Further Readings
Simple Guide to Customs and Etiquette in Saudi Arabia and the Gulf States
Foreign business people have been attracted to the countries of the Arabian Gulf for many years, lured by the region's affluence, excellent location, and cosmopolitan atmosphere. A growing number of business people have found the region to be a profitable and pleasant place to do business. Business in the Arabian Gulf region is competitive. Successful business people in the Arabian Gulf region are those who know their markets and their customers. Successful foreign business people in the Arabian Gulf region are those who choose the business structure that best suits their particular business plans, and who choose their Arabian Gulf national business associates carefully. This guide describes in general terms the legal structures for doing business in the six countries that are members of the Cooperation Council of the Arab States of the Gulf (the "Gulf Cooperation Council" or the "GCC"). These six countries, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, are a major destination for U.S. exports and an increasingly attractive location for U.S. business. These six countries are moving towards the elimination of barriers to trade within the GCC and the harmonization of their legal systems. Nevertheless, many significant differences remain among the countries of the GCC that affect the conduct of business. This guide provides basic guidance to foreign business people who are new to the GCC. It cannot answer all questions or address all issues, so instead it outlines the three fundamental structures that are available to a foreign business person who wishes to sell products in the GCC or operate in the GCC. The three structures are a commercial agency, a branch office, and a subsidiary. In the GCC, a commercial agency exists whenever a foreign party appoints a GCC party as the representative of any product or service of the foreign party. Regardless of whether the relationship is structured as a distributorship, sales agency or otherwise, the relationship will be governed by local law. The appointment of a commercial agent often enables the foreign business person to achieve significant market penetration without establishing a direct presence. Local law grants certain rights to the agent that cannot be waived by contract. In Bahrain, commercial agencies are governed by the Bahrain Commercial Agencies Law, Legislative Decree No. 10 of 1992. This Law requires the registration of all commercial agency agreements with the Ministry of Commerce and Agriculture, and provides that no claim shall be heard in respect of an unregistered agency. Upon registration, the Bahrain Commercial Agencies Law gives a commercial agent certain statutory rights that cannot be waived by contract. The most important of these rights includes exclusivity within Bahrain for the relevant products or services. The Bahrain Commercial Agencies Law protects the commercial agent against premature termination by the foreign party, but provides for de-registration upon the expiry of the agency's specified term. To qualify for registration, a commercial agent must be a Bahraini national or a validly incorporated Bahraini company that is at least 51% Bahraini-owned and that has its head office in Bahrain. A foreign company may conduct business in Kuwait by appointing a Kuwaiti agent which conducts the business under its own trade license and in its own name. Chapter 5 of the Decree Law No. 68 of 1980, the Law of Commerce, refers to three types of agency; the contracts agency, the distributorship, and the commission agency. The agent may be a Kuwaiti individual or company. If the agent is a Kuwaiti company, it need not be 100% Kuwaiti owned. Registration of the agency in the Agency Register at the Ministry of Commerce and Industry affords the agent significant protection provided under the Laws of Commerce although the law does not impose an affirmative obligation on the foreign party to ensure that this is done. Unlike in other jurisdictions in the Gulf region, the registered agency agreement between the principal and the Kuwaiti agent is not required by law to be an exclusive agreement. Kuwait law also recognizes "distributorship" as a distinct category of commercial agency. A distributor's activities are generally restricted to promoting, importing and distributing the products of the foreign principal and do not include negotiation and performance of contracts on behalf of the principal. In Oman, commercial agencies are governed by Royal Decree No. 26 of 1977, the Law of Commercial Agencies, as amended. This Law requires the registration of all commercial agency agreements with the Ministry of Commerce and Industry. Once registered, an agent acquires certain rights of exclusivity for the marketing of the product in the territory and the award of compensation upon termination. However, recent changes in the practice of the Ministry with respect to commercial agencies appear to permit non- agents under certain conditions to import products into Oman which are nevertheless the subject of