KUWAIT: An Introduction to Corporate & Finance

Kuwait’s Strategic Shift: Embracing Foreign Investment Through New Legislation

In a groundbreaking move on 14 January 2024, the Emir of Kuwait approved key amendments to Kuwait’s commercial regulations, which were officially published in the Kuwait Official Gazette on 21 January 2024. These changes, specifically to Article 24 of Kuwait Commercial Law No 68 of 1980 (the “Commercial Law”) and Article 31 of Public Tenders Law No 49 of 2016 (the “Public Tenders Law”), have opened a new chapter for foreign businesses looking to establish a presence in Kuwait.

Previous legal regime in Kuwait 

Among the requirements in place under the previous regulatory regime, foreign companies operating in Kuwait were obliged to work with commercial agents who were either Kuwaiti nationals or companies at least 51% owned by Kuwaiti nationals. This requirement aimed to ensure local representation and participation in business activities involving foreign entities.

In addition, commercial agency and distributorship agreements were required to be registered in the commercial agencies register of the Ministry of Commerce and Industry. This registration process served as a means of formalising the relationship between the foreign principal and the local agent, ensuring adherence to legal standards and facilitating dispute resolution mechanisms.

Furthermore, the regulatory framework under the previous legal regime necessitated meticulous adherence to registration and reporting obligations, adding layers of administrative burden and procedural complexity for foreign businesses. These requirements, although intended to safeguard local interests and ensure regulatory compliance, often acted as barriers to entry for foreign investors, impeding the ease of doing business in Kuwait.

Overall, the legal landscape preceding the recent legislative changes reflected Kuwait’s efforts to balance the interests of local stakeholders with the objective of attracting foreign investment. While the Agency Law and the Commercial Law provided a degree of stability and legal certainty, they also posed challenges and limitations for foreign businesses seeking to navigate the Kuwaiti market. The subsequent amendments represent a key shift in Kuwait’s approach towards fostering a more conducive environment for foreign investment, signalling a departure from restrictive practices and a move towards greater openness and accessibility in the business landscape.

Understanding the new law 

As explained above, foreign companies in Kuwait were required to have a local agent in order to operate their business. The obligation to engage a local agent meant that foreign entities had to establish partnerships or nominee arrangements, often resulting in complex ownership structures where nominal control remained with Kuwaiti partners while the actual management and decision-making powers rested with the foreign entity. Such arrangements, while enabling foreign businesses to access the Kuwaiti market, also introduced challenges related to transparency, accountability and operational efficiency. The dependence on local agents for compliance with regulatory requirements and representation in business dealings posed inherent risks and limitations for foreign entities seeking to establish a presence in Kuwait. The new law, which amends Article 24 of the Commercial Law, eliminates this necessity. Now, foreign entities can establish branches in Kuwait and operate directly, thereby enhancing transparency and ease of doing business.

The new law also amends Article 31 of the Public Tenders Law, which was previously more restrictive, often necessitating Kuwaiti nationality or partnerships. Following the issuance of this new legislation, all bidders, whether local or foreign, must be registered in the commercial register of the Ministry of Commerce and Industry and are eligible to participate in tenders without the requirement to appoint a local agent, fostering a more competitive and diverse market.

The newly issued law in Kuwait, allowing foreign companies to establish branches without a local agent, brings significant changes to the framework established by the KDIPA (Kuwait Direct Investment Promotion Authority) Law No 116 of 2013 (the “KDIPA Law”). Under the KDIPA Law, foreign businesses seeking 100% ownership of a branch in Kuwait were required to obtain a foreign investment licence, a process that included comprehensive review and approval to align with Kuwait’s economic goals. This latest legislative development could potentially streamline the process for foreign entities to establish a presence in Kuwait, bypassing the more stringent requirements previously mandated by the KDIPA Law. This shift is indicative of Kuwait’s evolving stance towards fostering a more open and accessible market to foreign investment, and reducing the layers of regulatory compliance for foreign businesses.

Tax compliance shift for foreign branches 

With Kuwait’s new law allowing foreign companies to establish branches without the need for a local agent, there is a consequential shift in tax compliance responsibilities, particularly concerning royalties and licence payments.

Under the current tax system in Kuwait, withholding tax is not imposed. However, all entities are required to retain 5% from the value of contracts, agreements or transactions, or from each payment made to any party. This retention is in place until a tax clearance certificate is issued by the Ministry of Finance, confirming that the company has settled all its tax liabilities in Kuwait. Traditionally, local agents have been responsible for deducting and retaining this 5% from royalty or licence payments in compliance with Kuwait’s tax retention regulations. In this capacity, they acted as intermediaries, managing the tax obligations on behalf of the foreign companies. With the new legislative changes, the responsibility for tax compliance will likely transition directly to the foreign branches themselves. Foreign branches will now need to take on the role of directly managing the 5% tax deduction and paying 15% corporate income tax. The branches will need to register with the Kuwait Tax Authority, file annual tax declarations, complete the tax inspection process, settle any tax dues per the assessment, and apply for a tax clearance certificate.

Conclusion 

Kuwait’s recent legislative changes represent a bold step towards liberalising its economy and attracting foreign investment. This move aligns with regional trends observed in other Gulf Cooperation Council (GCC) countries, such as the UAE, Saudi Arabia and Qatar, all of which have similarly relaxed restrictions. The changes reflect a strategic shift towards global economic integration, presenting a new horizon for foreign businesses interested in entering the Kuwaiti market. While these legislative changes opens doors for foreign businesses, it is essential to recognise that they do not impact the legal status of existing local agents, as the law does not have a retroactive effect. This illustrates Kuwait’s balanced approach, taking into account both new investment opportunities and the interests of current market players.

Although this development marks a significant advancement in liberalising Kuwait’s investment environment, questions arise regarding its co-existence with and potential modifications to existing KDIPA regulations and other related legislation. The integration of this new law with the current Kuwaiti legal framework will be crucial in shaping the future landscape of foreign investment in Kuwait.