Investment


Openness to Foreign Investment
The Council of Ministers approved the implementing regulations for its current Direct Foreign Capital Investment Law—Law No. 8/2001, passed by the National Assembly on March 11, 2001, through Resolution No. 1006/1/2003 on November 1, 2003. The legislation authorizes foreign –majority ownership and 100 percent foreign ownership in certain industries including: infrastructure projects (water, power, waster water treatment or communications); investment and exchange companies; insurance companies; information technology and software development; hospitals and pharmaceuticals; air, land and sea freight; tourism; hotels; entertainment; housing projects and urban development. Projects involving oil discovery or oil and gas production are not authorized for foreign investment and must be approved by a separate law.

The Direct Foreign Capital Investment Law promotes foreign investment in Kuwait; authorizes tax holidays of up to ten years for new foreign investors; facilitates the entry of expatriate labor; authorizes land grants and duty-free import of equipment; provides guarantees against expropriation without compensation; ensures the right to repatriate profits; and protects the confidentiality of proprietary information in investment applications, with penalties for government officials who reveal such data to unauthorized persons. New investors will be protected against any future changes to the law. Full benefit of these incentives, however, will be linked to the percentage of Kuwaiti labor employed by the new venture. The investor is also obliged to preserve the safety of the environment, uphold public order and morale, and comply with instructions regarding security and public health. While the Direct Foreign Capital Investment Law is on the books, foreign companies still report numerous delays in getting approval to operate in Kuwait, and the law does not appear to have changed the investment climate in any significant way.

Foreign firms still may not invest in the upstream petroleum sector, although they are permitted to invest in petrochemical joint ventures. Implementing legislation brought before Parliament in January 2004 would allow for limited, controlled investment in the petroleum sector. This law was submitted specifically to allow for investment in and development of Kuwait’s northern oil fields, but may be used to allow for other investment in the petroleum sector in the future.

The National Assembly ratified the “Indirect Foreign Investment Law” in August 2000, allowing foreigners to own 100 percent of all listed shareholding companies, except banks. The banking sector was opened under the Direct Foreign Investment Law and the Central Bank has already granted licenses to three foreign banks; which began operations in 2006. However, while foreign banks may now operate in Kuwait, they are restricted to opening only one branch and are prohibited from competing in the retail-banking sector. Kuwait’s banking sector is regulated by the country’s effective Central Bank and is comprised of Islamic, specialized and commercial banks. With the conversion of Kuwait Real Estate Bank (KREB) in 2006, there are now three Islamic banks including Kuwait Finance House (1977) and Bubyan Bank (2004). KREB’s conversion leaves one remaining specialized bank, the Industrial Bank of Kuwait. The seven commercial banks include National Bank of Kuwait (1952), Commercial Bank of Kuwait (1960), Gulf Bank (1960), Al-Ahli Bank of Kuwait (1967), the Bank of Kuwait and the Middle East (1971), Burgan Bank (1976) and Branch Bank of Bahrain and Kuwait (1977).

On July 9, 2001, the Kuwaiti government announced an ambitious five-year privatization program, which closely resembled past initiatives. The plan outlined a wide range of activities, but with little detail. The first year called for privatizing some gas station outlets and part or all of Kuwait Airways. Year two would initiate privatization of the post, telegraph and telecommunications services. Years three and four would complete the telecommunications privatization and initiate the privatization of the Ports Authority and Public Transport Company. The fifth and final year targeted the power and water sectors, as well as Kuwait’s Petrochemical Industries Company (PIC). Kuwait’s National Assembly has made clear that any privatization program will have to insulate consumers from significant rate increases and protect the jobs of Kuwaiti employees. Kuwait Airways, which is still a government entity, continues to operate direct local competition from the new, private Jazeera Airways. Another private airline, Al-Wataniya, was licensed and formed in 2005. Both mobile telephone companies in Kuwait are private, with the Government holding significant minority interest, and the Ministry of Communications still sets tariffs. None of the other communication services have yet been privatized, though privatizing landlines has been discussed for several years. The ports and transport sector have not been privatized either. The energy and power sector has seen the most progress in privatization. Forty of the 120 government-owned gas stations have been privatized, with plans to privatize the rest in two additional rounds. The outcome will be three competing gas station companies, with gas still subsidized by the government and set in a price range. The government-owned lubrication oils plant was privatized in 2004 as were the coke smelter operations.

Build, Operate and Transfer (BOT) projects are gaining increasing acceptance in Kuwait, with BOT projects proposed in the power, wastewater, real estate development and transportation sectors.

There have always been selected real estate BOT projects by privately owned Kuwaiti companies. The first-class USD 132 million Sharq Mall, owned by the National Real Estate Company, contains real outlets, restaurants, theaters, and entertainment concessions. More recently, the Fifth Waterfront Development Project constructed the Marina Mall. This USD 162 million BOT is owned by the United Realty Company and features high-end retail, eating, and entertainment outlets. A future BOT is planned for a central incinerator in the Shuaiba Industrial Area, a project that stipulates foreign participation with at least 25 percent equity.

Foreign-owned firms and the foreign-owned portions of joint ventures are the only businesses subject to corporate income tax, which applies to both domestic and offshore income. Corporate tax rates can be as high as 55 percent of net profits, but the government has drafted legislation to reduce the maximum rate to 15 percent. New foreign investors can be exempted from all taxes for up to 10 years under the Direct Foreign Capital Investment Law. 

Kuwaiti firms are not subject to the corporate income tax, but those registered on the Kuwait Stock Exchange (shareholding companies) are required to contribute 2.5 percent of their national earnings to the Kuwait Foundation for the Advancement of Science (KFAS). The National Employment Law levies an additional 2.5 percent tax that will fund a program granting Kuwaitis working in the private sector the same social and family allowances provided to Kuwaiti’s government workers. Kuwait levies no personal income tax. 

