Saudi Arabia: Establishing A Branch Office By A Foreign Investor In Saudi Arabia

Last Updated: 30 September 2015
Article by Hesham Al Homoud

In recent times there has been a surge in foreign investment in the Kingdom of Saudi Arabia ('KSA') as investors seek to capitalize on the prosperous investment climate in the pursuit of business development opportunities.

Investors are conducting extensive due diligence to ensure that they structure their investment by establishing the type of entity which best suits their commercial objectives.

The establishment of a company in KSA is either by way of a limited liability company or, less frequently, a joint-stock company. This choice is generally driven by factors such as proposed shareholder numbers, management structure and the proposed activities of the company. Another potential factor is the possible need to include Saudi equity participation for activities such as for the importing, exporting, marketing, promotion and sale of products.

In addition to a company structure, in some cases a branch may be the optimum investment vehicle. The following is a brief overview of the two main types of available branch offices and the advantages and disadvantages of each. The two types of branches are:

  • Permanent entity (a 'Permanent Branch'); and
  • Technical & Scientific Services Offices ('TSSO').

This Article also comments on Temporary Commercial Registration which may be a possible structure in the context of government contracts.

In all cases, the selected establishment will require a foreign investment license from the Saudi Arabian General Investment Authority (SAGIA) and possibly other specific regulatory approvals.

Permanent Branch

A Permanent Branch is a conventional branch which would be considered as an extension of the parent office. The minimum start-up capital would commonly be approximately SAR 500,000. This would generally satisfy SAGIA's initial requirements.

The main advantages of a Permanent Branch are:

  • depending on the circumstances, it may be the quickest to establish
  • the formation process is generally similar to that of a limited liability company
  • no new articles of association are needed
  • it can have the full range of activities
  • it can engage in projects in both the public and private sector (in accordance with approved objects)
  • it may promote and solicit approved business throughout KSA

The main disadvantages of a Permanent Branch are:

  • Saudi-owned entities, or entities involving substantial Saudi participation, are likely to be preferred for government contracts
  • its activities are limited to the licensed objects approved by SAGIA
  • there is a general expectation that substantive income producing activities will be undertaken
  • it is not able to conduct promotion, marketing and trading activities (as a minimum 25% Saudi equity participation is required for these activities together with significantly greater capitalization)
  • it cannot be formed solely to engage in representation or promotional activities
  • the parent company cannot quarantine liability in KSA and may be exposed in its place of incorporation
  • no other shareholders share the financial burden of capital requirements and setting up costs.

Technical Scientific Services Office (TSSO)

A TSSO may be used where there is a registered commercial agency distribution agreement between a foreign manufacturing entity and a registered Saudi distributor dealing with the local market.

A TSSO:

  • can generally only be used in relation to complex products
  • can assist the registered distributor in KSA with marketing and customer relations;
  • must not market or sell products or generate any revenue
  • does not require any capitalization
  • requires the existence of a current distribution agreement registered with the Commercial Agencies Department of the Ministry of Commerce and Industry.

The main advantages of a TSSO are as follows:

  • the formation process is simpler than a company and similar to that of a branch
  • a TSSO may conduct market studies for the company's business activities and prepare reports arising from those studies to the parent entity
  • there are no capital requirements

The main disadvantages of a TSSO are as follows:

  • not all products are sufficiently complex to require a TSSO
  • the applicant for a TSSO must be the actual manufacturer of the product, not a downstream supplier
  • as there is no separate legal identity, the parent cannot quarantine liability in KSA and may be exposed in its place of incorporation
  • as it does not have licensed objects like a branch, a TSSO cannot perform services outside of local technical support for the registered local distributor
  • a TSSO is limited in terms of the number of employees with the number set by Saudi authorities;
  • a TSSO must provide SAGIA with an annual report of its activities
  • a TSSO must have a registered Saudi distributor.

It should be noted that the TSSO structure is not commonly used in KSA, mainly due to the disadvantages listed above and in particular because a TSSO

  • must be established by the actual manufacturer
  • cannot market or promote products and must only support the local distributor
  • must provide technical and scientific services to the KSA distributor and consumers of complex products
  • must conduct a market study for the company's business activity and prepare reports on such study for the headquarters
  • must provide SAGIA with an annual report of its activity.

Temporary Commercial Registration (TCR)

Temporary Commercial Registration is not strictly a branch office and is only relevant to servicing a KSA government contract or semi-government company. The foreign investment license is generally issued more quickly than for a conventional branch office (although a copy of the signed government contract will be required).

The main advantages of a TCR are that a TCR:

  • can be obtained for consulting projects
  • may sometimes be converted to a permanent commercial registration
  • may be able to be converted from temporary status to a regular commercial registration at a later stage
  • is generally easy to liquidate

The main disadvantages of a TCR are that a TCR:

  • can only be issued to a foreign investor after it has been awarded a government contract
  • may not be suitable for subcontractors on government projects
  • is limited to the scope and duration of the contract (extensions to commercial registration may be applied for with the support of the government party)

cannot have the purpose of:

  • promoting or marketing business
  • monitoring or surveying market conditions
  • providing other business opportunities

Conclusion

Whilst each particular situation requires assessment in the context of the relevant commercial objectives, in broad terms:

  • a Permanent Branch may be the preferred option for a foreign investor that is keen to invest in KSA without being involved in the more complicated process and requirements for a limited liability company but at the same time wants to conduct normal business without the limitations imposed on a TSSO or TCR
  • a TSSO may be the preferred option for a foreign investor that is interested only in providing technical support and to manage the relationship with their clients or potential clients on a limited scale
  • a TCR may be the preferred option for a foreign investor which is a contractor that has a single project with a KSA governmental authority and does not want to satisfy the procedural requirements for setting up a formal branch.

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”

Related Topics
 
Related Articles
 
Related Video
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 (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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