Introduction
The formation of business entities in Kuwait is regulated by the Commercial Companies Law No.15 of 1960 that was amended to give the Commercial Law No. 68 of 1980. Under this law Articles 23 and 24 lay down the basic guidelines for establishing business organizations. Article 23 deals with the involvement of non-Kuwaitis in entering the Kuwait commercial activities while Article 24 provides for provisions of entry into the Kuwait market of foreign companies. Certain sectors of the economy in Kuwait are not open for foreign investment such as upstream oil development, insurance and real estate except for citizens of GCC countries.
The general rule in the business legal provisions in Kuwait is that all business forms comprise 51% Kuwait participation. Moreover, foreigners engage in business in the country only through a business structure that allows 51% utilization of Kuwait capital. However, foreign investors have in recent years found it easier to enter into business in Kuwait due to the amendments made to the Commercial Companies Law No.15 of 1960 and other legislations enacted. This has also allowed holding companies to be formed to hold shares in companies and to be involved in the establishment of WLL companies both in Kuwait and foreign countries. These holding companies can now give loans or act as guarantors to WLL companies, manage them, hold assets both intellectual and industrial, give licenses and own both changeable and fixed assets.
The Kuwait law allows for the following business organizations; Limited Liability Company otherwise referred to as WLL; Joint Stock Company; Joint venture; General partnership; and Limited partnership, which are accorded independent legal personality except for joint venture (Office of the Bulgarian Economic and Commercial Counselor in Kuwait 2010).
Limited Liability Company (WLL)
This is the most common type of business formation allowed in Kuwait. It is also the major route for foreign investors to engage in business in Kuwait. It is similar to a Private Limited Company in the western sense.
WLL attains legal character only when it is registered with the Commercial Registrar. It is also formed with an original duration of twenty-five years after which it can lengthen its life to unlimited duration. The minimum membership of WLL is two and a maximum of thirty, one of which must be a Kuwait citizen, and if the minimum two are husband and wife, the law requires then that the minimum members be three.
The minimum capital for starting this form of business is KD 7500 divided into shares of the same value through this minimum capital varies from industry to industry and may be even higher in the real sense. This minimum capital is due on the date of incorporation either in cash or in form of assets with respect to their fair market value.
The formation requires at least two founding members, who were required by section 15/1960 to be natural persons, but an amendment to the same i.e. 28/1995, allowed companies to be founding members. The highest number of founding members allowed by law is 30. In these formations at least 51% of the capital must be held by Kuwait nationals as per Article 191 of the Companies laws with the exception of the businesses approved through the Foreign Direct Investment law, which allows up to 100% in certain approved sectors. For foreign companies that own shares in WLL, they must appoint a nominee who is a resident individual and under whose name the shares are registered.
It is also a legal requirement that a limited company with more than seven members appoint a board of directors comprising three of the members. The original board of directors is named in the Memorandum of Association while successive appointments are made in the General meetings of shareholders. Employees of these companies have no statutory right to management positions or representation on the board of directors (Abdullah Kh.Al-Ayoub & Associates 2006 and ipr Info-Prod Research.com).
Shareholding Company
This is also known as a joint-stock company which is similar to a public company in western terminology. In this formation shares are negotiable and liability is limited to the extent of the nominal value of the shares. Participation is also controlled such that shareholders must be Kuwait nationals and be registered in Kuwait. It is also required by the law that a minimum of 51% be held by Kuwaitis and non-Kuwait, except for banks and insurance companies, own a maximum of 49% share if foreign capital or expertise fills a gap.
This type of formation may be offer shares to the public or be closed. In the case of companies in insurance, banking or finance industries, foreigners can only hold 40% of shares.
It has a board of directors and share certificates. Foreigners can participate and own shares of up to the limit of 49% except where the foreign direct investment law is applicable. Founder shareholders are required to have at least 10% of the capital. These formations can engage in any type of legal activity. It has a capital requirement of KD 100,000 or more.
The closed shareholding companies are joint-stock companies where shares are not offered in the public and foreign investors’ participation is regulated by the same laws as in shareholding companies. They may act as holding companies as provided in 117/1992 where they may own shares in both Kuwait and non-Kuwait companies. As holding companies they are allowed by law i.e. 28/1995 to participate in the founding of other companies, providing loans to such companies and acting as guarantors to them (Abdullah Kh.Al-Ayoub & Associates 2006 and ipr Info-Prod Research.com).
Advantages of WLL
- WLL is simple to form and takes three months to register and be incorporated
- Profit on WLL is nontaxable since there is no individual income tax in Kuwait this is beneficial to investors both Kuwaitis and foreign individuals. However, corporate tax is applicable to non-Kuwait corporate bodies.
