Kuwait works to support economic diversification, foreign direct investment and entrepreneurship

 

As one of the most democratic states in the GCC, Kuwait has an economy largely based on its petroleum wealth. The legal system has been influenced by Egyptian and French law, as well as Islamic sharia principles, though the latter apply only to family law-related matters. Although the lawmaking process was not very active in the early-mid 2010s, 2018 has brought a growing wave of legal reforms. This is largely considered to be the result of an acknowledgment that legal reforms play a pivotal role in – and are a critical constituent of – societal progress.

Development Agenda

Several factors have motivated the legal reforms outlined in Kuwait’s development agenda, including:

• Global regulatory challenges, such as the OECD’s action plan on base erosion and profit shifting;

• The global economic crisis;

• Oil production cuts, which led to a production deficit and highlighted the need to diversify the economy away from hydrocarbons resources;

• Political turmoil between the GCC countries; and

• Kuwait Vision 2035, which aims to make Kuwait a peerless commercial, regional, cultural and financial centre, with the private sector significantly contributing to the financial resources of the state and encouraging competitiveness. These changes in the global, regional and national landscapes naturally create a need for comprehensive adjustments to the legal framework. These should support efforts to:

• Build a diversified and sustainable economy;

• Increase the quality of the public health care system;

• Develop and modernise infrastructure to improve domestic quality of life;

• Create jobs;

• Improve Kuwait’s international standing;

• Increase transparency, accountability and efficiency in the administrative sector; and

• Attract more foreign direct investment (FDI). The passage of Law No. 116 of 2013, known as the Kuwait Direct Investment Promotion Law or FDI Law, and its stipulated establishment of the Kuwait Direct Investment Promotion Authority (KDIPA) indicate the prioritisation of attracting FDI and local investment, as that is the objective of the legislation. The KDIPA’s objectives reflect the fundamental strategic objectives of Kuwait’s Vision 2035, such as Kuwaitisation – increasing the employment share of Kuwaiti nationals – in the private sector, the privatisation of various sectors and the introduction of new technology.

Policy Harmonisation

In line with the diversification strategy to reduce the region’s dependence on hydrocarbons, member states of the GCC have agreed to introduce common indirect taxes across the bloc. All GCC countries have signed a unified value-added tax (VAT) framework agreement, under which they agreed to implement VAT and excise tax. VAT came into effect in the UAE and Saudi Arabia on January 1, 2018.

While the Kuwaiti Parliament committee has announced that Kuwait will postpone this implementation until 2021, a parliamentary vote on the introduction of VAT is expected before the end of 2018, and excise tax is expected to be implemented soon. In addition to the introduction of VAT and excise tax, a new tax on remittances made by expatriates is under debate. According to the draft law, this would see the introduction of a 1-5% tax, dependent on the level of the remittance. Furthermore, the authorities are reportedly considering an update in the income tax regime.

Foreign Investment

Among the changes welcomed by the international community would be a friendlier environment for non-national players. Under the current law’s foreign ownership restrictions, a non-Kuwaiti entity may not establish or own a company in the country unless it has a domestic partner or partners who own at least 51% of the capital in such a company. There is an exception to this, which allows foreign investors to own up to 100% of businesses in non-restricted sectors, provided that they were issued an FDI licence by the KDIPA.

The FDI Law provides that an FDI licence may be sought for the establishment of:

• A subsidiary of a foreign company in the form of Kuwaiti joint stock companies, limited liability firms and special purpose companies;

• A branch office of a foreign company; or

• A representative office of a foreign company whose main purpose is limited to the study of markets and production. In addition to up to 100% foreign ownership of a domestic company, the FDI Law also offers certain incentives, such as:

• Exemption from income tax or any other taxes for a period not exceeding 10 years;

• Exemption from Customs duties or any other fees that may be payable on imports of machinery and equipment and their spare parts, as well as raw materials for a period of five years;

• Permission to employ the required foreign manpower without being subject to local manpower requirements; and

• Allocation for the use of land and real estate for the investors.

