While it is common knowledge that laws in the Middle East include restrictions on foreign parties doing business that do not apply to citizens, progress has been made in recent years to facilitate foreign investment and participation in businesses in the region. Kuwait was a pioneer in this regard, with the promulgation of the Foreign Direct Investment Law (FDIL) in 2014, which has since been replicated in one form or another by several other countries. Despite these steps, there continue to be restrictions on the participation of international investors and owners in Kuwaiti companies. The government has worked in recent years to address this, both procedurally and substantively.
Requirements & Exemptions
In general, Articles 23 and 24 of Law No. 68 of 1980 (the Commercial Code) require foreign entities conducting business in Kuwait to do so either through a local agent or a Kuwaiti partner, which is typically facilitated through the establishment of a Kuwaiti company with Kuwaiti participants owning at least 51% of the share capital. An exception to these restrictions on foreign ownership is when the relevant Kuwaiti company is established and licensed under the FDIL, which allows for increased levels of foreign ownership. The primary purpose of the FDIL is to improve the overall investment climate in Kuwait and encourage foreign investment by offering certain benefits to international investors, such as owning up to 100% of a local entity and tax credits. The Kuwait Direct Investment Promotion Authority (KDIPA) was established under the FDIL and is tasked with regulatory oversight on matters relating to the implementation and enforcement of the FDIL.
Certain activities are excluded from benefiting under the FDIL, but these tend to be narrowly defined and relate to certain specially protected sectors, such as the extraction of petroleum and natural gas, as well as security and investigative services. A key factor to the success of any application for an investment licence under the FDIL is that the foreign investor must demonstrate that their activities benefit the country. They must also satisfy the criteria set out in Article 29 of the FDIL, meaning that the activities result in the transfer of technology, modern methods of governance, and practical or technical experience to Kuwait; create employment opportunities and training for the national labour workforce; and enhance the use of national products, among other aspects.
Elaboration
To clarify what must be addressed when applying for a licence under the FDIL, KDIPA issued Decision No. 329 of 2019 (the 2019 Decision) laying out 15 subcriteria that elaborate on those set out in Article 29 of the FDIL. These subcriteria are:
• Innovative tangible technology: The transfer to Kuwait and settlement of products, machinery, vehicles and high-precision instruments, as well as their optimal utilisation;
• Innovative intangible technology: The transfer and settlement of patented technology, copyrights, trademarks, databases, software, production systems, distribution systems, franchises, literary works, applications and other intangible technology that contribute to the digital transformation of Kuwait in the era of the Fourth Industrial Revolution;
• Enabling knowledge transfer through research & development: The fostering of research, development and innovation activities undertaken by companies for their products, services, operations and strategic objectives;
• Modern management method: The introduction and adoption of practical systems, mechanisms, procedures and rules to enhance productivity, effectiveness and efficiency within the area of specialisation;
• Job creation for national labour
• Certified training programmes related to the activity: The provision of practical, on-the-job and certified professional training programmes that are related to economic activity to improve the skills of Kuwaiti employees and expand their knowledge;
• Scholarship programmes: The granting of corporate scholarship programmes for national employees and provision of financial support to cover needed expenses throughout the duration of the study period, such as travel and accommodation; or the provision of financial and technical support for national employees to benefit from career-oriented disciplines in certified centres abroad that offer intensive training courses to maximise learning and encourage more intensive professional interactions;
• Domestic market needs: The fulfilment of the domestic market’s need for goods and services, both in the framework of forwards integration by contributing to the distribution and marketing of output, or backwards integration by contributing to raw materials and the value of input; stimulating the domestic market by improving efficiency; saving on costs; and diversifying and increasing national exports while reducing imports;
• Use of domestically sourced products & services: The purchasing of local products and services to satisfy the needs of investment entities, supporting Kuwaiti producers and suppliers’ networks. This, in turn, enhances and encourages domestic market dynamism, decreases the propensity to import and increases the propensity to export;
• Product accreditation & quality management system: The attainment of product accreditation certificates, and the implementation of quality management systems that are in accordance with international standards to enhance the capability and efficiency of the established entity, as well as improve outcomes and the quality of local products available in the domestic market;
• Contribution to non-oil sector in total domestic production: The development of a diversified and sustainable economy by investing in non-oil economic activities in accordance with the Kuwait National Development Plan;
• Industry, innovation & infrastructure: The promotion of sustainable economic growth by investing in resilient infrastructure, stimulating and developing industrialisation, and promoting innovation and technological progress;
• Fostering competitiveness: The improvement of Kuwait’s competitiveness by contributing to the creation of competitive clusters in priority sectors. The development of enterprises and internationalising local companies – especially small and medium-sized enterprises – by facilitating their integration into the production, distribution and marketing chains of investment entities operating in Kuwait. Assisting in the expansion of such entities to international markets by integrating these multinational companies into the global value chains;
• Corporate social responsibility (CSR): The launch of CSR initiatives outside of the core business of the investment entities, supporting social, humanitarian and environmental activities; and
• Environmental sustainability: The provision of mitigating techniques for managing waste generated by the economic activity of the investment entity, addressing environmental risks, adopting green initiatives to protect the ecosystem, expanding the use of recycling, and promoting the use of new and renewable sources of clean energy. Promoting consumer products responsible for improving environmental quality.
