Business Structures and Forms
A new law permits for the first time majority foreign ownership of Kuwait-based firms. The new law still prohibits foreign investment in the upstream petroleum sector, but does allow investment in joint venture petrochemical projects. The law also permits foreigners to own up to 40 percent of banks and to invest in stocks directly through the Kuwait stock exchange. Property ownership is restricted to other GCC-member states.
The Commercial Companies Law No. 15 of 1960, as amended, and the Commercial Law No. 68 of 1980, which contains provisions of particular significance to foreigners, regulate the various types of business organizations that can be established in Kuwait.
The following types of organizations are available under Kuwait law: (1) Limited Liability Company; (2) Joint Stock Company; (3) General Partnership; (4) Limited Partnership; and (5) Joint Venture.
With the exception of the joint venture, all these forms of incorporation are endowed with independent legal personality.
Foreigners wishing to conduct business in Kuwait may find it easier to do so following changes to the Commercial Companies Law. This legislation, enacted in 1992 and amended, allows holding companies to be created to hold stock or shares in and to participate in establishing Kuwaiti or foreign limited liability companies. Holding companies are also entitled to grant loans or guarantees to such limited liability companies as well as to manage such companies, hold industrial and intellectual property rights, grant licenses thereto and own moveable and immovable property.
Limited Liability Companies
The limited liability company is the form of incorporation which most resembles the private limited company of Western terminology. Such a company is simple to establish and to operate and, therefore, is popular with foreign investors. A limited liability company is formed by applying for a Memorandum of Association to be entered into the Commercial Register, a process which may last three months.
The limited liability company acquires legal personality only upon being registered in the Commercial Register. The original life-span of the limited liability company may be up to twenty-five years, but the members may decide to extend its life for an unlimited period. A minimum of two and a maximum of thirty members, of which one must be Kuwaiti, is required. If the members include a husband and wife, however, then a minimum of three members is required. Until recently, all the members were required to be individuals. Law No. 28 of 1995 which amended the Commercial Companies Law allows companies to participate in establishing a limited liability company. The limited liability company may not be used for insurance, finance and banking activities.
The capital is divided into shares of equal value with a minimum of KD 7,500. Shareholders have a right of first refusal over shares offered for sale by other shareholders.
The limited liability company is managed by one or more directors, named in the Memorandum or appointed by the general meeting of shareholders. The directors have full authority to obligate the limited liability company, unless the Memorandum provides otherwise or the shareholders vote to restrict this authority. Holding an office in a rival company or a company with similar objectives as well as entering into transactions that compete with or are similar to the company's business is prohibited unless authorized by the shareholders.
Directors are personally liable to the company, the shareholders and third parties for any mismanagement, breach of law or violation of the company's Memorandum. The directors report to the general meeting of shareholders.
A limited liability company with more than seven shareholders must have a Supervisory Board consisting of at least three members. The duties of the Supervisory Board are to review the company's balance sheet, the distribution of profits and the annual report. The Supervisory Board reports on these matters to the general meeting of shareholders.
The general meeting of shareholders is obliged to require reports from the Supervisory Board and the Supervisory Board must convene a general meeting of shareholders at least once a year. Members holding at least 25 percent of the capital may also convene general meetings. Most resolutions of the general meeting are decided by majority vote, unless the Memorandum provides otherwise. To amend the Memorandum as well as to decrease or increase the capital a special majority of the shareholders holding 75 percent of the shares of the company is required.
A limited liability company is required to have at least one auditor to be appointed by the general meeting of shareholders. The auditor is responsible for the accuracy of the financial reports submitted to the general meeting regarding the company's accounts. The balance sheet must be sent to the Ministry of Commerce where it is open to public inspection.
The dissolution of a limited liability company is obligatory upon any of the following: expiry of the company's term; completion of its stated objectives or purpose; declaration of insolvency; or a court order for winding up.
A shareholder of a limited liability company is liable for the obligations or debts of the company only to the extent of such shareholder's share in the company's capital. If the number of shareholders drops below the statutory minimum at any time, however, the remaining shareholders are liable to the full extent of their assets for the obligations of the company. If the minimum number of shareholders is not satisfied within one month of when the requirement failed to be met, the company shall be deemed dissolved as a rule of law.
