KUWAITI BUSINESS LAWS
The rules of commerce are in general similar to
West European practice.
Any Kuwaiti or GCC national over 21 years of age
may carry on commerce in Kuwait provided he or
she is not affected by a personal legal restriction.
But a foreigner (non-GCC national) may not carry
on a trade unless he or she has one or more Kuwaiti
partners and the capital owned by the Kuwaiti
partner(s) in the joint business is not less than
51% of the total capital (60% in the case of banks,
investment houses and insurance companies). A
foreign firm (including a partnership) may not
set up a branch and may not perform any commercial
activities in the country except through a Kuwaiti
agent. Foreign individuals and firms may not acquire
commercial licences in their own name nor may
they own real estate locally.
The main laws regulating business in Kuwait, which
have been amended several times since they were
issued, are (a) The Civil Code (Law 67 of 1980),
(b) The Commercial Code (Law 68 of 1980), and
(c) The Commercial Companies Law (Law 15 of 1960).
Business Licences
To do business, a licence is necessary. General
trading, contracting, importing and industrial
licences are issued by the Ministry of Commerce
& Industry (MCI). For particular commercial
activities, specific licences are required and
these are often issued by the ministry that controls
that activity, e.g. publishing licences are granted
by the Ministry of Information.
Business licences are only issued to Kuwaiti nationals
and Kuwaiti companies and, in some cases, to GCC
nationals and companies. Costs are usually KD100
per licence. All licences require periodic renewal,
normally every two years.
Based on the GCC Unified Economic Agreement and
the Supreme Council resolutions issued some two
years back, GCC nationals are allowed to practice
all business activities and professions in Kuwait
excluding some activities such as: Haj & Omra
services, private employment bureaus, labour provision
services, finalizing document services,delivery
services at airports, real estate services, leasing
and sub-leasing of lands and buildings, car renting,
advertising and publicity services, transport
services and travel agencies.
Social activities excluded are: handicapped care
and re-habilitation centers, the elderly peoples
houses, community service centers and any center
or office providing social services.
Among the cultural activities excluded are: the
establishment of publishing houses, presses, newspapers,
magazines, photographic studios movie and art
production , commercial theatre bands, cinemas,
theatres and art exhibition halls.
Kuwaiti Manpower Law
Kuwait Manpower Law No. 19/2000 introduced in
May 2001 aims at solving the Kuwaiti unemployment
problem by creating job opportunities for Kuwaitis
in the private sector. A high-ranking government
team entrusted with implementing the law has to
endorse the set of additional charges for expatriates
on residence transfers, residence renewals and
work permits. The team is seeking a legal basis
to specify Kuwaiti manpower percentages to work
in the private sector and the companies which
do not comply with these percentages will be charged
KD 500 for issuing new work permit for each expat
appointed.
Kuwait has begun applying a 2.5 % tax on the net
profit of Kuwaiti companies listed on the Kuwait
Stock Exchange (KSE). The tax may be imposed on
all local companies in the future. This tax will
supplement additional charges to be collected
from expatriates in the private sector.
According to a recent statistical report the total
labour force in Kuwait reached about 1.271 million
individuals in the year 2001. The labour force
growth rate was 6.3 per cent. The Kuwaiti workforce
increased from 233,250 to 249,800. While 228,600
Kuwaitis are in the civil service, 21,200 are
employed in private sector.
A committee comprising Ministers of Social Affairs
and Labour, Commerce and Industry and Interior,
which has been entrusted with framing a mechanism
for implementation of the Kuwaiti Manpower Law,
has proposed increasing the charges for issuing
the work permit to KD 100 per year instead of
the current KD 10 for private firms not complying
with the percentage of Kuwaiti Manpower Law.
The government has already allocated a KD 40 million
fund in fiscal 2001/2002 to implement the law.
To subsidize the salaries of Kuwaitis in the private
sector several measures are under consideration.
A memorandum by the Ministry of Social Affairs
in August 2002 recommends a KD 500 fee to be imposed
on companies, not complying with the designated
percentage of Kuwaiti manpower, for obtaining
a new work permit for each hired expatriate worker.
It sets the percentages of Kuwaiti manpower required
in the private sector, according to the company's
business activity, highest 38 and 39 per cent
respectively for establishments engaged in telecommunications
and banking. The percentages for Kuwaiti manpower
in private sector will apply to all businesses
under specified categories employing 100 or more
workers.
Business Entities
Business enterprises can take several forms, viz
Kuwait shareholding company (KSC), company with
limited liability (WLL), and general partnership.
The time and cost of establishing and registering
these entities ranges from one month and at least
KD500 for a general partnership to about three
months and KD3,000 for a KSC.
Kuwait Free Trade Zone (KFTZ)
Kuwait's privately-managed Free Trade Zone is
located in Shuwaikh and allows 100% foreign ownership
of businesses within the zone. There are no import
duties and foreign corporate income is tax-free.
Commercial, industrial and service licences are
available without a local sponsor. KFTZ provides
a variety of infrastructural services. Tel: 802808,
Fax: 4822067, http: www.kuwaitfreezone.com, e-mail:
info@nrec.com.kw
In July 2001 KFTZ launched KFTZonline.com to provide
efficient means for clients to access KFTZ services
such as business visas, work visas, gate passes,
contract amendments and termination, building
permits etc.
