Doing Business in Kuwait

How a Foreign Entity can do Business in Kuwait

Kuwait presents a wide variety of business opportunities for foreign companies. To be effective and successful, the foreign company must have a basic knowledge of the business community in Kuwait and the Kuwaiti legal system. The first decision for any business is the type of operation to establish, awareness of the basic rules and practices, basic understanding of the laws governing its operations and finally, to know how to resolve legal disputes if they arise.

Entering the Kuwaiti Market

Articles 23 and 24 of the Kuwaiti Commercial Code state the basic premise for doing business in Kuwait. Article 23 provides that non-Kuwaitis cannot engage in commerce in Kuwait without having a Kuwaiti partner whose equity holding is at least 51 percent. Article 24 provides that a foreign company cannot establish a branch in Kuwait and it may not engage in commercial activities in Kuwait except through a Kuwaiti agent.

In an effort to attract foreign investment, Kuwait's Parliament passed Law No. 8 Regulating Foreign Capital Direct Investment in Kuwait (April 22, 2001). This law creates an exception to the general rules under which foreign investors conduct business in Kuwait by permitting up to 100% foreign ownership of business entities in certain approved sectors. Currently, a foreign Investor can enter and carry out business in Kuwait in the following ways: establishing a company, concluding a joint venture agreement, appointing a Kuwaiti commercial agent, or appointing a commercial representative. Otherwise they can invest under the Law Regulating Direct Foreign Capital Investment (Law No.8 of 2001).

Art. 3 of the Law No. 8 of 2001 stipulates an exception to Art. 23 and 24 of the Commercial Code, and allows foreigners to own up to 100% of business entities in some sectors, provided a license is issued by the Minister of the Ministry of Commerce & Industries (MOCI). The Council of Ministers Resolution No.1006/1 of 2003 issued a list of business activities for which a Foreign Investment License may be granted:

(1) industries other than oil and gas exploration and production;
(2) construction, operation and management of infrastructure enterprises in the fields of water, power, drainage and communications;
(3) banks, investment corporations and foreign exchange companies which the Central Bank of Kuwait agree to consider incorporation thereof;
(4) insurance companies which Ministry of Commerce & Industry agrees to incorporate;
(5) information technology and software development;
(6) hospital and medicines manufacturing;
(7) land, sea and air transport;
(8) tourism, hotels and entertainment;
(9) culture, information and marketing except for issuance of newspapers, magazines and opening of publishing houses;
(10) integrated housing projects and zones development except for real estate speculation;
(11) real estate investment through foreign investor subscription to the Kuwaiti shareholding companies according to the provisions of law No. 20/2002;
(12) Storage and logistic services;
(13) Environmental activities.

Further, Council of Ministers Resolution No. 1006/2 of 2003 provides that a license may be issued to a Kuwaiti Shareholding Company (Closed) in which the share of the foreign investor is 100% of its capital, subject to compliance with the following terms and conditions: first, the company's capital must be sufficient to achieve its objectives and must be fully subscribed to by the founders; second, the company must fulfill the procedures, rules and regulations prescribed under the Kuwaiti Commercial Companies Law (No. 15 of 1960); third, the company must engage in one of the sectors as listed in Resolution No. 1006/1 of 2003, and must pursue one or more of the following objectives:

A. transfer of modern technology and administration of practical, technical and marketing expertise;

B. expansion and participation of the Kuwaiti private sector;

C. creation of job opportunities for national labour and contribution to training;

D. support of national products exports.

Establishing a Kuwaiti Company

Kuwaiti law permits foreign persons or entities to establish a permanent presence in Kuwait by forming and investing in the following Kuwaiti companies:

• 1)Limited Liability Company;
• 2)Closed Joint Stock Company;
• 3) Public Joint Stock Company.

