In recent years, Kuwait has been engaged in legislative initiatives that cater to attracting foreign investments, including establishing better corporate governance regulations that align with international best practice. One of the latest initiatives in this respect is Ministerial Resolution No. 4 of 2023 Regarding the Procedures for Identifying Actual Beneficiaries as amended by Ministerial Resolution No. 41 of 2023 (“Resolution”). The Resolution was issued on 4 January 2023 and published in the Kuwait Official Gazette on 8 January 2023.

PURPOSE

The aim of the Resolution is to develop Kuwait’s business environment and consolidate its economic position and capabilities by establishing a mechanism to disclose ultimate beneficial owners (“UBO”) and align with international standards (Article 2). The UBO disclosure mechanism, as set out in the Resolution, purportedly serves to supplement the mechanisms already in place constituting the Kuwaiti anti-money laundering regime (which is set out in the Anti-Money Laundering Law No. 106 of 2013 and its Executive Regulations, the “Anti-Money Laundering Law”). Nonetheless, the existence of such a register raises the question whether the regulatory authorities could extend the scope of its application to enforce the foreign ownership restriction rules when reviewing the shareholding structures of companies under establishment by foreign investors or those companies already in existence.

SCOPE OF APPLICATION

The Resolution applies to all Kuwaiti companies licensed and registered in Kuwait (Article 3(1)), which would apply to both existing companies and companies under establishment. It exempts government-owned entities or entities wholly owned by the government (Article 3(2)). Issuing or renewing licenses of existing companies will now only be contingent upon satisfying all requirements under the Resolution (Article 17). All Kuwaiti corporate entities are required to obtain and maintain accurate, up to date details of all UBOs. Since entities regulated by the Kuwait Capital Markets Authority (“CMA”) are already subject to similar disclosure requirements under applicable regulations, the Resolution exempts corporate entities that are subject to the regulatory purview of the CMA (Article 3(3)).

DEFINING THE UBO

UBO As ‘Natural Person’

The Resolution adopts a broad mechanism in determining a UBO although it does narrow the definition down to a natural person rather than a corporate entity. It defines a UBO as a natural person who stands, in fact, to benefit from exercising complete ownership or control over a corporate entity (Article 1). Specifically, a UBO of a corporate entity is an individual who, whether directly or indirectly: (i) exerts full control over a corporate entity; (ii) owns at least 25% or more shareholding interests or shares in a corporate entity; (iii) has voting rights representing 25% or more of the shareholding in a corporate entity; or (iv) otherwise maintains such ownership or control through a chain of successive ownership or control mechanisms (Article 5(1)). Ultimate beneficial ownership does not need to be consolidated by, or in one person, and any number of people can be deemed to exercise ultimate beneficial ownership (Article 5(3)).

Identifying the UBO

Determining a UBO can be undertaken by tracing individuals through any number of corporate entities or arrangements (Article 5(2)). If establishing the UBO is not possible through ordinary means of tracing, then any natural person exercising control over a corporate entity by any other means can be deemed the UBO (Article 5(4)). If such control cannot be established, then the natural person assuming a decision-making position within higher management could be deemed the UBO (Article 5(5)).

REQUIREMENTS

UBO Register

Each Kuwaiti corporate entity must take reasonable measures to establish, safeguard and maintain a register of UBOs (“UBO Register”) (Article 11(1)). The UBO Register must include details of the UBO including (i) full name, nationality, place and date of birth; (ii) place of residence and address to which notices may be delivered; (iii) civil identification or travel document number, as well as country and date of issuance and expiry date; (iv) the basis and date upon which the individual or individuals became a UBO; and (v) the date on which the individual or individuals ceased to be UBOs (Article 8(2)).

Notice to Presumptive UBOs

If there is a likelihood that a person may be a UBO whose details were not properly recorded or not recorded altogether in the company’s ultimate ownership register, then the corporate entity must ascertain the fact of ownership within 15 days (Article 7(1)). The company must subsequently deliver notice to a presumptive UBO detailing the fact and the grounds upon which it has been established requesting confirmation from the presumptive UBO, or otherwise the provision of any corrected or missing details (Article 7(2)). A corporate entity may rely on the information or details provided in the presumptive UBO’s response unless there is reason to suspect that the information or details provided are incorrect or misleading (Article 7(4)).

