By Atyab Al-Shatti
Many international business entrepreneurs are looking to run their businesses in Kuwait through trust agreements due to the advantages of the trust structure, which they have recognized through practicing trusts in their jurisdiction mainly in relation to the protection and separation of assets from personal creditors and avoidance of probate and tax advantages. Moreover, entrepreneurs are looking at it from another angle, which is the advantages of limited liability, which is possible if a corporate trustee is appointed. The structure of the trust provides more privacy than a company, as well as more flexibility in distributions among beneficiaries.
Yet, the laws of the state of Kuwait do not recognize trusts as a permissible transaction, and prohibit establishing any form of agreement in which the trustor can legally transfer the ownership of specific assets to another person or entity (trustee) to be held for the trustor’s beneficiaries in a form of a joint ownership, whereas the concept of a joint ownership goes against the Anglo-Saxon system which the civil laws of Kuwait are based on. The ownership by the Kuwaiti law is recognized to be sole ownership, while the trust grants the trustee the owner’s rights which are duly owned by the trustor before the establishment of the trust agreement.
Such statutory nature is only permitted by the laws of Kuwait in a very exceptional practice where inheritors can jointly own assets of an inherited property, which is also a temporary condition subject to the distribution of the inheritance and reforming sole ownership of each inheritor according to Islamic sharia provisions.
The other challenge that faces trust agreements is the fact that the commercial law differentiates between business entities which are owned by nationals in Kuwait and foreign companies, considering the fact that foreign companies’ ownership of a local company’s assets should not exceed 49 percent. This is another barrier that any international business shall encounter once they decide they want to establish their business in Kuwait.
One of the main solutions to overcome this challenge is to convert the trust agreement into a joint venture agreement in which the distribution of benefits/profits shall be linked to the greater portion of contribution in the business by the foreign company, either through asset management or services, while providing clauses incorporated within the basic joint venture.
Linking an operating company to a holding company can be another solution with regards to securing the assets, The assets are placed in the holding company with a proper legal establishment for the company where the holding company is operated by operating companies e.g. A B C. The beauty of the holding company is that its ability to control money infuse therein through the operating companies where the holding company is indemnified against any damage that the operating company does, and vice versa! So essentially stopping the liquids’ infusion in the holding company shall be a solution.