A. Limited Liability Company ("WLL")

Both foreign individuals and corporate bodies may establish this type of entity. However, Article 191 of the Companies Law provides that a Kuwaiti must own at least 51% of the WLL shareholding. A WLL is simple to form and takes approximately three months to incorporate. The WLL provides the limited liability shield and is non-taxable since Kuwait has no individual income tax and its corporate tax applies only to non-Kuwaiti corporate bodies. However, a WLL company cannot engage in banking or insurance activities, and cannot be listed on the Kuwait Stock Exchange (KSE). There is no restriction on distribution of profits, but at least 10% must be transferred to a statutory reserve until it totals at least 50% of the capital

B. Closed Joint Stock Company ("KSC Closed")

A closed Kuwaiti joint stock company (KSC Closed) is the other type of company open to non-Kuwaiti entities. Articles 68 and 94 of the Companies Law provide for this type of company as an exceptional kind of Joint Stock Company. The general rule is that the shareholders of joint stock companies must be Kuwaiti nationals. As an exception, foreigners may own 49% of the share capital of a KSC Closed after obtaining the approval of the concerned authorities. The company's objects cannot be banking or insurance. The incorporation of a KSC Closed may take up to six months.

The limitation in using this form of business is that, over and above the tax levied on the profits made by the foreign company as a shareholder in KSC Closed Company, the KSC Closed Company is itself subject to the 1% contribution to the Kuwait Foundation for the Advancement of Science.

C. Public Joint Stock Company

In June of 1999, Kuwait passed a law permitting non-Kuwaitis, for the first time, to own shares in publicly traded shareholding companies. Pursuant to this law, the Minister of Commerce & Industry is to issue the implementing regulations setting forth the restrictions and conditions of this right, including the maximum amount of shares non-Kuwaitis may hold and the corresponding rights of the holder. Foreign nationals may acquire shares in KSCs that are traded over the Kuwait Stock Exchange as if they were Kuwaiti nationals. In such a case, there is no need for the special license for a foreign shareholder to acquire shares. However, it appears that a public KSC company may invest in banking and insurance activities, provided that they obtain approval from the Central Bank of Kuwait.

Entering into a Joint Venture

Joint ventures are simple contracts that require no formal establishment procedures (Article 57 of the Kuwait Companies Law). The Kuwaiti Companies Law refers to joint ventures as joint venture companies (Article 56). A joint venture company does not have a legal personality and may not transact business in its own name (Article59). The joint venture may transact business with third parties only through one venture, who is personally liable for the transactions he enters into with third parties. The transacting venture's liability to third parties is unlimited. The liability of a non-transacting venture is limited to his share in the joint venture. If the transacting venture is a non-Kuwaiti, then the Kuwaiti venture in the company must guarantee him in that transaction. If the joint venture were to deal with third parties in its own name, the effect would be to expose all of the joint ventures to unlimited joint and several liability, whether or not they were personally involved in the transaction. Joint ventures established by contractual agreements do, however, provide the parties wishing to conduct business in Kuwait with more flexibility in their arrangements than the establishment of a company. Joint venture agreements are more common in relation to a specific project that has a limited term.

Commercial Agency

Law No. 36 of 1964 on the Regulation of Commercial Agencies, and the Kuwaiti Commercial Code, Articles 260-296 regulates commercial agencies. Non-Kuwaitis may not act as commercial agents in Kuwait (Article 1 of Law No. 36 of 1964), and those who violate the rule are subject to three months imprisonment and/or a fine (Article 10 of Law No. 36 of 1964).The relationship between the Kuwaiti agent and the foreign principal must be direct. Article 2 of Law 36 provides that commercial agencies are not enforceable unless registered in the Commercial Register. Provisions in the Kuwaiti Commercial Code (Art 260-296) define the general rules governing commercial agents and their types. There are 3 types of agents: The first type is a contracts agency (Article 271 of the Kuwaiti Commercial Code). In a contracts agency, the local agent, by contract, undertakes to promote the principal's business on a continuous basis in the territory and to enter into transactions in the name of the principal in return for a fee. The contract must be in writing and must include the territory covered, the agent's fee, the term, the product or service that is the subject of the agency, and any relevant trademarks. The term of the contract must be at least five years if the agent is required to set up showrooms, workshops, or warehouse facilities.

The second type of agency is a distributorship under which the local agent is the distributor of the principal's product in a defined territory in return for a percentage of the profit (Article 286 of the Kuwait Commercial Code). Distributorships are governed by the same general rules as contracts agencies if the distributor is the sole distributor for the whole country.

The third type of commercial agency is the commission agency, which is provided for in Articles 287 through 296 of the Commercial Code. In this type of agency, the agent enters into contracts in his/its own name. The principal's name may not be disclosed without his permission. Commercial agents in Kuwait are protected by various laws and regulations: they must be registered with the MOCI; Kuwaiti law is the governing law in matters related to agents; foreign principals may not terminate an agreement without proving breach of contract by the agent, unless the foreign principal pays a compensation to the agent; the foreign principal may not refuse to renew the agency agreement when it expires; the agent may sue both the foreign principal and any new agent that the former may appoint if the termination is proved to be the result of their concerted action.

Commercial Representative

A commercial representative is a Kuwaiti individual or entity engaged by a foreign company pursuant to a contract called a "commercial representation agreement" to represent its business interests in Kuwait. The scope of authority of a commercial representative is usually more limited than the authority granted an agent. A commercial representative may be paid a set fee on a regular basis or a commission or percentage of profits. The duties and obligations of commercial representatives are governed by Articles 297 - 305 of the Commercial Code. In executing documents on behalf of the foreign company, the commercial representative must sign his name as well as the name of the foreign company and indicate that he is a commercial representative. A foreign company is liable for all of the commercial representative's actions and liabilities, so long as they are conducted or incurred within the scope of representation. Unlike an agency agreement, a commercial representation agreement cannot be registered with the Ministry of Commerce and Industry.

Public Sector Procurement

Procurement by the Kuwaiti Government and its agencies is regulated by Law No. 37 of 1964 (modified by Laws No. 13 and 31 of 1970 and 1977, respectively) concerning Public Tenders (the "Public Tenders Law"). The Public Tenders Law provides that any procurement made by the Kuwait Government with a value in excess of KD 5,000 (approximately $18.000) must be conducted through the Central Tenders Committee CTC and in accordance with its procedures in order to ensure competitive pricing.

Article 5 of the Tenders Law provides that a tendered for government contracts must:

• 1."Be a Kuwaiti merchant, individual or company, registered in the Register of Commerce in the Chamber of Commerce and Industry of Kuwait; The tendered may be a foreigner if he has a Kuwaiti merchant acting as a partner or agent pursuant to a deed duly executed by a notary, provided the Central Trading Committee shall set down a specific regulation for the participation of the foreign company in the tenders of large works.


• 2.Be registered in the Classification List of Contractors and Suppliers in conformity with the following Articles." Thus, a foreign entity may act as a government contractor only through a Kuwaiti entity in which it has an ownership interest or by acting directly but with the assistance and support of a Kuwaiti agent or commercial representative.

There are two important exceptions to the application of the Public Tenders Law:

1. Ministry of Defence Procurement. The Public Tenders Law does not apply to the procurement of military items for the Ministry of Defence and Security Forces. "Military materials" is broadly defined by Kuwait law to include land, sea and air weapons, spare parts, military communications, detection equipment and related systems ("strategic military procurement").There are no comprehensive laws or regulations that govern strategic military procurement by the Ministry of Defence ("MOD") Instead, the MOD has developed internal policies and procedures for such procurements, and such policies and procedures are not available to the public. In general, such policies are more flexible than those of the Public Tenders Law in an effort to accommodate MOD's specialized needs with respect to strategic military procurement.

2. Other Specialized Procurement. Kuwait government agencies may request permission of the Central Tenders Committee to conduct particular tenders outside the Public Tenders Law. However, such tenders are relatively rare. For procurements managed by the CTC, there are two procurement methods: open tendering, and restricted tendering. For both methods, Ministry of Finance is to approve the project, and FATWA is to review contracts above KD 75,000. CTC is to advertise the bids: for open tendering, the advertisement is open; for restricted tendering, the advertisement is to a list of registered contractors or suppliers (usually more than six). Before signing the contract, the State Audit Bureau must prior review contracts above KD 100,000. According to the authorities, restricted tendering accounts for more than half of all the Government procurement managed by the CTC, as most mega projects are awarded to a list of international companies. The CTC awards the tender to bidders who SUMMITted the lowest total price if the quality is satisfactory. The CTC may award the tender to the bidder who offered a higher price if the bidder with the lowest price offered an unreasonably low price.

