After years of abundant public spending, GCC economies experienced a direct hit on their fiscal balances caused by the 2014 fall in oil prices. As such, Kuwait is following the regional trend of pursuing economic and fiscal reform programmes. Multiple government-led initiatives seek to support economic diversification, strengthen the private sector’s contribution to the economy and help keep the deficit under control.

In this vein, the last few years have seen the authorities take positive steps towards sustainable development and economic growth by reducing bureaucracy and speeding up administrative processes, amending existing regulations and ratifying a number of new laws. Alongside the intended commercial improvements, there also appears to be much discussion relating to diversifying sources of income and developing other sectors, such as health care, transportation, energy, water and utilities, and housing.

Legal Reform

According to the World Economic Forum’s “Global Competitiveness Report 2019”, Kuwait advanced eight places to rank 46th out of 141 countries on the global competitiveness index. This increase can be attributed to the numerous regulatory changes implemented to key pieces of investment and business legislation, including the Companies Law, the Commercial Agency Law and the Foreign Direct Investment Law, as well as revisions to Capital Markets Authority (CMA) guidelines. Government regulatory reforms have focused on easing investor access to local markets, revising the Boursa Kuwait and establishing the Kuwait Direct Investment Promotion Authority (KDIPA) in 2013 to facilitate and promote foreign direct investment (FDI) in the country. At the same time, the authorities have set up business centres aimed at reducing bureaucracy and red tape, and facilitating the formation of new businesses. In December 2014 KDIPA issued executive regulations (ERs) to Law No. 116 of 2013 regarding the promotion of FDI in Kuwait, also known as the Investment Law, via Ministerial Decision No. 502 of 2014. Key features of the Investment Law include:

• The possibility for foreign investors to establish a wholly owned subsidiary, branch or representative office in Kuwait, compared to the maximum 49% interest permitted under the Companies Law;

• The potential to obtain a tax exemption for up to 10 years, subject to meeting prescribed requirements, which include contributions by the foreign corporation towards national technological advancement and employment;

• The potential to obtain an exemption from Customs duties, subject to meeting prescribed requirements;

• Protection from the Kuwaitisation requirements; and

• Allocation of land and real estate to investors. Through the approval of KDIPA, a foreign investor may establish the following business types:

• A wholly owned subsidiary in Kuwait;

• A licensed branch; or

• A licensed representative office. However, to take advantage of the incentives under the Investment Law, there are a range of requirements that need to be met, including the following:

• Approval of the type of business activity; and

• Showing the business activity will benefit the local economy through increased employment of Kuwaiti nationals, the transfer of advanced technology or by engaging local suppliers. KDIPA has issued a list of industries, including petroleum extraction and defence, that will not be able to take advantage of the incentives.


In keeping with its primary objectives and policies set out under New Kuwait Vision 2035, and in order to enhance the local economy by providing an investor-friendly environment, KDIPA has recently introduced amendments under Decision No. 329 of 2019 to further attract foreign investment. The decision defines the criteria and scoring mechanisms for evaluating and granting investment licences. The amendments are focused on providing investors with a set of regulations to ease the process of setting up a new business, including the following:

• The revision of key evaluation criteria, including the introduction of new criteria;

• A modified scoring mechanism for obtaining the licence; and

• A revised tax credit mechanism that includes the new criteria. In the decision, KDIPA has also provided the following elaborations to the definitions and requirements:

• National labour requirements: If the total number employees over a three-year period stands at 24 or less, the investing entity must hire a minimum of 50% Kuwaiti nationals. The required quota of nationals can be hired over a period of three years.

• Corporate social responsibility (CSR): Any programmes and/or volunteering contributions to society, environment or health care facilities outside the scope of the proposed projects of the investment entity in Kuwait would qualify as a CSR activity. Under the amended scoring mechanism issued in the decision, an investor would be eligible to obtain a licence for setting up an entity upon the satisfaction of a minimum of five points (i.e., a score of 30% and above under the new evaluation criteria). This is a major relaxation of the earlier benchmark of 60% (see table).

