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Navigating the Kuwaiti Sponsorship System: A How-to Guide for US Government Contractors

Jonathan M Persons


  • Discusses legal requirements applicable to U.S. contractors doing work in Kuwait.
  • Analyzes joint business undertakings between U.S. and Kuwaiti companies.
  • Discusses the requirement that U.S. companies operating in Kuwait be sponsored by a Kuwaiti company.
Navigating the Kuwaiti Sponsorship System: A How-to Guide for US Government Contractors
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On November 19, 2018, an article with the headline “Kuwaiti, 4 Expats from U.S. Base in Camp Arifjan Accused of Human Trafficking” appeared on the Arab Times Online website. According to the article, the Office of Public Prosecution was investigating the five people for receiving “about $10,000 from” each of some 1,500 Asian workers “for facilitating the issuance of their residency visas, and 1,000 Kuwaiti Dinar (approximately $3,000) for facilitating the issuance of each of their driving licenses.” The reported scam involved exaggerating the number of workers needed under U.S. contracts for projects on the base, without the knowledge of the contractors involved. An example identified in the article involved hiring workers for the “[Central] Texas College Technology Building.” While the building does not exceed the size of two rooms, and reportedly needs 13 or fewer workers, the suspects estimated that about 1,250 workers were required.

In order for American companies, and other non-Kuwaiti- national enterprises, operating in Kuwait to avoid being victimized as Central Texas College allegedly was, it is important to understand the legal regime governing U.S. and other foreign companies operating in Kuwait, including Kuwait’s requirement that non-Kuwaiti companies have local sponsors.

A good place to start is the general responsibility standard in Federal Acquisition Regulation (FAR) 9.104-1(g), which requires that a contractor “[b]e otherwise qualified and eligible to receive an award under applicable laws and regulations.” For a contract being performed outside of the United States, this presumably means that the contractor must comply with the laws that allow it to operate in the foreign country. This point is reiterated in FAR 52.225-19(d), Compliance with laws and regulations, which states, in relevant part:

The Contractor shall comply with, and shall ensure that its personnel in the designated operational area or supporting the diplomatic or consular mission are familiar with and comply with, all applicable —

  1. United States, host country, and third country national laws;
  2. Treaties and international agreements. . . .

Based on the inclusion of this contract clause, contractors operating in Kuwait are required to comply with all Kuwaiti laws, to include Kuwaiti Law 6 of 2010, The Law of Labor in the Private Sector, which states in Article 10 that an “employer shall be prohibited from employing foreign manpower unless the competent authority has granted them a permit to work for him.” Consequently, in order to comply with FAR 52.225-19(d), a contractor must obtain work visas from the Kuwaiti Ministry of Social Affairs and Labor for each non-Kuwaiti employee.

Additionally, FAR 52.222-50, Combating Trafficking in Persons — which prohibits U.S. contractors, subcontractors, and their employees from engaging in any form of trafficking in persons — defines some of these prohibited practices with reference to host-nation law. For example, the clause prohibits contractors or their agents from providing or arranging “housing that fails to meet the host country housing and safety standards.” The FAR also states that contractors must have a recruitment and wage plan that ensures wages meet applicable host-nation legal requirements or that explains any variance. Similarly, Department of Defense FAR Supplement (DFARS) 252.225-7040, Contractor Personnel Supporting U.S. Armed Forces Deployed Outside the United States, requires that contractors pay their employees according to the host-nation rate and provide host-nation-quality housing.

Consequently, American companies and other non-Kuwaiti-national enterprises performing in Kuwait under U.S. government contracts must not only obtain proper visas and work permits for all foreign workers in Kuwait, they must also remain in compliance with the Kuwaiti labor law. As the following analysis of applicable Kuwaiti laws will show, the foregoing is easier said than done.

Doing Business in Kuwait

The United States does not have a standing Status of Forces Agreement with Kuwait. Rather, the relationship between the two countries is governed by a Defense Cooperation Agreement (DCA). First signed on September 19, 1991, the DCA had an initial duration of 10 years but remains in effect. As explained in a recent Congressional Research Service report, the text of the DCA is classified, but it “reportedly provides for mutual discussions in the event of a crisis; joint military exercises; U.S. evaluation of, advice to, and training of Kuwaiti forces; U.S. arms sales; prepositioning of U.S. military equipment; and U.S. access to a range of Kuwaiti facilities. The DCA also provides that U.S. forces in Kuwait be subject to U.S. rather than Kuwaiti law — a common feature of such arrangements.” Such protection from Kuwaiti law, however, was not afforded to non-U.S. force personnel, such as contractors. Thus, U.S. contractors are still required to comply with Kuwaiti laws, including those governing commercial operations.

