Business Formations Under Kuwait Law Essay (Critical Writing)

Introduction

Regulation of companies and businesses is necessary in any country to ensure that there is order in the formation, operation and termination of such companies. Just like any other country, Kuwait has Laws that regulate the companies in the country which is contained in different articles of the Kuwait Company Law Act. Kuwait allows different types of businesses among them being businesses With Limited Liability (WLL) and Kuwait Shareholding Companies (KSC). These companies are governed by different processes and procedures as per The Civil Code Law of 1980, The Commercial Companies Law of 1960 and The Commercial Code Law of 1981. The Commercial Law of Kuwait deals with all business activities ranging from contracts, trademarks, competition and bankruptcy among others.

The basic Laws of operating a business in Kuwait are similar for all businesses where all Kuwaiti nationals are allowed to operate businesses as long as they are above the age of twenty-one years and are not legally restricted from operating the business. The rules however vary when it comes to foreigners where they are only allowed to operate their businesses in partnership with Kuwaiti citizens where such citizens own not less than fifty one percent of the total business capital. Foreign companies wishing to operate their businesses in the country are only allowed to do so through Kuwaiti agents and not under their own names or business branches. This means that foreign companies can only operate their businesses in Kuwait under Limited Liability, Closed or Public joint stock agreements, Joint Venture agreements or by appointing Local Commercial Agencies or individual Kuwaiti agents (Campbell & Netzer, 2009, pp. 274)

Businesses with Limited Liability (WLL)

With Limited Liability companies are also known as Limited Liability Companies and they provide limited liability to their owners who can be corporate bodies or natural persons as stipulated in the Company Law Act. Limited liability in this case means that the liability of the owners of the business is only applied to them depending on the level of equity or capital they have contributed to the company and cannot be extended to their personal property or capital. The amount of equity held by the company is contained in the Memorandum of Association and the company books. With Limited Liability companies have a restricted membership with the maximum being thirty people and the minimum being two people. In Kuwait, the husband and wife are considered as one person meaning that they cannot own a Limited Liability company on their own. WLL are not allowed to operate business relating to insurance, banking and management of portfolios. In order to form a WLL Company in Kuwait, the following procedures are followed:

An application is made and presented to the Director of Companies and Insurance whose office lies under the Ministry of Commerce and Industry together with a standard form containing information such as the names, addresses and nationality of the partners, the company objects, the amount of capital invested into the business, the structure of the company’s management and the name which the company is expected to go by. Upon approval of the company, the Ministry writes to the Kuwaiti Bank requesting that it accepts capital payment for the With Limited Liability Company. The bank then furnishes the Ministry with certificates acting as evidence for such payment. The ministry also writes to Kuwait’s Municipality seeking their approval for the location of the WLL as well as the company’s premises. The criminal records of the partners are also checked to ensure that no person with a criminal record is allowed to become a partner in the company. (Al-Saleh & Partners, 1996, para. 2) A memorandum of Association (MOA) is then obtained from the department of Partnerships and presented to the Ministry for initial approval after which it is taken to the Notary Public. When the MOA is notarized it is returned to the Ministry where a license allowing the commencement of business is issued. Other processes include registering the company with the Commercial registry, the Chamber of Industry and the Civil Data Department which leads to the opening of a Labor file at the Labor and Social Affairs Ministry.

With Limited Liability Companies in Kuwait Enjoy the Following Advantages

The Liability of the owners of the company is limited to their capital contribution meaning that they cannot be held personally liable for the company’s debts. The company’s creditors can also claim their payment in so far as the company assets go and cannot touch on the personal property of the shareholders meaning that their property under such conditions is protected. The company is also considered a separate legal entity from its shareholders and directors meaning that these entities have different rights as far as their existence and operations are concerned. Upon the registration of a WLL under a specific name, it is recognized and protected by the Law meaning that no other person can be allowed to own it. With Limited Liability companies are not taxable as Kuwait does not charge income tax on individuals and the tax chargeable to corporate bodies only applies to those companies which are not Kuwaiti, that is only non- Kuwaiti corporate bodies are taxable. (Dabdoub, 2010, pp.22-23)

Disadvantages

The restriction of membership impressed upon WLLs means that an individual cannot be allowed to form such a company. The same applies to a husband and wife who are considered as a single person. WLLs also have a limited life unlike corporations whose life is unlimited. The formation of WLLs is an expensive process and its operations after formation is also a costly affair. Foreigners have to bear with strict restrictions as far as their membership and capital contribution is concerned. This means that their decision making powers are also limited.

