Commercial Law of:

• UAE
• Qatar
• Bahrain
• Oman
• Saudi Arabia
• Kuwait

Kuwait has a small, relatively open economy dominated by the oil industry and government sector. Approximately 90% of the Kuwaiti citizen labor force works in the public sector, and 90% of private sector workers are non-Kuwaitis. Kuwait's proven crude oil reserves of about 101.5 billion barrels--9% of world reserves--account for nearly 60% of GDP, 95% of export revenues, and 80-90% of government income. During the 1970s, Kuwait benefited from the dramatic rise in oil prices, which Kuwait actively promoted through its membership in the Organization of Petroleum Exporting Countries (OPEC). The economy suffered from the triple shock of a 1982 securities market crash, the mid-1980s drop in oil prices, and the 1990 Iraqi invasion and occupation. The Kuwaiti Government-in-exile depended upon its $100 billion in overseas investments during the Iraqi occupation to help pay for the reconstruction. Thus, by 1993, this balance was cut to less than half of its pre-invasion level. The wealth of Kuwait is based primarily on oil and capital reserves, and the Iraqi occupation severely damaged both, although both have been restored as reconstruction has proceeded and world oil prices have risen. Kuwait enjoyed an economic boom following Operation Iraqi Freedom as many companies working in Iraq established offices in Kuwait and procured goods through Kuwaiti companies. The banking, financial services, logistics, telecommunications, and construction sectors, in particular, have grown in the last two years. The sustained high oil prices also provided the Kuwaiti Government with windfall revenues in 2005 and 2006.
In the closing hours of the Gulf War in February 1991, the Iraqi occupation forces set ablaze or damaged 749 of Kuwait's oil wells. Kuwait spent more than $5 billion to repair oil infrastructure damage. Oil production was 1.5 million barrels per day (bpd) by the end of 1992, and pre-war capacity was restored in 1993. Kuwait's current production capacity is estimated to be 2.5 million bpd. Kuwait plans to increase its capacity to 3.5 million bpd by 2015 and 4.0 million bpd by 2020.

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 more Kuwaiti partners and the capital owned by the Kuwaiti partners(s) in the joint business is not less than 51 % of the total capital (60 % in the case of banks, investments 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 Kuwait agent. Foreign individuals and firms may not acquire commercial licenses in there 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 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.

Business Licenses:

To do business, licenses is necessary. General trading, contracting, importing and industrial licenses are issued by the Ministry of Commerce & Industry (MCI). For particular commercial activities, specific licenses are required and these are often issued by the ministry that controls that activity, e.g. publishing licenses are granted by the Ministry of Information.
Business licenses are only issued to Kuwaiti nationals and Kuwait companies and. In some cases, to GCC nationals and companies. Costs are usually KD100 per licenses, All licenses require period renewal, normally even two years.

Free Zones:

Kuwaitis new privately managed free trade zone is located Shuwaikh and allows 100% foreign ownership of business within the zone. There are no import duties and foreign corporate income is tax-free. Commercial, Industrial and service licenses are a variety of infrastructural services.
Depending on the requirements of the investors KFTZ issues 4 basic licenses:
i. Commercial License for companies that wish to engage in trading activities in general such as import/export or distribution/storage.
ii. Industrial License to allow investors to undertake activities related to manufacturing, assembly, packing and/or repackaging.
iii. Service Licenses to investors who offer services such as financial services, management consulting, auditing, law firm services and/or engineering.
iv. Special License can be issued to investors in any of the above activities but who have special requirements.

Corporate Income Tax:

In Kuwait there are personal income taxes, property, gift or inheritance taxes. The only tax paid by Kuwaiti shareholding companies is a 20% levy for the Kuwait Fund for the Advancement of Science. 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 filling of tax declaration and accounts, the assessment of liabilities and the payment of taxes are administered by the Tax Department in the Ministry of Finance. All tax declaration, 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 the 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 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 Kuwait Company has no liability. There is no withholding tax on dividends, interest payment 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.

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 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 activities must be aggregated for tax purposes, even if it’s different activities are organized through separate local companies.

Allowable Expenses:

All normal business expenses are allowable on an accrual basis provided they are incurred in the generation of income in Kuwait. But the following may be noted:
i. Accounting provisions, whether specific or general, are not allowable. Bad debts
are only allowed once they have proved irrecoverable. Other provision, such as
labour indemnities, is only allowed when they are actually paid.
ii. Depreciation of fixed assets is allowed 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.
iii 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.
iv Commission paid to the taxpayer’s local agent is limited to 3% of revenue.
v 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 later period cannot be carried back to an earlier period.
vi 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.
vii As a contribution to a foreign corporate body’s head office expenses, deductions may be claimed as followed:
1. By foreign consultants or contractors operating through a local agent: 3.5% of revenues ( net of amounts payable to subcontractors and reimbursable costs).
2. By foreign shareholders in a WLL or KSC: 2% of revenues (net of amounts payable to subcontractors and reimbursable costs).
3. By foreign insurance companies: 3.5% of net premiums.
Inventory is usually valued at weight 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, These are not progressive, ie 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 thus 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 become the tax payable.

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-old. 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 certified by a practicing 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 Kuwait Dinar by certified cheque, in four equal installments 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 field.
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 filling of audited accounts. The penalty for tardiness in filling 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 contractors 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 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 dose not usually give binding ruling 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 has also

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 analyses the market. Foreign government trade promotion agencies have information on market prospects and updates on new projects. These agencies also organize trade mission to Kuwait, a cost-effective way of marking local contracts.
There are several sources of market-related information within Kuwait, Al-Kuwait Al-Youm, and the official gazette, is the official source of government announcement but is published in Arabic only. An English translation of all tender-related and regulatory matters, with a local news update and business diary, is issued by Kuwait publishing House at the same time as the official version.
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:
1. The British Business forum (BBF) is an association of British business people which
aims to foster British business interests and win business for the UK. The BBF works closely with the British Embassy where business-relate meetings and seminars are organized regularly. A meeting, open to all, is usually held at 7.30 pm on the second Monday of each month. Membership is not restricted to British nationals.
2. The American Business Council – Kuwait (ABC-K) serves as the local chapter of the US Chamber of Commerce. Its objectives are the development of commerce and investment between the USA and Kuwait, bringing a better awareness of the Kuwait market to the USA, and providing a forum to pursue business interests and enhance the business climate in Kuwait. Membership & meeting information: Brenda Stoetzer.
3. The India business Advisory Council (IBAC) promotes economic and commercial relation between India and Kuwait. Most prominent Indian businessmen in Kuwait are members, The IBAC meets periodically to discuss business matters, Prominent Kuwaiti businessmen, as well as well-known visiting Indian entrepreneurs, are invited to meetings to exchange views on economic and commercial matters.