Kuwait Tourism

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The Council of Ministers approved the implementing regulations for its new 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, waste 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, and 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 will also be obliged to preserve the safety of the environment, uphold public order and morals, 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 all that much. (The Minister of Finance did not renew the term of the Assistant Undersecretary who is in charge of the Direct Foreign Investment Office). Some reports claim that the Minister will cancel or change it into an authority after a recent report by the Economic Reform Committee describing it as complete failure). 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 oilfields, but may be used to allow for other investment in the petroleum sector in the future.

Kuwait's economy has been dominated by the state and the nationalized oil industry since the early 1970s despite efforts by the government to divest. The government acquired major holdings in private Kuwaiti firms -- particularly banks and insurance companies -- following stock market crashes in 1979 and 1982. After liberation from Iraq (early in 1991), the government passed a debt settlement law and purchased outstanding debts emanating from the stock market crashes and the Gulf War. Between 1995 and 1998, the government successfully divested over 50 percent of its equity holdings in private firms by selling off its full holdings in 28 firms
and portions of holdings in 17 other firms, earning some US $3.2 billion. The program was suspended in 1998 because of weakness of the Kuwait Stock Exchange, but resumed in May 2001 when the Kuwait Investment Authority sold 113 million shares (about 24 percent) of the Mobile Telecommunications Company (MTC). There were six times as many prospective buyers as could be accommodated.

The sale fulfilled the government's intention to reduce its equity in MTC from 49 percent to 25 percent. The Kuwait Stock Exchange (KSE) is the second largest bourse in the Arab world after Saudi Arabia's NCFEI. KSE lists 113 Kuwaiti companies and 2 companies from other Gulf States. It reopened in 1992 following the Gulf War and has a market capitalization of US $61 billion (KD21.745 billion) as of December 2004. The index grew 389 percent between 1994-2003 as the government divested itself of private holdings. 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. Foreign investors require Central Bank's approval to own more than
five percent of a Kuwaiti bank, and are limited to a maximum ownership of 49%. The banking sector was opened under the Direct Foreign Investment Law and the Central Bank has already granted one foreign bank, BNP Paribas, a license to operate. Other foreign banks have expressed interest and will likely apply for licenses in 2005.

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, which has operated at a loss since 2000. Year two initiated privatization of post office, telegraph, and telecommunication services. Years three and four will complete the telecommunication privatization and initiate the privatization of the Ports Authority and Public Transport Company. The fifth and final year targets 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. Little of the 2001 five-year plan has been implemented. Kuwait Airways is still operating at a significant loss and is still a government entity. While both mobile telephone companies in Kuwait are private, none of the other communication services have yet been privatized, though talk is increasing of privatizing landlines. 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. Kuwait's PIC is now operating a joint private venture with Dow Chemicals called Equate, and the operation has proven to be a successful, profitable model of both privatization and foreign investment.

Build, Operate and Transfer (BOT) projects are gaining increasing acceptance in Kuwait, with BOT projects proposed in the power, wastewater, real estate development and transport sectors. After nearly four years of deliberation the Sulaibiya Waste Water Treatment BOT contract was signed in May 2001. The winning consortium, which includes U.S. firms, projects revenues of US $390 million over 10 years. The project will process 50 million gallons of wastewater daily to be used for irrigation. There have also been selected real estate BOT projects by privately owned Kuwaiti companies. The first-class US $132 million Sharq Mall, owned by the National Real Estate Company, contains retail outlets, restaurants, theaters, and entertainment concessions. More recently, the Fifth
Waterfront Development Project constructed Marina Mall.

This US $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 which 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 domestic and offshore income. Corporate tax rates can be as high as 55 percent of net profits, but the government has put forward legislation to reduce the maximum rate to 25 percent. New foreign investors can be exempted from all taxes for up to 10 years under the new Direct Foreign Capital Investment Law. As of January 2004, the new draft taxation law lowering the corporate tax rate to 25% on all sectors was still held up in Parliament.

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 Kuwait's government workers. Kuwait levies no personal income tax.

Tax exclusions -- besides those offered under the new 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 new 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.

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