The basic premise for carrying out business in Kuwait is identified in Articles 23 and 24 of the Kuwaiti Commercial Code. Article 23 of the Code states that non-Kuwaiti citizens may not pursue any commercial activities in Kuwait without a Kuwaiti partner. This partner’s share must not be less than 51 percent. Article 24 sets forth that any foreign company may not establish a branch in Kuwait and cannot pursue its commercial activities in Kuwait without a Kuwaiti agent. Consequently, foreign entities wishing to conduct business in Kuwait must enter into some sort of business arrangement with a Kuwaiti national. This arrangement can take one of several forms, ranging from a simple joint venture to a more complex form of joint undertaking.

Joint Undertakings Under Kuwaiti Law

Strictly speaking, any two persons can participate in a joint venture, subject to certain limitations, for the purpose of carrying out a specified project. The concept of a “joint venture,” however, differs when used by businesspeople or by lawyers. In a business context, a “joint venture” can be made up of proprietorships, partnerships, or corporations, or a combination of the three. When used by lawyers, on the other hand, the concept has a more specific meaning. Black’s Law Dictionary, for instance, defines a joint venture as a “business undertaking by two or more persons engaged in a single defined project.” For clarity, the term “joint undertaking” will be used here on out when referring to the business concept.

Since Kuwait’s independence from Great Britain in 1961, the Kuwait Companies Law (CCL) has incorporated both joint ventures as well as joint undertakings. While there are seven recognized forms of companies in Kuwait, there are only four in which a foreign entity could operate. The first — joint venture company — is covered briefly by Articles 76–79 of the Companies Code. The other three types of companies — partnership companies, shareholding companies, and limited liability companies — will be discussed in more detail below

Joint Venture Companies in Kuwait

Article 76 of the CCL defines a joint venture company as a company agreed between two or more partners. Pursuant to Article 77, the joint venture company is formed under a simple contract and does not need to be registered in the Commercial Register or announced in two local Arabic-language newspapers, as is required for the other company structures discussed below. The company contract must specify the partners’ rights and obligations and the manner in which the profits and losses are distributed among them. Additionally, the joint venturers can establish any other terms and conditions that they can agree to, such as capital, management, accounting procedures, liquidation of assets, and representation vis-à-vis third parties. The agreement, which is ultimately signed and executed by the parties, is binding, valid, and enforceable as to each other and any third parties with whom business is conducted.

Because a joint venture company is not subject to registration in the commercial register or announcement, it does not have a legal personality. Consequently, these companies may not conduct business in their own name. It is only through one of the co-venturers that a joint venture company may conduct business with third parties. Because foreign entities participating in a contractual joint venture company in Kuwait must still comply with the foreign ownership restrictions, the transacting venturer is typically the Kuwaiti co-venturer. The fact the Kuwaiti co-venturer should be the transacting venturer is especially true considering the Kuwaiti venturer is required to guarantee the obligation of the foreign participants. While any liabilities incurred in this manner are typically shared among the co-venturers — subject to their contractual agreement — the co-venturers are subject to unlimited joint and several liability if the joint venture company deals with third parties in its own name, as opposed to in the name of one of the co-venturers. It makes no difference whether the joint venturers were personally involved in the transaction or not.

Now we turn to the joint undertaking type of companies.

Joint Undertaking Corporations in Kuwait

Joint undertakings, on the other hand, are de facto companies and, as such, are generally subject to certain legal constraints. As noted above, every company established in the State of Kuwait needs to be majority-owned by Kuwaitis. Consequently, foreign entities wishing to conduct business in Kuwait must enter into some sort of contractual relationship with a Kuwaiti national.

Partnership Companies

There are three types of partnership companies discussed in the CCL: general partnership companies, limited partnership companies, and partnerships limited by shares.

A general partnership company is defined in CCL Article 33 as a “company established between two or more persons and that operates under a certain name.” All partners in a general partnership company are jointly and severally liable for partnership debts to the extent of their personal wealth. While Kuwaiti law does not place a limit on the nationalities of the partners involved in forming a general partnership, it does provide that the Kuwaiti partners must own “no less than 51 percent of the company’s capital.”

Limited partnership companies have two types of partners: general partners with unlimited liability and limited partners, which, as the name suggests, have limited liability. All general partners are jointly and severally liable for partnership debts to the extent of their personal wealth, while limited partners’ liability is limited to the capital they have invested in the joint undertaking. All general partners in a limited partnership company must have Kuwaiti nationality and must own not less than 51 percent of the company’s capital.

