Entry of Major Corporations into Kuwait

A Brief Legal Report for the Entry of Major Corporations into Kuwait

In Accordance with the Public-Private Partnership Law and the Direct Investment Promotion Law

In the context of achieving Kuwait Vision 2035, which aims to diversify the national economy and reduce reliance on oil revenues, the State of Kuwait has enacted two strategic legislations to reshape its investment environment. These are Law No. 116 of 2013 on the Promotion of Direct Investment and Law No. 116 of 2014 on Public-Private Partnerships. The primary purpose of their issuance is to open new horizons for foreign capital and expertise, stimulate the role of the private sector in driving development, and accelerate the completion of major vital projects.

The importance of these two laws lies in their provision of two integrated yet distinct tracks for entering the Kuwaiti market. The Direct Investment Promotion Law aims to attract global companies to establish independent commercial entities, offering unprecedented incentives, most notably the possibility of 100% foreign ownership and exemptions from taxes and customs duties, with the goal of transferring advanced technology, localizing knowledge, and creating quality job opportunities for citizens. The Public-Private Partnership Law was enacted to regulate the participation of the public and private sectors in financing, developing, and operating large-scale infrastructure projects, thereby alleviating the financial burden on the state budget and leveraging the efficiency and experience of the private sector in managing long-term projects. Together, these two laws form the cornerstone of Kuwait’s strategy to enhance its investment attractiveness and support its national economy.

Track One: Direct Partnership with the State in Vital Projects such as Infrastructure and Energy Projects

Governing Law: Law No. 116 of 2014 on Public-Private Partnerships (the “PPP Law”).

• • Primary Objective: To engage the expertise and financing of the private sector in the development, construction, and operation of major public infrastructure and services projects led by the government (e.g., power and water plants, transportation projects, and waste treatment).
  • Supervising Authority: The Kuwait Authority for Partnership Projects (KAPP), which is the central body managing all project phases from tendering to awarding.
  • Who is this track for? Ideal for companies aiming to build, own, and operate strategic assets for the government under long-term contracts, particularly for vital projects like energy and infrastructure, and the management of commercial facilities and zones, where the government is the primary off-taker of the service or product.

Mechanism of Entry and Operation

• • Ownership Structure (for projects exceeding KWD 60 million in cost):
    • 26% to 44% for the winning foreign investor (or consortium).
    • 50% offered for public subscription to Kuwaiti citizens through an Initial Public Offering (IPO).
    • 6% to 24% retained by government entities.
  • Procedures:
    • KAPP issues a public tender for the project and invites companies for pre-qualification.
    • Companies undergo a rigorous qualification process based on technical expertise and financial solvency.
    • The winning investor is selected through a competitive process that ensures transparency.
  • Investor Guarantees and Rights:
    • Long-Term Contracts: The partnership contract can extend up to 50 years, providing investment stability.
    • Risk Allocation: The contract clearly defines the distribution of risks between the government and the investor.
    • Financing Guarantees (Bankability): The law permits the mortgaging of project assets and shares as security to obtain financing from banks.
    • Dispute Resolution: The law allows for recourse to international arbitration if stipulated in the contract.

Track Two: Independent Investment and Establishment of a Private Commercial Entity

Governing Law: Law No. 116 of 2013 on the Promotion of Direct Investment (the “DIP Law”).

• • Primary Objective: To attract value-added investments that contribute to technology transfer, create jobs for Kuwaitis, and diversify the economy.
  • Supervising Authority: The Kuwait Direct Investment Promotion Authority (KDIPA), which acts as a “One-Stop Shop” to facilitate all licensing procedures.

