The loan is a contract binding the lender to pay the borrower an amount of money or any other tangible thing, provided that a similar thing in kind, description or amount is returned. Interest can be defined as the payment of a certain amount of money for using the borrowed money for a specified time.

Payment of interest is common among western countries and in countries which were under the colonial rule. Due to the influence of the capitalist system under the colonial rule and due to the impact of the interest-based institutions Kuwait also followed a similar system. This influence is apparent in the drafting of its Commercial laws which accepts that interest can be charged at simple rates.

Sharia law prohibits payment of interest. The word “Riba”, in Arabic language, literally means an “increment’ or addition”. In Islam the term “riba” has a special meaning. Riba is an unfair augmentation of money. If the money advanced as loan, which is paid in kind or to redress a financial crisis is asked to be returned along with a payment above the amount of loan, as a condition imposed by the lender or voluntarily by the borrower can be termed as “riba”. Riba defined in this way is called in “Fiqh riba al-duyun” (debt usury).The Prophet in his ‘hadith’ warned that “riba” is more sinful than committing adultery over and over or again and again.

The state of Kuwait has assigned a special place for the civil law system and is properly drafted to avoid any discrepancies. The civil law is considered as the prevailing law of the country without prejudice to the fact that in commercial issues the commercial law would only be applicable without any interference from the civil law. Kuwait gives predominance to investment legislations with the aim of regularization of the foreign investment in the country and the state is entrusted with the authority to supervise and control while facilitating and encouraging the investment activity. It is mainly due to serious economic dependence on the Western world, during the 19th and 20th century, the system of payment of interest is introduced to an Islamic country like Kuwait.  The commercial law of Kuwait allows payment of interest while Civil law prohibits it. The following paragraphs give an explanation on how this is possible without nullifying the contradictory provisions.

The civil law of Kuwait forbids the payment of interest. This is based on the principle that interest on consumption loans is definitely “usury”, but that on loans taken to finance trade or development is not. Article 547 clearly says that lending shall be without interest and any agreement to the contrary shall be invalid without infringement of the loan contract itself and any benefit stipulated in this respect shall be treated as interest. Invalidating the clause demanding interest in a civil contract is mandatory as it would otherwise adversely affect the organizational structure of the country itself and therefore the government is entrusted with the right to voluntarily take up such issues.

The commercial Code of Kuwait indicates that the creditor has the right to charge an interest on commercial loans, unless otherwise agreed and if the rate is not mentioned in the contract the applicable rate would be 7%, subject to restrictions. The Commercial code makes clear cut differentiation on commercial and consumption loans and classify that a loan shall be treated as commercial loan if its purpose is to spend the borrowed amount for commercial purpose, which can be proved based on the agreement entered into at the time of payment or based on how the borrowed money is spent. Again, the borrower should be a merchant or a person doing business of commercial nature.

Commercial law is applicable not only for loan but for late payment, as well. It can be in any form, whether paid as commission, service charge or supply of any kind. If the debtor disagrees to repay the money and if he is postponing the payment without a valid reason then the court can impose a ‘complimentary’ compensation for non payment of loan on the agreed date along with the agreed interest i.e., if there is delay in repayment, the creditor is entitled to a compensation for delay, a legal interest or agreed upon interest and it is not necessary that he should prove that the delay incurred detriment to him. However, it is mandatory that when there is delay in payment the lender should send an appropriate notice stating that there is delay in payment. On failure to furnish such a notice his negligence to do so would be treated as acceptance of late payment.

There is something called “Darura” (necessity) rule in Shariah law which restricts payment of interest if the debtor is in poor economic situation. However, the civil law of Kuwait does not make any such distinctions and disallows payment of interest for all kinds of consumption loans. However, the Commercial Code of Kuwait has some influence of the “Darura” rule and gives a much more elaborate explanation on this. It clearly stipulates that if the debtor is in dire need of money or if he is ignorant or is not in a position to assess his risk, the lender should not levy any kind of interest for such transactions. If this is not complied with then there are provisions for imprisonment and/or penalty of Thousand Rupees (Seventy Five Dinars – calculated as per the old money calculation system).