registered agencies. The Ministry apparently no longer requires for importation of products by sea or air that the non-agent obtain the approval of the registered agent. This change in practice does not prevent a registered agent from seeking damages from the principal, but effectively prevents him from blocking sales of the product in Oman. Non- agent importers, like registered agents, will apparently be held to the requirement to provide after sales service and may do so through establishment of workshops or through agreement with existing entities. Historically, only Omani individuals or companies wholly-owned could qualify for registration as commercial agents. Newly issued regulations allow companies with foreign equity ownerships of up to 49% to register and act as agents. In Qatar, commercial agencies are governed by the Commercial Agencies Law, Qatar Law No. 4 of 1986. This law requires the registration of all commercial agency agreements with the Companies Control Department of the Ministry of Finance, Economy and Commerce. To qualify for registration, a commercial agent must be a Qatari national or a company wholly owned by Qatari nationals. Upon registration, the Commercial Agencies Law gives a commercial agent certain statutory rights that cannot be waived by contract. The most important of these rights include exclusivity within Qatar for the relevant products and services, protection from termination and the right to receive compensation upon termination or non-renewal of the agency. Different agents may be appointed for different product lines of the same manufacturer. In the Kingdom of Saudi Arabia, commercial agencies are governed by Royal Decree M/11 of 1962 as amended, and Ministry of Commerce Order No. 1897 of 24/5/1401H. All commercial agency agreements are required to be registered with the Saudi Ministry of Commerce, but failure to register an agreement does not render it unenforceable. Moreover, registration of the agreement generally does not give the commercial agent rights beyond the terms of the agreement. While the law does not specify whether the relationship must be exclusive, the Ministry of Commerce generally refuses to register agreements that do not grant the commercial agent an exclusive appointment in respect of either geograph ical scope or product line. To qualify for registration, a commercial agent must be a Saudi national or a commercial entity that is wholly owned by Saudi nationals. In the United Arab Emirates, commercial agencies are governed by the Federal Commercial Agencies Law, Federal Law No. 18 of 1981, as amended. This Law requires the registration of all commercial agency agreements with the Federal Ministry of Economy and Commerce, and provides that no claim shall be heard in respect of an unregistered agency. Upon registration, the Federal Commercial Agencies Law gives a commercial agent certain statutory rights that cannot be waived by contract. The most important of these rights include exclusivity within the territory for the relevant products or services, and protection from termination. A foreign business may appoint a single agent for the entire U.A.E., or multiple agents for particular Emirates or groups of Emirates. Different agents can be appointed for different product lines of the same manufacturer. To qualify for registration, a commercial agent must be a U.A.E. national or commercial entity that is wholly owned by U.A.E. nationals. All GCC countries except Kuwait and Oman permit foreign companies under certain conditions to open local branch offices without any local equity participation. Such a branch office can do business, hire employees and operate local bank accounts in its own name. This structure provides the foreign party with a greater degree of control over local operations than an agency or a subsidiary. Local law may also provide for establishment of a representative office, a particular type of branch office with restricted activities. The Bahrain Companies Law, Legislative Decree No. 25 of 1975, as amended, provides, as a general rule, that a branch office of a foreign company operating in Bahrain is required to appoint a Bahraini national as a sponsor. The sponsor's compensation is normally structured as either a flat fee or a percentage based on branch office revenues in Bahrain. However, Bahrain Legislative Decree No. 13 of 1991 modified the Bahrain Companies Law to allow exemptions to the sponsorship requirement if the branch office uses Bahrain as a regional center or a representative office for its business activities in the Middle East. The exemption must be applied for, and applications for exemptions are considered on a case-by-case basis. A number of prominent American companies have taken advantage of this exemption to establish offices in Bahrain that serve as regional administrative headquarters for their operations in other GCC countries. Kuwaiti law does not permit a foreign company to establish its own, wholly-owned branch office in Kuwait. The option of establishing a branch office wholly owned by a foreign company is not necessarily available in