Scoring
Using the subcriteria, KDIPA implements a scoring system to evaluate applications for an investment licence. Depending on the score, the applicant is entitled to tiered benefits. The benefits attached to the scoring can be summarised as follows:
• Achieving five to eight of the subcriteria: The investor is granted a KDIPA investment licence, allowing up to 100% foreign ownership;
• Achieving nine to 12 of the subcriteria: The investor is granted the KDIPA investment licence and a benefit of its choice, such as credits in relation to income tax or Customs duties;
• Achieving 13 or more of the subcriteria: The investor is granted the KDIPA investment licence and all of the benefits outlined in the FDIL.
Save for the 2019 decision itself, no additional substance on the evaluation subcriteria has been provided, nor have the exact requirements for satisfying the relevant subcriteria. However, in relation to the fifth subcriterion related to creating jobs for the national labour force, such activities should be done in accordance with the local laws on Kuwaitisation. Specifically, if the new Kuwaiti company has fewer than 25 employees, the subcriterion would be granted if at least half of the staff are nationals.
GCC Nationals & Companies
Another exception to the restrictions in place on foreigners doing business in Kuwait is afforded to GCC individuals and to GCC companies wholly owned by GCC nationals, as Ministerial Resolutions No. 141 of 2002 and No. 237 of 2011 make clear that they may establish branches in Kuwait and/ or own more than 51% of a Kuwaiti company’s shares.
Except in limited instances, GCC nationals are afforded the same rights to establish an entity and do business in Kuwait as Kuwaiti nationals. GCC nationals and GCC companies wholly owned by GCC nationals may take advantage of the GCC exemption to open a Kuwaiti company or a Kuwaiti branch of their operations. The process and timing varies, depending on various factors such as the desired corporate form and the relevant activities to be undertaken.
During the establishment process the authorities will also seek to confirm that the relevant investor is a GCC national, or that GCC nationals wholly own the entity. This is typically evidenced by the relevant identification documents in the case of GCC nationals, such as the passport of the GCC national or the constitutional documents of the GCC company, which should include the shareholder details.
Foreign investors must meet the following conditions in order to open a branch under the GCC exemption:
• The relevant GCC entity must be wholly owned either directly or indirectly by GCC nationals for such a time as the exception is relied on in the conducting of business activities in Kuwait.
• The relevant GCC entity must have been in existence for at least three years before the submission of the branch establishment application to the Ministry of Commerce and Industry (MoCI). This three-year rule does not apply to situations in which the GCC entity is seeking to establish a new Kuwaiti company.
• The activities of the relevant GCC entity must be permitted in the GCC region, and the Kuwaiti branch’s activities must be covered under the relevant GCC entity’s licensed activities.
Corporate Structures
In relation to the type of vehicles to be established, Law No. 1 of 2016 provides for the establishment of several different kinds of companies, the most common forms used by foreigners investing in Kuwait being either the single-person company (SPC) or the with limited liability company (WLL).
SPCs and WLLs are largely subject to similar rules and regulations, with perhaps the most significant difference between them being that a SPC only has a single shareholder, while a WLL needs to have between two and 50 shareholders. If a SPC has more than one shareholder, it is automatically converted into a WLL, which is the most common form of corporate entity established by foreign parties in Kuwait. That said, if a foreign party is looking to establish its own subsidiary in accordance with the FDIL or is relying on the GCC exemption, it will seek to establish a SPC.
The objects of a SPC and WLL have to be selected from a pre-approved list issued by the MoCI. The ministry recently updated its objects to be more in line with the International Standard Industrial Classification of All Economic Activities (ISIC), but care should be taken in selecting the relevant objects, as an entity is not authorised to undertake activities that are inconsistent with the objects listed in its memorandum of association (MoA). The minimum required share capital of an SPC and WLL is currently KD100 ($329) per licensed object; the share capital is cumulative, with the minimum share capital of each registered object such as licensed activity added together to reach the required minimum share capital of the relevant SPC or WLL.