The law also specifies that even in the promissory note the interest should be stipulated or else when the payment accrues an interest as per the then prevailing rate would become payable. The Commercial law is silent when it comes to future sales but civil law prohibits it therefore it is a general practice not to impose interest on future sales. Conversely, I hold the view that if the law is silent then it should be interpreted affirmatively i.e., right to demand interest for future payments should be conferred. Interest rate more or less equalizes the disparity in the inflationary rates. Therefore, under sky rocketing inflationary conditions, interest payments may be considered as compensation for the loss in real value of money, and not ‘riba’. Moreover, it is to be noted that the economic system prevailing in the county does not support finance on loss and profit sharing basis and therefore it is indispensable for the business people to seek out finance on interest basis.

UPDATES

The Kuwait Income Tax Decree No 3 of 1955 set up the structure for levying tax on all foreign companies carrying trade or business in Kuwait and the Kuwait Income Tax decree No. 23 of 1961 levy tax on foreign companies operating in the offshore neutral Zone. Apart from this there are Ministerial orders in the form of resolutions and there are unwritten practices and precedents set by the tax department which administers the law.

The Kuwait National Assembly passed a law on 26 December 2007 that amends several provisions of Income Tax Decree No. 3 of 1955 (Decree). The Kuwait Government has implemented the new tax law which substantially cuts taxes on foreign companies working within the territory. The new tax legislation would be available to the public only after its publication in the official gazette and is expected to be released by August 2008.

Per the amendment foreign companies working within the territory shall only pay a flat rate of 15% of the profit generated within the territory rather than a variable tax which reached up to 55%. Moreover, profit earned by foreign companies from trading in Kuwaiti shares, whether directly or through investment portfolios or funds, is not to be taxed, and intends to keep out from taxation the profits of Kuwaiti agents earned on trading foreign goods for their own account. Neither the old tax law nor the new amendment subjects foreign individuals to income taxes. Only foreign body corporate with an independent juristic personality is subject to taxation. The tax is levied on all foreign companies doing business in the State of Kuwait, except those wholly-owned by GCC nationals. However, GCC companies with foreign shareholding shall be taxable in accordance with the foreign share. In the Kuwaiti companies where there are non-Kuwaiti shares, whether such share is contributed by a partner or by virtue of ownership rights, it will not be taxable, unless such rights are owned by a foreign partner. It is worth mentioning that revenues of Kuwaiti agents are not taxable as long as these revenues resulted from selling for their own interest.

Apart from a blanket tax rate structure, the new law also gives an elaborate explanation about the taxable income or in other words it explains what income is to be taxed.

Profits generated from any of the following activities are subject to the tax:

  1. Profits realized from any contract that is partially or fully executed in the State of Kuwait.
  2. Revenue from the sale of leasing, or from conceding a franchise to use or utilize any trademark, patent or copyright.
  3. Commissions from commercial representation or intermediary agreements.
  4. Commercial or industrial activities.
  5. Profits realized from sale of assets.
  6. General trading activities in property or goods, or the rights accrued therein, and the establishment of a Permanent office in Kuwait to carry out such activities.
  7. Property lease.
  8. Service provision.

Expenses associated with the income to be taxed may be deducted as follows:

  1. Wages, salaries and end of service indemnity
  2. Other taxes and fees
  3. Depreciation, subject to the specifications of the implementing regulations
  4. Donations to Kuwaiti charities, subject to limitations specified in the implementing regulations.
  5. Head office expenses in accordance with the specifications of the implementing regulations.

The law also inflicts a limit on a company’s ability to carry forward losses and the maximum limit is set as three years. It is to be noted that under the previous tax law, companies were able to carry losses forward for an unlimited period of time.