The 'Future Zone' or Kuwait's mini ?Silicon Valley?
in the Free Trade Zone is expected to start operating
by the end of year 2002. It is located on the
water front parallel to Al-Ghazali Street in Shuwaikh
outside the customs area of the Free Trade Zone
and covers an area of 800,000 square metres.
NEW LIBERALISED BUSINESS LAWS
Extensive legislation to reform Kuwait's economy,
liberalise its business laws and comply with WTO
rules was issued by Amiri Decree in June 1999.
In May 2000 the National Assembly approved the
indirect Foreign Investment Law which allows foreigners
to own stocks on the Kuwait Stock Exchange (KSE).
Law No. 20/2000 on allowing non-Kuwaitis to posses
shares in Kuwaiti shareholding companies was approved.
According to the Article (1) of the law, non-Kuwaitis
may posses shares in the Kuwaiti shareholding
companies already incorporated during the effective
date or which may be incorporated after its implementation.
Non-Kuwatis may participate in the establishment
of these companies in accordance with the provisions
of the law. In August 2000 the Kuwaiti Cabinet
approved regulations necessary to implement the
bill allowing foreigners to own stocks and trade
on the bourse. The legislation allows foreign
investors and expatriates living in Kuwait to
own up to 100 per cent of the stock of Kuwaiti
companies listed on the KSE, except in banks where
the ownership will be limited to 49 per cent.
IMPORTING INTO KUWAIT
The right to import goods into Kuwait on a commercial
basis is restricted to Kuwaiti individuals and firms
who are members of the Kuwait Chamber of Commerce
& Industry (KCCI) and who have import licences
issued by the Ministry of Commerce & Industry
(MCI).
Import Licences
General import licences, which must be renewed
annually, allow any amount of a variety of products
from any country to be imported any number of
times. But special licences are needed to bring
in regulated products such as arms, ammunition
and explosives, ethyl alcohol, drugs, pesticides,
jewellery and precious stones, weights and weighing
machines, vintage cars, etc; these too must be
renewed annually. Special licences are also needed
to import industrial equipment and spare parts;
these are issued to industrial firms upon the
recommendation of the Public Authority for Industry
and are valid for a single use only.
To protect local morals, alcoholic beverages and
materials used in making them, pigs, pork, pigskin
products (such as handbags, wallets and shoes),
narcotics and associated plants and seeds, pornographic
and subversive materials, are, among other items,
prohibited. To protect local trade and industry,
items such as vehicles over 5 years old and goods
manufactured locally are prohibited. Items injurious
to health, such as air-guns, asbestos and cyclamates,
are banned. Imports from Israel and Iraq are banned
absolutely.
All imports, as well as locally made items, must
comply with Kuwaiti standard specifications (KSS).
If there is no KSS for a particular product then
Gulf standard specifications (GSS), a set of common
standards being devised under the GCC's Unified
Economic Agreement, apply, and if there is no
suitable GSS, the product must adhere to international
standards.
Import Documentation
To clear goods imported into Kuwait, a minimum
of four documents are needed: (a) Commercial Invoice,
(b) Certificate of Origin, (c) Official Delivery
Order, and (d) Packing List.
The invoice, certificate of origin, and the delivery
order (bill of lading or airway bill) must be
in three original copies and must be certified
by a chamber of commerce in the country of export,
preferably a joint local-Arab chamber, and certified
by the Kuwaiti consulate in that country. If there
is no Kuwaiti embassy in the exporting country,
the consulate of Saudi Arabia (preferably) or
any other Arab country (except Iraq) is acceptable.
As well as being shown on the packing list, the
country of origin must also be marked on each
packing unit.
To clear customs, many products must be accompanied
by additional certificates showing that they comply
with health and safety regulations issued by the
Ministry of Public Health, the Municipality and
the MCI. Goods failing to clear customs must be
re-exported within a month. The minutiae of import
regulations tend to change frequently and these
changes are published in Al-Kuwait Al-Youm, the
Official Gazette.
Import Duties
Kuwaiti customs duties are the lowest in the region,
though there are protective tariffs on some goods.
However commercial samples worth up to KD5,000
may be brought in temporarily.
Duty is levied as a percentage of the CIF value
of the goods up, but excluding unloading in, Kuwait.
It is calculated and must be paid in Kuwaiti Dinar
(KD). Where importers are invoiced in foreign
currencies, customs use a list of 'standard' exchange
rates to translate the CIF value into KD. These
rates change frequently and a list in Arabic is
available for 250fils from customs.
The standard rate of duty is 4%. But most goods
may be imported duty free, including:
- food products, medicines,
essential consumer goods, live animals, bullion,
printed matter, etc, except where these (such
as bread) are manufactured locally;
- industrial and farm products from other GCC
states provided they have at least 40% added value
in the
GCC exporting country; and
- raw materials, semi-processed goods, equipment
and spare parts for new industrial establishments
provided exemption has been obtained.
But imported hydrocarbon products that are also
manufactured locally, such as lubricating oils,
are subject to duties of 100%. The duty on cigarettes
and tobacco is 75%. But some goods of Arab origin
are subject to only 50% or 75% of the duty imposed
on similar goods of non-Arab origin.
Many locally made products are protected by tariffs.
