million revenue threshold.

– Preparing for mandatory registration and ensuring compliance with reporting requirements.

– Reviewing intercompany transactions for adherence to the arm’s length principle.

Conclusion

The law represents a significant step in Kuwait’s alignment with global tax standards. Entities impacted by the new rules are advised to engage tax professionals for compliance readiness and to monitor the issuance of the Executive Regulations for further guidance.