While it is common knowledge that laws in the Middle East include certain restrictions on foreign parties doing business that do not otherwise apply to citizens, significant strides have been made in the region in recent years. These reforms have facilitated foreign investment and participation in businesses. Kuwait has led the way with a number of reforms and was a pioneer with the promulgation of the Foreign Direct Investment Law (FDIL) in 2014, which has since been replicated in one form or another by other GCC countries. There are certain general restrictions on foreign ownership of companies in Kuwait and the manner in which these can be overcome. The country has also seen recent developments that have impacted investment procedurally and substantively.
General Regulatory Requirements
As a general premise, but subject to certain limited exceptions, Articles 23 and 24 of Law No. 68 of 1980 (the Commercial Code) require that foreign entities conducting business in Kuwait do so either through a local agent or through 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.
FDIL
One of the exceptions to these general restrictions on foreign ownership is where the relevant Kuwaiti company is established and licensed under the FDIL, which allows for increased foreign ownership. The primary purpose of the FDIL is to improve the overall investment climate in Kuwait and to encourage foreign investment by offering certain benefits to foreign investors, such as owning up to 100% of a Kuwaiti 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 benefitting under the FDIL, but these are narrowly defined and relate to certain specially protected sectors, such as the extraction of petroleum and natural gas, and security and investigative services. A key factor in the success of any investment licence application under the FDIL is that the foreign investor must demonstrate that its activities will benefit Kuwait as a whole and 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 national labour; and enhance the use of national products, among others.
To clarify what needs to be addressed in the application that is to be licensed under the FDIL, the KDIPA issued Decision No. 329 of 2019 (the 2019 Decision), which provides for 15 sub-criteria that elaborate on those criteria set out in Article 29 of the FDIL. These sub-criteria are:
• Innovative tangible technology: The transfer to Kuwait and the 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 innovative intangible technologies to contribute to supporting 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 innovation, development and improvement of their products, services, operations and strategic objectives;
• Modern management method: The introduction and adoption of practical systems, mechanisms, procedures and rules to enhance the productivity, effectiveness and efficiency in each of the areas 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 the economic activity in order to improve the skills of national employees and expand the knowledge of Kuwaitis;
• Scholarship programmes: The granting of corporate scholarship programmes for national employees in Kuwait and providing the financial support to cover needed expenses throughout the duration of the study period, including 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 and saving on costs; and diversifying and increasing national exports while reducing imports;
• Use of national products & services: The purchase of local products and services to satisfy the needs of investment entities, supporting local producers and suppliers’ networks, which enhances and encourages domestic market dynamism, decreases the propensity to import, and increases the propensity to export products and services that are domestically sourced;
• Product accreditation & quality management systems: The attainment of product accreditation certificates and implementation of quality management systems in accordance with international standards to enhance the capability and efficiency of the established entity. These also improve outcomes and the quality of local products that are available within the domestic market;
• Contribution of the non-oil sector in the 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 2020-25;
• Industry, innovation & infrastructure: The promotion of sustainable economic growth by investing in resilient infrastructure, stimulating and developing industrialisation, and promoting both 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 these entities to international markets by integrating these multinational companies into global value chains;
• Corporate social responsibility (CSR): Launching CSR initiatives that take place outside the core business of the investment entities, contributing to support social, humanitarian and environmental activities with the aim of benefitting society; 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 the quality of habitat environment.
Scoring
Using the sub-criteria, the KDIPA then implements a scoring system in evaluating applications for an investment licence. Depending on the score attained, the applicant is entitled to increased and tiered benefits. The benefits attached to the scoring can be summarised as follows:
• Achieving five to eight of the sub-criteria: The investor will only be granted a KDIPA investment licence, which allows up to 100% foreign ownership;
• Achieving nine to 12 of the sub-criteria: The investor will be granted a KDIPA investment licence and one benefit of its choice, such as credits in relation to income tax or Customs duties;
• Achieving 13 or more of the sub-criteria: The investor will be granted a KDIPA investment licence and all of the benefits under the FDIL.