Kuwait Offset Program

The Counter-Trade Offset Program (Offset Program), established by Decision No. 694/1994, requires all foreign contractors who meet certain criteria to participate in the Offset Program. offset programme, requires foreign firms that win government contracts above certain thresholds to make an investment that will add value to the economy. Primary objectives of offset programmes include the transfer of advanced technology, creation of job opportunities for Kuwaiti nationals, and provision of training for Kuwaitis. A National Offset Company (NOC), a state owned Shareholding Corporation managing the offset programme on behalf of the Ministry of Finance. NOC works with foreign contractors by reviewing and approving their offset proposals and ensuring their offset obligations are fulfilled. Offset obligations apply to military contracts equal to or greater than KD3 million, civilian contracts equal to or greater than KD10 million, and oil and gas contracts (with the exception of exploration and production contracts). Foreign firms, before they receive government contracts satisfying these conditions, must carry out an investment project. That is, foreign suppliers must invest 35% of the contract value in an approved offset business venture. Offset investment can be either direct or indirect. Direct investment involves those projects in which foreign contractors help the Government to acquire and deploy new technologies, or to train Kuwaiti citizens in their use, such as establishing a laboratory, training programme on high technology equipment or software. Indirect investment involves those projects which help the Government develop the private sector, such as grants or donations to approved and licensed organizations in Kuwait providing educational, health care and public services. The NOC uses a multiplier system to encourage offset projects in the most needed areas. A higher multiplier value means a smaller financial obligation for the foreign firm. Projects in health, education, environment, social, manufacturing and services typically receive higher multiplier values, and direct projects are given a higher multiplier value than indirect ones. Foreign contractors subject to offset must provide an unconditional and irrevocable bank guarantee, the value of which is equal to 6% of the contract value. The bank guarantee is to make sure that foreign contractors implement their offset obligations. The value of the bank guarantee is reduced gradually until the entire obligation is fulfilled and the bank guarantee is cancelled.

Public Private Partnerships (PPPs)

The key piece of legislation which establishes the legal framework in Kuwait for PPP Projects is: Law No. 7/2008 : on the Regulation of Build, Operate and Transfer (BOT) Operations and Similar Operations and amendment of some provisions of Decree-Law No.105/1980 on the regulation of the public domain and Decree No.256 of 2008 regarding promulgating the executive regulations of Law No.7 of 2008 (the "PPP Law"). The PPP Law combines the objective of attracting private-sector participation based on competitive and transparent rules with the social objective of ensuring that the economic Benefits of private investment are shared with Kuwaiti citizens.

The Technical Bureau of Studying Developmental Projects and Initiatives (PTB) is the Kuwait Government agency responsible the implementation of the PPP program, in charge of the financial, commercial and technical evaluation of PPP projects. Established under Article 12 of the PPP Law, it is involved in all phases of a project, from inception to financial close. Under the PPP Law, no Public Entity may enter into a PPP contract for a project on State-owned property without the prior approval of the Higher Committee (HC) (art. 4) ; Proposals for PPP projects may be SUMMITted by a Public Entity (i.e. solicited proposals) or may be prepared by an investor (i.e. unsolicited proposals) Solicited proposals

The process to be followed for solicited proposals is as follows:

• The Public Entity registers the project with the PTB
• The Public Entity prepares, in collaboration with the PTB, a feasibility study a comprehensive evaluation study of the project's viability, sustainability, and bank ability
• The Public Entity and the PTB prepare the terms of reference for the feasibility study
• The PTB selects the transaction advisors to conduct the feasibility study and to undertake the project procurement
• The PTB presents the feasibility study - with its recommendations – to the HC for approval
• The HC approves the project and the tender Unsolicited proposals - The PPP Law also sets out a procedure for dealing with unsolicited proposals Once a project has been approved by the HC, the PTB issues a request for an expression of interest ("EOI").
• The request for an EOI shall be advertised in broadcasting outlets, the official gazette, and at least 2 Kuwaiti Arabic dailies.
  

Free Trade Zones

Kuwait passed Law (No. 26 of 1995) Concerning Free Trade Zones In 1995,. Under the Law, one or more free trade zones (FTZs) may be established. Ministry of Commerce and Industry assumes supervision of the free trade zones, although it may entrust the management of these zones to the private sector. Firms can obtain licenses on the spot and face as little State intervention as possible. They are exempted from corporate income tax and Customs duties (although firms outside these zones are also exempted from customs tariff when import "national industry inputs".). Exports and imports into the zone are not subject to the restrictions imposed on importation and exportation, although goods prohibited from being imported into the country cannot enter FTZs as well. Kuwait established its free trade zone in the industrial and commercial area at Shuwaikh Port. The FTZ is owned and financed by the private sector. The objective of the zone is to attract national and foreign investment for the restoration of Kuwait as a pioneering trade country, by providing investors with commercial and investment opportunities, so as to carry out all permissible activities without restriction or limitation to boost exports and the national economy.