A partnership limited by shares — which is a hybrid of the general partnership company and the shareholding company — is a company made up of general partners, who are jointly and severally liable for all the obligations of the company, and limited partners, whose liability for the company’s obligations is limited to the amount of the shares they hold in the capital. As a general rule, the general partner in this company is subject to the legal provisions that govern a partner in a general partnership company, while the limited partner is subject to the legal provisions that govern a shareholder in a shareholding company. The provisions applicable to a limited partnership company also apply to a partnership limited by shares, which means that not less than 51 percent of the company’s capital must be owned by the Kuwaiti partners.

Shareholding Companies

A shareholding (joint stock) company (KSC) is a company whose capital is divided into tradable shares of equal value that can, subject to certain limitations, be traded or pledged. The shareholder in such a company can be a natural or corporate person. Either way, a shareholder’s liability is limited to his or her equity participation in the company.

Two kinds of KSCs exist: public shareholding companies, which are listed on the Kuwaiti Stock Exchange, and closed shareholding companies. While no foreign shareholders are allowed to own shares in a public company, no such restriction exists in the case of a closed company. Consequently, shares of companies involving foreign equity are not eligible to be listed on the stock market. Regardless of the form it takes, a KSC must be of Kuwaiti nationality, i.e., it must be incorporated in Kuwait and have its registered office in Kuwait. Consequently, foreign equity in a KSC is limited to 49 percent.

The founding shareholders in a KSC are required to submit an application for the company’s incorporation to the Ministry. The number of founding shareholders must be at least five, and founding shareholders may not dispose of their shares — other than to another incorporator or in bankruptcy — before two fiscal years have elapsed from the date of final incorporation. The Minister of Commerce and Industry must issue a resolution approving the incorporation of public shareholding companies. Because its stock is not publicly traded, there is no requirement — other than for companies holding concessions or monopolies — for a closed shareholding company to obtain a decision from the Minister for the purpose of incorporating.

Limited Liability Companies

The third major type of company is the limited liability company, which is usually referred to as “with limited liability” (WLL). In this type of company, all partners must be natural persons and may not include corporate entities. As in the case of the KSC, liability is limited to the partners’ equity participation. Unlike a KSC, however, equity in a WLL is not represented by a certificate; instead, it is evidenced by the memorandum of association and the books of the company. Although shares (called “parts” for WLLs) are not evidenced by a certificate, they can be sold or pledged. The number of partners may not be less than two (a husband and wife are considered one person) nor exceed 50 persons. Limited liability companies cannot engage in insurance, banking, or portfolio management, nor can they issue debentures.

The process of forming a WLL is comparatively simple. While foreign shareholders in a KSC must be approved by ministerial decree, foreign partners in a WLL only require approval by the Undersecretary of the Ministry of Commerce and Industry, a less time-consuming process.

As with a closed KSC, however, foreign equity may not exceed 49 percent of the company’s capital. Foreign shareholders can serve on the board of directors of both types of companies proportionate to their equity.

Commercial Law 36 of 1964, as amended by Commercial Law 68 of 1980, governs the establishing of a business or business relationships in the State of Kuwait. Under the above provisions, foreign corporate bodies are not permitted to set up a branch in Kuwait without approval from the Kuwait Direct Investment Promotion Authority. If a foreign corporate entity does not wish to operate in Kuwait through participation in a shareholding company or a limited liability company, it may still engage in business in Kuwait, but it may only do so through commercial agents, distributors, or service agents.

Commercial Agencies

Commercial agencies in Kuwait are governed by Law No. 13 of 2016, On the Regulation of Commercial Agencies (Agencies Law). As defined in Article 1 of the Agencies Law, a commercial agency is an “agreement whereby the party holding the legal right entrusts a merchant or company in the State to sell, promote or distribute goods or products or render services in his capacity as an agent, distributor, franchisee or licensee of the product or the original supplier against a profit or commission.”

In order for an entity to operate as a Commercial Agent, it must be:

  1. A natural person or a group of natural persons of Kuwaiti nationality, or a legal person, provided the share of the Kuwaiti partner in its capital is not less than 51 percent;
  2. Registered in the Commercial Register;
  3. Licensed to exercise the business covered by the agency; and
  4. Connected with the principal by a direct agency contract or connected with the party holding the legal right to represent it.

Commercial agents are engaged in promoting products or negotiating and concluding deals on behalf of their principal. In this type of agency, the local agent contractually undertakes to promote the principal’s business on a continuous basis in the territory and enter into transactions in the name of the principal in return for a fee. The agency contract must be in writing and set forth terms and conditions such as the territory covered, the agent’s fees, the agency term, the product or service that is the subject of the agency, and any relevant trademarks. While these Kuwaiti operations of foreign corporate entities are often referred to as “branch” operations, a branch is not a recognized legal form for foreign investors under the CCL.