Kuwaitsation
Save for the information in the 2019 Decision, no further substance on the evaluation sub-criteria is provided or the exact requirements to meet the relevant sub-criteria. However, in relation to the fifth sub-criterion on job creation for national labour, this will be done in accordance with the local laws on Kuwaitisation, provided that, where the new Kuwaiti company has fewer than 25 employees, the point for this criterion will be granted if at least half of the staff are nationals.
GCC Nationals & Companies
Another exception to the general restrictions on foreigners doing business in Kuwait is afforded to GCC individuals and to GCC companies wholly owned by GCC nationals. These entities may establish branches of their businesses in Kuwait and/or own more than 51% of the shares of a Kuwaiti company, as indicated by Ministerial Resolutions No. 141 of 2002 and No. 237 of 2011, known as the GCC exemption. Except in limited instances, GCC nationals are afforded the same rights to establish and do business in Kuwait as is afforded to Kuwaiti nationals. GCC nationals and GCC companies that are wholly owned by GCC nationals may also take advantage of the GCC exemption in order to open a Kuwaiti company or a Kuwaiti branch within their operations. The process and timing will vary, depending on various factors, such as the desired corporate form and the relevant activities undertaken.
The Kuwaiti authorities may seek to confirm that the relevant investor is a GCC national or that the relevant GCC company is wholly owned by GCC nationals in the establishment process. 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 in the case of the GCC company, which should include the shareholder details.
Foreign investors must satisfy each of the following conditions in order to be permitted to establish a branch under the GCC exemption:
• The relevant GCC entity must be wholly owned by GCC nationals, whether directly or indirectly for such a time as the exception is relied upon in order to conduct business activities in Kuwait;
• The relevant GCC entity must have been in existence for at least three years before a branch establishment application is submitted to the Ministry of Commerce and Industry (MoCI). The three-year rule does not apply to situations where the GCC entity is seeking to establish a new Kuwaiti company; and
• 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 (the Companies Law) provides for several different types of companies that may be established. The most common forms used by foreigners when investing in Kuwait are 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 being that an SPC may only have a single shareholder while a WLL is required to have between two and 50 shareholders. If an SPC has more than one shareholder, it is automatically converted into a WLL. WLLs are the most common form of corporate entities established by foreign parties in Kuwait. That said, if a foreign party is seeking to establish its own subsidiary under the FDIL or is relying on the GCC exemption, it will obviously seek to establish an SPC.
The objects of an SPC and WLL have to be selected from a pre-approved list issued by the MoCI. The MoCI updated its objects to bring it more in line with the International Standard Industrial Classification of All Economic Activities. However, care should be taken in the selection of relevant objects as an entity, as an entity is not authorised to undertake activities that are not consistent with its objects as listed in its memorandum of association (MoA). The minimum required share capital of an SPC and WLL is currently set at KD100 ($325) per licensed object; the share capital is cumulative, with the minimum share capital of each registered licensed activity being added together in order 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. 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, KSCs are subject to certain additional taxes, such as zakat (religious charity) and contributions to the Kuwait Foundation for the Advancement of Sciences. They are also subject to increased regulation and greater minimum capital requirements compared to an SPC or WLL: the minimum required capital is KD10,000 ($32,500) for closed KSCs and KD25,000 ($81,300) 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. Taking this into account, we do not propose to deal with the establishment or purchase of a KSC.
Establishment & Transfer Process
A number of digital-related reforms were in the pipeline prior to the Covid-19 pandemic that enabled matters to accelerate 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 the application in hard copy. This rule changed progressively, and the establishment process now begins with the submission of an application online through the MoCI’s portal.
When a new company is being incorporated, several options for a name should be included in the application, in addition to other information regarding the manager, proposed shareholders and objects. Once the name is approved – and approvals from other authorities are obtained, which vary depending on the company’s objects – the applicant would be referred to the Ministry of Justice for the execution of the MoA before a notary by all shareholders. Thereafter, a commercial registration certificate would be issued and an application would be made for the issue of a trading licence for the new company together with the relevant supporting documents. These include the leasing of the company’s premises with 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 prior to the 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
Under 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 than prior to 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 obtain an investment licence are:
• Application request: An application request is submitted online through the KDIPA portal to begin the formal process with the authorities. The application request should briefly summarise the proposed investment/project that the foreign party wishes to undertake in Kuwait under the FDIL. Once the application request is finalised and submitted, the KDIPA will review the application and typically respond to the applicant within a week.