The liability of SPC and WLL shareholders is limited to the extent of their share capital contribution in the company. However, in relation to an SPC, the owner may also be liable for the debt of the SPC if the shareholder:
• Liquidates the SPC in a mala-fide manner before its expiry or the realisation of its objectives; or
• Does not separate the financial rights and obligations of the SPC from its other activities to the prejudice of bona-fide third parties.
Investors may also establish a Kuwaiti joint-stock company (KSC). However, such companies are subject to certain additional taxes such as zakat (religious charity) in addition to contributions to the Kuwait Foundation for Advancement of Science. They are also subject to increased regulation and greater minimum capital requirements in comparison to an SPC or WLL: the minimum required capital is KD10,000 ($32,900) for closed KSCs and KD25,000 ($82,300) for public KSCs. Investors prefer to establish SPCs and WLLs unless the particular project requires a KSC. SPCs and WLLs are generally easier to set up and administer, subject to less stringent regulations, and relatively cheaper to establish and operate than KSCs. Because of this, many investors find the establishment or purchase of SPCs and WLLs to be a more favourable option than a KSC.
Establishment & Transfer Process
A number of reforms were in the pipeline to facilitate digitalisation before the Covid-19 pandemic accelerated matters significantly. Initially the process with the MoCI to incorporate a new company or transfer shares, as the case may be, would commence with the submission of an application in hard copy. This rule changed incrementally, and the process now begins with the submission of an application online through the ministry’s portal.
When a new company is being incorporated, several options for a name should be included in the entity’s application, in addition to other information regarding the manager, proposed shareholders and objects. Once the name is approved – and approvals from other authorities obtained, which vary depending on the company’s objects – the applicant is referred to Kuwait’s Ministry of Justice for the execution of the MoA before a notary by all shareholders. Thereafter, a commercial registration certificate is issued and an application made for the issue of a trading licence for the new company, together with the relevant supporting documents, including the leasing of the company’s premises to which the trading licence is linked.
The process for transferring shares is similar, an exception being that the Deed of Amendment to the MoA is signed before a notary. Following the signing of the deed, the applicant can obtain an annotation from the MoCI’s Commercial Registry Department confirming the share transfer through the online portal of the MoCI and obtain an updated trading licence for the company.
Incorporation
In accordance with the new procedures, a company can be incorporated through the MoCI in less than a month and shares can be transferred in two to three weeks. This is significantly less time compared to before the pandemic, when it took three months to incorporate a new company and two months to transfer shares.
For a company being incorporated under the FDIL, the steps to an investment licence are:
• Application request: An application request is submitted online through the KDIPA portal to begin the formal process. The application request should briefly summarise the proposed investment or project that the foreign party wishes to undertake in Kuwait in accordance with the FDIL. Once the application request is finalised and submitted, KDIPA will review the application and typically respond to the applicant within a week.
• Formal application: If KDIPA believes that the investment or project as set out in the application request complies with and addresses the points required under the FDIL, the applicant will proceed to the second and more substantive stage of the application process. During this stage, the applicant must submit an application form appropriate to the vehicle it plans to use to pursue the project, as well as a business plan that sets out what the foreign party intends to do through its Kuwaiti investment and demonstrates how the subcriteria will be fulfilled.
• Consultation: KDIPA and the relevant applicant will discuss and consult with one another on the application and the supporting documents, such as a business study or plan. KDIPA may require additional information on particular aspects of the project as part of the process.
• Evaluation & approval: Once the application and business study are finalised and formally submitted along with the relevant supporting documents, KDIPA must respond to the applicant with an approval or rejection of the entity’s application within 30 days.
• MoCI procedures & the investment licence: If the application is approved, which is initially done on a preliminary basis, the process shifts to the MoCI for incorporation. This follows a process that is similar to the one set out above, provided that it is undertaken manually and not electronically. This process then culminates in the issue of the new company’s investment licence once the incorporation is complete.
When a share transfer occurs in relation to a Kuwaiti company operating under the FDIL, the process starts with a notification to KDIPA of the transfer of shares, and the authority’s approval for the change to the company’s ownership should be obtained. This is dealt with on a case-by-case basis by KDIPA, and the authority will request certain documentation and undertakings from the purchaser of the shares to confirm the purchaser has the qualifications and capability to take over the business, as well as to comply with the requirements and obligations of KDIPA and the FDIL. Once KDIPA’s approval is obtained, transferring the shares is a straightforward process and can be completed within two to three weeks of the filing of the relevant application with the MoCI, in line with the process outlined above.