Joint Stock Companies
The joint stock company is the Kuwaiti corporate form which most resembles the public company in Western terms. All shares are negotiable, and shareholders are liable for the joint stock company's obligations only to the extent of the nominal value of their shares. A joint stock company may offer its shares to the public or remain a closed company. If the company deals in banking, insurance or finance activities, foreign ownership may not exceed 40 percent.
A joint stock company whose shares are offered to the public is formed by preparing and submitting a Memorandum and Articles of Association along with an application for a decree authorizing incorporation to the Ministry of Commerce and Industry. At least five founders must be registered. If the decree authorizing incorporation is granted, the company acquires legal personality as of the date of the decree, which must be published in the Official Gazette.
The founders must subscribe for at least 10 percent of the capital, which must be paid for before public subscription starts; a minimum of 20 percent of the capital must be paid for upon incorporation. Subscriptions are conducted through approved banking institutions.
Within thirty days of the completion of the public subscription, a general meeting of shareholders must be held to elect the initial members of the board and approve the founders' report on the corporation. Following this meeting the joint stock company must be entered in the Commercial Register.
A closed joint stock company, the shares of which are not offered to the public, does not require a decree authorizing incorporation. The incorporation documents must contain a declaration that the founders have subscribed for all the shares. The founders are required to pay at least 20 percent of the nominal value of their shares upon incorporation and the remainder within the next five years.
A minimum investment of KD 37,500 is required to establish a public joint stock company, and a minimum of KD 7,500 is required to establish a closed joint stock company. The capital must be divided into equal value shares having a minimum nominal value of KD 1 and maximum nominal value of KD 75. Shares may be issued at a premium but not at a discount. Shares may be sold, pledged or otherwise disposed of, but such transactions are effective only when they have been entered in the company's register of shareholders. Kuwaiti shareholders may not sell to foreigners. Founders may transfer their shares after the lapse of three years from the date of incorporation or after a dividend of at least five percent has been distributed. Other shareholders may transfer their shares at any time after the company has issued its first balance sheet or one year following the commencement of operations. Bearer shares may not be issued.
By resolution of the general meeting, a joint stock company may issue bonds by public subscription, thus entitling the holders to receive fixed interest amounts payable on fixed dates. The subscribed capital of the joint stock company must be paid in full prior to opening subscription of the bonds. The total value of the outstanding bonds may not exceed the subscribed share capital. A general meeting of bondholders must be held for each bond issue in order to safeguard the rights of the bondholders. Representatives of the bondholders' may attend but not vote in general meetings of the shareholders.
The board of directors of a joint stock company must consist of at least three members whose terms of office may not exceed three years but whose appointment may be renewed for successive terms. Directors are required to hold at least 1 percent of the capital. A person may not serve on more than three boards of Kuwaiti joint stock companies or be a managing director or chairman in more than one joint stock company.
Directors are elected by the shareholders by secret vote. Foreign organizations may designate representatives to the board in proportion to their holdings, and such representatives have the same rights as elected directors; the organization that appointed them is held responsible for their acts.
The authority, restrictions and liabilities of the board members of a joint stock company are similar to those of board members in a limited liability company.
Directors are prohibited from having any personal interest in the company's transactions, and they may not take part in the management of a rival company without the approval of the general meeting.
Remuneration paid to directors may not exceed 10 percent of net profits after deducting required reserves, depreciation and a dividend of at least 5 percent.
A general meeting must be convened at least once every year. In addition, the board must convene a general meeting of shareholders upon the request of shareholders holding at least 10 percent of the capital. Quorum at a general meeting is satisfied when shareholders holding at least 50 percent of the capital are present. Resolutions are decided based on simple majority vote.
Certain matters require extraordinary resolutions of shareholders holding at least 75 percent of the shares, such as amending the incorporation documents, selling the entire operation, winding up or merger, and reducing capital.
Other matters such as increasing financial liability of shareholders, increasing the nominal value of the shares, reducing the dividends specified in the Articles, setting new conditions on shareholder participation and voting at the general meeting or restricting the shareholder's right to sue directors require a unanimous vote.
The rules regarding the appointment of an auditor and dissolution are similar to those of a limited liability company.
Two or more persons may form a partnership. Each partner is fully liable for the partnership's debts. The general partnership is established by preparing and registering with the Commercial Registrar a Memorandum and Articles of Association. Amendments to the Memorandum and Articles require unanimous approval of all the partners. The general partnership acquires legal personality only upon registration, but third parties may consent that the partnership existed prior to its registration.
Each partner must contribute to the capital. Transfer of a partner's share is subject to the provisions of the general partnership's Memorandum and Articles or to the consent of all the partners.
The general partnership must have at least one manager whose authority is specified in the Memorandum and Articles. Partners who are not managers may not take part in the management of the partnership, but have the right to inspect the general partnership's books and records.
The partnership is terminated upon the following: its term of existence expires and has not been extended; the objective for which it was established has been achieved; it loses all or most of its assets; court order; unanimous decision of the partners; or the bankruptcy of the partnership or one of its members. If a partner is declared bankrupt, however, the remaining partners may elect to continue the general partnership without the bankrupt partner.
There are two types of limited partnerships, a regular limited partnership and a limited partnership limited by shares.
A regular limited partnership has at least one general partner, whose liability for the obligations of the limited partnership is unlimited and at least one limited partner whose liability for the obligations of the limited partnership is limited to the extent of his investment in the limited partnership. The regular limited partnership is generally governed by the same rules that apply to a general partnership, subject to the following conditions: limited partners are limited to serving as supervising managers; they can exercise authority within sanctioned limits; and they may advise the management. Any other format participation in the management by a limited partner may result in his liability to third parties.
The limited partnership limited by shares is governed by similar rules. Additionally, the capital of a limited partnership limited by shares must be divided into shares. Any specific provision in the partnership’s incorporation documents may also restrict its activities. The position of the limited partners is governed by the rules relating to shareholders in a joint stock company as described above.
Under Article 59 of the Kuwaiti Company Law joint ventures are a contractual type of partnership relationship between at least two persons, which has no independent legal personality and requires no formal establishment procedures. As a joint venture has no independent legal personality; actions for the joint venture are undertaken by the ventures. Thus, a venturer transacting for the joint venture bears unlimited liability toward third parties for such transaction. 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 must serve as the non-Kuwaiti’s guarantor in that transaction. In the event a 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, regardless of whether a particular venturer was personally involved in the specific transaction.
Commercial Agency and Representation
Since foreign businesses may not open branch offices in Kuwait, they must resort to appointing commercial agents or representatives to transact their business in Kuwait unless they choose to cooperate with a Kuwaiti national to establish another kind of corporate entity. Foreign businesses carrying out government work must appoint a service agent or sponsor. There are no express provisions governing service agents or sponsors, however, the rules governing commercial agents are applied by analogy.
Commercial agencies are regulated by Law No. 36 of 1964 or the Regulation of Commercial Agencies, and the Kuwaiti Commercial Code, Chapter 5, Articles 260-296.
Law 36 provides that only Kuwaiti nationals may act as commercial agents in Kuwait. The relationship between the Kuwaiti agent and the foreign principal must be direct, and commercial agencies are not enforceable unless registered in the Commercial Register.
Amendments to this law has been made that allow foreign investors to own up to 40 percent of a bank.
The Kuwaiti law defines three types of agencies:
The Contractual Agency: In a contractual agency, the local agent agrees to promote the principal’s business on a continuous basis in a specified territory and to enter into transactions in the principal’s name in return for a fee.
The contract must be in writing and must indicate the territory covered, the agent’s fee, the term, the product or service that is the subject of the agency, and any relevant trademarks. If the agent is required to set up showrooms, workshops or warehouse facilities, the term of the contract must be no less than five years.
The Distributorship: Under this type of agency, the local agent is the distributor of the principal’s product in return for a percentage of the profits.
Only Kuwaiti nationals or Kuwaiti corporate entities may act as distributors. In order for a corporate entity established in Kuwait to be deemed a Kuwaiti corporate entity for purposes of acting as a distributor, it must have Kuwaiti participation of at least 51 percent. The principal must directly enter into a contract with the distributor in a contract which provides for the appointment of the distributor and which limits the distributor's activity to promoting and to distributing the principal's products. Distributors bear their own business expenses. If the distributor is to incur the expense of building special facilities, such as a showroom or a repair and maintenance facility, then the distributorship term must be established for a minimum of five years. Distributorships need not be exclusive as a practical matter.
The Commission Agency: This agency is provided for in Articles 287 through 296 of the Commercial Code. In this type of agency, the agent enters into contracts in the agent’s own name. The principal’s name may not be disclosed without the principal’s permission, however, this rule is difficult to adhere to in practice since most manufactured products bear the principal’s name.
The following protective legislative measures are designed to protect the local agent:
-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; unless the principal pays 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 has committed no breach and that his activities led to the successful promotion of the principal’s products.
-The agent 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.
A commercial representative is a Kuwaiti individual or entity engaged by a foreign company pursuant to a “commercial representation agreement,” to represent its business interests in Kuwait. The authority granted to a commercial representative is usually more limited than the authority granted an agent. A commercial representative may be paid according to a set fee, a commission or a percentage of profits. Articles 297 to 305 of the Commercial Code govern the commercial representative’s obligation. 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.
A commercial representation agreement is not registered with the Ministry of Commerce and Industry. The advantage of a commercial representative over an agent is that the representative can be engaged, compensated, and terminated as agreed upon by the parties to the commercial representation agreement, and the representative is not protected by the legal provisions applicable to agencies as discussed above.
Banking and Currency
There are normally no foreign exchange restrictions in Kuwait. The Kuwaiti Dinar is freely convertible for all current and capital account transactions. The exchange rate is calculated daily on the basis of a basket of currencies which is weighted to reflect Kuwait's trade flow.
The banking system of Kuwait is supervised by the Central Bank of Kuwait. A recently approved law now allows non-Kuwaitis to own up to 40 percent of a bank. In addition to the commercial banks in Kuwait, there are specialized banks which include the Industrial Bank of Kuwait, the Kuwait Real Estate Bank and the Saving and Credit Bank.
Kuwaiti banks have established banking relationships throughout the West. Full correspondent relationship, which include deposit account services, are more limited and concentrated in large regional banks.
Several American banks provide a wide range of correspondent services. In addition, many non-US banks also share firm correspondent relationships with Kuwaiti banks.
Kuwait has seven commercial banks of which one, the Bank of Bahrain and Kuwait, is a foreign joint venture bank. Apart from this exception, foreign banks are not allowed to operate within Kuwait or to hold shares in Kuwaiti banks.
Other Financial Institutions
Kuwait has a number of specialized banks. The Kuwait Finance House is a commercial bank that carries out Islamic financial transactions. The Industrial Bank of Kuwait and the Kuwait Real Estate Bank function much like American investment banks.
In April 1998, Kuwait was placed on USTR's Priority Watch List. In 1999, new copyright and patent protection laws were passed that greatly improve the situation. During the first half of 1999, the Ministry of Information raided and seized pirated software and videocassettes and fined the violators.
A new amendment to Law No. 4 of 1962 is designed to bring Kuwait into compliance with WTO criteria. Protection is now available for patented inventions and know-how for up to 20 years. The patent, however, must be renewed every four years. Patent infringement is punishable by a maximum jail term of one year and/or a fine of no more than $16,500.
The Kuwait Patent Office is located in the Ministry of Trade and Industry. Once an application is filed with the Registrar of Patents, no further action is taken by the Patent Office since it has not yet started the process of conducting examinations of patent applications. Opposition actions are not available in Kuwait.
Law No. 4 of 1962 provides for the registration of patents and industrial models in Kuwait. Although the Patent Law was enacted in 1962, the Patent Office in Kuwait was opened only in 1995, after a resolution adopted by the Gulf Cooperation Council (GCC) states calling for a unifying of the patent registration systems of the member countries.
The Kuwaiti government is presently preparing a draft law for the protection of patents to replace the current law discussed above. The draft, if adopted, would, inter alia, narrow the definition of a patent and lengthen the validity period to twenty years.