To qualify for protection, an industrial firm
must show that it meets, or will be able to meet,
at least 40% of the demand in the local market
for the products concerned. The tariff varies
according to the value added by domestic production.
AGENCY & SERVICE AGREEMENTS
Only Kuwaiti individuals or firms may act as commercial
agents in Kuwait, while foreign individuals or firms,
except for GCC nationals, are not allowed to carry
on commercial activities in the country except through
a commercial agent. All arrangements between a foreign
entity and its local agent are governed by Articles
260 to 296 of the Commercial Code.
Terms of An Agency Agreement
An agency agreement must be in writing and must
be registered with the MCI. Its terms must cover
the activities to be undertaken, the scope of
the agent's authority, his remuneration, and the
duration of the agency (if limited). Generally
speaking, the parties to an agency agreement have
full freedom of contract, but a few provisions
of the Code override what the parties might wish
to agree and any terms which contradict these
provisions are void.
If an agent is required to erect premises then
the contract must be for at least five years.
The principal is obliged to provide the agent
with all that the agent requires for the promotion
of the principal's products and services. The
agent must preserve confidentiality even after
the agreement is terminated.
The agent is entitled to his remuneration (a)
on all matters concluded by him, (b) on transactions
which would have been concluded but for some act
of his principal, and (c) on transactions concluded
either directly by the principal or by others
acting on behalf of the principal in the area
of the agent's operations, unless otherwise agreed
in writing.
Termination Compensation
If a principal terminates an agency when his agent
is not at fault, the agent may seek compensation
for loss of income. And, if an agent abandons
his agency at an unsuitable time and without reasonable
cause, his principal may seek compensation for
damages. Any clause to the contrary in an agency
agreement is void.
Even where an agency is for a fixed term, the
law expects it to be renewed on expiry. If the
principal does not renew it, the agent may seek
fair compensation (even if the contrary is stated
in their agreement) provided the agent has not
been at fault nor negligent in his performance.
If a principal replaces his agent and the termination
was due to collusion between the principal and
the new agent, the new agent will be held jointly
responsible with the principal for settling any
compensation due to the former agent.
There is no set legal formula for calculating
compensation on termination. However an action
for compensation must be started within 90 days
of the end of the agency.
Service Agreements
To open a branch in Kuwait, a foreign firm must
enter an agency agreement with a Kuwaiti sponsor
or service agent. Under such an arrangement the
agent is merely the foreign entity's legal representative
in the country and does little more than take
care of licensing formalities, obtain visas for
the principal's executives and emplo-yees, and
represent the principal officially. The agent
will expect a fee for his sponsorship and the
use of his licences.
Registration Procedures
An agency agree-ment is not enforceable under
Kuwaiti Law unless it has been registered in the
Commercial Agencies Register at the MCI. Application
for registration must be made within two months
of the agency being created. Before applying to
the MCI, the agreement must be registered with
the KCCI.
The application for registration can only be made
by the Kuwaiti agent. It must be made on two original
copies of the official MCI form and must be accompanied
by:
- an original copy of the
agency agreement
- a translation of the agreement into Arabic
- a copy of the agent's commercial licence
- a copy of the agent's nationality document or
registration in the commercial registry
- a certificate of registration from the KCCI.
If the agency agreement was executed overseas,
the original must be attested at the principal's
location by an official authority and the Kuwaiti
consulate. Where it was executed in Kuwait, it
must be notarised by a Kuwaiti Notary Public.
Upon registration, the MCI gives the agent a signed
and stamped copy of the application, and advertises
the registration in the official gazette.
Amendments to the agreement must also be registered
and when an agency terminates it must be removed
from the register. The register may be searched
by the names of agents, the names of principals
and the trade names of goods.
INTELLECTUAL PROPERTY RIGHTS
(LAW NUMBER 64)
Copyright
Until 1999 there was no general copyright law under
which the rights in intellectual works could be
protected effectively. The only protected works
were audio and visual recordings of Kuwaiti, Arab,
American and British origin. In addition, public
institutions were not allowed to buy pirated computer
software.
Under the Law No. 64 of 1999 protection is to be
given to all literary works (written and oral),
theatrical shows, musical works (with or without
lyrics), choreographic works, motion pictures, audio,
video and radio works, artistic works (painting,
sculpture, carving, architecture and decoration),
photographs, applied art (craft or industrial designs),
illustrations, maps, designs and models, computer
works (software and databases), and translated works.
The scope of protection under this law covers the
following works in particular:
* Written works.
* Works delivered orally, such as lectures, speech,
religious sermons and the like.
* Theatrical works and musical plays.
* Musical works with or without songs.
* Works performed by means of movements or steps
and mainly prepared for direction.
* Movie works, audio, video and radio works.
* Painting and works depicted by means of lines,
colour, and diagrams as well as works of architecture,
arts, carving and decoration.
* Photographic works.
* Works of applied art, including craft or industrial
designs.
* Illustrations, geographic maps, designs, plans
and models relating to geography, topography, architecture
and science.
* Computer works including software, databases and
the like.
* Derived and translated works.
The protection also covers the title of the work
if this is created and it is not a common expression
that indicates the subject matter of the work.