• Formal application: If the 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. As part of this, the applicant will have to submit an application form appropriate to the vehicle that it will use to pursue the project, as well as a business plan setting out what the foreign party intends to do through its Kuwaiti investment and demonstrating how the sub-criteria will be fulfilled.
• Consultation: The KDIPA and the relevant applicant will discuss and consult with one another on the application and the supporting documents, which will include a business study or plan. As part of this process, the KDIPA may require additional information on particular aspects of the project process.
• Evaluation & approval: Once the application and business study are finalised and formally submitted along with the relevant supporting documents, the KDIPA must respond to the applicant within 30 days regarding the success or failure of the application.
• MoCI procedures & investment licence: If the application is approved, which is initially done on a preliminary basis, the process then shifts to the MoCI for incorporation. This follows a process similar to the one set out above, provided that the process 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. Where a share transfer is occurring in relation to a Kuwaiti company operating under the FDIL, the process starts with a notification to the KDIPA for the transfer of shares, and its approval should be obtained regarding the change of ownership. This is dealt with on a case-by-case basis by the KDIPA. As part of this process, the KDIPA will request certain documentation and undertakings from the purchaser of the shares in order to confirm it has the qualifications and capability to take over the business and comply with the requirements and obligations outlined by the KDIPA and the FDIL. Once the KDIPA’s approval is obtained, transferring the shares should be a straightforward process that can be completed within two to three weeks from the time of filing the relevant application with the MoCI following the process as outlined above.
It should be noted that additional considerations would apply where all shares in a company would be transferred or where the company is conducting a specially regulated activity.
Competition
An issue which has significantly and materially impacted mergers and acquisitions (M&A) in Kuwait – not only in relation to the companies established within Kuwait but also in relation to foreign entities that conduct certain business operations in Kuwait – is Law No. 72 of 2020 (the Competition Law), which was promulgated at the end of that year. The Competition Law applies to actions taking place in Kuwait, as well as to the actions outside of Kuwait that impact competition within the country. The Competition Protection Agency (CPA) has been tasked with implementing and enforcing the Competition Law and regulating competition matters. The CPA issued regulations in July 2021 under CPA Resolution No. 14 of 2021 that have since been supplemented on a number of occasions in order to provide for further strengthening of 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 within Kuwait. The Competition Law also contains a general prohibition on acting in an anti-competitive manner, by stating that all of the agreements and practices that have a negative effect upon free competition are prohibited, and it further elaborates on the particular agreements and practices that, in specific cases, are restricted.
Impact On M&A:
While the Competition Law restricts parties generally from engaging in anti-competitive behaviour and abusing their dominant position, it also impacts M&A activity, not only in relation to transactions in Kuwait, but also those taking place abroad that impact Kuwait’s 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, in practice, it is important to correctly interpret and apply the relevant regulations. In this regard, the term “control” is defined under the Competition Law as “the legal or contractual relations that lead separately or jointly to decisive influence”, and 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 such approval, the Competition Law specifies the following events:
• A merger of two or more persons or parts of their business that result 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 that is practised.
The wording used in these provisions is broad and risks covering even smaller transaction types, which is obviously not the intention of the legislation. For this reason, the relevant transaction must also exceed certain materiality thresholds to trigger regulation under the economic concentration rules of the Competition Law. The thresholds are as follows:
• If any party to the economic concentration had annual sales in Kuwait that exceeded KD500,000 ($1.6m) during the last fiscal year;
• If the parties to the economic concentration had combined annual sales of more than KD750,000 ($2.4m) 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 ($8.1m) in the previous fiscal year.