Trademarks and Service Marks
Kuwait has effective trademark laws but weak enforcement. In general, Kuwait follows the international classification of trademarks with a few exceptions. In accordance with Islamic mores, the Trademark Law does not protect trademarks or service marks in classes 32 and 33 relating to alcoholic beverages and pork. Following the filing of an application to register a trademark, the application is examined as to registrability. The law allows an opposition to be filed by any interested party. An opposition requires the applicant for the registration to submit a counter-statement in order to maintain the application. In the absence of any opposition or the rejection of any filed oppositions, the trademark is registered.
A trademark registration is valid for ten years from the date of filing the application. The trademark registration is renewable for additional periods of ten years each. A trademark which lapses because of non-renewal may be registered in the name of a third party three years following the lapsed registration.
Use of the trademark in Kuwait is not a prerequisite for registration or for maintaining its validity. A trademark is vulnerable to cancellation, however, if a party convinces the court that the trademark was not actually used in Kuwait for five consecutive years or that no bona fide use of the trademark was made.
Assignment of a trademark is effective with regard to third parties only after the assignment has been entered in the register and published in the Official Gazette.
Unauthorized use or imitation of a registered trademark are offenses punishable by law.
The country's new copyright law protects computer software, video and music tapes, cassettes or CDs. It also protects, cinema, drawings, original books, translations and scientific papers. The new law issued in 1999 includes KD500 fines and/or a imprisonment for a one year maximum. Repeat offenders can face stiffer penalties. On December 7, 1999, the Kuwaiti Parliament approved the law.
There is no tax liability imposed on individuals and wholly owned Kuwaiti businesses. Tax is imposed only on foreign corporate bodies, including foreign partnerships, that conduct business in Kuwait directly or through an agent. Income tax is imposed on net profits of the foreign corporate body which is connected with or related to operations within Kuwait as well as on capital gains. Furthermore, the foreign corporate body is subject to tax on that proportion of the net profits of a Kuwaiti corporate entity, partnership or a joint venture, which may be attributed to it such as royalties, management fees, technical service fees or interest.
Conducting business in Kuwait may include: (1) the purchase and sale in Kuwait of properties, goods or rights and the keeping of a permanent place of business; (2) operation of any industrial or commercial project in Kuwait; (3) rental of properties; or (4) provision of services. A foreign corporate body for the purpose of taxation is defined as an association that has a legal existence completely separate from its members. Certain foreign partnerships, which in their country of origin may not be defined as a separate legal entity, may also be included in the term. In the event that there is more than one corporate body in a Kuwaiti entity or joint venture, each one is taxed separately.
The tax is imposed on profits. In calculating taxable profits, the following can be deducted: (1) expenses incurred; (2) depreciation; (3) head office and overhead expenses at specific rates; and (4) commissions to agents, up to a limited percentage.
Income gained by activities outside Kuwait is not taxable provided the activities are not connected to operations within Kuwait.
Losses can be deducted from profits in subsequent taxable years, indefinitely, but may not be carried back.
The income tax is imposed at a fixed rate determined by a graduated schedule ranging from 5 percent for income in excess of KD 5,250 up to 55 percent for income in excess of KD 375,000. Tax is calculated as the lower of: (1) the whole profit taxed at the highest applicable tax rate; or (2) the profit amounting up to the upper limit of the previous tax bracket at the rate applicable to that bracket plus the excess profit over the upper limit of the previous bracket.
Deductions are allowed for business expenses, depreciation of assets and loss carry forwards. A small percentage of revenues may be deducted for office overhead expenses.
The taxpayer must submit its tax return within three and one half months of the end of the tax period. Upon a taxpayer's request, the Director of Income Taxes can modify the taxpayer's tax year.
The tax return and supporting documentation must be certified by a recognized firm of accountants approved by the Director of Income Taxes.
There is no administrative appeals process over the Director's decisions, and both sides may challenge such decisions in civil court. The tax is payable in four equal installments on the fifteenth day of the fourth, sixth, ninth and twelfth month following the tax period, unless modified by a decision of the Director of Income Taxes
© 2000 Mena Report (www.menareport.com )