The period of copyright protection will be 50 years
from the death of the author. But works published
under a pen name or after the author's death, motion
pictures, photographs, applied art, computer works,
and works owned by corporate bodies will be protected
for 50 years from the end of the year in which they
are first published. Writers, composers and directors
of theatrical, choreographic, and TV and radio works
will enjoy 50 years protection from the end of the
year in which the works were first performed or
recorded.
The law specifies the penalties that the court shall
order for infringement of the author's rights.
Under the new law the penalty for piracy is a maximum
of one year imprisonment and a fine of KD500. A
shop selling pirated works can be closed down for
up to six months.
Trademarks
The protection of trademarks is governed by articles
61 to 85 of the Commercial Code, as amended by
Decreed Law #3 of 1999. A Trademarks Register,
open to public inspection, is maintained in the
Patent & Trademark Department at the Ministry
of Commerce & Industry (MCI). Under the new
law, the definition of a trade mark extends to
audible and olfactory marks. There is no registry
of service marks.
The person who registers a trademark is considered
the sole owner with the exclusive right to use
the mark on the products for which it is registered.
Registration initially protects a mark for ten
years from the date of application to register.
Registration can be renewed indefinitely for further
periods of ten years each. The registrar must
notify the owner that the period of protection
has expired within one month of expiry and if
the owner does not apply for renewal within six
months of expiry, the mark is automatically deleted
from the register.
A trademark may be sold but the change in ownership
must be entered in the Register and published
in the official gazette. A person who infringes
a registered trademark is liable to a fine of
KD 600 or imprisonment or both, and to pay compensation.
Registration
To register a trademark, an application must be
submitted in Arabic to the Trademark Control Office
along with a fee of KD 24. Once the application
has been accepted, it must be advertised in three
consecutive issues of the official gazette. Objectors
have 30 days after the third advertisement to
challenge the registration in writing. The registrar
must give a copy of the objections to the applicant,
who has 30 days to submit a reply. Thus the overall
time needed to register a trademark is not less
than three months.
Patents & Industrial Designs
Under Law 4 of 1962, a patent may be issued for
any new invention suitable for industrial use
which has not been used in Kuwait during the previous
20 years. Kuwaiti nationals, foreign residents,
foreign businessmen with a local presence and
foreigners in countries that grant reciprocal
rights to Kuwaitis, have the right to be granted
patents in Kuwait. All documents for filing a
patent application, including the specifications
of the invention, must be in Arabic.
Under Law 4 of 1962 patent holders are protected
against unauthorised use of their invention or
design for an initial period of 15 years, renewable
for a further 5 years. Under the new law the period
of protection will be 20 years, though patents
registered in other countries will only be granted
protection for the remainder of the period of
protection where they are registered. The new
law also extends the period of protection for
drawings, models and integrated circuits from
5 years to 10 years, which may be renewed for
a further 5 years. The law will, in addition,
allow improved versions of existing patents to
be protected for 7 years.
Patent holders may license their patents to others.
PUBLIC SECTOR CONTRACTING
As a general rule, a public authority in Kuwait
may only buy equipment and commodities, and commission
works, by way of an independently administered tendering
process. Public tendering is governed by Law 37
of 1964, Law 18 of 1970 and Law 81 of 1977 as amended.
Tendering procedures for most public institutions
are administered by the Central Tenders Committee
(CTC), though the client body (i.e. the public body
requiring the service) draws up the specifications
and particular conditions it requires, reviews pre-qualifying
companies, and evaluates bids technically. However
some public institutions have their own tendering
procedures. But no matter who administers a tender,
the procedures are in essence the same as CTC procedures,
and all activities relating to public tenders, such
as tender announcements, invitations to pre-qualify,
pre-tender meetings, and amendments to conditions
and specifications, are only published in Al-Kuwait
Al-Youm, the official gazette.
Funding for major projects is normally provided
by the government. In recent years other forms of
financing, such as credit facilities supported by
export credit agencies (ECAs) and build-own-transfer
(BOT) type schemes, have been tried.
Eligibility & Registration
A tenderer for a public contract must be a Kuwaiti
merchant who is (a) registered with the KCCI and
the MCI, and (b) registered as an approved supplier
or contractor.
The CTC and client bodies maintain lists of approved
suppliers of equipment and materials. To get on
the lists, the main requirement for suppliers
is that they be Kuwaiti merchants. Application
for registration is usually made to the client
body.
The CTC also maintains lists of approved contractors
for works. Before getting on these lists a contractor
must be classified according to the size of projects
he is deemed capable of undertaking. The size
limit for the first three categories represents
the cumulative size of all contracts being undertaken
at the same time by a contractor, e.g. a category
(4) contractor cannot bid for a contract worth
more than KD50,000 if, at the time of his bid,
he is already undertaking projects with an total
value of KD200,000. Foreign companies are not
classified as they must prequalify each time they
bid for public sector contracts.
Pre-Qualification
Participation in some public tenders is restricted
to firms who have been pre-qualified, i.e. judged
capable of undertaking the particular project.
To prequalify, a firm submits a standard set of
documents outlining its financial and technical
capabilities to the CTC. Foreign firms must prequalify
each time they bid for a public contract. Their
applications may only be submitted by their Kuwaiti
agent and must be accompanied by an authenticated
copy of the agency agreement.
