Kuwait investment authority clarifies means and conditions for tax exemption of investments

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1 29 January 2016 Global Tax Alert Kuwait investment authority clarifies means and conditions for tax exemption of investments EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary On 27 January 2016, Kuwait Direct Investment Promotion Authority (KDIPA) issued a resolution 1 clarifying the mechanism and the conditions to be satisfied by the investment entity for obtaining the tax exemption on the total investment value in Kuwait. Further to the EY Global Tax Alert on the KDIPA law and executive regulations issued on 14 December 2014, this Alert provides a summary of the detailed criteria, processes and conditions to be satisfied by the investment entity to qualify for tax exemption in Kuwait. Detailed discussion Criteria for tax exemption The key criteria defining the tax exemption available to the investment entity are as set out below.

2 2 Global Tax Alert Sl No Criteria Measure Percentage/ Multiplier 1 Technology Transfer 2 Based on the cost of equipment (material 20% of the value of equipment on an approximate scale of Creating job and training opportunities for nationals 3 Total expenditure on salaries paid to national labor Total number of national labor (in excess of the percentage prescribed) 4 Expenditure on training of national labor 3 Increasing local content 5 Office rent of the investment entity Dealing with local suppliers (especially small and medium-sized companies) 6 Use of inputs from local sources such as raw material Value of the tax exemption granted (total annual benefit) = sum of times the annual salaries paid to the national KD 60,000 per Kuwaiti 10 times the annual expenditure on training of national two times the annual rental value of the licensed investment two times the value of annual contracts with local two times the annual value of inputs used from local sources Mechanism for tax exemption If the investment entity satisfies one or more of the criteria summarized above, the value of tax exemption granted shall be calculated as follows: Percentage or Multiplier or Value (granted by KDIPA) X Cost of the specified measure 7 Tax Exemption Value While determining the Tax Exemption Value (TEV), the following scenarios may occur: If TEV granted is < than the tax base, the difference between tax base and TEV shall be deemed as a net tax base (e.g., if TEV is 10 and the tax base is 15, the net tax base would be 5) If TEV granted is > than the tax base, the TEV shall be deducted to the extent of the tax base. However, the excess TEV of such tax base shall not be eligible for carry forward (e.g., if TEV is 20 and tax base is 15, the excess TEV of 5 shall not eligible for carry forward) If TEV granted is = to the value of tax base, the full TEV shall be deducted (e.g., if TEV is 15 and the tax base is 15, the entire amount of 15 shall be deducted as TEV) Period limitation The TEV is limited to a ten-year period starting from the date of effective operation, provided that the TEV shall be linked to performance during the stated exemption period as set forth in the mechanism.

3 Global Tax Alert 3 Conditions to fulfil to claim TEV The investment entity shall satisfy the following conditions to claim the TEV: Notify the KDIPA within thirty days of the date of effective operation, as a starting date for calculation of the exemption duration Register with the Ministry of Finance as per tax laws and regulations in Kuwait Obtain a tax exemption report from an auditor authorized by Ministry of Finance Obtain a tax exemption certificate from the KDIPA Upon satisfying the above conditions, the investment entity shall include the TEV as a part of the tax declaration and file the prescribed documentation with the tax authorities, who will further scrutinize the documentation during the tax assessment process. Exceptional case The KDIPA has also indicated that exemptions may be granted to the following exceptional cases: A licensed investment entity expanding its business in Kuwait may qualify for tax exemption, subject to satisfying certain conditions A licensed investment entity with multiple activities may also be entitled for tax exemption, subject to satisfying certain conditions Role of an auditor The auditor of the investment entity in Kuwait shall prepare and report on the TEV, following the criteria approved by the KDIPA for the grant of tax exemption using the tax exemption report. The auditor is held responsible to check and validate the information and documents related to each criteria approved by KDIPA (i.e., criteria summarized above). Further, the auditor is also required to conform with due diligence and perform the tasks in accordance with the professional and ethical fundamentals for such function. Implications It s important for every investment entity to carry out due diligence prior to investing into Kuwait and to also understand the detailed requirements and process to be followed (including appointing an authorized auditor) in order to qualify and benefit from the investment license and potential tax incentives in Kuwait, approved by the KDIPA. Endnotes 1. Resolution No. 16 of Including localization and diversification of economic base. 3. Measured by total expenditure costs incurred for wages and training for Kuwaitis as well as the number of jobs. 4. In the Council of Ministries Resolution No of Expanding local content by motivating and activating the Kuwaiti private sector s role by the utilization of local products and services. 6. For provision of local products and services including technical, professional and advisory services. 7. Cost of the specified measure is estimated and approved for each criterion upon which the credits are granted, as per the evaluation bases and controls approved by KDIPA (including verification of supporting documents and fulfillment of specific purpose).

4 4 Global Tax Alert For additional information with respect to this Alert, please contact the following: Ernst & Young, Al Aiban, Al Osaimi & Partners, Safat Alok Chugh Kula Kulaseelan Ranjith Pathiyil Sanchita Mehta Louloua Al Ali

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