Taxation Laws

Generally, individuals (Kuwaiti and foreign nationals) and Kuwaiti companies are not subject to taxes on income. However, a foreign corporate body engaged in commercial activities in Kuwait is subject to income tax. The tax rates range from (5% to 55% )used to be levied. In 2007, Kuwait amended its Corporate Tax Decree, and the new tax decree entered into force in February 2008. Therefore, for tax periods beginning after 2 February 2008, a 15% flat rate tax on earnings above KD 5,250 per year is applied. Specifically, the following is taxable in Kuwait: first, profits earned from any activities or businesses wholly or partially executed in Kuwait, including any industrial or commercial activities, sale or transfer of assets, trade of goods or property (including rights associated with tangible or intangible assets), leasing of any movable or immovable property for use in Kuwait, and rendering services including fees from administrative, technical or consulting services; and second, income such as royalty, franchise, license and similar fees earned; commissions or fees earned from representation or brokerage agreements relating to Kuwait; lending of funds; and income earned from having a permanent office in Kuwait, where sale and purchase contracts are concluded. Gains from trading in securities on the KSE are exempted. Also, there is no withholding tax in Kuwait, other than the requirement for investment funds, investment custodians, and companies managing portfolios for foreign entities to deduct 15% (or appropriate percentage applicable under the double tax treaty) of the foreign entity's share of profits and dividends. Nonetheless, all government departments, entities and individuals making payments to parties with whom they have entered into contracts, agreements or transactions are required to withhold 5% of such payments as tax retention. The parties can recover the retained money, but only after SUMMITting a tax retention release letter issued by the tax department. If the 5% tax retention is not made, the related costs will not be allowed to be tax deductible. Also, the entity that fails to withhold the retention is liable to pay the tax in case the taxable entity fails to settle its taxes.

Other taxes and contribution:

• a. Zakat : Under the Zakat Law No. 46 for 2006 (Law Regarding Zakat and Contribution of Public and Closed Shareholding Companies in the State's Budget), zakat (tax according to the Islamic Sharia principles) is levied on all Kuwaiti shareholding companies as 1% of their net annual profit.


• b. Contribution to Kuwait Foundation for the Advancement of Science (KFAS), : In addition to taxation, each KSC company must pay 1% of its net profits to the Kuwait Foundation for Advancement of Science (KFAS), which was established to assist science students and researchers in their education and training for scientific research and development.


• c. National labour support tax : The National Labour Support Law (Law No. 19 of 2000) was enacted to support and encourage national labour force to work in the non-government sector. The Law obliges the Government to share the cost of labour force training. To cover the cost, (public) Kuwaiti shareholding companies listed in the KSE must pay a tax amounting to 2.5% of their net annual profits, i.e. national labour support tax.

Disclosure Law

In August 1996, the Kuwaiti Government passed Law 25 of 1996 regarding the disclosure of commissions in connection with government contracts. This law effectively requires full transparency and accountability in all government contracts in excess of one hundred thousand dinars (approximately $300,000) in value. The law, which applies to all transactions entered into by the Kuwaiti Government or its agencies or instrumentalities, requires a stipulation by the contracting party as to whether it has paid or will pay a commission of any kind to a disclosed or concealed intermediary. Additionally, the law imposes an obligation on both the payor and the payee to disclose in a separate declaration, the amount of the commission, the type of currency, and the place and manner of the commission. The sanctions for non-disclosure or misinformation range from civil and criminal penalties equal to the value of the payment to imprisonment. However, it is important to remember that full compliance does not necessarily exonerate the parties in the event that the payment in question constitutes a violation of any other Kuwaiti law.

Intellectual Property Rights

Kuwait is a signatory to the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPSAgreement). It is under an obligation to pass intellectual property laws meeting the minimum standards for the protection and enforcement of intellectual property rights set forth in the TRIPS Agreement.