Additional considerations may apply in situations in which all of the shares in a company are transferred, or when the company’s business involves conducting activity that is subject to special regulations in Kuwait.
Competition
An issue that has significantly and materially impacted mergers and acquisitions (M&A) in Kuwait – not only in relation to those companies established in the country but also in relation to foreign entities that conduct certain business operations in Kuwait – is Law No. 72 of 2020 (the Competition Law) promulgated at the end of that year. The Competition Law applies to actions taking place in Kuwait, as well as to actions outside of Kuwait that impact competition within the country. The Competition Protection Authority (CPA) is tasked with implementing and enforcing the Competition Law and regulating competition matters. The CPA issued regulations in July 2021 under CPA Resolution 14 of 2021 that have since been supplemented on a number of occasions to further strengthen the Competition Law.
The Competition Law guarantees the freedom of conducting economic activity in a manner that does not negatively impact free competition for other entities doing business in Kuwait. The Competition Law also contains a general prohibition on acting in an anti-competitive manner by stating that all agreements and practices that have a negative effect on free competition are prohibited, and it elaborates on particular agreements and practices that are restricted.
Impact on M&A
While the Competition Law generally restricts parties from engaging in anti-competitive behaviour or abusing their dominant position, it also impacts M&A activity. This is not only in relation to transactions in Kuwait but transactions abroad that impact the market. When acquiring or merging with another business, certain reporting obligations and approval requirements arise in the context of what is considered to be an economic concentration. An economic concentration is essentially a permanent change of control in the relevant market resulting from M&A activity, among other things.
As with most legal issues, it is important to correctly interpret and apply the relevant regulations. The term “control” is defined under the Competition Law as, “the legal or contractual relations that lead separately or jointly to decisive influence”, and it would require an understanding of the applicable market and how the relevant market would be impacted by the economic concentration. To assist in clarifying when a reporting obligation would require approval, the Competition Law specifies the following events:
• A merger of two or more persons or parts of their businesses resulting in control or increased control;
• An acquisition of direct or indirect control over one or more other persons by acquiring assets, equities, usufruct and/or shares, among other things; or
• The existence of a partnership between two or more persons that leads to a permanent and independent economic or commercial activity, regardless of the legal form or activity practised.
Threshholds
The wording used in these provisions is broad and risks covering even smaller transactions, which is not the intention of the legislation. For this reason, the relevant transaction must also surpass certain materiality thresholds to trigger regulation under the economic concentration rules of the Competition Law. The thresholds are:
• If any party to the economic concentration had annual sales in Kuwait that exceeded KD500,000 ($1.6m) in the most recent fiscal year;
• If the parties to the economic concentration had combined annual sales of more than KD750,000 ($2.5m) in the most recent fiscal year; and
• If the combined value of the Kuwaiti assets of the parties to the economic concentration exceeded KD2.5m ($8.2m) in the previous fiscal year.
As evident from the above limits, the thresholds are not particularly high and are set at amounts that are substantially lower than those in foreign jurisdictions, including elsewhere in the Gulf region. It is not uncommon for regulators when implementing new regimes to be conservative on such points, and to adjust requirements when issues and core concerns crystallise and develop. In this regard, the CPA has advised that it is considering adjusting the thresholds in light of the information now available and the experience gained from the market in general.
The application to be submitted to the CPA for the approval of the economic concentration should include confirmation of the payment of an administration fee that is equal to 0.1% of the paid capital or the aggregate value of the assets of the relevant persons involved in the transaction in Kuwait, with the fee currently capped at KD100,000 ($329,000). Regarding timing, there was an initial concern that the timelines outlined under the Competition Law for the consideration of economic concentration applications were unduly protracted, or in excess of six months. However, in practice the authorities typically provide their decision within three months. The competition landscape in Kuwait is in its infancy, and the relevant authorities are looking to shorten this timeline further.
Care should be taken by parties to ensure that all of the necessary filings are made as required when participating in transactions that may have an impact on competition in Kuwait. Although the Competition Law and regulations are relatively new, the authorities are making the rules increasingly visible, as well as actively enforcing them. Importantly, the principles being followed by Kuwait’s competition authorities appear to be based on concepts developed abroad, and the authorities are expected to continue to draw lessons from international experience when addressing these issues and interpreting the principles involved.
Read More from OBG
