Legal changes in Kuwait make direct investment easier and more attractive

In the past few years there has been a wave of increased interest in the Kuwait market, with existing investors seeking to restructure their business to establish more permanent ties to Kuwait and potential foreign investors vying for market entry. A variety of groundbreaking laws and reforms aimed at modernising the archaic legal system – including the Companies Law issued in November 2012, and Law No. 116 of 2013 regarding the Promotion of Direct Investment in the State of Kuwait and its Executive Regulations – has been the catalyst driving improved business environment.

Despite these positive changes, there appears to be misplaced focus on the fact that Kuwait’s ranking on the World Bank’s “Doing Business” report fell by seven places in 2015. Concentrating on rankings and statistics without scrutinising the underlying data tends to result in a skewed perspective of the subject matter.

This article aims to provide an introduction to the new Direct Investment Law and discuss how it has improved and will continue to improve Kuwait’s investment climate in the years to come.

Doing Business Report

The “Doing Business” report is published by the World Bank, with external contributions about the comprehensive measure of the business environment. The rankings are not intended to be an investment attraction index, but rather are aimed at measuring key features of the rules governing businesses. Recently, the report has undergone some changes, including computing all topic-level rankings and the ease of doing business ranking on the basis of distance-to-frontier (DTF) scores, which capture the gap between an economy’s performance and a measure of best practice across the areas in the life cycle of a business: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency and labour market regulation.

A higher DTF score indicates a more efficient business environment and stronger legal institutions. While Kuwait’s 2015 “Doing Business” ranking decreased by seven positions to 86th out of 150, Kuwait’s DTF score increased by around 0.06% – a positive adjustment. Nevertheless, it appears that a greater focus continues to be placed on the country’s change in ranking than its improvement in DTF score.

Reasons

According to the report, between 2010 and 2015 Kuwait has made starting a business harder for two main reasons: (i) an increase in commercial licence fees; and (ii) higher minimum capital requirements. The commercial licence fees for limited liability companies have increased from KD30 ($100) to KD 150 ($520); however, these fees had not been increased since 1986 and were changed to be more in line with other countries in the region.

These fees are high across the region in order to discourage the establishment and operation of imaginary companies. Furthermore, pursuant to Ministerial Resolution No. 411 of 2013 Issuing the Executive Regulations for Law 111 of 2013 Regarding the Commercial Stores Licences, commercial licences are valid for a period of four years rather than two years, which means there will be fewer fees for renewals.

Ministerial Decision No. 234 of 2015 was issued in May 2015, amending Ministerial Decision No. 425 of 2013 in relation to the reduction of the minimum capital requirements for all companies depending upon their respective legal forms (“Decision 234”). Decision 234 will be instituted to reduce minimum capital requirements for companies, subject to certain exceptions. For companies in the category of general partnerships, limited partnerships, companies limited by shares, sole person companies and companies with limited liabilities the minimum capital was reduced to KD1000 ($3450); whereas for closed shareholding companies it was reduced to KD10,000 ($34,450), and to KD25,000 ($86,100) for public shareholding companies.

In terms of the timing and number of procedures to start a business, it is clear that both the number of procedures and the timing for such procedures have decreased between 2010 and 2015, albeit marginally. Therefore, those considering investing in Kuwait should not rely on the World Bank’s “Doing Business” rankings alone, but should instead review the report in its entirety and conduct further due diligence on the business and regulatory environment in Kuwait.

In the past few years, Kuwait has been introducing new laws and implementing reforms that generally allow more flexibility in establishment and operations, facilitate various procedures, make conducting business in Kuwait more efficient and alleviate other hurdles enacted by antiquated laws.

Historically Doing Business

Historically, in order for a foreign entity to conduct business in Kuwait, the Kuwait Commercial Law required the foreign entity to either establish a Kuwait commercial entity with a Kuwaiti partner owning at least 51% of such company or appoint a Kuwaiti agent. These options are generally not attractive, as the Commercial Law grants local agents favourable treatment with respect to termination of the agency relationship and the minimum 51% Kuwaiti participation in the local company act as disincentives for foreign investors.

In 2001 Kuwait passed the Foreign Direct Investment Law No. 8 of 2001 (“Foreign Investment Law”) to encourage and secure foreign direct investment (FDI) in Kuwait. The Foreign Investment Law created an exception to the Commercial Law by allowing foreigners to own up to 100% of a commercial entity in Kuwait if the entity operates in select sectors, such as infrastructure, insurance, hospitals, housing, tourism and entertainment. It also offered various incentives, including property incentives (a land grant), full or partial Customs duty exemptions and tax holidays for up to 10 years.

