KUWAIT: An Introduction

Introduction 

With the fall in oil prices, there is a renewed vigour and push to diversify Kuwait’s economy and to promote foreign investment into the country. Although the rules have been relaxed somewhat in recent years, an issue which remains is the restrictions placed on foreigners doing business in Kuwait.

Foreign parties seeking to do business in Kuwait must do so either through an agent or through a Kuwaiti “partner” (typically by establishing a company with Kuwaiti participants owning at least 51% of such a company). Exceptions to this include the following:

• establishment under the Direct Investment Law (the PDIL);

• operation in the Kuwait Free Trade Zone (the FTZ) – which requires that all operations be conducted within the FTZ (and, therefore, limits its application); and

• exemptions granted to nationals of the Gulf Cooperation Council (the GCC) and GCC companies owned by GCC nationals.

The appropriate form to conduct business in Kuwait largely depends on the type and scale of business being pursued. The most common form of doing business in Kuwait is to operate through an agent, although partnering with a local company is also commonplace. We elaborate on certain of these issues below which might be pertinent to foreigners seeking to do business in Kuwait.

Promotion of Direct Investment - PDIL 

The Kuwait Direct Investment Promotion Authority (KDIPA) administers the operation of the PDIL. Foreign parties may establish a wholly owned Kuwaiti company, a branch of its operations or a representative office in Kuwait. With respect to representative offices, certain additional restrictions apply to the activities which can be undertaken (it cannot operate a typical commercial business and should be more focused on research and market studies, etc.).

Other than increased foreign ownership, benefits under the PDIL include tax credits for up to ten years, exemptions from customs duties on imports, allocation of land for investment purposes, protection from seizure or expropriation without compensation, and guaranteed remittance of capital and profits out of Kuwait. There is a list of activities which are excluded from relying on the PDIL but these tend to be narrowly defined with various carve-outs.

To obtain benefits under the PDIL, the applicant will have to demonstrate how its project will benefit Kuwait taking into account one or more of the following:

• creating jobs and training/education opportunities for Kuwaiti national manpower;

• technology transfer;

• diversification of national income sources;

• increased Kuwaiti exports;

• support for local small and medium enterprises; and

• utilisation of Kuwaiti products/services.

In our experience, the process followed under the PDIL for approval is rather fluid and is dependent on the particular project involved, and takes approximately two months to complete.

Agency 

An agency arrangement is established by contract and the costs involved are largely restricted to the attorney’s fees in assisting in drafting the agency agreement and having it registered with the local authorities. An agency relationship provides the foreign principal with a de facto branch; operating under the umbrella of the local agent (whose licence should permit the activities being undertaken by the foreign principal). The foreign principal will not itself be licensed separately and directly in Kuwait.

Under the Commercial Agencies Law (which was promulgated during March of 2016), all agents are to be registered at the Commercial Agencies Register at the Ministry of Commerce and Industry (the MOCI).

It is common to restrict the agent’s duties to what is commonly referred to as “sponsorship” type services for the foreign principal. While the foreign principal would be able to carry on business in Kuwait in its name, the agent would sponsor the foreign principal’s employees in Kuwait (i.e. arrange for Kuwaiti residency visas/work permits), register in the agent’s name vehicles owned by the foreign principal, locate office facilities and facilitate the importation of the foreign principal’s equipment/goods into Kuwait.

Retaining an agent in Kuwait raises certain considerations. For example, Articles 281 and 282 of the Commercial Code provide an agent with fair compensation in the absence of cause upon termination or non-renewal of an agency relationship, whether such termination results from the actions of the principal or simply the expiration of the term of the agreement. The parties cannot contract out of the compensation obligation. Certain defences to such claims for statutory compensation may apply including that the agent has committed a significant breach of its obligations or that the relevant dispute is to be resolved by arbitration abroad and under a foreign law which does not allow such statutory compensation payments.

Companies 

Foreign parties seeking to do business using a Kuwaiti company would do so either through a Joint Stock Company (KSC) or a With Limited Liability company (a WLL). As a general premise, Kuwaiti participants should hold at least 51% of the shares in Kuwaiti companies. Given the increased regulatory control and taxes which apply to a KSC, foreign parties wishing to conduct business in Kuwait through a specially incorporated Kuwaiti company will typically choose to do so through a WLL.

A WLL must have between two and 50 shareholders. Both natural and juristic persons may be shareholders of a WLL. There is a statutory right of pre-emption in favour of existing shareholders to purchase the shares of other shareholders. The management of a WLL is delegated to one or more managers who need not be shareholders or Kuwaiti nationals but must be a resident of Kuwait. The manager represents the WLL vis-à-vis third parties, but this authority may be restricted by the WLL’s constitutional documents. Where the WLL has more than seven shareholders, a supervisory council consisting of at least three of its shareholders should be established. Such a council has special oversight over the affairs of the WLL. The company laws/regulations also provide for possible increased share in the profits of the WLL. Annual submissions will have to be made to the MOCI (annual financial statements, etc.), but these are less than would apply in the case of a KSC.

Other considerations 

Under the Kuwaiti tax laws and its regulations, income tax is applied on net profits of entities operating in Kuwait at a flat tax rate of 15%. Under its current practice, the tax authorities impose income tax on foreign entities only to the exclusion of Kuwaiti companies and GCC companies wholly owned by GCC nationals. If the GCC company is not wholly owned by GCC nationals, the tax authorities may seek to look through the GCC company and apply tax on the foreign corporate non-GCC shareholders. Natural persons, both Kuwaiti and non-Kuwaiti, are not subject to Kuwaiti income taxes. Plans are underway to introduce VAT across the GCC region, and under current guidance this will be implemented during 2019. Kuwait is also exploring the idea of taxing foreign remittances but it is not clear at this stage whether this will be implemented.

Other issues to consider when doing business in Kuwait include the sponsoring of staff (and retaining work permits/visas for such staff), particular formalities when tendering for projects with the Kuwaiti Government and its companies (including disclosure of certain commissions being paid to third parties, prequalification, etc.) and special registrations which may be required depending on the business being conducted (as is the case with engineering-type services).