Kuwait Legacy Guide - By,Tareq Al-oan
How To Do Business in Kuwait
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.
How Can You Enter the Kuwaiti Market?
A foreign person or entity may enter the Kuwaiti market and do business in various
ways. These are:
- enter into a joint venture agreement;
- establish an incorporated entity;
- appoint a local commercial agent; or
- appoint a commercial representative.
Joint Ventures
Joint ventures are simple contracts that require no formal establishment procedures.
The Kuwaiti Companies Law refers to joint ventures as joint venture companies. A joint
venture company does not have a legal personality and
may not transact business in its own name. It may transact business with third parties
only through one venturer, who would be personally liable for the transactions he enters
into with third parties. The transacting venturers liability to third parties is
unlimited. The liability of a nontransacting 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.
WLLs and Closed Joint Stock Companies
Another form of doing business in Kuwait is to form a legal entity with independent
personality and limited liability. Under Kuwaiti law, there are two such company forms
that are open to non-Kuwaitis. The first is the limited liability company (WLL).
Both Foreign individuals and corporate bodies may use this type of entity. However,
Article 191 of the Companies Law provides that a Kuwaiti must own at least 51% of WLL
shareholding. A WLL is quite easily formed and takes approximately three months for its
incorporation. The WLL provides the limited liability shield and, prior to the recent
amendment, was nontaxable 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 companys 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 share holder in KSC Closed Company, the KSC
Closed Company is itself subject to the 5% contribution to the Kuwait Foundation for the
Advancement of Science.
Commercial Agents
Commercial agencies are regulated by Law No. 36 of 1964 on the Regulation of Commercial
Agencies, and the Kuwaiti Commercial Code, Chapter 5, Articles 260-296.
Article 1 of Law 36 provides that non-Kuwaitis may not act as commercial agents in
Kuwait, and Article 10 provides that those who violate the rule are subject to three
months imprisonment and/or a fine.
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 Codes provisions set out the general rules governing commercial agencies and
the types of commercial agencies.
The first type is a contracts agency. In a contracts agency, the local agent, by
contract, undertakes to promote the principals 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 agents
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 principals product in a defined territory in return for a
percentage of the profit. 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:
- Commercial agencies must be registered in order to be enforceable.
- Kuwaiti law is the governing law in matters pertaining to public policy.
- The principal may not terminate the agreement without proving breach of
contract by the agent; otherwise, the principal is liable for paying compensation to
the agent.
- The principal may not refuse to renew the agency agreement when it
expires without paying the agent equitable compensation for nonrenewal if the agent
proves that he committed no breach and that his activities led to the successful promotion
of the principals products.
- The agency may sue both the principal and any new agent the latter may
appoint in Kuwait if the termination is proved to be the result of their concerted
action.
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 principals name may not be disclosed without
his permission.
Commercial Representatives
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
representatives 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.
Tax Laws
The general rule is that 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%. These rates are applied progressively to income brackets.
Contribution to the Kuwait Foundation for Advancement of Science (KFAS)
KFAS was for the purposes of providing aid and assistance to science students and
researches for their education and training and for scientific research and development in
general. Under Article 6 of the Memorandum of Association of KFAS, it is provided that a
source of KFASs 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 KSCs to make such payments.
Public Sector Procurement
Procurement by the Kuwaiti Government and its agencies is governed generally by Law No.
37 of 1964 (modified by Law Nos. 13 and 31 of 1970 and 1977, respectively) concerning
Public Tenders (the "Tenders Law"). The 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
procedures in order to ensure competitive pricing.
Article 5 of the Tenders Law provides that a tenderer 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 tenderer 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."
As a result, 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 Tenders Law:
1. Ministry of Defense Procurement. The Tenders Law does not apply to
the procurement of military items for the Ministry of Defense 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 Ministry of
Defense ("MOD") strategic military procurement. 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 the Tenders Law in an effort to accommodate MODs specialized needs with respect
to strategic military procurement.
- Other Specialized Procurement.
Kuwait government agencies may request permission of
the Central Tenders Committee to conduct particular tenders outside the Tenders Law.
However, such tenders are relatively rare.
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.
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 obligation is incurred 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 any business entity having all of the
following characteristics, namely:
1. It does not exist or operate under Kuwait Laws as per Ministry of
Commerce and Industry, Department of Corporations.
2. It has been awarded, either as prime contractor or sub-contractor, a supply
contract by the government or any of its public sector institutions.
3. The goods and/or services to be provided under the supply contract are
defined as foreign produced under Kuwaiti Laws.
Kuwaiti business entities acting on behalf of foreign businesses which are formed for
the purpose of circumventing the Offset Program will be deemed to be foreign contractors.
Law 25 of 1996
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 $300,00) 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, 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.
All Rights are reserved to Tareq Aloun. Please Contact me If you like to use some of my inforamtion.Tareq Aloun@1998.Seattle,WA.Email: mishref1@hotmail.com |
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