Licence Consideration

Since the issuance of the FDI Law, the KDIPA has specified the various factors it considers when evaluating applications for FDI licences, which include but are not limited to:

• Job opportunities and training courses for Kuwaiti nationals;

• Transfer of technology and localisation;

• Support of small and medium-sized enterprises in Kuwait;

• Contribution to the diversification of Kuwait’s economic base; and

• Utilisation of local suppliers of goods and services. Decision No. 313 of 2016 – on a points-scoring mechanism for evaluating investment, licensing and granting incentives applications – was issued to describe the system to be used when the KDIPA evaluates an application for an FDI licence and corresponding to the aforementioned criteria. It concluded that the KDIPA will use a decision matrix to determine the points-scoring mechanism outcome as follows:

• If an application scores below 59%, then the application for the FDI licence incentives shall be rejected;

• If the score is above 60%, the applicant will receive only an FDI licence (and not incentives);

• If an application scores above 70%, the applicant will be entitled to receive an FDI licence, and one incentive selected by the investor; and

• Applications scoring above 80% will receive an FDI licence and will qualify to receive all incentives that are determined by the FDI Law. Unfortunately, there is no further guidance on exactly how the points are objectively awarded. As such, the awarding of points is assumed to be entirely within the KDIPA’s discretion.

There is a two-part process for establishing a company or branch with an FDI licence: first, the foreign investor must apply to KDIPA for approval and issuance of an FDI licence. Upon receipt of the licence, the investor must carry out the standard procedures for establishing a Kuwaiti company or branch through the Ministry of Commerce and Industry (MoCI).

Tax Regime

The corporate tax regime is governed by the Kuwaiti Income Tax Decree No. 3 of 1955 (as amended by Law No. 2 of 2008) and the Executive Bylaw issued by Ministerial Order No. 29 of 2008. Companies (wherever incorporated) that carry out trade or business in the country are subject to tax on their locally sourced profits at the rate of 15%. In practice, Kuwaiti companies and any share of profits coming from Kuwaiti or GCC nationals are not taxable in Kuwait.

Tax is imposed on the following sources of income:

• Profits realised from a contract completed (wholly or partially) in Kuwait;

• The amounts arising from the grant of a franchise to use or exploit any trademark, patent design or copyrights;

• Commissions due to or resulting from representation agreements or commercial mediation;

• Profits of the industrial and commercial business;

• Profits realised from the disposal of assets;

• Profits resulting from the purchase and sale of properties, goods and related rights;

• Profits arising from the lease of any properties; and

• Profits from the provision of services. Taxpayers are required to file an income tax declaration with the Department of Income Tax by the 15th day of the fourth month following the end of the taxable period of the taxpayer.

Compliance Agreements

Kuwait has committed to implement international tax compliance and reporting standards. In light of the US Foreign Account Tax Compliance Act to combat tax evasion by US citizens, Kuwait signed an intergovernmental agreement with the US in 2015. Broadly, Kuwaiti financial institutions are required to report certain information about their US account holders to the US Internal Revenue Service.

In 2016 the authorities signed the Multilateral Competent Authority Agreement for Common Report Standards, which requires the yearly exchange of financial account information between Kuwait and other jurisdictions. Similar to the Foreign Account Tax Compliance Act, this is part of global tax transparency initiatives launched by the OECD.

Customs Duties

Kuwait has enacted the GCC Common Customs Law, under which goods imported into the GCC are taxed at their point of entry into the political and economic bloc. This is generally equivalent to 5% of the cost of the product plus the insurance and freight charges. Certain goods, such as tobacco products, are subject to higher rates, whereas others are exempt from Customs duty.

Banking & Capital Markets

Two principal authorities dominate the regulatory landscape with respect to financial matters. First, the Central Bank of Kuwait (CBK) is entrusted with the supervision of the banking system, with its supervisory authority covering a vast array of banking institutions, including:

• Conventional banks operating in Kuwait;

• Islamic banks;

• Specialised banks;

• Branches of foreign banks operating in Kuwait; and

• A number of investment and exchange companies. Only banks licensed and regulated by the CBK are allowed to engage in domestic banking activities. In addition to the CBK’s supervisory tasks and role as the monetary authority, it acts as lender of last resort to the banking sector, as well as a banker for and financial adviser to the government. The CBK issues currency and helps foster relationships with international institutions.

