The Claimant is a well-known electronics company (LG), filed a claim against the Ministry of Finance (Tax Department) (the Defendant), requesting the court to rescind an administrative decision issued by the Tax Department in 22/5/2006 to pay income taxes for the period of 2000 to 2004 , stating that LG is conducting commercial activities in Kuwait throughout its local commercial agent in contradictory with the provisions of the distribution agreement concluded between LG and the local agent.
The Claimant also requested the court to confirm that the Claimant was not in breach of the agency agreement or any applicable laws and regulations implemented in Kuwait, and furthermore it has not conducted any direct distribution, sales or business activity within Kuwait territory to be subject to Income Tax law.
The Court of First Instance commenced to hear the case and has ordered that Claimant shouldn’t be subject to Income Tax or pay such tax and therefore canceled the Defendant’s administrative decision.
The Defendant challenged the judgement of the Court of First Instance before the Appellate Court on the same basis and arguments. The Court of Appeal upheld the decision of the First Instance Court by rejecting the appeal filed by the Defendant.
The Defendant challenged the decision of the Appellate Court on similar grounds and elaborated that actual relationship between the Claimant and the local agent is qualified as agency, whereas the local company is acting as agent in its general term as stated under the relevant tax decree no: 3/1955, despite the fact that parties have already concluded a distribution agreement under which the Claimant has appointed the Local company as its exclusive distributor to distribute and sell the products in Kuwait market.
Furthermore the Defendant stated that the Tax law shall cover all kind of companies, institutions and legal entities which carry on its businesses in Kuwait whether directly or through an agent, then they should be subject to Income Tax implementation, in general context of the term “agent ” without excluding any kind of agency. The defendant explained that regardless the ministerial resolution no: 387/2006 which exempted the exclusive distributor from being treated as contract agent, this resolution cannot supersede the Tax law or put it aside, as it is established by the Kuwaiti Cassation Court.
Consequently, The Cassation Court has reversed the judgment of the Court of Appeal and Court of First Instance, by stating that the Defendant‘s defense is valid and logically acceptable, since Article 3 of the aforementioned Tax law, states that the Income Tax should be imposed on each company and institution wherever its incorporation has taken place, provided that it conducts any business or commercial activity (purchasing or selling products) in Kuwait whether directly or indirectly throughout a local agent. In addition and pursuant to the generality of the term “ agent “ which covers all kind of agency works , it is not acceptable to limit or diminish the coverage of the general term in the absence of a specific rules .
The Cassation Court added that subject to the Commercial Law no: 68/1980 that regulates the contracts agency and the distribution contact , where article 271 defines the agent in contracts agency “ A Contract Agency is a contract whereby a person undertakes, in a certain area of activity to continuously encourage and negotiate the conclusion of transactions for the benefit of his Principal in consideration of a remuneration…” and at the same context Article 286 “Any distribution contract, under which a merchant undertakes to promote and distribute products of any industrial or commercial firm in specific area, provided that he is the sole agent therein shall constructively be considered a contract agency…”; Therefore the term “agent” as stated in the Tax Law is covering the term agent as specified in the above articles of the Commercial Law, to this extent the Court is persuaded that the Principal or Supplier ( Claimant) has conducted a commercial activity in Kuwait indirectly throughout the local agent and should be subject to the implementation of the Income Tax Law .
It is important to note that several considerations need to be taken into account by international companies to avoid being subject to Income Tax Law. However it is noteworthy to mention that in light of this recent significant precedent, many international companies have considered reviewing their agreements and its business model in order to prevent and avoid being subject to pay such taxes. On the other hand Local companies have already taken certain steps and initiatives and opened direct discussions with official authorities to reconsidering the negative impacts of such precedent and its effect on the business growth and economy development.
Adib A. Dib, IDI country expert for agency & distribution in Kuwait.