Bidding Procedures
Forthcoming tenders are announced in Al-Kuwait
Al-Youm as invitations to bid . To collect the
documents, a written request in Arabic plus the
fee (for which a receipt is given) is needed.
A foreign firm must show an authenticated copy
of the agreement with its local agent.
Firms who have purchased the documents may be
invited to pre-tender meetings with the client
body. Sometimes these are mandatory and bidders
who do not attend find themselves excluded from
the tender. The scope of work may be amended after
the tender documents have been issued or after
a pre-tender meeting. When this happens the administering
committee issues a formal addendum which can only
be collected on production of the original receipt
for the tender documents. Notice of pre-tender
meetings and tender amendments are announced in
Al-Kuwait Al-Youm and tenderers are seldom advised
directly.
Bid Preparation
A bid may only be submitted on the original official
tender documents issued to the company making
the bid. All parts must be completed in full and
the documents may not be altered in any way. The
bid must conform to the tender terms exactly and
alternative terms are never acceptable. All prescribed
supporting documen-tation must be appended.
The tender documents are expected to be submitted
without erasures or corrections. Where alternative
offers are allowed, a tenderer must buy a separate
set of documents for each offer he submits, with
each bid clearly marked to show that it is an
alternative.
Pricing & Pricing Preferences
Contracts must usually be priced on a lumpsum
fixed-price basis, though unit pricing is normal
in maintenance type contracts. Most bids must
be priced in Kuwaiti Dinar. Prices must be stated
on a cash-basis.
Public sector contracts must by law be awarded
to the bidder who offers the lowest price provided
his bid conforms with technical requirements and
he has adequate resources. But where a firm has
submitted an artificially low bid and it appears
that it will be unable to perform to the required
standard, the contract may be awarded to the next
lowest bidder.
Local manufacturers have a price advantage. Subject
to technical acceptance, goods made in Kuwait
may be priced up to 10% higher than comparable
items made abroad and be deemed the lowest priced.
Goods made in other GCC countries have a 5% price
preference; but if the goods are not made in Kuwait
then GCC goods have a 10% advantage. Local contractors
for the performance of works do not enjoy any
pricing advantage.
Bid Bonds
A bidder's offer must be irrevocable until the
end of its period of validity which initially
cannot be more than 90 days. An unconditional
bank guarantee for the entire initial period of
validity, issued in Arabic by a Kuwaiti bank,
must be submitted with the bid. These bonds vary
from 2% to 5% of the value of the bid. If a bidder
is successful but refuses to sign the contract,
the bond is forfeit.
Bidders are often asked, towards the end of the
initial period of validity, to extend their offers.
If they wish to do so then the bid bond must also
be extended.
Submission of Bids
Tender documents must be signed by the bidder
and stamped with his seal. If a foreign firm submits
a bid directly, rather than through its local
agent, both its stamp and the agent's stamp must
appear on every page. Proof of the signatory's
capacity to bind the bidding firm is always required
and this usually takes the form of a notarised
power of attorney.
If the tender documents include a bid envelope,
this must be used to submit the bid. The name
of the bidder may not appear on the envelope,
which must be sealed with wax.
Bids must be submitted to the tender committee
at the place, date and time stated in the conditions.
Where the CTC is administering the tender, bids
must be submitted in the CTC's office in Sharq,
which is done by placing the envelope in the box
designated for that tender by a notice in Arabic
(only). The closing time is usually 1:00pm and
the box is always sealed the very second time
is up.
Evaluation & Award
Where the CTC is administering the tender, bidders
may get a copy in Arabic of the list of bidders
and their prices from the CTC's Sharq office,
about a week or so after bidding closes, by showing
a copy of the original receipt for the docu-ments.
But other tender committees do not normally provide
such lists.
In most tenders a technical study, to ensure that
bids comply with the required specifications,
is usually carried out by the client body. During
these studies, a bidder may be invited to answer
queries orally or he may be sent a list of questions
requiring a written reply.
Once technical studies are completed, a contract
is awarded on the basis of price from among the
bids that conform with the tender specifications.
The administering committee notifies a successful
bidder in writing, but the latter does not have
any contractual rights until he has signed his
contract with the client body. If the winner fails
to sign the contract within a specified time of
being invited to do so, he is deemed to have withdrawn.
Before signing the contract, a successful bidder
must replace his initial guarantee with a final
guarantee or performance bond from a Kuwaiti bank.
This is typically 10% of the contract value and
must be valid for the duration of the contract
including a maintenance period. A contractor who
fails to present this guarantee is deemed to have
withdrawn.
Performance
Public sector contracts always contain penalty
clauses, and minor delays and faults in execution
usually result in penalties being imposed.
Contractors for the performance of works normally
receive an advance of 10% to cover costs of mobilisation.
Stage payments on account of work-in-progress
are also made. Most contracts allow the client
body to retain 10% from work-in-progress payments
until the end of the contract and to recoup the
advance pro-rata from work-in-progress payments,
so that during the maintenance period the client
body is holding a retention of 10%.
Public sector contracts normally include a maintenance
period of a year, during which the contractor
is liable for any faults in the equipment or works.
The period is covered by a retention, in the case
of works, and the performance bond.
