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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions