Saudi Arabia: Kingdom of Saudi Arabia Law - A Overview

Last Updated: 11 January 2011
Article by Don Turley

Saudi Arabia is experiencing an ongoing boom in construction and related infrastructure projects. This boom is supported by the approval in August 2010 of the 9th five-year development plan for the Kingdom of Saudi Arabia ( KSA ) by King Abdullah bin Abdulaziz al-Saud which will see $385 billion invested in infrastructure development for the next five years of 2010 to 2014. It is therefore timely to review the laws of KSA that will impact on those who intend to be involved in these development projects.

KSA is a sovereign Arab Islamic state. The law of KSA is based on Islamic law ( Shari'ah ) from two main sources being the Holy Qur'an ( the divine revelation to the Prophet Mohammed ) and the Sunnah ( a record of the sayings and actions of the Prophet Mohammed).

Key elements of Shariah Law:

Freedom of Contract. Parties are generally free to negotiate their own terms of contracts. An exception will be where the activities are expressly prohibited.

Fairness and Good Faith. Contracting parties must observe and maintain principles of fairness and equity in their dealings.

Uncertainty. There should be no element of deception or excessive uncertainty in the contract.

Agreements to Agree. Agreements that envisage the future consummation of an agreement or a material obligation may be considered uncertain and unenforceable.

Speculation. A contract that involves speculation on a future outcome will generally not be permitted and considered void.

Unjust Enrichment. Contracts where one party gains unjustly at the expense of another will be void.

Interest. Under Islamic Law, contracts including clauses which provide for payment or receipt of interest will generally not be enforceable. In KSA there is an exception to this general principle where in banking transactions the Saudi Arabian Monetary Authority Banking Disputes Settlement Committee may enforce interest provisions.

KSA Government Law

The Government of KSA will from time to time issue specific laws and regulations when necessary to supplement Shari'ah Law. In the event of any conflict between Shari'ah Law and any KSA Government laws or regulations then Shari'ah Law will usually prevail. Where KSA Government laws or regulations are silent then reference should be made to the relevant rules under Islamic law.

Key KSA Government Law:

Government Tenders and Procurement Law. This is a very significant law and together with the implementing regulations it governs all contracts with KSA Government entities. This law requires that all contracts over a certain value with KSA Government entities shall be in approved standard form contracts.

In June 2010 the KSA Ministry of Finance issued for comment a draft of a proposed new public construction contract. This draft is based on the FIDIC contract but includes significant changes with a view to sharing construction risk between KSA Government Employer and Contractor.

Saudi Building Code. Construction contractors must have full and careful regard to the SBC which includes 800 pages of detailed requirements including:

  • architectural
  • loads and forces
  • soil and foundations
  • concrete structures
  • steel structures

Foreign Investment Law:

Foreign investment in the KSA is regulated by the Foreign Investment Law and all foreign investors in the KSA must have a license issued under this law.

The KSA Government has established the Saudi Arabian General Investment Authority (SAGIA) which is intended to be a "one stop shop" for foreign investors. SAGIA have business centres throughout the Kingdom which have representatives from various government entities and are intended to facilitate the legal and permitting process for foreign investors.

Company Law:

Under KSA Company law a foreign entity can set up a business structure in KSA as a LLC or as a Branch in KSA of a foreign company. The LLC is the most common business structure. There is no minimal capital requirement but in practice there are certain levels of capital established in various business sectors.

There may be difficulties encountered in the use of SPV's or NewCo's where there is a requirement for 2 to 3 years audited accounts.

The establishment of a LLC or a Branch should take between 2 to 3 months.

Employment Law:

The employment relationship between employers and employees is governed primarily by the Labour Law (Royal Decree No. M/51 dated 23 Sha'ban 1426), which covers all aspects of employment relations, including employment contracts, wages and benefits, leaves, working hours and the termination of employment. The Law became effective as of September 2005, replacing the previous Labour Law, which had been enacted in 1969. There is also extensive regulation relating to the women in the workplace.

Non-Saudi nationals may work in Saudi Arabia provided they have prior approval from the Ministry of Labour. Applicants must have an entry visa issued by the Saudi Embassy from the country of origin. Employers are required to secure work permits and residence permits ("Iqama") for foreign employees brought into the country within 90 days of the employee's arrival. Similar to other Gulf countries, Saudi Arabia has a sponsorship system, which means that expatriate workers can enter, work, and leave the host country only with the permission or assistance of their sponsor.

The KSA government created a "Saudization" policy in 1996 to encourage employers in the private sector to hire Saudi nationals. The Labour Law introduced in 2005 subsequently specified that the percentage of Saudi workers should be 75%. However, the Labour Law also provides that in cases where adequately qualified workers are not available or it is otherwise not possible to fill vacant jobs the Minister of Labour may reduce this percentage. It is now typical for such Saudization requirements to be determined on a periodic basis, initially upon the licensing of a new business and subsequently upon the issuance of a Saudization certificate. The Ministry of Labour typically approaches the issue on a sector by sector basis.

Tax:

  • Corporation tax
    Non-KSA entities pay income tax on KSA income derived from KSA sources at a flat rate of 20%.
  • Zakat
    A religious wealth tax is payable by Saudis and GCC Nationals on ownership interests in KSA legal entities. The rate is 2.5% of capital employed. Complex rules apply to the calculation of Zakat.
  • Withholding Tax
    This tax is deducted at source from payments made to non-KSA entities on income earned from KSA sources such as:
    • management fees: 20% withholding tax
    • royalties: 15% withholding tax
    • rent/technical/consulting fees: 5% withholding tax

Sovereign Immunity

KSA Government entities are capable of being sued in Saudi Arabia in respect of their commercial and private acts.

Language

Contracts need to be in Arabic, otherwise they are inadmissible in the Courts and Judicial Committees of Saudi Arabia. A translation of a document executed in a language other than Arabic may only be adduced in evidence if the translation is by a certified translator.

KSA Courts

The General Courts in KSA cover civil, criminal and family matters. There is no established system of reporting decisions of the KSA Courts and there is no established concept of judicial precedent. As there is no concept of binding judicial precedent in the KSA then it is difficult to give an accurate assessment of how KSA Courts will apply KSA Law to a particular case.

The KSA Courts have considerable discretion to apply principles of Shari'ah Law to a particular case to give what the KSA Courts consider to be an equitable outcome. A KSA Court will not hesitate to modify or ignore strict contractual terms which impose inequitable obligations.

Appeal Rights. There are appeal rights from the decision of an individual Judge to an appellate Court of three Judges. Thereafter parties may appeal on matters of law but not matters of fact to the Supreme Judicial Council.

KSA Government Board of Grievances. The Board of Grievances will deal with disputes where the KSA Government is a party, and with disputes in the private sector over commercial transactions between private sector parties. Shari'ah Law will apply to all cases heard by the Board of Grievances.

Arbitration. Arbitration is allowed within the KSA and is governed by the Arbitration Law of 1983 and its implementing Regulations. Arbitration is not permitted where one of the parties is a KSA Government entity, except by specific permission of the Council of Ministers.

Decennial Liability in KSA

KSA Law imposes a 10 year warranty on a contractor against partial or full collapse of any structure where such collapse is due to construction defect. This obligation is specifically set out in Article 76 of the Government Tenders and Procurement Law.

Qualification - This is a brief overview of some of the legal principles that will apply to any transaction or business activity in the Kingdom of Saudi Arabia. It is necessarily an overview and is intended to be only an introduction. Reference should be made to qualified Saudi Arabian counsel before embarking on any particular transaction or business in the Kingdom of Saudi Arabia.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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