The thresholds are not particularly high and are substantially lower than those in foreign jurisdictions, including those elsewhere in the GCC. It is not uncommon for regulators when implementing new regulatory regimes to be conservative for such points, and when issues and core concerns crystallise and develop, to adjust requirements in line with lessons learned and experiences gained. In this regard, the CPA has advised it is considering adjusting the thresholds in light of the information now available and the experience gained from the market generally.
The application that is to be submitted to the CPA for approval of the economic concentration should include confirmation of the payment of an administration fee in an amount that is equal to 0.1% of the paid capital, or an amount equal to the aggregate value of the assets of the relevant persons that are involved in the transaction in Kuwait, provided that the fee is capped at KD100,000 ($325,000).
Timeline
Regarding the timing, there was an initial concern that the timelines afforded under the Competition Law for consideration of economic concentration applications were unduly protracted, or in excess of six months. However, the authorities will typically provide their decision within three months; the competition landscape in Kuwait is in its relative infancy and it is understood from a number of productive discussions with competition authorities that they are looking to shorten this timeline further.
Care should be taken by parties participating in transactions which may impact competition in Kuwait to ensure that all required filings are completed as required. While the Competition Law and regulations are relatively new, there is increasing visibility and active enforcement of the new rules by the authorities. Most importantly, the principles followed by Kuwait’s competition authorities appear to be based on concepts developed abroad, and it is expected that the authorities will continue to learn from foreign experiences when addressing these issues and interpreting the principles involved.
Unltimate Beneficial Owner (UBO)
In association with the Anti-Money Laundering Law No. 106 of 2023 (the AML Law), the MoCI issued Resolution No. 4 of 2023 on the Procedures for the Identification of the Actual Beneficiary (the UBO Resolution). The measure came into effect on April 1, 2023. Kuwaiti companies are now required to identify and disclose natural person(s) who are the ultimate beneficiaries of the company. This is a significant new development. The UBO Resolution must be considered from a structuring and compliance perspective by existing companies and by parties looking to establish a new company or acquire existing companies. Although not exhaustive, aspects of the UBO Resolution include:
• The “actual beneficiary” of a Kuwaiti corporate entity (KuwaitCo) is a natural person who owns or controls, directly or indirectly, 25% or more of the capital of a KuwaitCo, through having voting rights of 25% or more and/or through other means of control such as the right to appoint and remove the majority of the board of directors;
• If after exhausting all possible means KuwaitCo cannot identify the actual beneficiaries applying the criteria noted above, then the natural person exercising control over KuwaitCo through any means is to be considered the actual beneficiary. If it is still not possible to identify such persons, then the actual beneficiary is to be the natural person holding the senior-most management position; and
• KuwaitCo must identify the actual beneficiaries and include their names and data in an internal register, known as the UBO Register. There is also an obligation to keep the UBO Register updated.
• KuwaitCo must submit the information contained in the UBO Register to the relevant registration authority, the MoCI. All subsequent changes to the data must also be reported.
• Data contained in the UBO Register is to be made available by the MoCI to the public. Additionally, the UBO data may be shared by the MoCI with other concerned Kuwait authorities and competent foreign authorities upon request.
• KuwaitCo may not register or enforce any documents relating to a change in its ownership unless the transferee provides a statement indicating whether the transfer will entail a change in the identity of the actual beneficiary. If this is the case, the transferee must provide the information relating to the new actual beneficiary.
• Managers and board members are obligated to disclose to KuwaitCo if they act in a nominee capacity.
• It is prohibited to grant a company a licence, or renew their licence, unless the requirements of the UBO Resolution are satisfied.
• Non-compliance with the UBO Resolution by “Designated Non-Financial Business and Professions” as defined under the AML Law may also trigger measures and administrative penalties that are listed under Article 15 of the AML Law, without prejudice to any more serious criminal penalties that may be applicable under the AML Law. For example, sanctions that fall under Article 15 can include warnings, fines, suspension or the cancellation of the KuwaitCo licence, as well as the imposition of limitations on the powers of or dismissal of directors, officers or managers.
• The UBO Resolution does not apply to companies owned by the government of Kuwait, nor companies regulated by the Capital Markets Authority.
Read More from OBG
