Setting up a business in Kuwait

As a general rule, foreign investors can only conduct business in Kuwait either through an agent or through Kuwaiti partners. This typically involves the establishment of a company, with the Kuwaiti partner(s) owning at least 51 per cent of the capital.

An exception to this rule allows foreign investors to own up to 100 per cent of business entities conducting one of 13 permitted business activities – provided a foreign investment licence is issued by the Kuwait Ministry of Commerce & Industry (MOCI).

For foreign investors looking to incorporate a local entity, there are several company structures available and many legal considerations to take into account. It is therefore advisable to consult a local lawyer before establishing a commercial presence.

Adopting a commercial agent

The most common way for foreign companies to do business in Kuwait is through a local agent. Only Kuwaiti individuals or companies established under Kuwaiti law may act as agents.

An agency contract is defined under the Commercial Law as “a contract pursuant to which a person undertakes to carry on regularly against remuneration, in a certain specified area of activity, instigation and negotiation for the execution of transactions for the benefit of the principal.” Agents may be appointed on an exclusive or non-exclusive basis, and a principal may appoint more than one agent.

The most common way for foreign companies to do business in Kuwait is through a local agent

In many cases, the agent’s obligations are restricted to providing sponsorship-type activities for the foreign company. These may include arranging Kuwaiti residency visas and work permits, registering vehicles used by the foreign company in the agent’s name, locating office facilities and residences for employees, and facilitating the import of the foreign company’s products and equipment.

Legal considerations
Retaining an agent in Kuwait raises several legal issues and can have adverse tax consequences. Also, in the absence of cause, the Commercial Law provides an agent with certain rights of compensation as a result of termination of the agent or non-renewal of the agreement by the principal. However, certain contractual structures can provide some protection to the principal in such a relationship.

Various arrangements may be possible to give a foreign company a controlling interest

Terminated agents sometimes seek to impede the release of a foreign principal’s goods from customs and to deny access to the goods. Additionally, a terminated agent may seek to impede the transfer of the residency and working visas of employees to a new agent. Such issues are generally resolved by contract and recourse to the courts.

Limited liability Company

The limited liability company (WLL, standing for ‘with limited liability’) is one of the most common in Kuwait. A WLL consists of at least two shareholders but not more than 30, each only liable for the amount of his share in the company’s capital. The WLL must have a Kuwaiti partner(s), holding at least 51 per cent of its shares, and may not conduct business as a bank or insurance company.

Its capital must be a minimum of KD7,500. However, the Kuwait Ministry of Commerce and Industry may, at its discretion, increase the capital required depending on the scope of the objectives of the WLL.

Legal considerations
The Kuwaiti shareholder will have to perform ongoing administrative functions at the MOCI, as well as other governmental departments that will only deal with Kuwaiti shareholders. He or she will be the only party authorised to sign most documents on behalf of the company when dealing with certain governmental entities. Accordingly, there is a risk that the Kuwaiti partner could bind the company without the foreign shareholder’s consent. It is important that Kuwaiti partners are selected carefully, that the articles of the company and/or its shareholders’ agreement include control provisions, and that these are communicated to concerned third parties.

One of the advantages of a WLL is that there is a degree of flexibility in designing the management structure, particularly compared with a joint-stock company. Ownership interests are sometimes described in terms of parts, rather than shares, and share certificates may not be issued with respect to a WLL. Instead, they are recorded in the memorandum and articles of association of the WLL, which is registered at the MOCI. A transfer of such shares will not be effective until the memorandum and articles of association of the WLL are amended by the signing of a deed of amendment before the notary public of the Ministry of Justice, which is then filed at the MOCI. The form of the Memorandum of Association for a WLL is typically in a standard form. Partners in a WLL often also enter into a form of shareholders’ agreement to regulate the management and affairs of the company. Shareholder agreements are valid and enforceable, as long as the provisions contained in the agreement do not contravene public policy or law (for example, allowing a foreign party to own more than a 49 per cent interest in the company).

Joint-stock company

Joint-stock companies (KSCs) closely resemble shareholding companies as generally understood in the West. The law states that every Kuwaiti joint-stock company incorporated in the country must be of Kuwaiti nationality, all of its shareholders should be Kuwaitis and its registered office should be in Kuwait. There are, however, exceptions that allow foreign entities to become shareholders if necessary for the investment of foreign capital or for obtaining foreign expertise.

In order for a foreign entity to participate in a KSC, a licence must first be obtained from the MOCI, and these licences are routinely given. The capital holdings of the Kuwaiti partners should not be less than 51 per cent of the issued share capital.

Legal considerations
There is no limit on the number of shareholders in a KSC, though it must have a minimum of five. If there are fewer than five participants, nominee shareholders will be required to hold a small proportion of the shares.

