Bridging Business Cultures
This document is provided as information only and should not be used as a substitute to proper research.
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 recently 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. Implementing regulations, which establish the guidelines for investment under the law, will be forthcoming.
A foreign person or entity may enter the Kuwaiti market and conduct business in the following ways:
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.
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 nontaxable[1] since Kuwait has no individual income tax and its corporate tax applies only to non-Kuwaiti corporate bodies.
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 5% contribution to the Kuwait Foundation for the Advancement of Science.
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.
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 (Article 59). The joint venture may transact business with third parties only through one venturer, who is personally liable for the transactions he enters into with third parties. The transacting venturer’s liability to third parties is unlimited. The liability of a non-transacting venturer is limited to his share in the joint venture. If the transacting venturer is a non-Kuwaiti, then the Kuwaiti venturer 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 venturers to unlimited joint and several liability, whether or not they were personally involved in the transaction.
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.
The Code’s provisions set out the general rules governing commercial agencies and the types of commercial agencies.
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.[2] 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. These rules provide protection to both types of agents. The following protective measures are provided:
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.[6] The principal’s name may not be disclosed without his permission.[7]
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.
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 rate has been recently amended to be 15% of net income.
KFAS was established to provide aid and assistance to science students and researchers for their education and training and for scientific research and development in general. Article 6 of the Memorandum of Association of KFAS provides that a source of KFAS’s funding shall be from the payment by all Kuwait Shareholding Companies (a “KSC”) of five percent of such companies’ net profits to KFAS.
While, as a legal matter, a KSC is not strictly speaking obligated to pay five percent of its net profits to KFAS (under Article 48 of the Kuwait Constitution, taxes may be levied only by a duly promulgated law), it has become the general and accepted practice in Kuwait for KSC’s to make such payments.
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 $16,500) must be conducted through the Central Tenders Committee and in accordance with its procedures in order to ensure competitive pricing.
Article 5 of the Tenders Law provides that a tenderer for government contracts must:
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:
There are no comprehensive laws or regulations that govern strategic military procurement by the Ministry of Defense (“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.
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.
The guidelines issued by the Ministry of Finance for the Counter-Trade Offset Program define in Article 4 the terms “Offset obligation” and “foreign contractor”. Offset obligations are triggered when the single cumulative value of supply contract(s) awarded to a foreign contractor is equal to or greater than KD 1 million. The offset obligation is effective as of the signature date of the supply contract and is equal to 30% of the monetary value of the said supply contract. 50% of the offset obligation must be completed in the first four years and 100% in eight years.
“Foreign contractors” are defined as business entities having all of the following characteristics, namely:
Kuwaiti business entities acting on behalf of foreign businesses that are formed to circumvent the Offset Program will be deemed foreign contractors.
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.
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 submitted 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).
The Commercial Code (Law No. 68 of 1980) governs trademark registration and the penalties for infringement. Any person may apply to have his trademark registered at the Register of Trademarks (Article 64). Once the application is approved, the trademark will be protected for 10 years, and may be renewed for another ten years (Article 77).
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 that are published for the first time in one of those states (Article 43 of Law No. 64 of 1999).
The period of copyright protection is as follows:
(Article 17 of Law No. 64 of 1999)
Kuwait is a member of the World Trade Organization and a signatory to the Agreement on Trade Related Aspects of Intellectual Property Rights. As such, 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 this agreement. Kuwait is also a member of the World Intellectual Property Organization.
[1] Excluding the five-percent tax for the Kuwait Foundation for the Advancement of Science (“KFAS”).
[2] KCC, Art. 274.
[3] KCC, Art. 281.
[4] KCC, Art. 282.
[5] KCC, Art. 285.
[6] KCC, Art. 287.
[7] KCC, Art. 292. This rule is of historical importance only and may be enforced only in the case of fungible goods for practical reasons.
These pages contain some basic information about business structure and procedures regarding some key Middle Eastern markets. The following articles are for information only:
Doing business in Egypt
Doing business in Kuwait
Doing business in Lebanon
Doing business in Libya
Doing business in Oman
Doing business in Saudi Arabia
Doing business in U.A.E.