Kuwait Shareholding Companies

In order for a KSC to be formed in Kuwait, all the shareholders should be Kuwaiti nationals with the main office of the company located in Kuwait. However, there are exceptions as far as foreign shareholders are concerned. That is where their expertise is necessary for the running of the business and the injection of foreign capital to the business is necessary. These exceptions stand as long as the foreigners’ shareholding does not exceed forty nine percent of the company capital. (Campbell & Netzer, 2009, pp. 276). Founder members of the shareholding companies are required to own at least ten percent of the companies share capital.

Shareholding companies may either be public or closed, with a minimum membership of five shareholders. The companies are governed by a board of directors and are allowed to engage in any form of business. Their capital requirement is specified meaning that they cannot be formed with an amount of capital which is less than the stipulated one. Foreigners are allowed to become shareholders but subject to the forty nine percent capital contribution restriction. An exception where a hundred percent ownership is permitted is possible subject to the rules contained in the Foreign Direct Investment Law Act. Closed shareholding companies unlike the public ones are not allowed to put forward their shares to the public. These companies at times take the form of holding companies as provided by the Kuwaiti Law, where the holding Company is allowed to own shares in both Kuwait and non Kuwait companies including participating in their formation. The holding companies are allowed to own shares even in limited liability companies. (Dabdoub, 2010, pp.22-23)

Advantages and Disadvantages of Kuwait Shareholding Companies

The benefits of KSCs arise from the fact that their membership can either be individual or corporate meaning that more capital can be injected into the business especially in the case of corporate ownership. The amount of equity held by shareholders of such companies is represented in share certificates meaning that they can trade their shares or pledge them as the case may be. The disadvantage arises especially in the case of closed shareholding companies because they cannot trade their shares to the public. This means that if the need for additional capital arises, their sources are restricted. As far as taxes are concerned, the company is charged tax based on the profits earned and an additional five percent is also charged to the company which goes to the Kuwait foundation.

Comparison between WLLCs and KSCs in Kuwait

Membership: With Limited Liability companies have a minimum membership of two people with a set maximum of thirty while the shareholding company’s membership is five with an unlimited maximum.

Taxation: With Limited Liability companies enjoy tax freedom since tax charges do not apply to them, while KSCs are charged tax based on their profits and in terms of their contribution to the Kuwait Foundation.

Company Life: WLL companies’ life is limited subject to the provision of the Laws while KSCs enjoy an unlimited life as far as their existence is concerned.

Share Certificates: In a Limited Liability Company, share holders are not issued with share certificates as proof of ownership unlike in Share Holding companies where the shareholders are issued with share certificates which they can use to trade their shares.

Financial reporting and Auditing: As per the ministerial order number 206 of 1985, all Kuwaiti companies and businesses are required to maintain necessary financial reports in order to facilitate their inspection by the country’s income tax department which falls under the ministry of finance. The different companies are also expected to comply with the general accounting principles and standards as stipulated by the Committee of International Accounting Standards (IASC). These provisions came into force in the period after 1991 before which international accounting standards were applicable.