A distributor promotes, imports, stocks, and distributes the principal’s goods and services. A foreign entity can appoint more than one distributor; however, if the appointed distributor is the sole distributor, then, in accordance with Article 286 of the Commercial Law, the exclusive distribution is deemed to be an agency contract.

Service agents or sponsors are appointed by foreign companies intending to engage in government contract works. It is through this sponsorship system that foreign companies operating in Kuwait interact with the Kuwaiti government.

Sponsorship System

In accordance with Kuwait’s sponsorship system, all foreigners — including those working on Department of Defense contracts — require a local sponsor in order to work in Kuwait. Such a sponsor acts as a sort of guardian, as well as guarantor, and must undertake and process all administrative work (i.e., paperwork) on behalf of the foreigner, including applying for a work and residence visa. A sponsor can be a company or an institution but, as noted above, must be a Kuwaiti national.

To ensure compliance with Kuwaiti labor laws, the Public Authority for Manpower (PAM) requires that manpower for DoD contracts in Kuwait be registered in a labor file before issuing a work visa. In order to request the creation of a labor file, the contractor must provide the contract number, a copy of the agreement between the contractor and service agent, the number of personnel required to fulfill the contract, and a description of the type of work to be performed, broken down by job title or duty description for every position a company intends to hire for a particular contract. For instance, if a contractor is awarded a contract to provide bus transportation on Camp Arifjan (a military installation in Kuwait), the labor file would list every position required to fulfill the contract and the number needed — such as drivers (7), mechanics (3), supervisors (2), and dispatchers (4) — with each on a separate line. This list is not dissimilar to the Modified Table of Organizational Equipment (MTOE) or Table of Distributions and Allowances (TDA) of a U.S. military unit. Unlike an MTOE, however, these lists are typically 10 to 15 percent over the actual manpower estimate required in order to account for transitioning employees and temporary surges.

This list, along with an introductory letter, would then be presented to PAM for verification. After validating and registering the file, PAM will notify the Kuwaiti sponsor company directly to obtain work visas, which includes providing a bank guarantee of 250 Kuwaiti dinars for each position on the labor file. Because the Kuwaiti government will only deal with Kuwaiti nationals for the purposes of labor law compliance, the Kuwaiti government considers the migrant workers to be employees of the sponsor.

Once verified, the contractor begins the process of identifying individuals to place against each of the listed positions. As workers are identified, their information is added to an Excel spreadsheet that details laborer names, country of citizenship, Defense Biometric Identification System (DBIDS) ID number (with expiration date), civil ID number, and DoD ID number. With each position assigned, the completed labor file is presented to PAM for approval, along with the original passport for each person assigned to the labor file. The Kuwaiti government then compares the potential workers identified for each position against which they are assigned to ensure they are matched. Once a labor file is approved, the Kuwaiti government issues work visas for all identified employees.

Because a worker’s visa is issued against a specific contract, that migrant worker’s immigration status is legally bound to a sponsor for the specific contract period. As the sponsor must present the original passports to PAM, some sponsors offer to hold onto the passports “for safekeeping.” Regardless of who holds the passports, the migrant worker cannot enter the country as a new worker or transfer employment without first obtaining explicit written permission from the sponsor and processing the same through PAM. If the sponsor cancels the visa of the employee, the employee can depart the country and return under another sponsor. The sponsor must report to the immigration authorities if the migrant worker leaves its employment and must ensure the worker leaves the country after the contract ends, including paying for the flight home.

The Case of the Central Texas College Technology Building

In the example discussed above, the four foreign nationals accused of human trafficking are reportedly believed to have worked with a Kuwaiti to falsify the labor file for the “[Central] Texas College Technology Building.” Where the labor file would have originally been limited to the 13 or fewer workers actually required, according to the news article, the suspects “padded the numbers” in order to obtain extra visas that they could then sell. Because Central Texas College is not a Kuwaiti national company, it could not deal directly with the Kuwaiti government. Consequently, Central Texas College was at the mercy of unscrupulous employees of its Kuwaiti service agent, who would be in a position to manipulate the labor file without Central Texas College ever knowing.

Based on the foregoing, any entity wishing to conduct business in Kuwait needs to register with the Kuwait Ministry of Commerce and Industry. In order to do so, however, the business entity needs to be majority owned by Kuwaiti nationals. One way a foreign national company could legally operate in Kuwait is through a sponsorship agreement with a Kuwaiti national company. As noted above, however, the sponsorship system is subject to abuse. While foreign national companies wanting to conduct business in Kuwait must abide by the laws, they must also be aware of how the system works so their ignorance cannot be exploited, as was allegedly done with Central Texas College.