When a project of works is completed, the contractor
usually receives a provisional completion certificate
which is replaced by a final acceptance certificate
at the end of the maintenance period. This final
certificate releases him from further liability
and enables him to claim his final payment. Before
he can receive his final payment, a foreign contractor
must obtain a tax clearance certificate.
COUNTERTRADE OFFSET PROGRAMME
Under Kuwait's counter-trade offset programme, a
foreign contractor who signs contracts to supply
government institutions with goods or services that
are cumulatively worth more than KD1million in any
fiscal year (April to March) incurs an offset obligation
that requires him to set up a business beneficial
to Kuwait.
According to a report, the offset programme has
achieved 19 projects in different fields since its
start in 1992.
The Offset Obligation
The offset obligation is expressed in the same
currency as the supply contracts and is nominally
30% of their value. The contractor earns 'credits'
for expenditures relating to his offset business
venture (OBV) and when these credits amount to
30% of his supply contracts he has fulfilled his
obligation. Actual expenditures will be much less
than 30% because most expenditures earn credits
at a rate greater than 1:1 and, in practice, offset
expenditures amount to about 3% of a contractor's
supply contracts. But before a contractor may
embark on his OBV, the business must be officially
approved. The programme is administered by the
Counter-Trade Offset Program Executive Office
(PEO) in the Ministry of Finance. The stated objectives
of Kuwait's offset programme are:
- to promote long-term mutually beneficial collaborative
business ventures between foreign enterprises
and Kuwaiti companies with an emphasis on the
private sector;
- to achieve sustainable economic benefits (such
as export sales and import substitution);
- to enhance the high-tech capabilities of the
private sector by creating and expanding education
and training opportunities for Kuwaiti nationals
locally and abroad;
- to facilitate the transfer of state-of-the-art
technology into the private sector; and
- to support Kuwait's foreign aid programmes.
These objectives provide the criteria by which
proposed OBVs are evaluated.
A contractor's obligation begins when he signs
the supply contract that creates it. The total
time allowed to fulfil the obligation is 10 years,
i.e. 24 months for approval of the OBV and eight
years thereafter to generate the credits needed
to extinguish the obligation, with 50% being settled
within four years. A contractor's OBV must include
Kuwaiti businesses or entrepreneurs as equity
partners, and it must exist and operate under
Kuwait's Commercial Companies Law.
A contractor who refuses to participate in the
programme or ceases to participate before he accumulates
credits equal to 10% of his obligation, incurs
a penalty of 6% of the value of his supply contract(s).
If he fails to continue after completing 10% or
more of his obligation, the penalty is reduced
by the percentage of the obligation which has
been completed.
The Offset Process
Once a foreign contractor has signed the supply
contracts that trigger his obligation, he must
acknowledge this obligation by signing a memorandum
of agreement with the Ministry of Finance. He
must then submit business ideas to the PEO in
order to obtain approval for an OBV. For each
idea he must submit in turn a concept paper, a
proposal and a business plan, and each of these
documents must be approved before the next one
is submitted.
The concept paper is essentially a brief summary
of the proposed business. A proposal is similar
to a traditional feasibility study and is the
key document upon which approval of the OBV rests.
The business plan must be fully detailed and must
cover the whole eight years in which the obligation
must be fulfilled.
The proposed OBV must pass normal evaluation criteria
for commercial, technical and financial viability.
The business is also evaluated on its ability
to further capital accumulation and promote economic
development in Kuwait, on the contribution it
can make to developing a highly skilled experienced
globally-competitive work force and on whether
it will transfer inwards technology appropriate
to the development of new industries in Kuwait.
Calculation of Credits
Once his business plan has been approved the foreign
contractor establishes and operates the OBV with
his Kuwaiti associates. He is awarded offset credits
annually on the basis of the expenditures relating
to the OBV as shown by its audited financial statements.
All the OBV's expenditures, except for costs incurred
in administering the programme, are eligible for
credits. But instead of being just aggregated
to calculate the credits, these expenditures are
classified and weighed according to the preferences
given to them under the government's economic
policy objectives. First the expenditures are
classified, according to the internal functions
of the OBV, into micro-categories (see box). The
actual expenses in each micro-category are then
multiplied by the appropriate micro-multiplier.
The result is then multiplied by the approved
macro-multiplier. The final result is the amount
of credits earned in that particular micro-category.
The credits earned in each micro-category are
then summed to arrive at the total number of credits
generated by the OBV for that year.
To decide what the OBV's macro-multiplier should
be, the OBV is classified according to its activities
into one of the economic activity areas (EAA)
shown in the box. Each EAA has a macro-multiplier
which ranks it by the preferences accorded to
that economic activity in the government's policy
objectives.
Once an OBV is established, the PEO must be provided
with six monthly progress reports, i.e. performance
updates. The OBV is required to maintain accounting
records according to International Accounting
Standards and to file annual audited financial
statements with the PEO. All supporting records
must be kept for four years and PEO has the right
to audit these records annually.
Future Credits
After a contractor's current obligation has been
fulfilled, additional credits generated by his
OBV may be carried forward and set against offset
obligations arising from any future supply contracts
he signs. These future credits may not be transferred
to other contractors.
Third Party Fulfilment
Subject to PEO approval, a foreign contractor
may designate a third party to fulfil his offset
obligation, though the contractor remains responsible
for the outcome. Contractors unable to find suitable
OBVs may be allowed to fulfil their obligations
by investing in approved investment funds which
provide finance for ventures acceptable under
the offset programme. Several local funds have
been approved for this purpose by the Ministry
of Finance.