KFIB: The Kuwait Foreign Investment Bureau (KFIB), a division of the Ministry of Commerce and Industry (MOCI), was established to implement the Foreign Investment Law and attract FDI in Kuwait. Although the law was introduced with a great deal of anticipation and optimism, after a while it largely became viewed as ineffective by the private sector, leading many to abandon pursuit of their own foreign investment licence and instead focus their efforts on participation through other means. This was primarily due to the difficulty foreign investors faced in obtaining an investment licence under the Foreign Investment Law; completing the establishment procedures where an investment licence was granted by the KFIB; and delays in obtaining land grants. This is not entirely attributable to the law, as inward investment has been affected by political turmoil and the delay of many anticipated projects that had been designed to boost economic diversification and foreign investment.

Legal Changes

In line with the recent modernisation of legislation in the country, the KFIB and government officials sought to revise the Foreign Investment Law after discussing the various concerns with investors. Due to the critical need for change, the law was repealed and replaced by the Direct Investment Law No. 116 of 2013 (“Direct Investment Law”) in June 2013, which came into effect on December 16, 2013.

The intent of the Direct Investment Law is to address flaws in the repealed Foreign Investment Law, encourage more direct investment in Kuwait and make it much easier for investors to obtain a licence. The Direct Investment Law, like the Foreign Investment Law, was established as part of the Vision 2035 long-term economic development plan “to transform Kuwait into a world- class financial and commercial centre, with the private sector leading economic activities, fostering competitiveness, increasing productivity, supported by viable public institutions, while maintaining the deep-rooted values and national identity, towards achieving balanced economic and human development, supported by adequate infrastructure, legal framework and enabling business environment”.

KDIPA 

As a starting point, the KFIB was dissolved and all assets, liabilities, obligations and decisions attributed to the KFIB were transferred to the Kuwait Direct Investment Promotion Authority (KDIPA). Unlike the KFIB, which was a division of the MOCI, KDIPA was established as an independent public authority. KDIPA has a board of directors that is composed of representatives from the public and private sectors and is chaired by the minister of commerce and industry. Pursuant to the Direct Investment Law, the KDIPA board is granted with the broadest powers necessary to achieve the organisation’s objectives. KDIPA is managed by the director- general, who is entitled to attend board meetings but has no right to vote. The current director-general of KDIPA is Meshaal Jaber Al Ahmad Al Sabah.

KDIPA’s main function is to attract and encourage foreign and local direct investment in Kuwait. Such investment is sought to support economic diversification efforts and, in particular, for other purposes that add value to the economy, including but not limited to:

  • Developing and improving the investment environment;
  • Raising awareness of the importance of the Direct Investment Law and promoting Kuwait’s investment environment and direct investment opportunities;
  • Encouraging investors to transfer, settle and use modern and sophisticated technologies, means of production and operations, management methods, and technical and marketing expertise; and
  • Providing employment creation and training opportunities for the national workforce.

Actions

Pursuant to Article 4 of the Direct Investment Law, KDIPA is to accomplish its goals by undertaking the following actions, among others:

  • Facilitating the process of issuing investment licences;
  • Removing the hurdles encountered by investors by providing various means of assistance and support;
  • Promoting direct investment opportunities by means of marketing, orientation and promotion;
  • Presenting incentives, exemptions and guarantees granted to investors;
  • Responding to inquiries from investors and providing available information and clarification;
  • Addressing investor complaints;
  • Establishing economic zones in coordination with the other relevant authorities; and
  • Issuing visa permits for interested investors. In addition to the above, one of KDIPA’s more important mandates was set forth under Article 4(5) of the Direct Investment Law, which states that KDIPA is “to coordinate with all relevant and competent authorities to simplify and facilitate the procedures and services required to improve and streamline the investment environment in the State of Kuwait, and enhance its competitive advantage and monitor the competitive position and performance indicators in the investment filed on the basis of international standards and reports so as to ensure the encouragement of direct investments in the State of Kuwait”.

Streamlining

To accomplish the above task, the Permanent Committee for Streamlining Business Environment in Kuwait (“SBE Committee”), headed by KDIPA, was established pursuant to Council of Ministers Decision No. 1551 issued on December 9, 2013. According to this decision, the SBE Committee consists of representatives of the MOCI, the Ministry of Electricity & Water, the Ministry of Justice and Kuwait Municipality. On January 26, 2015 Council of Ministers Decision No. 116 was issued to designate new committee members from the Ministry of Finance, the Central Bank of Kuwait and the General Directorate for Customs. The SBE Committee is tasked with coordinating with concerned government entities in order to streamline Kuwait’s business environment and be the central contact in dealing with all international, regional and local organisations that publish specialised economic reports and indices.