Shareholders that sign the memorandum and articles of association of the KSC, referred to as the promoters, are subject to certain obligations and restrictions. For example, the promoters are not entitled to dispose of any of their shares for a period of three years from the legal date of the KSC’s incorporation. Other shareholders are restricted from transferring their shares until the KSC has issued its first balance sheets for a period of at least 12 months.

The minimum stated capital of a KSC ranges from KD250,000 ($890m) to as much as KD2m, depending on the company’s objectives. The MOCI has the discretion to increase the minimum capital required for the incorporation of any KSC and it is not unusual for that to occur.

The minimum capital required must be deposited into an account at an accredited Kuwaiti bank, prior to completion of the incorporation of the KSC. Once incorporation is complete, the capital deposited in the bank can be released to the KSC’s management.

The liability of each shareholder in a KSC is limited to the nominal value of its shares. All shares must be issued at their stated value and cannot be issued at a value below par. The rights attached to all shares in the KSC are equal in all respects, including rights in relation to the distribution of profits. Only one class of shares may be issued.

Contractual joint ventures

A joint venture is defined by the Commercial Companies Law as a “commercial partnership formed between two or more persons, provided that the partnership shall be confined to the relationship between the partners and shall not be valid in regard to third parties.”

In Kuwait, a joint venture does not require any formal establishment procedures. Instead, the partners enter into a deed or agreement to outline the rights and obligations of the participants, including the way in which profits and losses will be apportioned between the participants. A joint venture does not have a legal personality, meaning third parties can only enforce their rights against the participants of the joint venture and not the joint venture itself.

A joint venture provides foreign investors wishing to conduct business in Kuwait with a more flexible option due to the lack of registration procedures involved in its establishment.

Legal considerations
There is no specific indication under Kuwait law that says contractual joint ventures are subject to foreign ownership restrictions or that they require 51 per cent or more of the profits to be distributed to Kuwaiti individuals or entities. However, foreign entities participating in a contractual joint venture are still restricted by the Foreign Ownership Law. This means they are restricted from conducting business in Kuwait unless they do so through a Kuwaiti agent.

Generally speaking, third parties dealing with one of the participants of a contractual joint venture may only enforce its rights regarding that participant. However, a third party may have recourse against all of the joint-venture participants where that third party can use the joint-venture agreement to demonstrate the third party dealt with a participant in that participant’s capacity as a representative of the joint venture.

Under Kuwaiti law, a participant in the joint venture that deals directly with a third party will have recourse against the other participants in accordance with the terms of the joint-venture agreement. So although there may be some protection for the joint-venture participants from liability to third parties, a participant may, in accordance with the terms of the joint-venture agreement, be liable for the actions of its fellow participants.

Kuwaiti participants are also deemed to guarantee the obligations of a foreign participant in a contractual joint venture. This makes joint ventures unattractive from the perspective of the Kuwaiti participants and entry into them with foreign participants has been somewhat limited.

Other company structures

General partnership
Also known as a joint-liability company, a general partnership consists of two or more partners formed under a specific name to carry on commercial business. It has a separate legal personality, but its members are jointly and separately liable for its obligations to the extent of their entire personal property.

A general partnership must have at least one Kuwaiti partner holding a minimum of 51 per cent of the company’s capital. There is no minimum capital requirement.

Limited partnership
The Commercial Companies Law provides for the establishment of two basic forms of limited partnerships. A partnership in commendam consists of joint-liability partners, who are jointly and separately liable for the partnership debts to the extent of all their assets, and limited partners, who are liable only to the extent of their respective contributions. A partnership limited by shares is a limited partnership whose capital is divided into shares. Members are generally subject to the same rules as shareholders in a joint-stock company.

A limited partnership must have at least one Kuwaiti partner holding a minimum of 51 per cent of the company’s capital. There is no minimum capital requirement.

Holding company
The final type of company is a holding company whose purpose is to hold as property the shares of companies, Kuwaiti or foreign; to own shares or portions of Kuwaiti or foreign companies with limited liability; or to participate in the incorporation, management and lending of both types of these companies and the guarantee thereof before a third party. A holding company is required to be in the form of a closed joint-stock company and the minimum capital requirement is KD1m.

Alternative structures

Kuwaiti nationals must own a minimum of 51 per cent of the issued share capital of a WLL. Various arrangements may be possible, however, to give a foreign company a controlling interest.

A foreign entity may establish a holding company in a GCC country that allows majority foreign ownership. Kuwait considers entities formed in and under the laws of a GCC member nation as Kuwaiti companies, for the purposes of the foreign ownership restriction. Recently the MOCI has been overlooking the underlying foreign ownership of these foreign-owned GCC entities. Therefore, it is possible for a foreign entity to establish a holding company in a GCC country, such as Bahrain, in which it retains a controlling interest, to carry out business in Kuwait. However, this is not codified and is based on the practice at the time, always subject to change in the future.