Mechanism of Entry and Operation

• • Ownership Structure (The most prominent feature):
    • Up to 100% foreign ownership of a Kuwaiti company or the establishment of a branch of a foreign company, granting the investor full autonomy and control.
  • Procedures:
    • The investor submits a direct application to KDIPA for an investment license.
    • KDIPA evaluates the application based on the project’s contribution to the national economy (such as technology transfer, job creation, strategic returns, and project importance).
  • Investor Guarantees and Rights (Incentives):
    • Tax Exemption: Exemption from income tax (15%) for a period of up to 10 years.
    • Customs Duty Exemptions: Full or partial exemption from customs duties on the import of machinery, equipment, and materials necessary for the project.
    • Strong Legal Guarantees: Protection against expropriation or confiscation, except for public benefit and with fair and prompt compensation.
    • Freedom to Transfer Funds: Guarantee of the freedom to transfer profits and capital abroad without restrictions.
  • Sectoral Restrictions: This law excludes activities related to the extraction of crude oil and natural gas (the upstream/exploration and production sector), but allows investment in the oil services, downstream, and petrochemical industries.

Legal Guarantees for the Protection of Foreign Investments

To foster a secure and attractive investment environment, both laws provide a set of fundamental guarantees aimed at protecting the rights of foreign companies.

1. Guarantees under the Direct Investment Promotion Law (No. 116 of 2013)

This law provides direct and explicit protections for the investor, which are among the most significant attractions for companies seeking autonomy and full control.

• • Protection from Expropriation and Confiscation:
    • Principle: A licensed investment entity may not be confiscated or expropriated except for public benefit and in accordance with the law.
    • Compensation: In the event of expropriation, the law mandates “fair compensation” equivalent to the true economic value of the project at the time of the decision. The compensation must be paid promptly. This guarantee protects the investment from arbitrary actions and ensures against capital loss.
  • Freedom to Transfer Funds:
    • Principle: The law grants the foreign investor the full right to freely transfer their profits, capital, investment proceeds, and any due compensation abroad without restrictions.
    • Importance: This guarantee is vital for international companies, as it ensures their ability to repatriate profits to their home country and manage their global cash flows with flexibility.

• • Dispute Settlement:
    • Principle: Although jurisdiction lies with Kuwaiti courts, the law permits agreements to resort to arbitration to settle any disputes that may arise.
    • Importance: This option gives the foreign investor the ability to choose a neutral and internationally accepted mechanism (such as international arbitration) for dispute resolution. This mitigates concerns about potential bias in local courts and provides an effective and confidential mechanism for resolving conflicts. Kuwait is also committed to international investment agreements, which further enhances legal protection.

2. Guarantees under the Public-Private Partnership Law (No. 116 of 2014)

The nature of guarantees under this law differs, as they are primarily based on the contractual framework of the project itself, where the contract is considered the law of the parties (pacta sunt servanda).

• • The Partnership Contract as a Primary Guarantee:
    • Principle: The main guarantee for the investor is the “Partnership Contract” itself, which is a detailed, long-term legal document (up to 50 years) that precisely defines all rights and obligations of both parties (the government and the investor).
    • Importance: The contract provides a stable and predictable long-term legal framework. It includes detailed clauses on risk allocation, payment mechanisms, performance standards, and contract termination conditions, which reduces ambiguity and protects the investor from sudden political or administrative changes.
  • Financing Guarantees (Bankability):
    • Principle: The law enhances the bankability of projects by allowing the investor to mortgage project assets and shares in the project company as security for lenders.
    • Importance: This guarantee is crucial for attracting financing from international and local banks, as it provides lenders with a mechanism to recover their funds if the project defaults, thus making the financing of large-scale projects feasible.
  • Dispute Settlement via Arbitration:
    • Principle: The law explicitly permits recourse to arbitration to settle disputes arising between the contracting parties, provided it is agreed upon in the contract.
    • Importance: As with the DIP Law, this provision gives the foreign investor additional confidence by providing a neutral and effective mechanism for settling complex disputes that may arise in long-term projects, away from traditional judicial proceedings.

Strategic Summary for Major Corporations

• • To execute a large-scale infrastructure project for the government (e.g., a power plant):
    • The mandatory track is the PPP Law (KAPP). The company must be prepared for a joint ownership structure and a lengthy, competitive tendering process.
  • To provide specialized services or advanced technology to the Kuwaiti market:
    • The optimal track is the Direct Investment Promotion Law (KDIPA). This track offers complete autonomy and strong financial incentives, allowing the company to operate as an independent commercial entity that can contract with both the government and the private sector.

Writer is Managing partner : Dr.fayez Alfadhli

Counsal