KDIPA organised a public-private dialogue on January 7, 2015, which included contributors to the questionnaires used by the World Bank team to prepare the “Doing Business” report to obtain more detailed information on their experiences in establishing business in Kuwait. KDIPA also conducted field visits to identify barriers faced by investors and potential solutions. These types of dialogue and studies should assist not only KDIPA, but also other parts of the government in determining whether the business community faces any obstacles in dealing with the authorities and, if so, how best to improve their laws and practices to alleviate such obstacles and ameliorate the business environment.

Executive Regulations

Although the Direct Investment Law was effective December 16, 2013, there were various important details that were not addressed therein and were to be clarified by executive regulations. On December 14, 2014, the Executive Regulations of Law No. 116 of 2013 regarding the Promotion of Direct Investment in the State of Kuwait (“Executive Regulations”) were issued. This was a highly anticipated and long-awaited event, as the regulations were expected to clarify certain issues necessary for the effective implementation of the Direct Investment Law. The Executive Regulations are composed of 45 articles divided into nine chapters covering the following topics: definitions; KDIPA; one-stop shop; investment entity and applications to be submitted to the authority; rules of licence applications; incentives and exemptions; grievances; judicial officers; and investment register.

Investment Entity

Article 12 of the Direct Investment Law states that an investment licence may be sought for (i) all company forms, as outlined under Law No. 25 of 2012 (“Companies Law”); (ii) branch offices of a foreign company licensed to operate in Kuwait; and/or (iii) a representative office whose main purpose is limited to the study of markets and production. Article 8 of the Executive Regulations confirms Article 12 of the Direct Investment Law, clarifying that a foreign investor may obtain an investment licence to own 100% of the capital of a limited liability company, joint stock company or single-person company.

In addition, Director-General Decision No. 35 of 2014 on Principles, Rules and Procedures for Licensing Branches and Representative Offices of Foreign Companies in the State of Kuwait, which was issued on December 9, 2014, aims to identify the requirements for obtaining an investment licence from KDIPA in order to open a branch of a foreign company or a representative office in the country.

Negative List

One of the most common questions raised by potential foreign investors relates to the list of sectors that are excluded from direct investment within the scope of the Direct Investment Law (“Negative List”). Ministerial Resolution No. 75 of 2015 ( Regarding the List of the Excluded Direct Investments from the Provisions of Law No. 116 of 2013) was issued on January 26, 2015 and published in the Official Gazette, Issue No. 1211, dated February 1, 2015. Article 1 of Resolution 75 sets out the Negative List, which includes 10 different sectors that are not eligible for an investment licence, including:

  • Extraction of crude oil;
  • Extraction of natural gas;
  • Manufacturing coke oven products;
  • Manufacturing fertilisers or nitrogenous formulas;
  • Manufacturing of coal gas and distribution of gaseous fuels through main pipelines;
  • Activities related to security and investigations;
  • Activities of hiring labour, such as domestic workers;
  • Activities of membership organisations;
  • Real estate activities except for construction development projects for private operations; or
  • Regulations related to the general administration, defence and compulsory social security. As the above-listed sectors are broad in nature, it is therefore important to refer to the corresponding section of the International Standard Industrial Classification of All Economic Activities, Rev. 4, as specified in Resolution 75, to further determine whether or not a potential investor’s activities fall within the Negative List.

Licence Applications

In general, the KDIPA application process is as follows: a potential foreign investor schedules a meeting with KDIPA on the KDIPA website to introduce themself and to learn more about the investment opportunities available. After the initial meeting, or as an alternative first step, the potential investor will likely be required to prepare a “concept paper” – a brief summary of the main features of the proposed project and proposed project entity, which generally depicts its compliance with the principles, rules and standards of the Direct Investment Law. This concept paper is reviewed by KDIPA, allowing them to quickly determine whether the proposed project would be eligible for an investment licence.

Within three business days of receipt of such a concept paper, KDIPA will inform the potential investor of the next steps relating to submission of a licence application. This does not necessarily indicate that the potential investor’s application is pre-approved by KDIPA, but it is aimed at saving potential investors who may be clearly ineligible for an investment licence from spending time and resources preparing and submitting an application for KDIPA’s review and rejection.

