Banking proposal to exempt Kuwait Foundation for the Advancement of Sciences from major corporate tax base

- The bank advocating the move believes that continuing to require it to pay the 1% rate raises its total payments to 16%.

- It argues that foreign companies not bearing the same rate contradicts tax fairness.

- If any company’s tax burden rises to the 15% bracket, its support for national labor and zakat obligations are waived.

- Concerns exist that the local deduction may ultimately benefit foreign coffers under the pretext of being excluded from the general budget.

- Selecting the best practice in Kuwait’s interest; probabilities lean toward maintaining the status quo.

A bank recently opened a legal and tax discussion with the Ministry of Finance, requesting a 1% deduction from the fixed income tax applied to the net profits of Kuwaiti companies operating in both domestic and international markets, with annual revenues starting at 750 million euros.

According to instructions from the Ministry of Commerce and Industry, joint-stock companies are required to allocate 1% of their annual net profits to the Kuwait Foundation for the Advancement of Sciences (KFAS). Procedurally, their auditors must include a statement confirming payment of the foundation’s share among the elements required in the financial report.

Bank officials supporting this initiative argue that the KFAS share should be deducted from the fixed income tax levied on joint-stock companies, as it constitutes a sustainable financial obligation to one of the state’s institutions. The annual contributions derived from the 1% deduction represent a major portion of the foundation’s revenues, making the 1% rate an integral part of the tax entitlement mechanism for the fixed income of joint-stock companies.

They added that if local companies continue to pay the KFAS rate, their total tax payments would amount to 16% rather than 15%, meaning their tax burden in this category would exceed that of foreign companies by 1%. In this scenario, foreign companies would gain a tax advantage compared to local companies subject to the 15% bracket, thereby contradicting tax fairness and undermining the principle of equal opportunity.

Notably, if a company’s tax rate rises to the 15% bracket, it is exempt from paying 2.5% of its net profits as support for national labor, plus an additional percentage as zakat on wealth. These payments apply to companies classified outside the multinational entity tax bracket, totaling no more than 4.5% of their net profits, including the KFAS share.

Bank officials argue that the KFAS share deducted from the net profits of companies included in the tax bracket constitutes a direct tax on Kuwaiti multinational entities. They note that this amount is not deducted from the 15% rate, despite both obligations being levied on the same net profits and for the same fiscal year.

They believe that restricting the application of the KFAS deduction solely to local entities warrants a tax review. The best approach would be to deduct it within the framework of required tax incentives to support the activities of major Kuwaiti companies, ensuring fair and equal tax opportunities between local and foreign companies in the international tax arena.

In practice, the bank has not received a direct response from the Ministry of Finance, either accepting its proposal to deduct the 1% from the 15% tax due or rejecting it on the grounds that the matter is still under legal and tax review. The ministry emphasized that the best practice serving Kuwait’s interests will be selected.

However, in detail, there is a legal view arguing against deducting the “scientific advancement” percentage from the 15% corporate tax rate imposed on Kuwaiti multinational companies, on the grounds that such a deduction locally could accountably offset it in any of the member states of the Organisation for Economic Co-operation and Development (OECD), which may impose a 1% top-up tax on Kuwaiti companies covered by the OECD’s minimum tax rule. This is based on the premise that tax payments are counted only insofar as they accrue to the state’s general treasury, not to an institution established to support its activities.

In this scenario, Kuwait would lose out on collecting 1% of the 15% tax, with the revenue instead benefiting other countries’ coffers, thereby further strengthening the case for rejecting the banking proposal submitted on this matter.