A. Patents : Law No. 4 of 1962 governs patents in Kuwait. In order to obtain patent protection in Kuwait, the inventor must first register the patent with the Patents Office at the Trademark Control Department of the Ministry of Commerce & Industry (Article 4). The law permits foreigners who are nationals of or live in countries that give Kuwait reciprocity, as well as companies and other juristic personalities, to register patents in Kuwait (Article 5). Once registered, the owner of the patent is vested with the right to use that patent by any means for 15 years from the date of the application (Articles 10 and 12). The patent may be renewed for an additional five-year term (Article 12).

Similarly, industrial designs must be registered in the Industrial Designs & Models Register and an application for registration is to be SUMMITted to the Trademark Control Department (Articles 36 and 37). The registration is valid for five years and renewable for two additional consecutive terms (Article 42).

B. Trademark : The Commercial Code (Law No. 68 of 1980 and amended by Law No.1 of 2001) governs trademark registration and the penalties for infringement. Article 64 stipulates that any person may apply for the registration of his trademark at the Register of Trademarks. If the Registrar accepts the application, the application must be published in 3 consecutive issues of the Official Gazette. Within 30 days of the publication, any concerned person may write a notice of objection. If no objection is raised during this period, a certificate of registration is granted to the applicant. Approximately it takes 6 months to one year to obtain a registration certificate, if no objection is raised. If the trade mark is registered, the registration shall retroactively take effect from the date of SUMMITting the application. And once registered, a trademark is protected for 10 years as of the date the application is approved. It may be renewed for other 10 year intervals.

Any decision made by the Registrar to reject or suspend the registration of a trade mark may be challenged by the applicant before the Court. The Court may order cancellation of the registration, upon the application of any concerned persons, if it has realized that the mark had not been used effectively for 5 consecutive years. The cancellation or renewal of the registration must be published in the Official Gazette. If the registration of a mark is cancelled, it cannot be re-registered in favour of a third party for the same products, unless after 3 years from the date of cancellation.

c) Copyright : Law No. 64 of 1999 governs copyrights and provides copyright protection and penalties for copyright infringement. With respect to non-Kuwaitis, the law applies to
1) works of foreign nationals that are published for the first time in Kuwait;


2) works of Arab authors who are nationals of member countries of the Arab Agreement for the Protection of Author's Rights and published in any of those countries; and

3) works of authors who are nationals of member states of the World Intellectual Property Organization WIPO that are published for the first time in one of those states (Article 43 of Law No. 64 of 1999).

The Copyright Law defines a non-exhaustive list of protected works (Art.2), and the terms of protection of the author's economic rights (Art. 17), which are:

• 50 years from the death of the author, and if it is a joint work, from the death of the last surviving author;


• 50 years from the end of the calendar year of publication for
  
  (a) works published under a pseudonym or anonymously, unless the author reveals his identity or his true name becomes publicly known, in which case the term lapses in accordance with item (i);
  (b) works in which the owner of the copyright is a legal personality;
  (c) cinematographic and photographic works, works of applied art, computer programmes and databases;
  (d) works published for the first time after the author's death;


• 50 years from the end of the calendar year in which the performance or recording took place;


• 20 years from the end of the calendar year in which the broadcast of a programme first occurred.

In case of infringement or potential infringement of copyright, at the request of the author or the successor, a judge may temporarily suspend the publication, production, or presentation of a work (Art.36). If the judge deems appropriate, he may order destruction of the illegally published copies of the work, and the court may decide compensation for the use of such work (Art. 38). Penalty for copyright infringement is a detention for a period of one year or a fine of KD 500, or both. Comparing to a one-year detention, a fine of KD 500 seems rather low. The authorities agreed, and point

KUWAIT FOREIGN INVESTMENT BUREAU INCENTIVES

• * Tax exemptions for a maximum period of 10 years.


• * Total or partial exemption from customs duties on project's imports of manufactured goods, packaging materials, etc


• * Total or partial exemption from other export and import restrictions.


• * Allocation of land and real estate in accordance with the laws and regulations of the State of Kuwait.


• * Allowing the recruitment of foreign labor as required for the project in accordance with the laws and regulations of the State of Kuwait.


• * Benefits arising under Double Taxation Treaties (DTTS) and Bilateral Treaties for the Encouragement and Protection of Investment (BITs).