Saudi Arabia: The Draft Saudi Arabian Non-Profit Companies Law

Last Updated: 5 May 2016
Article by Dr. Zaid Mahayni

1. INTRODUCTION

On 10 April 2016 – less than six months following the enactment of the Civil Associations and Institutions Law1 and following the enactment of the new Saudi Arabian Companies Law2. – the Saudi Arabian Ministry of Commerce and Industry (the "MoCI") published a draft law on Non-Profit Companies (the draft "Non-Profit Companies Law").3 The MoCI invited the public to submit comments on the draft by 17 May 2016.4

In the meantime, the MoCI's introductory remarks to the draft Non-Profit Companies Law give some insight as to the rationale behind the initiative.  As the MoCI explains, the draft Non-Profit Companies Law extends from the duty mentioned in the Saudi Arabian Basic Law of Governance for the Saudi Arabian State to "encourage organizations and individuals to participate in philanthropic activities".5

The MoCI indicates that there are essentially four main objectives pursued by the contemplated legislative instrument:

  1. To support the public sector in achieving overall development goals;
  2. To develop the regulatory framework surrounding non-profit work contemporaneously with the Kingdom's economic development;
  3. To provide financing avenues for non-profit work and encourage financial support from philanthropists; and
  4. To contribute towards the increase of the Kingdom's gross national product, encourage the economy and create work opportunities.

The MoCI provides criteria by which to characterize a company as a non-profit company.  First, non-profit companies must be operated with no final pecuniary gain to their founders or members.  Their purpose must fall within the non-exhaustive list of objectives, namely the advancement of humane, cultural, educational and other such objectives which serve the community.

Second, the MoCI also distinguishes non-profit companies from charitable associations and institutions. While charitable entities rely essentially on charitable contributions, non-profit companies would be able to exercise commercial activities and achieve financial gains, subject to these gains being reinvested by the company in the pursuit of its non-profit objectives.

The MoCI expects that the introduction of non-profit companies will help reinforce the corporate social responsibility initiatives of private companies. They will act as recipients of technical, managerial, production, and marketing know-how and experience that would be put to the use and benefit of the community.

The draft Non-Profit Companies Law comes as a very welcomed step since it would particularly help palliate important gaps in the legal framework governing endowments, since endowments usually engage in commercial activities and own revenue generating assets. Indeed, although a Supreme Endowments Council6 was created in 1966 and a regulatory instrument governing charitable endowments7 has been in place since 1973, the framework fails to establish a  process for the setup or the internal operation of  endowments.

Under current Saudi practice, and although there is no clearly formulated underlying legislation in this respect, it is possible to place corporate shares under endowment subject to obtaining a court judgment to this effect. Non-profit companies can address the current legislative void and simplify the current practice, according to the MoCI.  Non-profit companies can serve as vehicles to structure and channel endowments. endowments operated through non-profit companies can closely implement the will of the donor, while benefiting from ordinary corporate liability protections and from an ability to compete more effectively against private sector players.

2. CORPORATE STRUCTURE

According to the draft Non-Profit Companies Law, non-profit companies may be established either as limited liability or closed joint stock companies only. They would need to be registered in a special register to be maintained by the MoCI for non-profit companies. Obviously, non-profit companies would not be able to be listed publicly in light of some of the special privileges granted to them (as explained below).

3. PURSUED CHARITABLE OBJECTIVES

The draft Non-Profit Companies Law lists, non-exhaustively, examples of charitable objectives that may be pursued by non-profit companies. These include Islamic affairs, education and research, health affairs, poverty relief, environmental protection, arts and culture, sports activities, community building, human rights and infrastructure maintenance.

4. GENERAL VERSUS PRIVATE NON-PROFIT COMPANIES

The draft Non-Profit Companies Law creates, and distinguishes between, two different categories of non-profit companies: general and private non-profit companies. While the charitable objectives pursued by general non-profit companies may relate to any of the aforementioned broad objectives and aim to serve the community at large, those pursued by private non-profit companies may be confined to a defined group of beneficiaries and may relate to a narrower or altogether different scope.

5. PURSUED COMMERCIAL ACTIVITIES

The draft Non-Profit Companies Law authorizes non-profit companies to exercise any legitimate activity for the purposes of achieving the purposes described in its Articles of Association or Bylaws.

6. NAME

The name of non-profit companies must indicate their non-profit nature, as well as the value of their capital. Failure to mention this would expose the directors to being personally and severally responsible for any obligations contracted by the non-profit company.

This rule should draw many comments from the public for multiple reasons. First, the draft Non-Profit Companies Law does not specify whether the obligation refers to paid-up capital or to authorized capital. Pursuant to the Companies Law,8 the authorized capital of joint stock companies does not need to be fully paid upon incorporation.

Moreover, the repercussions that directors face for omitting to mention the nature or capital of the company are quite excessive. Directors usually are not involved in the day-to-day business of the company and therefore cannot guarantee that the company's executives and general staff will not inadvertently omit the mention of the company's non-profitable character or the value of its capital. At best, directors can implement internal company policy to guard against this.

Presumably, the intention behind the provision in the draft Non-Profit Companies Law is to protect vulnerable third parties against misrepresentations by companies or misunderstandings as to their non-profit nature. But this does not, in our opinion, warrant the inclusion of such potentially harsh sanctions on directors.  To the extent that the provision is intended to protect against misrepresentation, then express provision for this should be made in the law instead of including an indiscriminate sanction for all omissions. Likewise, if the provision serves to avoid misunderstandings, these could be avoided by making available to the public a special register for non-profit companies. Finally, commercial dealings by third parties with non-profit companies should essentially be similar to dealings with lucrative companies since both structures can pursue profit but only differ in the manner in which the profit is ultimately utilized. Greater risk would actually lie in transactions conducted by lucrative companies falsely claiming a non-profit dimension in order to negotiate more favorable terms in their commercial activities.