Responding to calls for greater regulation and transparency, the government enacted new securities laws and regulations in 2010. Law No. 7 of 2010 and Executive Bylaws for Law No. 7 of 2010 Concerning Establishment of the Capital Markets Authority (CMA) and Organisation of Securities Activity, collectively known as the Capital Markets Law, marked a complete reboot of the regulatory framework for securities and capital markets in Kuwait. The Capital Markets Law established the CMA, which regulates, develops and supervises the activities of the capital markets, with the primary objective of creating an attractive investment environment that builds investor trust. The CMA’s responsibilities include:

• Regulating the marketing, offer and sale of securities;

• Regulating merger and acquisition activities;

• Disclosure of interest;

• Investment fund promotion;

• Regulating the licensing requirements for the Kuwait Stock Exchange (KSE); and

• Licensing those who operate within the KSE, such as funds, asset managers and brokers. In addition to regulating all domestic securities activities, the CMA has issued a comprehensive set of corporate governance rules, which cover all aspects of a corporate entity, including, but not limited to, composition of the board, selection criteria of constituent members, risk management and corporate social responsibility.

To help bring Kuwait in line with international financial standards and policies, the government introduced Law No. 106 of 2013 Regarding the Combatting of Money Laundering and Financing of Terrorism, also known as the Anti-Money Laundering (AML) Law, to protect local financial institutions from being used to launder money and finance terrorism. Pursuant to the AML Law, a fully independent Financial Intelligence Unit was created to serve as the main investigative body to receive, apply for, analyse and transfer information related to suspected proceeds of money laundering or monies used to finance terrorism. In conjunction with and pursuant to the AML Law, the CBK and CMA have each issued a set of instructions or circulars with respect to AML and combatting the financing of terrorism to be followed by the entities under each of their respective auspices.

PPP

The public-private partnership (PPP) model has created significant opportunities for local and international investors to take part in financing large infrastructure projects. PPP projects in Kuwait are governed by Law No. 116 of 2014 and the executive regulations thereto, collectively known as the PPP Law. The PPP programme is administered by the Kuwait Authority for PPPs (KAPP).

The PPP Law contains provisions pertaining to the bid and selection processes, as well as the implementation of PPP projects. If a PPP project is expected to cost KD60m ($199m) or more, the PPP Law stipulates that it be implemented through a project company (PC), which falls under the following guidelines:

• It must be established and incorporated in Kuwait.

• It is to be owned and managed by the successful bidder, who is entitled to own at least 26% of the equity shares in the PC through a holding company, also known as the investor company (IC), which also must be established and incorporated in Kuwait.

• The remaining equity shares in the PC are to be owned by the Kuwaiti government at the outset.

• Part of the government’s equity in the PC is to be owned by the relevant Kuwaiti governmental entities that are involved in the project in question.

• 50% of the shares in the PC are to be held by KAPP in trust on behalf of Kuwaiti citizens. Once the project reaches the commercial operation stage, the shares held by KAPP are then distributed to Kuwaiti citizens via a public offering. The successful bidder’s managerial authority over the PC is ensured pursuant to the terms of a shareholders’ agreement to be entered into between the IC, KAPP and the participating governmental entities.

The PPP Law also contains provisions designed to make domestic PPP projects more attractive and bankable to international investors and contractors. Stakeholders enjoy greater certainty that their investments will yield returns through rules, regulations and procedures that allow investors to take security over project assets (except for assets deemed to be owned by the State of Kuwait, such as the land on which the project is to be implemented) and substitute investors in the event that a stakeholder fails to live up to its obligations under the project agreements.

Furthermore, the PPP Law contains an express exemption from foreign ownership restrictions while giving KAPP the authority to grant a variety of tax exemptions and incentives, all of which bring the PPP regime in Kuwait closer in alignment with prevailing international standards.

Agency Law

Another important step towards the increasing liberalisation of the commercial sector’s business environment came with the introduction of Law No. 13 of 2016 Regulating Commercial Agencies, also known as the Agency Law, which superseded the previous law and – along with the issuance of its executive regulations – set forth the new regulatory and legal framework of commercial agencies operating in the country.

