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Doing Business in Kuwait
 
 
 

General

Kuwait follows the civil law system or what is commonly known as the Latin system. The historical origins of Kuwaiti Law are from the Egyptian and French codes. Article 2 of the Constitution provides that Islamic Sharia forms a major source of law. It is not however the exclusive source. Therefore, it is not essential for a law to be totally in conformity with Islamic Sharia in order for it to be constitutional. For example, there are provisions under the law of commerce which permit payment of interest in commercial transactions. The Kuwaiti legal system is of recent origin. It has benefited from the experiences of other legal systems in the world. In addition to incorporating provisions from the Egyptian legal system, Kuwait has also incorporated various international forms and standards into its legal system. For example Kuwait adopted the rules of the International Chamber of Commerce (Vienna) as amended in 1974 for regulating letters of credit. Likewise, International Accounting Standards have also been adopted by Kuwait under a special enactment regulating the procedures to be followed by auditors and accounting firms 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%. 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.

These two provisions pertain to public policy, and as such are mandatory. Non-compliance, therefore, among other things, renders the transaction null and void.

As an exception to Articles 23 and 24, a new law (Law No.8/2001) has been enacted permitting foreign entities to establish Kuwaiti companies with up to a 100% foreign equity participation. Although a license under the new law can only be granted for certain types of business activities, the enactment of this legislation is a significant milestone in the legislative history of the country.

A foreign person or entity may enter the Kuwaiti market and do business in various ways. These are:

• establish a corporate entity, that is, a limited liability company (referred to as a WLL), or a closed joint stock company (KSC    Closed);
• enter into a joint venture agreement;
• appoint a local commercial agent;
• appoint a commercial representative;
• apply for a licence under the foreign investment law for incorporating a company in Kuwait with or without a local partner.

Forms of Business Organisation

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

• Limited Liability Company;
• Closed Joint Stock Company;
• Public Joint Stock Company;
• 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.

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 5% contribution to the Kuwait Foundation for the Advancement of Science.

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.

Joint Ventures

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.

Commercial Agencies

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. 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:

• 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   non-renewal if the agent proves that he committed no breach and that his activities led to the successful promotion of the    principal’s products;
• the agency may sue both the principal and any new agent the latter may appoint in Kuwait if the termination is proven 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 principal’s 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 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.

 

 
 


 


 
 

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