Examples of Kuwaiti Shareholding and With Limited Liability Companies

Gulf Petroleum Investment Company

The Gulf Petroleum Investment Company is a Kuwaiti Shareholding Company which was formed in 1988. Its services are mainly centered on the gas, oil and petrochemical fields where it provides drilling, consulting and engineering services and also provides equipment necessary for related jobs and projects whether they are on shore or off shore or whether the projects cover up or downstream jobs. (GPI, 2006, para. 1). The company’s headquarters is located in Kuwait City and it trades in the Kuwaiti Stock Exchange market having gone public in 2005. Gulf Investment Company’s majority shareholders include the Grand Real Estate in Kuwait, the Investors Bank in Bahrain and the International Investment group in Kuwait. The company derives its capital from itself as well as its associate shareholders company. The management of the company derives its powers from the company’s article of Association which allows it to engage in service provision in areas of production, refining and marketing. Provide consulting services of a technical an economic nature in the petrochemical and petroleum industries, own plants, machinery, tools and other equipment related to the said industries as well as to act as an agent of various oil producing countries with specific reference to the petroleum industry. (GPI, 2006, para. 2).

The company also owns several subsidiaries such as the PDI (Pyramid Drilling International) which facilitate the provision of its various services to the Oil Industry in the Middle East, North Africa and Arabian Gulf Regions. The subsidiaries are incorporated under the company’s umbrella group referred to as the Superior Group of Companies (SGC). This group of companies deals with the provision of services to the oil fields in order to boost the productivity of operators in this field. The SGC is made up of different legal entities, namely the Superior Oil Field Services LCC, the Superior Abu Dhabi Company, Superior Oil Fields services Limited and the Maritime Superior Oil Field Services LLC. The GPI Company is governed by several members who make up the directors board and has intentions of expanding its range of services as part of its growth and expansion plan.

Al-Deera Holding Company

This is a leading Kuwaiti Shareholding Company which has been in the Kuwaiti Stock Exchange listing since 2005. It focuses on investments in both public and private companies with considerable investments in top companies in different sectors such as the industrial, technology, real estate, retail and financial services sectors among others. The company has several subsidiaries each focusing on the services offered by the parent company. For example the Al-Deera Financial Group, Al-Deera Services Group, Al-Deera Real estate Group and the Al-Deera Industrial Group. The company is governed both by its management and the members of the board of Directors. Just as required by the companies act, the Al-Deera Holding Company provides its annual reports both in Arabic and English for their various stakeholders. (Al-Deera Holding Company, 2008, para.3).

Arabian Motors Group W.L.L.

This is a Kuwaiti company with limited liability which was established in 1983 and deals with the importation of specific motor vehicle brads such as Mercury, Ford and Lincoln in Kuwait and Iran. The company is engaged in the running of several vehicle dealership outlets in places such as Jahra and Shuwaikh. It also runs a quality care service facility where it provides spare parts and offers related technical services.

Maseelah Trading Company Limited

Maseelah Trading Company is a Limited Liability Company based in Kuwait. It was formed in 1972 and is fully owned by the Al-Mulla Group. It deals with the servicing and sale of vehicles used for both commercial and passenger travel as well as equipment used in fire fighting, office automation and industries. It also deals with consumer electronics and heavy machinery. The company also distributes Mitsubishi vehicles in Kuwait as well as other vehicle brands such as the Chrysler and Dodge brands.

Conclusion

The establishment of companies requires the following of processes and procedures as required by the Law whether the company is a Limited Liability one or a shareholding Company. It is therefore imperative for those seeking to form companies in Kuwait to ensure that they observe the Law in order to avoid legal issues that may disqualify them from being granted the right to form their companies. Foreigners wishing to become shareholders in Kuwaiti companies should also seek advice from experts in the field to ensure that they fully understand the implications of their shareholding rights and Liabilities. The establishment of the foreign direct Investment Act gives foreigners the opportunity to fully establish and own companies in Kuwait unlike before and therefore foreigners should take advantage of such provisions as contained in the Act.

Reference

Al-Deera Holding Company.2008. Welcome to Al-Deera Holding Company: corporate overview. Web.

Al-Saleh and Partners. 1996. Kuwait: Formation of Companies. Web.

Campbell, D. & Netzer, A. 2009. International Joint Ventures. Netherlands: Kluwer Law International. Web.

Dabdoub, I.S. 2010.National bank of Kuwait: doing business in Kuwait. Web.