The Agency Law became effective upon its publication in the Official Gazette and replaced the previous agency law of 1964, which was criticised as posing significant obstacles to international activity and deterring foreign players from entering the Kuwait market. In the application of the Agency Law, its executive regulations were issued under the Ministerial Resolution No. 565 of 2017. Furthermore, the Agency Law should be read alongside the commercial agency section of Law No. 68 of 1980 promulgating the Commercial Law.

Key Changes

The most notable changes that the updated Agency Law brought can be summarised as follows:

• The scope of the definition of the commercial agency was expanded to include all agency, distributorship, franchise or licensee relationships.

• The concept of non-exclusivity was introduced, with stakeholders now permitted to appoint more than one agent or goods distributor. It also allows for the import or supply of any goods or products to not be confined to a single agent or distributor, even if that person is exclusive and even if it includes the right to use the trademark. Despite the permission of non-exclusivity, a practical issue has arisen with the Commercial Agencies Registry in the past, as the Commercial Agencies Department has sometimes not registered multiple agents for the same products. However officials in the Commercial Agencies Department have since released a statement that the concept of non-exclusivity appears to be applicable following the recent issuance of the executive regulations of the Agency Law.

• The registration requirement was reinstated, with any commercial agency that has not been entered in the Commercial Agencies Registry not considered valid and not be eligible to be heard by a court of law.

• Statutory compensation is provided in the event that a foreign principal terminates the agency agreement without a breach on the part of the agent. Any provision to the contrary in the agency agreement would be considered null and void under Kuwait law.

• A process was outlined for the deregistration of agency agreements upon their termination by the agent, distributor, franchisee, or such a person’s representative or heirs, as well as the manager of the agent or distributor company, who could submit an application to the MoCI to this effect within three months of the termination date of the agency.

• Parties to an agency agreement could opt for arbitration as a dispute-resolution mechanism for all the disputes arising thereof.

Intellectual Property

With the widespread use of technology, and as the majority of the public uses various platforms to publish their ideas, innovations, writings, designs and arts, it is becoming more important to spread knowledge and protect the intellectual property rights of such materials.

According to the World Intellectual Property Organisation, any creation of mind – such as inventions and artistic works, designs, logos, names or symbols – that are used in commerce can be defined as intellectual property. This includes three categories:

• Copyrights, such as artistic work, literary work, photography or musical productions;

• Patents, which includes any innovations and inventions; and

• Trademarks, which comprise logos, symbols or names used by commercial entities to identify their business, products or services. Kuwait has joined a variety of conventions and adopted several laws to protect the different types of intellectual property. However, copyright and patent protection is still in its early stages in the country, as the current focus remains on trademarks.

Kuwait had previously protected trademark rights in accordance to the provisions of Commercial Law No. 68 of 1980. This was used for many years until Kuwait approved and implemented the regulations stipulated in the GCC’s commercial trademark law in March 2015.

The new system regulates the protection of a trademark, from filings to the completion of registration, as well as the legal measures to protect it from any infringement or overcome a direct rejection from the trademark office. Under the previous law, if a trademark application was rejected, applicants had to appeal before the courts, but under the new system, it is possible to file a grievance objecting the rejection directly to a committee appointed by the MoCI’s trademark office.

As for the general practice regarding copyrights and copyright infringement, in 2017 a department was established at the Criminal Investigation Department, which reviews cases and complaints filed for copyright infringement. The complaints must first be filed and discussed before the public prosecutor, who – if the infringement is clear – transfers the case to the Criminal Investigation Department. This newly established department will augment the domestic protection of copyrights.

Kuwait is looking to implement more laws to ensure further protection for all intellectual property matters, including patents, as the citizens are partaking in increasing numbers of technical, industrial and other projects that require protection.

Health Care

In a bid to help increase non-oil revenue and curb the rising number of expatriates and visitors who were seen to be taking advantage of the largesse of free or nominal health care charges in the country by visiting Kuwait only to receive medical treatments, the Ministry of Health (MoH) decided to increase health care service fees at public hospitals and clinics for expatriate residents and visitors The MoH issued two ministerial decrees – Ministerial Decree No. 293 of 2017 applying to expatriate residents of Kuwait registered in the government’s health insurance system and Ministerial Decree No. 294 of 2017 applying to expatriate visitors not registered in a public health insurance system – to advance these efforts.

