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Jade Al Araoui
The Kuwaiti tax laws have granted the Minister of Finance inherent powers to issue a set of executive rules and instructions to facilitate the implementation and enforcement of the legal provisions provided in the said tax laws. However, what would be the legal and practical effect when an “executive rule” seemingly exceeds its objective and purpose or contradicts with its source of legislation in all tax matters?
Income-tax in Kuwait is regulated by the Decree No.3 of 1955 (“Decree”) and Law No.2 of 2008 amending certain provisions of the Decree (“Amendment”) and the Ministerial Resolution No. 29 of 2008 concerning the issue of executive by-laws (“Implementing Regulations”), (collectively referred to as “Tax Laws”).
The Tax Laws enable the Minister of Finance, Kuwait or a representative /delegate/ authorized person of the Ministry of Finance, Kuwait to issue executive rules containing prescribed forms and procedures to facilitate the implementation and enforcement of the legal provisions provided in the Tax Laws. Such executive rules address procedural issues relating to tax cards, correspondence, submission of declarations, approval of fiscal year, exemptions and other procedures related to the administration of tax.
New Executive Rules
In January 2011, the Ministry of Finance has issued a new set of executive rules (“Executive Rules”). The Executive Rules are intended to regulate the proper execution of the provisions of the Tax Laws which constitute the source of legislation in that matter.
Executive Rule 20 versus Article 46 of the Implementing Regulations
A Questionable Change in the Tax Landscape?
One could argue that there has been an improper widening of the scope of ER 20 now requiring each Kuwaiti shareholding company (beyond the scope of its capacity as investment and portfolio manager, fund manager or custodian) to withhold/ pay tax whereas Article 46 is silent on such reference.
Such widening of the scope of ER 20 is currently under scrutiny from a legal and financial perspective, particularly due to the uncertainty and lack of clarity on the issues pertaining to the date of issuance of the Executive Rules, their date of applicability and their binding effect vis-à-vis the earlier set of executive rules of 2008.
This ambiguity begs two key questions – (i) whether the Executive Rules should have been published in the Official Gazette of Kuwait (Kuwait Alyoum), and (ii) whether ER 20 improperly widens the scope of Article 46 of the Implementing Regulations. Each of these has been discussed below.
Do the Executive Rules need to be published in the Official Gazette of Kuwait (“Official Gazette”) in order to be valid?
Does ER 20 improperly widen the scope of Article 46 of the Implementing Regulations?
We believe that the intended implementation of ER 20 by all incorporated entities/bodies (which would include Kuwaiti shareholding companies as well) would be a tedious exercise and any of these entities may be inclined to challenge ER 20 before an appropriate forum or may elect not to adopt such implementation. Given that there is no legal precedent on this issue so far, it is difficult to anticipate the outcome of such challenge proceedings.