7. AMENDMENT OF CONSTITUTIONAL DOCUMENTS

The draft Non-Profit Companies Law expressly allows non-profit companies to amend their Articles of Association. The MoCI's approval is required for any modification relating to the rules for transactions involving the company's assets and any modification to the powers of the company's Board of Directors or to the company's objects.

8. INTERNAL STRUCTURING

Non-profit companies would be managed by 'members' (as opposed to 'shareholders' in the context of lucrative companies), which may be either physical persons or corporate entities.  Non-profit companies would be free to establish, in their Articles of Association or Bylaws, rules for membership and membership classes. In this regard, the draft Non-Profit Companies Law states that:

  • Membership classes can be given voting rights, the right to appoint directors, and could be represented by non-tradable certificates. Exceptionally, however, members in private non-profit companies may assign their membership;
  • Membership may be made subject to the payment of annual fees or the extension of monetary or in-kind contributions; and
  • Membership could likewise be made subject to the provision of work and/or services to the non-profit company.

Non-profit companies would be managed by a Board of Directors. The draft Non-Profit Companies Law has put in place certain criteria for being able to act as a director. For instance, a director may not also act as an auditor or executive for the non-profit company.

9. DONATIONS

The draft Non-Profit Companies Law allows non-profit companies to collect or receive donations, or both. If donations received are coupled with certain conditions imposed by the donor, non-profit companies would be bound by them. If at any time a non-profit company finds itself unable to fulfill the donor's conditions, it must either receive the donor's approval before applying his or her donation to any end or must otherwise solicit the instructions of the competent judicial body which would rule in the "general/public interest".9

10. UTILIZATION OF PROFIT

As previously explained, the draft Non-Profit Companies Law allows non-profit companies to generate profit, with the understanding that no part of such profit may, directly or indirectly, be paid to the non-profit companies' members, directors or employees.

Interestingly, the draft Non-Profit Companies Law allows non-profit companies to reinvest its profits and expand its activities, but only within the limits of the proportions to be subsequently established by the MoCI by way of regulation. Such a restriction may impede the ability of non-profit companies to compete in the market.

11. CONVERSIONS AND MERGERS

The draft Non-Profit Companies Law authorizes 'normal' companies to convert into non-profits and private non-profit companies to convert into 'normal', lucrative ones.  A private non-profit company converting to a lucrative company may retain the capital which it had upon inception but must apply its past profits and reserves towards the fulfillment of the non-profit objectives which it had been pursuing.

The draft Non-Profit Companies Law also authorizes the merger of non-profit and lucrative companies, provided that general non-profit companies may only be merged with other general non-profit companies, with the approval of the MoCI.

12. LIQUIDATION OF NON-PROFIT COMPANIES

The draft Non-Profit Companies Law stipulates that, upon the liquidation of a non-profit company, proceeds must be utilized in the manner indicated in the company's Articles of Association or Bylaws. If the non-profit company was financed by way of a donation or endowment, the proceeds would be directed as per the instructions of the donor. In case that the Articles of Association or Bylaws are silent on the manner in which the proceeds would be utilized and in case that the relevant donors have left no instructions, the proceeds must be handed over, with the approval of the MoCI, to another non-profit entity that is pursuing the same or similar objectives.

13. TAX EXEMPTIONS

Perhaps one of the main advantages accorded to general non-profit companies pursuant to the draft law is exemption from the payment of Zakat (i.e., religious tax). Similarly, contributions paid to general non-profit companies may be offset against one's Zakat or tax liability.

14. FOLLOW-UP DOCUMENTATION

The draft Non-Profit Companies Law requires the MoCI to issue indicative forms of Articles of Association and Bylaws for non-profit companies. Moreover, the MoCI is required to publish complementary implementing regulations to further clarify the framework surrounding non-profit companies.

15. CONCLUSION

The draft Non-Profit Companies Law is definitely a promising step in the right direction. It is hoped that the legislative instrument, once issued in its final form, will help foster philanthropic activities and help the Kingdom's move to strengthen its private sector and diversify away from oil.

Footnotes

1 Enacted by way of Royal Decree No. M/8 dated 1 December 2015.

2 Enacted by way of Royal Decree No. M/3 dated 10 November 2015.

5 Article 27 of the Basic Law of Governance. See http://www.saudiembassy.net/about/country-information/laws/The_Basic_Law_Of_Governance.aspx . See MoCI introductory remarks to the draft Non-Profit Companies Law.

6 Created pursuant to the Supreme Endowments Council Law, enacted by way of Royal Decree M/35 dated 2 November 1966. See: http://www.moia.gov.sa/Menu/SysAndRegulations/Council_Endowment.pdf

7 Namely the Implementing Regulations Governing Charitable Endowments, enacted by way of Council of Ministers Resolution No. 80 dated 5 March 1973. See http://www.moia.gov.sa/Menu/SysAndRegulations/Charitable_Endowments.pdf

8 See Articles 65(2)(c), 106(2) and 117 of the Companies Law.

9 The term in the original Arabic can refer to both "generalinterest" or "public interest".

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
Dr. Zaid Mahayni
 
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