CORPORATE INCOME TAX
In Kuwait there are no personal income taxes, property,
gift or inheritance taxes. Nor are there any sales
or value added taxes. The only tax paid by Kuwaiti
shareholding companies is a 2.5% levy for the Kuwait
Foundation for the Advancement of Sciences (KFAS).
Kuwaiti Manpower Law which was introduced in May
2001 applies a 2.5% tax on the net profits of Kuwaiti
companies listed on the Kuwait Stock Exchange (KSE).
This tax may be imposed on all local companies in
the near future.
But corporate income tax is levied on the net income
of foreign firms.
The Liability to Corporate Income Tax
Corporate income tax is governed by Law #3 of
1955, as supplemented by directives issued by
the Director of Income Taxes, i.e. the Minister
of Finance, from time to time. The filing of tax
declarations and accounts, the assessment of liabilities
and the payment of taxes are administered by the
Tax Department in the Ministry of Finance. All
tax declarations, supporting schedules, financial
statements, and correspondence must be in Arabic.
All foreign corporate bodies carrying on a trade
or business in Kuwait are liable to income tax,
with the exception of companies incorporated in
the GCC that are wholly owned by GCC citizens.
A foreign corporate body means any business entity,
formed under the laws of any state, which has
a legal existence separate from that of its owners.
The term includes foreign partnerships. Where
a foreign firm operates through a local service
agent, it is taxed on its income arising in Kuwait.
Where it is a shareholder in a local company,
it is taxed on its share of the company's profit.
Taxable income includes net profits, whether distributed
or not, and amounts receivable on account of interest,
royalties, technical services and management fees,
etc, whether actually paid or not. Where the foreign
firm is a shareholder in a local company, the
foreign entity bears the tax and the Kuwaiti company
has no liability. There is no withholding tax
on dividends, interest payments and royalties.
Net taxable income is computed on the basis of
the net profits disclosed in audited financial
statements as adjusted for tax purposes. Where
the taxpayer is a shareholder in a local company,
the foreign element in total adjusted profits
is isolated.
Tax Reduction Plan
According a draft law approved by the Cabinet
the taxes on foreign companies may be reduced
to 25 per cent from the current 55 per cent. The
tax margin on foreign companies will be in the
range from 5 to 25 per cent, depending on their
income. The minimum taxable income will be KD
30,000 on a sliding scale of 5 per cent for every
incremental KD 30,000, up to a maximum of 25 per
cent. Thus a company posting an annual income
of less than KD 30,000 will not be liable to taxation
but one earning KD 30,000 will have to pay 5 per
cent (KD 1,500) as tax. A company earning KD 60,000
will have to pay 10 per cent (KD 6,000) and a
company earning KD 90,000 will have to pay 15
per cent (KD 13,500) and so on. The maximum tax
however will be 25 per cent. The objective is
to attract more foreign investors.
Gross Revenues
Gross income is all income from business and trade,
including amounts receivable as rents, royalties,
premiums, dividends and interest, as well as capital
gains on the sale of assets and on the sale of
shares by a foreign shareholder, where the source
is in Kuwait. The source of income is Kuwait if
the place where the services are performed is
in Kuwait. Work done outside Kuwait is deemed
to be performed in Kuwait where it is part of
a contract that includes activities within Kuwait;
e.g., in a supply and installation contract, the
full value of the contract including the foreign-supply
element is assessable.
Gross billings, excluding advance payments, less
the costs of work incurred in an accounting period
are used to assess income from contract work and
percentage accounting or completed contract accounting
methods are usually not acceptable.
Where a foreign firm has more than one activity
in Kuwait, its income from all activities must
be aggregated for tax purposes, even if its different
activities are organised through separate local
companies.
Allowable Expenses
All normal business expenses are allowable on
an accruals basis provided they are incurred in
the generation of income in Kuwait. But the following
may be noted:
- Accounting provisions,
whether specific or general, are not allowable.
Bad debts are only allowed once they have proved
irrecoverable. Other provisions, such as labour
indemnities, are only allowed when they are actually
paid.
- w Depreciation of fixed assets is allowable
but only at particular rates for different classes
of assets on a straight-line basis. Losses on
the disposal of fixed assets below their tax written-down
value are allowable.
- w Interest charges are allowable provided they
are payable to a Kuwaiti bank and are reasonable
in relation to the business activities carried
out in Kuwait.
- Commissions paid to the taxpayer's local agent
are limited to 3% of revenue.
- Losses brought forward are allowable. Losses
may be carried forward indefinitely and deducted
from income in later periods, provided there has
been no intervening cessation of activities. But
losses in a later period cannot be carried back
to an earlier period.
- Management fees receivable by a foreign corporate
shareholder in a local company and expensed in
the latter's books are not allowable. But direct
expenses incurred by the foreign taxpayer are
allowable provided they are supported by adequate
documentation.
- As a contribution to a foreign corporate body's
head office expenses, deductions may be claimed
as follows:
:: by
foreign consultants or contractors operating through
a local agent: 3.5% of revenues (net of amounts
payable to subcontractors and reimbursable costs)
:: by foreign shareholders in
a WLL or KSC: 2% of revenues (net of amounts payable
to subcontractors and reimbursable costs)
:: by foreign insurance companies:
3.5% of net premiums.