Oman. The Foreign Investment Law requires that foreign business activity be conducted through a company incorporated in Oman. However, the same law exempts certain types of companies from this requirement. These include, in addition to banks and certain professions, "companies . . . which are engaged in activities in the Sultanate of Oman by virtue of agreements or special contracts concluded with the government of the Sultanate or its public institutions" and "companies . . . which are engaged in a project declared to be an Economic Development Project." Qatar Law No. 25 of 1990 sets forth the general rules governing foreign company operations in Qatar. The Law requires foreign companies operating in Qatar to do so in partnership with a Qatari company or individual and does not permit, as a general rule, branch offices of foreign companies to operate in Qatar. However, exemptions to Law 25 are available that would permit a foreign company to establish a branch office to perform a specific contract in Qatar. The foreign company would have to appoint a Qatari Service Agent (similar to a "sponsor" or "national agent" in other GCC countries) in connection with its application for an exemption. Exemptions are given at the discretion of the Qatar Ministry of Finance, Economy and Commerce. Although the Saudi Companies Regulations provide for the registration of branches of foreign companies, the Foreign Capital Investment Committee (the "FCIC") of the Saudi Ministry of Industry and Electricity, the first licensing authority whose approval is required for such branches, for many years did not grant approval except in rare cases. Although this policy was recently liberalized, it is still fairly difficult to establish such branches. Branches are 100% owned by the entity establishing them. Branches of foreign companies must obtain approval from the Ministry of Industry and Electricity (including the FCIC) and the Ministry of Commerce. Such branches are not entitled to any tax holiday. A branch office of a foreign company must appoint a local national agent, who is also referred to occasionally as a sponsor. A national agent usually agrees to provide certain services to the branch office, such as assistance with licensing and immigration formalities. A national agent does not participate in any aspect of the foreign company's business in the U.A.E., unless it is specifically agreed to give the national agent a role in business promotion. The national agent is entitled only to the fee that the parties agree to, and is not liable for any of the obligations of the foreign company. Foreign companies with offices in more than one Emirate often find it advantageous to appoint a separate national agent in each Emirate in which an office is present. In some areas of business in the GCC, there are commercial advantages in operating through a local subsidiary. Such local subsidiaries are distinct from the wide variety of structures known as contractual joint ventures The Bahrain Companies Law, as amended by Legislative Decree No. 13 of 1991, now allows the establishment of Bahraini companies having majority or one hundred percent (100%) foreign ownership, provided that such companies use Bahrain as a regional center for their activities. Prior to the 1991 amendments, the Bahrain Companies Law permitted the establishment of so-called "exempt companies" having majority foreign ownership, but the activities of such companies were limited to investment in industrial projects within Bahrain or the conduct of business activities outside Bahrain. For various reasons, the limited liability company is generally the most suitable corporate form for Bahraini subsidiaries of foreign companies. A limited liability company must have at least two (but no more than fifty) shareholders and may be incorporated with a capital as low as BD 10,000 ($27,250). The liability of shareholders is limited to the assets of the limited liability company. The limited liability company offers a considerable degree of flexibility in management and distribution of profits. A Bahrain limited liability company with majority Bahraini ownership may be eligible for preferential treatment in government tenders and in tariff treatment on exports to other GCC states; however, it is unlikely that such preferential treatment would be extended to Bahraini companies with majority foreign ownership. Law No. 15 of 1960 (the "Companies Code") permits two types of corporate entities in which a foreign party may be a partner; the Limited Liability Company (known locally as a "WLL") and the Private Shareholding Company (also called a closed joint stock company). The Private Shareholding Company is the only form of Kuwaiti company in which a foreign corporate entity may hold shares in its own name. In practice, formation of a Private Shareholding Company is difficult and there has not been a great amount of foreign participation in such companies. The minimum capitalization of the Private Shareholding Company is generally subject to the discretion of the concerned authorities. Establishment of a Private Shareholding