- WLL is suitable for middle-sized enterprise since they do not require a large start-up capital
- Limited liability of the shareholders up o the extent of the nominal share capital
Disadvantages of WLL
- There is a limit to areas of engagement in closed shareholding companies with exception of the banking and insurance industry and investment of monies for third parties due to large investments required and fear of speculation.
- Law requires for maximum members establishing this kind of business entity to be thirty which, may limit mobilization of large capital for the business
Advantages of shareholding companies
- There is no limit to areas of doing business
- Since Kuwait has no income tax, profit on shares is non-taxable for individual investors whether they are Kuwaitis or non-Kuwaitis and this is beneficial to foreign investors especially
Disadvantages of shareholding companies
- In Closed shareholding companies, foreign companies as shareholders in this form of organization have imposed a tax on profits made and on top of that, the company itself is required to submit a 5% contribution to the Kuwait Foundation for the Advancement of Science, this reduces the profits even further.
- There is a limitation to ownership by non-Kuwaitis where they can own only up to a maximum of 49% with approval from relevant authorities i.e. ministry of Commerce and Industry.
- There is a limit to areas of engagement in closed shareholding companies where they can not engage in the banking and insurance industry.
- Approval and incorporation of shareholding companies is time-consuming and can take up to six months
- Requires a high start-up capital of 100,000 KD.
Similarities and differences in the advantages and disadvantages of Limited Liability Company (WLL) and shareholding companies.
Differences
WLL are simple to form and get incorporated since the process takes only three months while shareholding companies’ incorporation is tedious and time consuming and can take up to six months as they await authorization from the ministry of commerce and industry.
Limited Liability Company requires a medium-sized start-up capital of 7500 KD while Shareholding Company requires a higher amount of 100,000 KD.
Similarities
In both WLL and shareholding companies there is a limitation on the percentage ownership of the companies where 51% must be held by Kuwaitis and a maximum of 49% by foreigners.
There is also a limitation to the areas of doing business in both closed shareholding companies and WLL. Closed shareholding companies can not engage in banking and insurance industries and WLL can not engage in banking, insurance and monies investment sectors since they require large sums of capital and the fear of speculation.
In both forms of business entities, profits on individual shareholders are nontaxable since there is no levy on individual’s income in Kuwait but corporate bodies holding shares in these companies are charged a corporate tax and a further 5% tax on profit contribution to Kuwait Foundation for the Advancement of Science.
In my opinion, Limited Liability Companies in Kuwait are the most attractive forms of investment both to Kuwait nationals and foreign investors due to their simple establishment process. Their limited liability characteristic is another added benefit that the law offers to its shareholders. Moreover, the requirement that at least 10% of profit be kept in a reserve to be given as dividends to shareholders during lean years when dividends are not enough is thoughtful and a benefit to shareholders.
Shareholding companies, on the other hand, are a great way to attract the much-needed foreign investment into Kuwait especially through the Foreign Direct investment law where foreigners can own up to 100%. However, the red-tapism and bureaucracy involved in the incorporation can discourage investment as much as the regulation is required.
Examples of a shareholding company
Zain Mobile Telecommunications Company was established in June 1983 and listed on the Kuwait Stock Exchange on 9th March 1985. It is involved in the purchase, delivery, installation, management, and maintenance of mobile telephone and paging systems in Kuwait. It has an authorized capital of 429,737,167 KD and 4,275,183,146 issued share with100 KF share per value and share trading price of 1,400 as of 29th March 2010. It has eight elected directors (Burke 2006).
Examples of Limited Liability Company
Kuwait Pipes Industries and Oil Services Co. was established on 24th August 1966 and listed on the stock exchange on 29th September 1984. It deals with the manufacture, production, importation and maintenance of pipes, engineering and oil services works, construction of oil gathering installations and other energy-related activities. It has a paid-up capital of 22,533,105 KD and 225, 331, 05 issued shares with 100KF share par value. It has nine members of the board of directors (Burke 2006).
References
Abdullah Kh. Al-Ayoub & Associates, 2006. A Memorandum: Legal and practical Aspects of Doing business in Kuwait. Web.
Burke, Kevin. 2006. Law Office of Al-Essa Al-Bader & Partners Kuwait, Legal Media Group Online. 2006 edition. Web.
Office of the Bulgarian Economic and Commercial Counselor in Kuwait, 2010. Forms of Business and Corporate governance. Web.
ipr Info-Prod Research, 2010. Business Forms and Structures: Company Law. Web.