Inventory is usually valued at weighted average
cost, though FIFO (first-in, first-out) is becoming
more popular, but any valuation method in general
use is acceptable.
Calculation of Tax Due
The tax due on net taxable income is reckoned
according to the rates shown below. These are
not progressive, i.e. tax is charged on all profits
at the rate of the level into which total profits
reach. For example, if taxable profits are KD50,000,
tax of 15% is levied on the whole KD50,000 and
the tax payable is KD7,500.
Some relief is available where taxable profits
reach marginally into a higher level. This is
obtained by calculating the total tax payable
at the top of the band just below the highest
band into which taxable income falls and to the
tax thus calculated the whole of the income in
excess of this band is added. Where the resulting
amount is less than the tax payable as calculated
normally, the lower amount becomes the tax payable.
| TAX
RATES |
| Total
Taxable Profits |
|
Tax
Rate
KD % |
Tax Cumulative
Payable
KD |
| Upto |
18,750 |
5 |
937/ |
500 |
| Upto |
37,500 |
10 |
3,750/ |
- |
| Upto |
56,250 |
15 |
8,437/ |
500 |
| Upto |
75,000 |
20 |
15,000/ |
- |
| Upto |
112,500 |
25 |
28,125/ |
- |
| Upto |
150,000 |
30 |
45,000/ |
- |
| Upto |
225,000 |
35 |
78,750/ |
- |
| Upto |
300,000 |
40 |
120,000/ |
- |
| Upto |
375,000 |
45 |
168,750/ |
- |
| Over |
375,000 |
55 |
|
n.a. |
| Source:
Tax Department, Ministry
of Finance |
Administration
The Gregorian solar calendar is used for tax accounting.
Tax periods are normally 12 months long, though
a period of up to 18 months may be allowed on commencement.
The usual year-end for tax accounting is 31st December,
but a taxpayer may request another year-end. Taxpayers
are legally obliged to submit their tax declarations
to the Tax Department without being requested. The
deadline for filing tax declarations is the 15th
day of the 4th month following the end of the tax
accounting period; e.g., where the usual end-of-December
period end is used, tax declarations must be submitted
by 15th April. An extension of 75 days may be allowed
if audited accounts are filed.
Tax declarations and supporting documentation must
be in Arabic and must be certified by a practising
accountant who is registered with the MCI. The law
is unclear on a number of issues and final assessments
are usually agreed by negotiation. There is no special
appeals process.
Payments
Tax must be paid in Kuwaiti Dinar by certified
cheque, in four equal instalments on the 15th
day of the 4th, 6th, 9th and 12th months following
the end of the tax period. No payment is required
until accounts have been filed. The tax is payable
in a single lump sum where payments are delayed
and also where an extension of 75 days has been
allowed for the filing of audited accounts. The
penalty for tardiness in filing declarations or
paying by the due date is a fine of 1% of the
tax payable for every 30 days (or fraction thereof)
of delay.
Tax Clearance Certificates
The final payment due to a foreign contractor,
which must not be less than 5% of the total contract
value, must be retained by all ministries, public
authorities and private companies (including foreign
firms) operating locally until the contractor
has produced a tax clearance certificate from
the Ministry of Finance confirming that all tax
liabilities have been settled.
All ministries, public authorities and private
companies operating in Kuwait must submit the
names and addresses of all companies with which
they are doing business as contractors, subcontractors
or in any other form, together with a copy of
the contracts, to the Tax Department. When assessing
liability to tax, the Director of Taxes may disallow
payments to subcontractors which have not been
reported.
Tax Planning
The Director of Taxes tends to look at the substance
rather than the form of transactions and does
not usually give binding rulings in advance on
how tax will be determined in unclear cases and
so the scope for tax planning is rather limited.
As final assessments are a matter of negotiation,
advice from a local practitioner who has a good
working relationship with the Tax Department can
be helpful.
Kuwait is a signatory to the GCC Joint Agreement
and to the Arab Tax Treaty. Kuwait also has double
taxation treaties with Belgium, China, Cyprus,
France, Germany, Hungary, Italy, Romania, South
Africa and Thailand, and is negotiating treaties
with Australia, Austria, Canada, Finland, India,
Japan, Malaysia, Singapore, Switzerland, Turkey
and the USA.
SOURCES OF INFORMATION
Researching business opportunities from outside
Kuwait is easy. Data on exports to Kuwait by OECD
countries can be used to analyse the market. Foreign
government trade promotion agencies have information
on market prospects and updates on new projects.
These agencies also organise trade missions to Kuwait,
a cost-effective way of making local contacts.
There are several sources of market-related information
within Kuwait. Al-Kuwait Al-Youm, the official gazette,
is the official source of government announcements
but is published in Arabic only. English translation
of all tender-related and regulatory matters is
offered by a few translation offices on yearly subscription
base.
The Ministry of Planning is the main source of government
statistics. The Central Bank issues an Annual Economic
Report. Research units in the IBK, commercial banks
and Institute of Banking Studies are worth contacting.
Foreign embassies have data on opportunities. Local
foreign business associations provide good networking
facilities.
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