The income of a body corporate subject to Kuwait income tax is determined on the basis of gross income after deducting the allowable expenses and costs, provided these expenses are necessary to generate the income arising from the activity, genuine and supported by documents, and related to the tax period.
Key Deductible Expenses
- Raw materials, consumables, and services necessary for the purposes of the activity.
- Salaries, wages, and end-of-service gratuities paid and their equivalents.
- Taxes and fees other than the income tax itself, paid under the Decree.
- Depreciation of assets used in the activity, according to the annual percentages set out in the executive bylaw.
- Donations or grants made to government bodies in the State of Kuwait.
- Head office overhead according to the percentages set out in the executive bylaw.
Gross income and the allowable expenses and costs are determined in accordance with the international accounting standards applied in the State of Kuwait, consistently with the provisions of the Decree and its executive bylaw, so a body corporate may not deduct any expense that fails to meet the conditions of necessity, genuineness, and relation to the tax period described above.
Cap on Deducting Donations to Private Bodies
Grants, donations, and subsidies paid to licensed private Kuwaiti bodies, such as charitable and social associations, are deductible provided the deduction does not exceed 2,5% of the body corporate's net income before allowing this deduction.
Head Office Overhead Percentages
Bodies corporate operating in Kuwait are allowed to compute and add an amount equal to 1,5% of the direct revenue realized in Kuwait as the branch's share of head office overhead, and this percentage is reduced to 1% for bodies corporate partnering with Kuwaiti establishments or companies, applied to the foreign partner's share, while a rate of 1,5% also applies to bodies operating in insurance and banking activities.
Examples of Asset Depreciation Rates
The executive bylaw sets annual depreciation rates on a straight-line basis for a number of asset types, including: buildings at 4%, plant and equipment at 20%, drilling equipment at 25%, and cars at 20%. The Director of Income Tax may depart from these rates if the operating conditions of the asset differ from what is customary for the activity in which it is used.
Non-Deductible Expenses
Expenses and costs that are not related to the taxable activity in Kuwait or are not necessary to generate profit are not deductible, including personal and private expenses, penal fines, compensated losses, and provisions and reserves of any kind, except certain bank and insurance reserves specified in the executive rules and instructions. The tax administration may request a review of any expenses it considers exaggerated and require supporting documents.
Legal References
- Ministerial Resolution No. 29 of 2008 issuing the Executive Bylaw of Income Tax Decree No. 3 of 1955 as amended by Law No. 2 of 2008 – Articles 3, 4, 5, and 6 (allowable and non-allowable deductions).
For questions about your specific situation, you can ask the Kuwait Tax & Legislation Helper on Helpers, or consult a licensed chartered accountant.