Facotrs

There are factors KDIPA considers when initially determining whether a potential investor meets the criteria of the Direct Investment Law, including:

  • National job creation;
  • Training and education of the national workforce;
  • Technology transfer;
  • Diversification of national income sources;
  • Increasing national exports;
  • Supporting local small and medium enterprises;
  • Utilising national products and services (i.e., cooperation with local suppliers); and
  • Whether or not a proposed investment would benefit Kuwait in various areas in the long term. The potential investor must prepare and submit an application based on the forms provided by KDIPA for the relevant entity contemplated for establishment, as well as a business study. Chapter V of the Executive Regulations sets out the information and statements that must be contained in or attached to the application and the conditions to be met by the applicant.

Pursuant to Article 14 of the Executive Regulations, the application for establishment of a Kuwaiti company must be accompanied by an initial business study, which must include certain information, including but not limited to: the type of proposed activity or project, the size of the proposed investment, and the economic and environmental impact of such an investment.

Fees & Procedures

Issued at the same time as the Executive Regulations, Ministerial Decision No. 503 of 2014 (on Issuance of Stated Fees Schedule for Services Rendered by KDIPA) specifies KDIPA service fees, which range from KD10 ($35) for a certificate of record in the investment register, to KD50 ($170) for issuance, replacement or renewal of an investment licence and KD100 ($345) for submission of a licence application for a Kuwaiti company, a foreign company branch or a representative office of a foreign company.

The Direct Investment Law states that KDIPA must respond to an application within 30 days of receipt of a complete application. The Executive Regulations reiterate this in Article 17, which provides that KDIPA “shall decide on the merits of the application within 30 days as of the fulfilment of all conditions, data, papers and documents required by KDIPA and the competent authorities”. Therefore, foreign investors with strict timelines should be able to obtain a response on whether or not establishment through the Direct Investment Law is possible in a relatively short amount of time, subject to when required documents are submitted to KDIPA.

The Executive Regulations provide that the investor will be notified of KDIPA’s acceptance, in which case the establishment of the investment entity and issuance of the commercial licence will proceed, or rejection of the application. In the event that an application is rejected, KDIPA will provide written notice of such rejection, including reasons for the same.

If approved, a decision would be issued by the director-general of KDIPA approving the application and specifying the incentives and exemptions granted to the investor. Upon receipt of the director-general’s decision, the investor would commence the establishment process with the MOCI.

Pursuant to Article 18 of the Executive Regulations, the investment entity must obtain the necessary approvals to commence preliminary procedures and activities prior to full operation within one year of the date of issuance of the licence, unless KDIPA provides for a longer period. Furthermore, the investor is required to notify KDIPA of the actual date of commencement of operations within 30 days of such date. Upon establishment and issuance of a commercial licence, KDIPA will issue an investment licence.

Once the investment entity has been established and commences operations, KDIPA will continue to supervise the investment entity to ensure compliance with the Direct Investment Law, its Executive Regulations and any other relevant decisions or resolutions.

One-Stop Shop

Another exciting feature of the Direct Investment Law is the one-stop shop. The Direct Investment Law provides that KDIPA will have a one-stop shop, which is a specialised unit comprising all relevant officials from the various relevant government departments in coordination with KDIPA, which will assist with establishment and issuance of licences for such entities. The Executive Regulations expand on this to specify that, in addition to the one-stop shop unit being responsible for transactions relating to an investor’s establishment of an investment entity, the amendments relating such entity, and the renewal of approvals, permits and licences, the one-stop shop unit will also be responsible for preparing introductory guidelines, setting out relevant requirements and responding to any inquiries raised in connection with such guides. These guides will likely prove to be useful for investors and specialised companies that are currently unfamiliar with the new applications.

In addition to the above, the Executive Regulations state that KDIPA will prepare a list of specialised companies, firms and offices that are prequalified and approved to submit and follow-up on applications in the name and on behalf of an investor. Such measures appear to be taken in order to encourage more foreign investment by easing the process for foreign investors to submit investment licence applications and establishment of investment entities. This should hopefully reduce red tape for foreign investors and help investors navigate the procedures and requirements of the Direct Investment Law and its Executive Regulations.

In practice, the one-stop shop has yet to be formed under one roof. In the meantime, a more personalised approach has been adopted. Investors will be assigned a KDIPA Investor Services representative that will assist the investor with establishment procedures and facilitate dealings with any government authorities. Under this approach, the KDIPA representative will accompany the investor (or its delegate) to various ministries and to designated individuals to ensure that the establishment process is completed in a timely and efficient fashion, minimising any bureaucracy and easing the incorporation process, which has previously been deemed difficult and time-consuming by investors.

