The power of the local trader:
To give a historical background to the Kuwaiti legislation, it is worth mentioning that first and foremost local traders have always been the main focus to protect in the commerce field. That is to say that Commercial Law No. 68 of 1980 was designed in order to enhance the power and dominance of the local trader. That can be translated through the regulator’s belief that Kuwait’s economy should always be governed by Kuwaiti traders far away from foreigner ones.
At the same time, the legislator believed that foreign participation in the Kuwaiti market would enhance commercial activity. Hence, foreigners were allowed to engage in trade through two avenues: either by establishing a company, with the Kuwaiti ownership stake being no less than 51% of the capital—thus ensuring the Kuwaiti partner holds significant influence in the company’s management and decision-making—or through a contract between the foreign parent company (the "principal") and a sole Kuwaiti agent, who would represent the company and conduct business on its behalf in Kuwait, in exchange for an agreed-upon commission or percentage.
It should be mentioned, foreign investors often prefer to work through a Kuwaiti agent who is more familiar with the local market and the preferences of Kuwaiti consumers. The reason behind this is that the Kuwaiti market is relatively small and has unique characteristics that a foreign investor may not fully understand. As a result, many foreign companies have chosen to operate under agency agreements, which saves them the burden of marketing, management, and sales in an unfamiliar market, while compensating the local agent with a commission or percentage.
As a matter of fact, many international agencies have been present in Kuwait since the 1950s, and continued for decades. These agencies have often been exclusive to certain Kuwaiti agents who have built a strong relationship of trust and mutual understanding with the foreign parent companies, making it hard to compete or joint the market.
Commercial Agency Law of 2016:
Demands from the Kuwaiti public arose, calling for that foreign agencies not be monopolized by a single agent. In response, the legislator enacted the new Agency Law No. 36 of 2016, which explicitly stated in Article 2 that "the principal may have more than one agent or distributor." This allowed foreign companies to contract with multiple Kuwaiti agents, promoting legitimate competition among Kuwaiti traders and providing equal opportunities. However, in reality, success often depends on the negotiation skills of those who can persuade the foreign parent company, which may still prefer to remain solely with their established agent.
Kuwait Direct Investment Promotion Authority (KDIPA):
In 2013, the Kuwaiti legislator realized that the economy needed to be opened up to attract foreign capital. To encourage and attract foreign investments, Law No. 116 of 2013 on Promoting Direct Investment was issued, and a dedicated authority called KDIPA was established to handle foreign investor applications and licensing. This law allowed foreign investors to fully own their investments (100%) and provided exceptional benefits, such as full or partial exemptions from taxes and customs duties. It should be noted that KDIPA has full discretion in assessing licensing applications, evaluating projects, and granting benefits. The authority applies specific criteria in accordance with its regulations to approve, reject, or revoke licenses, and to grant or restrict benefits.
No Need for a Kuwaiti Agent:
Finally, in 2024, Law No. 1 was issued, amending Article 24 of the Commercial Law No. 68 of 1980. It clearly states that "a foreign company may establish a branch in Kuwait and conduct its business without the need for a local agent." Thus, foreign investors can now establish their business directly in Kuwait with 100% ownership. This differs from licensing through KDIPA, as the investor in this case is not required to submit a feasibility study to the authority and is not entitled to any incentives such as exemptions or facilities. It is important to note that this foreign branch will be treated as a Kuwaiti entity and will be subject to Kuwaiti law, with Kuwaiti courts having jurisdiction over any disputes.
In summary, today the foreign investor has several options for entering the Kuwaiti market, these include:
- Engaging with a sole Kuwaiti agent or multiple agents.
- Establishing a commercial company with a Kuwaiti partner, where the Kuwaiti capital share must not be less than 51%.
- Apply for direct investment licensing through KDIPA, with the possibility of benefiting from incentives but under the supervision of the authority.
- Establishing a branch directly in the Kuwaiti market without the oversight of the authority and without enjoying any incentives.
Author:
Dr. Fatemah Alshuraian
Assistant Professor
Commercial, Financial Law
School of Law
Kuwait University
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