Disclosure to Registrar

A corporate entity must disclose the details of the UBO Register to the Registrar (Article 11(1)), in addition to any other information the Registrar may require (Article 11(2)). For existing corporate entities, the UBO Register detailing information on a company’s UBO must be established by 1 June 2023, or sixty (60) days from the date the Resolution comes into force on 1 April 2023 (Article 18(1)). Companies under establishment are required to create the UBO Register by the date of their establishment if they are established after 1 April 2023. The UBO Register must also be updated and a new register reflecting the change in, or amendment of the details of the UBO must be submitted to the Registrar within fifteen (15) days from the date the amendment or change took effect (Article 14(2)).

POTENTIAL IMPLICATIONS OF THE RESOLUTION

Foreign Ownership in Kuwait

Under Kuwaiti law, it remains the case that foreign investors cannot maintain more than 49% of shareholding interest in Kuwaiti corporate entities. Although the Kuwait Direct Investment Promotions Authority (“KDIPA”) regime does offer the option of 100% foreign ownership of a Kuwaiti entity, the ability of the KDIPA regime to attract foreign investment remains somewhat limited, particularly for small and medium-sized foreign businesses with limited capabilities and resources if compared with alternative options available in other regional markets. Because ‘would-be’ foreign investors are required to contribute to the Kuwaiti economy in exchange for full ownership of the Kuwaiti corporate entities they establish, the nature and scope of their contributions remain subject to specific criteria, as well as the assessment and approval of the KDIPA.

Alternative Workarounds

For this reason, nominee arrangements and multi-layered corporate structures continue to be attractive to foreign investors and are the common ‘go-to’ workarounds to protect their investments. Although they still pose some risks, nominee arrangements are not strictly penalized under Kuwait law. To determine whether ultimate majority shareholding is indeed foreign owned, the officials at the Kuwait Ministry of Commerce and Industry (“MOCI”), furthermore, do not usually inquire beyond two levels up the corporate chain in which the Kuwaiti entity is to be established. These workarounds continue to provide foreign investors with some degree of comfort in carrying out their businesses in Kuwait by maintaining majority ownership of their investments, whether through legal or beneficial ownership.

Scope of Application and Enforcement

Pursuant to the Resolution, the MOCI is endowed with the authority to share the details of the UBO Register with local and international authorities or obtain information on UBOs, including their locations, on behalf of authorities abroad to facilitate international cooperation in this regard and meet Kuwait’s international treaty obligations (Article 15). This is expressly in line with the Resolution’s mandate to supplement legal measures set out in other legislation to combat money laundering and other types of funding of illegal activity.

However, notwithstanding the apparent intent of the Resolution, the disclosure requirements, namely the UBO Register mandated by the Resolution, puts into question whether it could be used indirectly to apply or enforce foreign ownership restrictions under Kuwaiti law and the consequences of any such enforcement, not to mention potential tax implications. The MOCI would already maintain the UBO Register detailing and evidencing ultimate ownership for a period of at least five (5) years (Article 13), including the grounds upon which a UBO assumes such designation. The MOCI could potentially apply the sanctions available to it under the Resolution (Article 16) to enforce the rules on foreign ownership restriction, including restricting, suspending, or altogether prohibiting the business or commercial activity, as well as suspending or withdrawing a company’s commercial license (Article 15, Anti-Money Laundering Law). These sanctions could potentially have a direct impact on the operations of any existing or future foreign investor carrying out business in Kuwait.

The Resolution’s disclosure requirements are set to come into force on 1 April 2023 (Article 18). We have consulted with MOCI officials who indicated that, as of the date of this writing, the means and extent to which the Resolution will be implemented is still under consideration and no official guidelines have yet been established. Whilst the indirect effects of applying the Resolution could, in theory, widen the scope of enforcement of the foreign ownership restriction rules by the MOCI, any such enforcement, however, would ultimately depend on whether the MOCI will, in fact, elect to expand the ambit of the Resolution in its regulatory practice.

Author: Julian Awwad, Phd, Legal Director 

For further information, please contact Alex Saleh (alex.saleh@glaco.com) and Julian Awwad (julian.awwad@glaco.com)