Tax exclusions—besides those offered under the Direct Foreign Capital Investment Law—for business expenses are limited, and Kuwait’s tax code is often ambiguous. For example, deductions are only three percent for agent commissions and head office expenses (mainly for turnkey supply and installation-type contracts). 

The licensing authority of the Ministry of Commerce and Industry screens all proposals for direct foreign investment. In the past, this authority has encouraged high-tech industries over sectors viewed to be saturated, such as the hotel industry. The Foreign Capital Investment Committee (FIC), chaired by the Minister of Commerce and Industry and including representatives from the private and public sectors, will authorize investment incentives put forth under the Foreign Investment Law on a case-by-case basis. Foreign companies have reported numerous delays in gaining authorization, some waiting up to 18 months for approval.

Conversion and Transfer Policies
After linking the Kuwaiti Dinar (KD) exchange rate to the US Dollar, Kuwait decided to peg the Dinar to a basket of currencies. The Central Bank of Kuwait (CBK) will retain a band of plus or minus 3.5 percent in order to ensure a smooth evolution of the historic behavior of the KD that has traded within the specified band since 1991. Since 1997, the KD has fluctuated within a 3 percent band against the U.S. Dollar*. There are no restrictions on current or capital account transactions in Kuwait beyond the requirement that all foreign exchange purchases be made through a bank or licensed foreign exchange dealers. Equity, loan capital, interest, dividends, profits, royalties, fees and personal savings can all be transferred in or out of Kuwait without hindrance. Under the current Foreign Investment Law, investors are also permitted to transfer all or part of their investment to another foreign or domestic investor.

Expropriation and Compensation
There have been no recent cases of expropriation or nationalization involving foreign investments in Kuwait. Nevertheless, as a safeguard, the Direct Foreign Capital Investment Law guarantees against expropriation or nationalization except for the public benefit in accordance with existing laws; in this case, compensation will be provided without delay for the “real economic value of the project at the time of the expropriation.” When foreign companies were nationalized in the past, as with Kuwait’s oil industry in the late 1970s, foreign interests were compensated promptly and effectively.

Dispute Settlement
The Foreign Investment Law stipulates that Kuwaiti courts alone are responsible for adjudicating any disputes involving a foreign investor and other parties, although arbitration is permitted. Few contracts in Kuwait contain clauses specifying recourse to traditional commercial and political arbitration. According to the Central Bank of Kuwait, the Kuwaiti judicial system recognizes and enforces foreign judgments only when reciprocal arrangements are in place.

Kuwait has a developed legal system and a strong trading history. It has a civil code system influenced by Islamic law. As a traditional trading nation, Kuwait’s judiciary is familiar with international commercial laws. Kuwait has been a GATT member since 1963 and has signed the WTO agreement. Kuwait, however, is not a signatory to the WTO Government Procurement Code.

Performance Requirements and Incentives

Government Procurement Requirements

Law Number 37 of 1964 (Articles 43 and 44) specifies the use of local products when available and prescribes a 15 percent price advantage for local firms in government tenders.

Participation in Research and Development
There are no specific restrictions on foreign participation in government-financed or subsidized research and development. The Kuwait Institute for Scientific Research (KISR) has expressed interest in working with foreign firms. The government would welcome programs that provide expertise unavailable locally, but these are likely to be evaluated on a case-by-case basis.

Visa and Work Permit Requirements
Kuwait has a stringent visa regime and most work permits require a local sponsor. The Foreign Investment Law, however, may redress this problem for new investors. Visa requirements for citizens of 34 nations, were relaxed in 2004 allowing for application for a visa upon arrival at the airport. However, investors should be aware that as of August 2006, persons entering on tourist visas will no longer be able to convert to work permits without first leaving the country.

Right to Private Ownership and Establishment
Rights to private ownership and establishment are respected in Kuwait. Licenses from the Ministry of Commerce and Industry are required for the establishment of all new companies, and government authorization is required for any incentives offered by the new Foreign Investment Law.

Protection of Property Rights
In 2004, the Kuwait Customs authority established a special IPR unit and began taking some enforcement actions. Other Kuwaiti ministries, most notably the Ministry of Commerce and Industry, began taking a more active role in copyright enforcement.

Kuwait’s patent and trademark legislation passed the National Assembly in December 2000 and took effect on 14 January 2001. The legislation was to make Kuwait compliant with the World Trade Organization’s Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). The legislation affords protection of twenty years and extends coverage to include pharmaceuticals. Industrial designs and integrated circuits are afforded protection of between 10 to 15 years. Trademarks can be registered in Kuwait for ten years and renewed in additional ten-year increments indefinitely. If a trademark has not been used for a five-year period, an interested party can apply to the judicial system to have the trademark rescinded. Registration affords the owner exclusive rights to use the trademark, and third parties would be barred from the use of the trademark. Since trademark registration is linked to the Kuwaiti agent, the trademark would need to be again registered when a mark holder signs a new agent or distributor.

Bilateral Investment Agreements
Kuwait has signed investment agreements with Germany, France, Italy, Russia, China, Romania, Poland, Hungary, Turkey, Malaysia, Pakistan, Switzerland, Malta, Finland, Ethiopia, Croatia, Tajikistan, Austria, Bulgaria, Kazakhstan, Morocco, Mongolia and the Czech Republic. In the past few years, Kuwait has signed a bilateral investment agreement with Pakistan and a free trade agreement (FTA) with Jordan. Kuwait has initiated agreements on bilateral investment with Denmark, Belgium, the Netherlands, Thailand, Ukraine, Latvia, Lithuania, Lebanon, Bosnia/Herzegovina, and India. Kuwait began talks with Singapore on a free trade agreement in December 2004.