Monday June 30, 2025 marked a significant milestone for Kuwait’s financial landscape with the Ministry of Finance publishing the executive regulations for Law 157/2024. This legislation is a pivotal move, ushering in the implementation of the OECD’s Base Erosion and Profit Shifting (BEPS) Pillar Two initiative and the Global Anti-Base Erosion (GloBE) Model Rules. While these terms might sound complex, their essence is straightforward: to ensure that large multinational companies (MNEs) pay a fair share of tax wherever they operate, including right here in Kuwait.

For years, the global tax system allowed multinational corporations to minimize their tax bills by shifting profits to countries with very low or no corporate taxes. This created an uneven playing field, making it harder for countries to fund public services and putting local businesses at a disadvantage. Pillar Two, developed by the OECD and agreed upon by over 160 countries, aims to change this.

What is Pillar Two, and who does it affect?

At its heart, Pillar Two introduces a global minimum corporate tax rate of 15%. This means that if an MNE operates in a country where its effective tax rate (the actual tax paid on its profits) falls below 15%, that company might have to pay, in its jurisdiction, an additional “top-up tax” to bring its effective rate up to the minimum.

Crucially, this new rule is not for every business. It specifically targets large multinational enterprises. In Kuwait, as per Law 157/2024, the rules apply to MNEs with annual consolidated revenues of EUR 750 million or more (approximately KD 250 million) in at least two of the four preceding financial years. This threshold ensures that the focus remains on the biggest global players, leaving smaller local businesses unaffected. Certain entities, such as government bodies, non-profit organizations, and international organizations, are generally excluded from these rules.

The pillars of implementation:

How the top-up tax is collected

To achieve this 15 percent minimum tax, Pillar Two utilizes two main interlocking mechanisms:

1.Income Inclusion Rule (IIR): This is the primary mechanism. It essentially allows a parent company, usually the ultimate parent entity (UPE) of an MNE group, to impose a top-up tax on its low-taxed subsidiary located in another country. Think of it as the head office ensuring its branches around the world pay their fair share.

2.Undertaxed Profits Rule (UTPR): This acts as a backstop. If the IIR is not applied (for example, if the parent company’s country has not implemented the IIR), the UTPR allows other countries where the MNE operates to deny deductions or impose an equivalent charge, effectively collecting the top-up tax that would otherwise have gone uncollected.

In addition to these international rules, many countries, including Kuwait, are also implementing a Qualified Domestic Minimum Top-up Tax (QDMTT). This allows Kuwait to collect any top-up tax due on the profits of MNE entities located within its borders, ensuring that the revenue stays in Kuwait rather than being collected by another jurisdiction under the IIR or UTPR.

Understanding the key numbers: GloBE income, covered taxes and effective tax rate

To figure out if an MNE owes top-up tax, we need to understand a few key concepts:

•GloBE Income or Loss: This is the starting point for calculating the MNE’s profits in a particular country for Pillar Two purposes. It begins with the financial accounting net income or loss (FANIL) of the MNE’s entities in that jurisdiction, and then undergoes specific adjustments outlined in the GloBE rules. These adjustments ensure a consistent and standardized measure of profit across different countries, regardless of their local accounting rules.

•Adjusted Covered Taxes: This refers to the taxes actually paid by an MNE in a particular country that are relevant for Pillar Two. It starts with the current and deferred tax expense as reported in the MNE’s financial statements, and then specific adjustments are made. These adjustments are crucial to ensure that only the taxes directly related to the GloBE income are considered and that any temporary differences in tax recognition are properly accounted for.

•Effective Tax Rate (ETR): This is the most crucial calculation. For each country where an MNE operates, the ETR is determined by dividing the total Adjusted Covered Taxes by the total GloBE Income for that jurisdiction. If this calculated ETR falls below the 15 percent minimum rate, then a top-up tax will be due.

Calculating the top-up tax: Bridging the gap

Once the ETR for a jurisdiction is found to be below 15 percent, the “top-up tax percentage” is calculated as the difference between the 15 percent minimum rate and the actual ETR. This percentage is then applied to the MNE’s “excess profits” in that jurisdiction. The GloBE rules also include a Substance-Based Income Exclusion (SBIE), which reduces the amount of profit subject to the top-up tax based on the MNE’s tangible assets and payroll costs in that jurisdiction. This is designed to reward real economic activity and discourage purely artificial profit shifting. The final top-up tax amount is then determined, with any QDMTT collected by Kuwait reducing the amount that would otherwise be due under the IIR or UTPR.

What this means for Kuwait

The implementation of Pillar Two through Law 157/2024 and its executive regulations signifies Kuwait’s commitment to international tax cooperation and fairness. For multinational enterprises operating in Kuwait, this means:

•Increased compliance: MNEs will need to gather and analyze significant amounts of financial data on a jurisdictional basis to comply with the new rules. This will require robust data management systems and close collaboration between tax, finance, and accounting departments.

•Potential for Higher Tax Bills: Companies that have historically paid very low effective tax rates in Kuwait or other jurisdictions may see an increase in their overall tax burden.

•Leveling the Playing Field: For local Kuwaiti businesses and smaller enterprises not subject to Pillar Two, this initiative helps to create a fairer competitive environment by ensuring large MNEs contribute their share.

•Enhanced Revenue for Kuwait: More importantly, by implementing a QDMTT, Kuwait ensures that any top-up tax generated from low-taxed profits within its borders is collected locally, contributing to the national economy and supporting public services.

This new tax era is a complex but necessary step towards a more equitable and stable global tax system. While the intricacies of Pillar Two can be challenging, Kuwait’s proactive approach in implementing these rules demonstrates its commitment to responsible global citizenship and a more prosperous future for all.

Note: Hassan M Abdulrahim is a Senior Instructor (Business) at Canadian College Kuwait and CEO & Co-founder of Visionary Consulting Company