Facilitating Licensing

In order to streamline the licensing process and facilitate the market entry of investors, KDIPA has formed a one-stop shop, effectively establishing a single network involving various government entities. KDIPA’s Investor Service Centre coordinates with relevant government ministries and authorities to attend to the needs of foreign investors. This reduces the previous administrative burden on investors which required them to coordinate and communicate with numerous ministries and public bodies to complete the licensing process.

Similarly, in order to aid foreign investors, KDIPA issued Ministerial Resolution No. 49 of 2019 regarding KDIPA rules and procedures for allocating commercial plots. As per the resolution, KDIPA can now assist investors in obtaining land to carry out approved activities. The evaluation criteria for land allocation to foreign investors remains the same.

Agency Law

Another prominent update involves the Commercial Agencies Law (CAL) No. 13 of 2016, which has now come into effect and aims to arrange, clarify and clearly set out the formalities and requirements surrounding agency law in Kuwait. The new CAL replaces the previous CAL No. 36 of 1964, which was criticised for causing foreign principals to be locked out of the Kuwaiti market due to the complex formalities of setting up and monitoring agency agreements. Instead of reforming the country’s agency laws, the new CAL focuses on procedure by clarifying the extensive formalities required to have an agent.

One notable change is the deletion of the exclusivity principle. The CAL provides that importing or providing any goods or products now cannot be limited to a sole agent or distributor, even if there is an exclusive arrangement in place. This means that principals may appoint multiple agents or distributors in the territory, with the aim of encouraging fair competition, protecting consumer rights and combating monopolies.

The amendments have been made so that the new CAL will help promote Kuwait to foreign principles and encourage more international trade. The definition of a commercial agent also now includes “franchisee” and “licensee”. Both entities are required to abide by the same laws and regulations as agents and distributors.

Capital Markets

In order to strengthen the legislative structure of the capital markets, and in the framework of its efforts to activate its supervisory role and establish an effective regulatory system in line with the latest international standards, the CMA has prepared capital adequacy rules for licensed persons. These rules represent a legal entitlement in accordance with the provisions of Law No. 7 of 2010 regarding the establishment of the CMA to regulate securities activities, and its executive by-laws and their amendments. In particular, Item No. 2 of Article 66 stipulates that, “A person licensed to engage in the management of securities activities shall comply with the regulations specified in the by-laws and in particular as follows, maintenance of adequate capital.”

The rule represents an important step in this regard, especially as it is one of the most effective regulatory tools to enhance efficiency in companies licensed to deal in securities, and ensure the safety of their financial centres in proportion to the magnitude and nature of the risks they are exposed to. The rule creates a secure investment environment by providing the necessary precautions to secure risks related to the activities and transactions of licensed companies. In particular, this includes the risks resulting from the introduction of new products and financial activities within the phases of market development, such as short selling, lending and borrowing shares, and repurchase agreements, as well as capital requirements that correspond to the activities of the capital market infrastructure institutions, such as the central counterparty.

In cooperation with EY, the CMA has prepared the draft capital adequacy rules and regulations for licensed persons, as well as all templates of rules in both Arabic and English. This rule is expected to help reduce minimum capital requirements in general, which will enhance capital utilisation for companies and the market in general, and balance the risks of companies and the regulatory capital to be maintained by them.

Transfer Pricing

With the recent developments in tax globally, Kuwait is now beginning to understand that from a fiscal perspective, it must align itself to a globally accepted policy. Due to these major developments, Kuwait is now looking at non-oil sources of revenue, which may also come in the form of other tax regulations, such as selective taxation and transfer pricing. Kuwait has yet to join the Inclusive Framework on Base Erosion and Profit Shifting (BEPS). One of the minimum standards of the BEPS guidance is the implementation of a three-tiered documentation approach towards transfer pricing (i.e., a transfer pricing master file, a transfer pricing local file and a country-by-country report).