Company requires at least five founders (individual or corporate) and a board of directors of at least three members, who are elected by the shareholders. The maximum foreign ownership of a Private Shareholding Company is 49%, and income attributable to such foreign shareholding is subject to Kuwaiti corporate income tax. Shares in a Limited Liability Company may be held only by a "natural person", whose liability is limited to the amount of the company's share capital for which he has subscribed. The WLL must be at least 51% Kuwait owned, and may not be used as a vehicle for banking, insurance, or investment of funds belonging to third parties. The minimum number of shareholders in a WLL is two and the maximum thirty. Minimum capitalization statutorily required is KD 7,500, but some higher minimum amount may be required at the discretion of the concerned authorities at the Ministry of Commerce and Industry. The Foreign Business and Investment Law (Sultani Decree No. 7 of 1974, as amended) together with the Commercial Companies Law (Sultani Decree No. 4 of 1974, as amended) govern foreign business activity in Oman. The recent issuance of regulations for these laws indicate that Omani authorities may approve foreign equity ownership in an Omani commercial company of up to 65%. Such companies may undertake commercial activities in the fields of agriculture, industry, construction contracting, services and tourism. In order to engage in commercial agency activities, including import and export, foreign equity participation should apparently be limited to 49%. The capital requirement for such Omani companies is set at a minimum of Omani Riyals 150,000 although the recently issued regulations give the authorities discretion to reduce this amount to OR 30,000. The establishment of Qatari subsidiary companies has not been a common business structure for foreign companies doing business in Qatar although there is now increasing interest in this structure. Qatar Law No. 25 of 1990 permits the establishment of such subsidiary companies in Qatar provided that citizens of Qatar own a minimum of 51% of the capital. However, in practice, there are few fields of commercial activity open to such mixed-ownership subsidiary companies. Trading activities are effectively reserved for Qatari individuals and companies wholly owned by Qatari citizens, and the participation of foreign entities in contracting companies requires special approval from the Ministry of Finance, Economy and Commerce. Such approval has, in the past, been difficult to obtain. The Qatar Commercial Companies Law, Qatar Law No. 11 of 1981, governs the formation of companies in Qatar and specifies the form of corporate organization available in Qatar. For various reasons, the limited liability company would be the most suitable form of corporate organization for Qatari subsidiaries of foreign companies. A limited liability company may have from two to fifty shareholders and may be incorporated with a capital as low as QR 200,000 (roughly $55,000). The liability of the shareholders is limited to the assets of the limited liability company. Although the Ministry will not permit deviation from its standard form Articles of Association, the shareholders may be able to introduce flexible management structures through separate contractual arrangements. Like laws in certain other jurisdictions in the GCC, Saudi law does not permit 100% foreign-owned companies. Unlike such other jurisdictions, however, Saudi law does permit the foreign party to be a majority owner, subject to certain limits. As a practical rule, the FCIC will not approve an application for a joint venture that will have less than 25% Saudi ownership. This minimum number also is significant for tax purposes as it is the minimum Saudi participation permitted for a joint venture to qualify for a tax holiday. For various reasons, the limited liability company generally is the most suitable to foreign companies of the forms available under the Saudi Companies Regulations. A limited liability company may have from two to 50 shareholders (partners). The minimum share capital is SR 500,000 (approximately $133,000). The shareholders are liable for the debts of the company to the extent of the subscribed share capital. The limited liability company offers considerable flexibility in management. It may not offer its shares to the general public. Under the U.A.E. Commercial Companies Law, Federal Law No. 8 of 1984, as amended, a company established in the U.A.E. must have a minimum of 51% U.A.E. national ownership and must take one of seven forms of corporate organization. For various reasons, the limited liability company form is generally the most suitable of the seven forms for local subsidiaries of foreign companies. A limited liability company may have from two to fifty shareholders and may be incorporated with a capital as low as DH 150,000 ($41,000). The liability of the shareholders is limited to the assets of the limited liability company. The limited liability form offers a considerable degree of flexibility in management and distribution of profits. A limited liability company incorporated in the U.A.E. may be eligible for preferential treatment in government tenders. A limited liability company may not offer shares to the general public. There are no personal, corporate or withholding taxes in Bahrain. There is no personal income tax in Kuwait, and as a practical matter there is no corporate income tax imposed on the Kuwaiti share of a company. The foreign corporate shareholder, however, is subject to tax for its share of income from business conducted in Kuwait. The tax imposed on such income is determined by a graduated schedule ranging from 5% for income in excess of KD 5,250 (roughly U.S.