Incentives & Exemptions

The Executive Regulations list the incentives and exemptions available under the Direct Investment Law, including the following:

  • Exemption from income tax or any other taxes for a period not exceeding 10 years;
  • Exemption from taxes, Customs duties or any other fees that may be payable on imports of machinery and equipment and their spare parts, and raw materials for a period of five years;
  • Employment of foreign labour; and
  • Allocation of land and real estate for use by the investors. Chapter IV of the Executive Regulations sets forth the procedures for obtaining such incentives and exemptions, and further details the procedures for conversion of an investment entity (e.g., through the merger of two investment entities).

Governance & Supervision

Another important feature that is also provided for in the Executive Regulations is a grievance procedure, which permits stakeholders to submit grievances relating to decisions issued by KDIPA. This grievance procedure gives investors an opportunity to attend a hearing before a committee formed by the board of directors of KDIPA to discuss any grievances. The committee’s deliberations are to be confidential, passed by a majority and issued within 30 days of the date of its registration. This feature will help to foster more open communication with investors and will monitor the actions of KDIPA to ensure compliance by both KDIPA and investors operating under the relevant laws and regulations.

In addition, Chapter VIII of the Executive Regulations explains that the minister of commerce and industry will appoint certain employees to act as judicial officers in order to monitor whether investment entities are complying with the Direct Investment Law, the Executive Regulations and any implementing decisions or instructions issued by KDIPA. The role of these judicial officers is important, as it will allow KDIPA to ensure that any licences, incentives or exemptions that have been issued are not being misused.

Implementation

Since late December 2014, KDIPA has been accepting applications for investment licences. Al Tamimi & Co. Kuwait submitted the first and second applications to KDIPA in January 2015, and on April 30, 2015 KDIPA announced that it had issued the first investment licence to an American multinational technology and consulting corporation, allowing it to establish a 100%-owned Kuwaiti sole person company, and granting certain incentives and exemptions allowed by the Direct Investment Law. Acting as the local counsel for the technology corporation, Al Tamimi & Co.’s Kuwait office assisted with the establishment of the first wholly foreign-owned sole person company in the country’s history. Although there were various delays and issues during this landmark establishment, KDIPA was very helpful in ensuring that such delays were minimised, and it also facilitated communications with the relevant authorities when it was needed. KDIPA’s continued support during this period of transition has been unwavering and timely; it is reviving the confidence of investors and legal practitioners that had been previously diminished by bureaucratic practices.

While the Executive Regulations were recently issued, several applications have already been submitted to KDIPA and it is anticipated that many more applications will be submitted based on the number of inquiries that are received on a daily basis.

Conclusion

 In light of the above discussion, it is clear that KDIPA, in its implementation of the Direct Investment Law, will help to improve Kuwait’s “Doing Business” ranking as well as its DTF score. As stated before, one of the factors that resulted in the country being deemed more difficult to start a business was the increase in minimum capital. However, this issue was recently addressed with the issuance of Decision 234. This decision was welcomed by KDIPA’s director-general, who said in a press release that he considered this a positive step towards making the establishment of commercial entities in Kuwait easier and closely bench-marked against best practices. Al Sabah further elaborated that such reforms and related measures shall be duly documented by the Permanent Committee, as per its mandate, and widely communicated.

There is likely to be a transition phase, given the relative novelty of the Direct Investment Law, but KDIPA has so far proven to be committed to providing the necessary support to investors and service providers, aiming to significantly reduce the obstacles that have been faced by investors in the past.

In order for the Direct Investment Law to continue to succeed, reform must be continuous and based upon studies of the best and most current international standards, identification of hurdles encountered by investors and monitoring of the relevant performance indicators and measures of competitiveness.

In applying the Direct Investment Law and its Executive Regulations, KDIPA has made great improvements thus far in terms of attracting direct investments in Kuwait in such a small amount of time, and it is continuing to strive to further improve and develop Kuwait’s investment environment.

Many are hopeful that KDIPA will, in the long run, prove effective in meeting its objectives as set forth in the Direct Investment Law, including attracting local and foreign direct investment, and improving and streamlining the investment environment in the country, as well as pursuing the Vision 2035 development plan.

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The Report: Kuwait 2015

Legal Framework chapter from The Report: Kuwait 2015

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