Kuwait tax law does not currently set out formal transfer pricing guidelines. However, the Kuwait Tax Authority (KTA) has issued a set of ERs that allow the KTA to appropriately tax intercompany transactions. ER No. 49 of Kuwaiti Income Tax Decree No. 3 of 1955, as amended by Law No. 2 of 2008, also known as the Kuwait Tax Law, gives the KTA the right to inspect and verify the intercompany transactions that are undertaken between associated entities. The ER further defines related companies as follows:

• A holding or parent company is a company that owns a number of subsidiaries and has the right of control or supervision over them, either due to ownership of a majority of shares in each company or because the articles of association stipulates that right.

• A subsidiary belongs to a parent or holding company either because it is wholly owned thereby or is under its control and supervision.

• A branch is an incorporated body fully affiliated to the parent company and has neither legal nor financial independence whether the branch carries out the same activities or others.

• An associate or sister company is a firm in which another entity owns a share of the capital ranging between 20% and less than 50%, and has substantial influence but is not a subsidiary as it has no right of control or supervision. Substantial influence is the right to participate in making decisions related to financial policies of the investee, but such influence does not reach a point of control or shared control of the policies. Substantial influence includes ownership of more than 20% of the voting rights. In addition to the transfer pricing guidelines discussed above, the method of imputing profit on transactions between related parties has been addressed specifically in the case of imported materials, and design and consultancy services rendered outside Kuwait.

As per ER No. 25 and No. 26 of the Kuwait Tax Law, for costs incurred and/or paid outside Kuwait by related parties, the KTA allows as a deduction, a proportion of the contract revenue as tabled in the graph below. Given that some of the other countries within the MENA region have recently adopted such transfer pricing regulations, Kuwait may follow suit, but there have been no publicly known discussions or developments in Kuwait in this regard.

Withholding Tax

Kuwait does not currently have a withholding tax regime. However, the Kuwait Tax Law requires companies in Kuwait to withhold 5% as a tax retention from every payment due to contractors until such time that the contractor provides a valid tax clearance certificate (TCC) issued by the KTA. The KTA requires tax payers to strictly comply with requirements laid out in ER No. 5 and No. 6 of the Kuwait Tax Law, where every business entity operating in Kuwait is required to comply with the following:

• Notifying the names and addresses of its contractors and subcontractors;

• Submitting copies of all the contracts and subcontracts to the KTA; and

• Retaining 5% of the contract or subcontract value from each payment due to the contractors or subcontractors until such time a valid TCC issued by the KTA is presented by the contractor or subcontractor. As per Article 39 of the by-laws for Law No. 2 of 2008, in case the contract owner fails to retain 5% of payments made to the contractor and if the contractor fails to settle the tax dues to the KTA, the contract owner would be responsible for settlement of taxes due. The KTA does not allow the costs to be claimed in its tax returns. The above obligation also applies to related or affiliated entities.

With the recent BEPS initiatives and the application of withholding tax by other jurisdictions and in order to protect its tax base, Kuwait may look to shift from the tax retention regime to a withholding tax regime. In June 2017 Kuwait signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS to enable jurisdictions to rapidly implement treaty-related measures developed in the course of the BEPS project, including BEPS minimum standards. At the time of signing the treaty, signatory countries can provide a list of their current tax treaties that they would like to be covered, known as covered tax agreements (CTAs). However, the multilateral instrument provisions within the CTA will only come into effect in each signatory jurisdiction, once both countries have ratified the treaty, the relevant conditions have been met and a certain amount of time has passed. As Kuwait has yet to ratify the treaty, the provisions have not yet come into force.

With the recent strain on Kuwait’s finances caused by low oil prices, Kuwait may look to expedite its fiscal and commercial reforms even further to attract foreign investors and lead itself towards a post-oil economy.