Kuwait's Economy:
The Kuwait economy is dependent upon its oil resources, and fluctuations in the demand for oil directly affect the country's plans for development. Over the past decade, unexpected weaknesses in oil prices have reduced governmental revenues, which placed constraints on government spending. Noting the limitations of such a strong reliance on oil, Kuwait has begun to diversify its economy so that the main source of income will shift from oil profits. In the 1999 United Nations Human Development Report, Kuwait topped all Arab states by ranking 35th in the world in the area of human development. The report amended Kuwait on its efforts to limit its economic dependence on oil. Kuwait was chosen for
its high rate of development in the areas of health, education, income, life expectancy, and mortality rates.
Foreign Investment in Kuwait:
In 1952, the Kuwait Investment Board was established in London to manage Kuwait's portfolio of foreign investments. In 1958, the Kuwaiti Investment Board became the Kuwait Investment Office (KIO), and was managed by Kuwaitis.
Kuwait's investments were prudent, combining safety with capital appreciation and income. In 1982, with the increasing amount of revenue to be invested, Law 47/1982 established the Kuwait Investment Authority (KIA) as an independent legal entity that operated under the auspices of the Ministry of Finance. KIA is authorized on behalf of the State of Kuwait to develop and manage the General Reserve Fund, along with the assets of the Reserve Fund for Future Generations. KIO is technically an arm of KIA, but operates independently.
Privatization in Kuwait:
Privatization has now become the cornerstone of the government's economic policy. The Kuwaiti government once owned shares in 62 companies, some of which the World Bank recommended should be privatized. Most of the shares in these companies were acquired by the government as an attempt to relieve creditors during the collapse of the unofficial stock market, Souk Al-Manakh , in 1982.
Privatization in Kuwait involves both the reduction of the government's stake in some existing public sector companies, and new opportunities for the private sector to invest in strategic industries previously supported by government funding. In September 1992, the Kuwait Investment Authority (KIA) began implementing a three-phase privatization program that aims to reconstruct the economy and reduce dependence on oil income. The first phase has been an outstanding success, drawing in new capital to the market and providing new investment opportunities, which has helped revitalize an important sector of the national economy. KD 906 million ($2.9 billion) worth of assets held in local companies have been sold.
The second and third phases call for the privatization of certain state-owned utilities and services, such as telecommunications, power and water industries, along with part or all of the Kuwait Oil Tanker Company, the Petrochemical Industries Company, and Kuwait Airways Corporation.
Entering the Kuwaiti Market:
A foreign person or entity may enter the Kuwaiti market and do business in the following ways:
A. Enter Into A Joint Venture Agreement-
Joint venture companies are simple contracts that require no formal establishment procedures. A joint venture company does not have a legal personality and may not transact business in its own name. It may transact business with third parties only through one member, who would be personally liable for the transactions he enters into with third parties. The transacting party's liability to third parties is unlimited. The liability of a non-transacting company member is limited to his share in the joint venture. If the transacting member is a non-Kuwaiti, then the Kuwaiti member in the company must guarantee him in that transaction. If the joint venture were to deal with third parties in its own name, the effect would be to expose all of the joint venture company members to unlimited joint and several liability whether or not they were personally involved in the transaction.
B. Establish An Incorporated Entity-
Another form of doing business in Kuwait is to form a legal entity with an independent personality, with limited liability. Under Kuwaiti law, there are two such company forms that are open to non-Kuwaitis. The first is the limited liability company (WLL).
Both foreign individuals and corporate bodies may use this type of entity. However, Article 191 of the Companies Law provides that a Kuwaiti must own at least 51% of WLL shareholding. A WLL is quite easily formed and takes approximately three months for its incorporation. The WLL provides a limited liability shield and, prior to the recent amendment, was non-taxable since Kuwait has no individual income tax and its corporate tax applies only to non-Kuwaiti corporate bodies.
A closed Kuwaiti joint stock company (KSC Closed) is the other type of company open to non-Kuwaiti entities. Articles 68 and 94 of the Companies Law provide for this type of company as an exceptional kind of joint stock company. The general rule is that the shareholders of joint stock companies must be Kuwaiti nationals. As an exception, foreigners may own 49% of the share capital of a KSC Closed after obtaining the approval of the concerned authorities. The company's objectives cannot be banking or insurance. The incorporation of a KSC Closed may take up to six months.
C. Appoint A Local Commercial Agent-
Commercial agencies are regulated by Law No. 36 of 1964 on the Regulation of Commercial Agencies, and the Kuwaiti Commercial Code, Chapter 5, Articles 260-296.
Article 1 of Law 36 provides that non-Kuwaitis may not act as commercial agents in Kuwait, and Article 10 provides that those who violate the rule are subject to three months imprisonment and/or a fine.
The relationship between the Kuwaiti agent and the foreign principal must be direct. Article 2 of Law 36 provides that commercial agencies are not enforceable unless registered in the Commercial Register.
The Code's provisions set out the types of commercial agencies, and the general rules governing these agencies as follows:
The first type is a contracts agency. In a contracts agency, the local agent, by contract, undertakes to promote the principal's business on a continuous basis in the territory, and to enter into transactions in the name of the principal in return for a fee. The contract must be in writing and must include the territory covered, the agent's fee, the term, the product or service that is the subject of the agency, and any relevant trademarks. The term of the contract must be at least five years if the agent is required to set up showrooms, workshops, or warehouse facilities.
The second type of agency is a distributorship, under which the local agent is the distributor of the principal's product in a defined territory in return for a percentage of the profit. Distributorships are governed by the same general rules as contract agencies if the distributor is the sole distributor for the entire country. These rules provide protection to both types of agents. The following protective measures are provided:
Commercial agencies must be registered in order to be enforceable.
Kuwaiti law is the governing law in matters pertaining to public policy.
The principal may not terminate the agreement without proving breach of contract by the agent; otherwise, the principal is liable for paying compensation to the agent.
The principal may not refuse to renew the agency agreement upon expiration, without paying the agent equitable compensation for non-renewal if the agent proves that he committed no breach and that his activities led to the successful promotion of the principal's products.
The agency may sue both the principal and any new agent the latter may appoint in Kuwait if the termination is proved to be the result of their concerted action.
The third type of commercial agency is the commission agency, which is provided for in Articles 287 through 296 of the Commercial Code. In this type of agency, the agent enters into contracts in his/its own name. The principal's name may not be disclosed without his permission.
D. Appoint A Commercial Representative-
A commercial representative is a Kuwaiti individual or entity engaged by a foreign company pursuant to a contract called a "commercial representation agreement," to represent its business interests in Kuwait. The scope of authority of a commercial representative is usually more limited than the authority granted an agent. A commercial representative may be paid a set fee on a regular basis, or through a commission or percentage of profits. The duties and obligations of commercial representatives are governed by Articles 297 - 305 of the Commercial Code.
In executing documents on behalf of the foreign company, the commercial representative must sign his name as well as the name of the foreign company, and indicate that he is a commercial representative. A foreign company is liable for all of the commercial representative's actions and liabilities, so long as they are conducted or incurred within the scope of representation.
Unlike an agency agreement, a commercial representation agreement cannot be registered with the Ministry of Commerce and Industry.
