The fundamental legal basis for starting a business in Kuwait is stipulated in Articles (23) and (24) of the Kuwaiti Commercial law. Article (23) of the Code states that non-Kuwaiti citizens may not pursue any commercial activities in Kuwait, unless having a Kuwaiti partner. This partner’s share must not be less than (51%). Article (24) sets forth that any foreign company may not establish a branch in Kuwait and cannot pursue its commercial activities in Kuwait unless having a Kuwaiti agent.
It should be noted that Corporate Law no. 1/2016 and its Executive bylaw missed the enacting of the aforementioned percentage that a Kuwaiti partner must acquire in the establishment of the company. The Ministry of trade and commerce apply in this regard the aforementioned Articles (23) and (24) of the Kuwaiti Commercial law.
In attempt to attract foreign investors, the Kuwaiti parliament enacted law no. 116/2013 for the promotion of Direct Investment in the State of Kuwait by allowing foreign ownership up to (100%) of business entities in certain sectors that added value and contributes to the development of the Kuwaiti economy; This Law draws an exception to the general rules governing doing business in Kuwait by foreign investors.
The following ways define how a foreign individual or entity may enter the market and carry out business in Kuwait:
- Establishing a company :
As per the Kuwaiti Law, foreign individuals or entities may establish permanent presence in Kuwait through forming and investing in the following Kuwaiti companies:
1-Limited Liability Company (WLL): Foreign individuals and corporates may establish a Limited Liability Company (WLL) in Kuwait. However, as mentioned above, the share of the Kuwaiti citizen in the WLL Company must be at least (51%). The process of forming a WLL is simple, and it takes approximately three months. This type of companies provides a limited liability shield. Since Kuwaiti citizens do not pay individual income tax, and only non-Kuwaiti corporate bodies pay corporate tax, WLL companies do not pay taxes.
2-Closed Joint Stock Company (KSC Closed): As a rule, only Kuwaiti citizens may be shareholders of a closed joint stock company. However, foreigners may own up to (49%) of the share capital of a Closed Joint Stock company (KSC Closed) after attaining approval of the concerned authorities. Activities of KSC Closed Company may not include banking or insurance. The process of forming a KSC Closed company takes up to six months.
In addition to the taxes levied on profits made by the foreign company as a shareholder in a KSC Closed Company, the KSC Closed Company must contribute with 5% in Kuwait Foundation for the Advancement of Science.
3-Joint Stock Public Company: Kuwaiti law permits non-Kuwaitis to hold shares in publicly traded shareholding companies. However, foreigners may not exceed 49% of the share capital of the KSCP Company.
- Concluding a joint venture agreement:
Pursuant to Article 76 of Kuwaiti Corporate Law no. 1/2016, joint ventures are formed under simple contracts. No formal procedure for their establishment is involved.
As stated in Article (78) of the aforementioned law, joint venture companies do not have legal personalities. These companies may not conduct business in their own name. Only through venturers that a joint venture company may conduct business with third parties. This venturer is personally responsible for the transactions he enters into with the third parties. The liability of the transacting venturer to the third parties is unlimited. Meanwhile, the liability of the non-transacting venturer is confined to his share in the joint venture. The Kuwaiti venturer in the company must guarantee the transacting venturer, if the latter is a non-Kuwaiti citizen. The joint venturers are to be exposed to unlimited joint and several liability, if the joint venture company deals with third parties in its own name. It makes no difference whether the joint venturers were personally involved in the transaction or not.
- Appointing a Kuwaiti commercial agent :
Commercial Agency: Pursuant to Article (2) of the Law No. (13) of (2016), non-Kuwaiti citizens may not act as commercial agents in Kuwait. There must be a direct relationship between the Kuwaiti agent and the foreign principal. Article (6) of the above-mentioned law stipulates that commercial agencies are not enforceable unless recorded in the Commercial Register. The Kuwaiti Law defines three types of Commercial Agencies:
1-Contract Agency: As per Article (271) of the Kuwaiti Commercial Code, the local agent undertakes to do the following by the contract: a) promoting the principal’s business on a continuous basis in the territory, b) entering into transactions in the name of the principal in return for a fee.
The agency contract must be written. Items of contract must define: the territory covered, the agent’s fees, the agency term, the product or service that is the subject of the agency, and any relevant trademarks. If the agent should establish showrooms, workshops, or warehouse facilities, the contract must be valid for a period not less than five years.
2- Distributorship Agency: Under this agency, the local agent may act as the distributor of the principal’s product in a defined territory and in return for a percentage of the profit as per Article (286) of the Kuwaiti Commercial Code. If the distributor is the only distributor in the whole country, distributorships are governed by the same general rules as contracts agencies.
The following rules protect both types of agencies:
– Registration of Commercial agencies is required to be enforceable.
– Kuwaiti law is the governing law in all public orders.
– The principal may not terminate the agreement without proving violation of the contract by the agent. If contract violation is not proved, the principal should compensate the agent.
– The principal may not decline to renew the agency agreement upon its expiration without paying the agent equitable compensation for the non-renewal, provided that the agent provides evidence that he is not at fault and that his activities successfully promoted the principal’s products.
– The agent may file a suit against both the principal and the new agent appointed in Kuwait, if the principal colludes with another agent, and, for this reason, the agency contract is terminated.
3- Commission Agency: As stated in Articles (287) to (296) of the Kuwaiti Commercial Code the agent concludes contracts in his/its own name. The principal’s name may not be revealed without his consent.
- Appointing a commercial representative
A commercial representative is a Kuwaiti individual or entity engaged by a foreign company to represent its business interests in Kuwait. Usually, the authority scope of a commercial representative is more limited than that granted to an agent. Fees of a commercial representative may be paid as either a fixed regular amount, a commission, or percentage of profits.
The commercial representative must sign his name as well as the name of the foreign company, whenever executing documents on behalf of the foreign company. Within the signature, he must indicate that he is a commercial representative. A foreign company accepted full liability for all of the actions of its commercial representative, provided that all the actions are carried out or incurred within the scope of representation. Contrary to the 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 do not pay taxes on income. However, an income tax is levied on a foreign corporate body conducting commercial activities in Kuwait.
International Department Team
Dr. Bader S. Al-Otaibi
Law Firm & Intl. Arbitration