Kuwait’s health services have caused the country to gain a reputation as a kind of safe haven for expatriates. Despite the 50-500% rise in health service fees, this standing is likely to continue, as the previous prices were nominal in comparison to other countries in the region. Health services that saw an increase in applicable fees include:

• Natural child delivery;

• Open heart surgery;

• Nuclear medicines;

• Radiology tests;

• Laboratory tests; and

• Prostheses. It is worth noting that the MoH has exempted certain categories of patients from all public health services fees. Such exemptions are applicable to the below listed categories:

• Residents of social welfare homes;

• Children of Kuwaiti women married to a foreigner;

• Children with disabilities of Kuwaiti women married to a foreigner;

• Domestic labour compound residents, as they are more vulnerable to health problems that require admission to hospital to undergo medical examinations, be operated on or be accommodated therein;

• Emergency cases of transit passengers who suffer health issues while they are at Kuwait International Airport for transit;

• All foreign prisoners;

• Residents who live in Kuwait without having the appropriate legal residency documentation but are holders of a valid identification card from the Executive Committee for Illegal Residents Affairs;

• Members of official delegations visiting Kuwait who are vulnerable to health problems;

• Scholarship students of the Ministry of Education; and

• Non-Kuwaiti children with cancer who are under the age of 12 years and who have a valid residence provided that the initial diagnosis of the disease shall have been conducted in Kuwait.

Further Exemptions

In addition to the aforementioned exemptions, the MoH has freed certain categories from the fees payable for health services related to X-ray and nuclear medicine in public affiliated hospitals and health care centres. The following are included in this:

• Employees of the MoH;

• MoH employees’ spouses and children who have a valid residence permit. With regards to children, their exemption is with the following caveats: The daughter of an MoH employee must not be married or employed, while the son of an MoH employee must be younger than 21, or be between 21 and 25 years of age and studying at an institute of higher learning, as well as not be employed (a certificate to this effect must be produced); and

• The children of MoH employees with impediments to legal competence.

• The non-citizen wife of a Kuwaiti national; and

• The Kuwaiti child of a non-Kuwaiti mother. The increase of medical fees relating to expatriate residents has been a topic of controversy within parliamentarian circles and among lawmakers. The long-term effects of these price hikes remain unclear; however, this could contribute to non-oil revenue, which would positively affect the public budget and provide enhanced services offered by the public hospitals and clinics throughout the country.

Maritime Trade

The transport marine field constitutes a significant element of the economy due to the country’s strategic geographical location. Pearl diving and fishing trades were the primary business activities until the discovery of oil, which significantly affected the relationship between Kuwait and the rest of world. The legal field was also affected as witnessed by the issuance of the Maritime Law of Kuwait, Law No. 28 of 1980 Maritime Trade Law. The Kuwait Maritime Trade Law consists of 325 articles which deal with the following subjects:

• The vessel, such as the registration, the documents and control and the real rights on the vessel, the building of the vessel, common ownership, preference rights, marine mortgage and arresting (precautionary arrest or executive arrest);

• The persons of the vessel, such as the rights and obligations of the ship owner and the furnisher, the ship master, the crew members, the marine agent and other related individuals;

• The vessel exploitation (use), including the charter parties, the marine transport contracts, whether the cargo transport contract (bill of lading) or the person transport contracts, the tugging and piloting of the vessels;

• Marine incidents dealing with the collision, salvage and marine common losses;

• Marine insurance dealing with insurance with respect to hull and machinery, cargo, and liability insurance. Kuwait is a signatory to the Convention for the Unification of Certain Rules of Law relating to Bills of Lading – signed in Brussels on August 25, 1924 and also known as the Hague Rules – but it is not a signatory of the protocol amending the Brussels Convention, which was created in Brussels on February 23, 1968 and is known as the Hague-Visby Rules. Likewise, it did not join the UN Convention on the Carriage of Goods by Sea – Annex I of the Final Act of the UN Conference on the Carriage of Goods by Sea – which was agreed upon in Hamburg on March 31, 1978 and is known as the Hamburg Rules.

OBG would like to thank Al Tamimi & Co for its contribution to THE REPORT Kuwait 2018.

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The Report: Kuwait 2018

Legal Framework chapter from The Report: Kuwait 2018

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