$ 18,000) up to 55% for income in excess of KD 375,000 (roughly U.S.$ 1,300,000). Corporate income tax is computed on the basis of financial statements provided by the companies to the Kuwait Tax Department. As in other self reporting jurisdictions, the onus is on the reporting company to make a good faith effort to report its income in a manner that accurately reflects income earned through the conduct of business in Kuwait. The computation allows for deduction of business expenses, depreciation of assets, and loss carry-forwards. A small percentage of revenue (generally from 2% to 3.5%) may be deducted as an expense relating to head office overhead. Oman assesses a tax on the taxable income realized by any business having a permanent establishment in Oman. Taxable income includes profits, gains, interest and royalties and the term permanent establishment is broadly defined. Income tax is imposed at rates ranging from 5% to 50% under which companies with Omani ownership will pay lower rates depending on the percentage of Omani ownership. There are concessionary rate tax exemptions for 100% Omani owned companies and certain express exemptions from taxation for projects in particular fields, such as agriculture, fisheries, land reclamation and others. Various employment levies, import duties, municipality and utility fees and registration and licensing fees are also imposed. Qatar Law No. 11 of 1993 provides that income tax shall be levied on profits realized on any project executed in Qatar. Tax is calculated on a progressive scale with a maximum rate of thirty-five percent on taxable income in excess of QR 5,000,000 (roughly $1,360,000). Deductions are available for costs and expenses incurred to earn taxable income. No Qatari income tax is imposed on salaries, wages, personal bank interest and other forms of personal income. Saudi Arabia has two forms of tax on income: (i) a tax on Saudi source business income on foreign individuals, partnerships and companies and (ii) an "arbitrary" tax on Saudi source income from royalties, license fees, lease rentals, insurance premiums and the like. Currently no personal income tax is imposed on foreign individuals. The income tax is assessed against actual net income from Saudi sources at progressive rates from 25% to 45%. Income tax on companies incorporated in Saudi Arabia which have non-Saudi shareholders is imposed on the company itself, but only on the portion of the company's net income allocable to the non-Saudi shareholders. The "arbitrary" tax is assessed against an arbitrary percentage of gross income from Saudi sources at the progressive rates. Normally, the arbitrary percentage is between 15% to 25%. However, in come cases, such as for royalties, the arbitrary percentage is 100%. A tax holiday is available to foreign entities for investments in companies incorporated in Saudi Arabia which are at least 25% Saudi owned. Industrial and agricultural projects can qualify for 10 year tax holiday while other types of projects can qualify for a five-year tax holiday. An additional 10-year tax holiday is available for expansion of an existing industrial joint venture that originally qualified for a tax holiday. This additional tax holiday applies only to the profits arising from the capital expansion portion of the project and not the profits arising from the original project. The United Arab Emirates imposes no tax on the income of natural persons. With respect to the income of corporate entities, tax statutes exist in a formal sense in most of the individual Emirates. However, in practice, the corporate income tax is collected only from banks and petroleum producing companies, at negotiated rates. Accordingly, most business people in the U.A.E. do not have to engage in elaborate tax planning. A foreign business entering the GCC for the first time should take care to understand thoroughly its potential market. For example, the rules for doing business with government and petroleum sector purchasers vary considerably throughout the GCC, and these rules may determine the structure through which a foreign business wishes to operate. A foreign business will also have to consider the rules applicable to its staff. Each of the GCC countries has its own labor laws that govern hiring of local and expatriate employees, conditions of employment, conditions of termination, and various employment benefits.
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