Strategizing International Tax Best Practices – by Keith Brockman

Kuwait: Virtual Service PE

Kuwait’s Department of Inspections and Tax Claims (DIT) has introduced its interpretation of a Virtual Service PE, notwithstanding its nonconformity with the physical presence standard and its double tax treaties in accordance with OECD’s Model Convention.

Unfortunately, this concept is not new in the Middle East and it is hoped that other countries will not follow this breakaway interpretation.

EY’s Global Tax Alert provides additional details into this development:

http://www.ey.com/Publication/vwLUAssets/Kuwait_Tax_Authorities_adopt_Virtual_Service_PE_concept/$FILE/2015G_CM5779_Kuwait%20Tax%20Authorities%20adopt%20Virtual%20Service%20PE%20concept.pdf

Key observations:

  • The Virtual Service PE concept takes into account only the duration of the contract itself.
  • Work extending beyond the tax treaty threshold of 183 days will be presumed to have created a Service PE.
  • The DIT takes the position that a nonresident is deemed to have a PE in Kuwait, particularly, if the following conditions are met:
    • A nonresident furnishes services to an entity in connection with the latter’s activity in Kuwait.
    •  The period during which such services are rendered according to the contract, exceeds the threshold period under the applicable tax treaty.

The immediate implication of the DIT’s current approach to a “Virtual Service PE” is that the applicability of tax treaty-based income tax exemptions with respect to cross-border services has become highly uncertain.

Accordingly, all legal agreements and provision for services to Kuwait (disregarding the physical standard) should be reviewed for potential disputes based on a Virtual Services PE argument.  Practically, it may also be difficult to obtain tax treaty relief from double taxation.

 

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