United States: Doing Business In The Kingdom Of Saudi Arabia

Introduction

As the third largest recipient of foreign direct investment in the region, not to mention its standing as the region's largest economy,1 the Kingdom of Saudi Arabia is of significant interest to foreign investors, particularly in light of recent Government initiatives (discussed further in the final section of this article).

This article will summarise some of the key considerations for foreign investors embarking on investments in the Kingdom, which include:

  • the licenses and permits required by foreign investors;
  • sectors where foreign investment is restricted in the Kingdom;
  • vehicles that may be used for making foreign investments;
  • the strategy for exiting the investment in the future;
  • Saudi tax implications;
  • labour practices in the Kingdom, including compliance with "Saudisation" requirements;
  • directors' obligations under Saudi law;
  • availability of financing;
  • the legal and judicial environment of the Kingdom; and
  • the impact of "Saudi Vision 2030" and "National Transformation Program 2020".

Any discussion in this article of Saudi laws should be treated only as a general guide and not as legal advice. If you require advice on a matter relating to Saudi law, you may wish to contact one of the lawyers in our Saudi Arabian practice. Furthermore, any information contained in this article regarding tax matters should be treated as a general overview of the tax regime in the Kingdom and is not a substitute for seeking proper tax advice from duly licensed accountants.

Licences and Permits for Foreign Investment

SAGIA Licensing Requirements

Foreign (i.e., non-Gulf Cooperation Council ("GCC")) investors are required to obtain an investment licence from the Saudi Arabia General Investment Authority ("SAGIA") in order to conduct their business in the Kingdom. Minimum capital requirements for SAGIA licence holders vary depending on the sector, from SAR1 million in the industrial sector, SAR25 million in the agriculture sector, SAR100 million in the insurance sector and SAR20 million in the trading sector. There are no minimum capital requirements for the service sector. SAGIA retains the discretion to impose similar requirements in other circumstances, depending on an entity's activities. Trading entities must also have a Saudi local hold at least 25% of its shares.

A SAGIA licensed company is able to:

  • sponsor its employees for residency purposes;
  • apply for financing from the Saudi Industrial Development Fund in cases where it is working on an industrial project;
  • once established, apply for funding from the Human Resources Development Fund to assist with training and employment of Saudi employees;
  • own or rent industrial land; and
  • engage in the full range of activities as defined by its approved objects, work with private and public sectors and promote and solicit business throughout the Kingdom.

A company may only carry out the activities specified within its objects as approved by SAGIA. It is important to note that an object of "general commercial activity" common to European jurisdictions is not available in the Kingdom and too broad a set of objects will not be approved by SAGIA. It is possible to amend or expand the company's objectives although the approval of all of the shareholders of the company as well as that of SAGIA and the Ministry of Commerce and Investment ("MOCI") will be required.

Other Licensing and Registration Requirements

Following the issuance of a SAGIA investment licence, foreign investors must make additional registrations with certain Governmental authorities, submitting all supporting documentation in Arabic. This includes applications to:

  • the MOCI for a commercial registration;
  • the Ministry of Energy and Industry and Mineral Resources (for industrial companies);
  • the Labour Office for the opening of a "700 file" allowing for the employment of potential employees;
  • the General Organisation for Social Insurance ("GOSI");
  • the Department of Zakat and Income Tax ("DZIT");
  • Civil Defence; and
  • the Municipality where the entity is to be located.

Recent Developments Benefitting Foreign Investors

In recognition of the increasing importance of foreign investment to the Kingdom's long-term economic prosperity, the Kingdom has taken a number of steps to further open the Saudi market to foreign investment:

  • In June 2015, the Saudi Capital Markets Authority opened the local stock market for trading to foreign investors and foreign investors now own just under 1% of all listed companies in the Kingdom.
  • In September 2016, new qualified foreign investor rules were introduced, pursuant to which eligible foreign investors are able to own up to 10% of shares in any company listed on the Saudi Stock Exchange (the "Tadawul").
  • Foreign entities are now permitted to hold 100% of the share capital in wholesale and retail sector companies in the Kingdom, provided that they have a minimum share capital of SAR30 million and make a foreign investment of at least SAR200 million over a five-year period.
  • SAGIA has introduced a new fast track service which guarantees decisions on licence applications within five working days, subject to additional Government approval which will be required if the entity undertakes some form of "special" activity (e.g. in the healthcare, transportation or insurance sectors).

Foreign Investment Restrictions

Foreign investors should be aware that certain investments are wholly closed to foreign nationals in any corporate form, documented on what is known as the "Negative List." This list includes investments in religious tourism, commercial agencies and distribution, real estate brokerage, recruitment and employment and fisheries services, amongst others. A list of activities which are not open for foreign investment is set out in the Appendix.

Potential Investment Vehicles

Prior to making any investment in the Kingdom as a foreign investor, parties should first select the most appropriate corporate structure for the purposes of their investment. This may include incorporating as:

  • A branch: This will require a minimum capital of SAR500,000 (or potentially higher in certain circumstances), but is generally the quickest type of entity to establish in the Kingdom. However, as branches operate as extensions of parent companies, their activities are limited to those which its parent entity is licensed to perform.
  • A limited liability company ("LLC"): This entity largely resembles a private company with limited liability, and is the most common form of entity established by foreign investors in the Kingdom. It requires between two and 50 shareholders. The Companies Law allows the formation of a single shareholder LLC, subject to certain restrictions.
  • A joint stock company ("JSC"): This entity must have at least two shareholders and there is no limit as to the maximum number of shareholders. The Companies Law permits wholly-state owned companies and companies with a minimum capital of SAR5 million to be incorporated as a single shareholder JSC.  The JSC is arguably the most regulated form of corporate entity in the Kingdom. This is evident from the regulatory requirements that must be satisfied for its incorporation, the degree of involvement of MOCI in the JSC's administration, decision-making process, its on-going filing obligations as well as the detailed legal requirements concerning the management of the JSC.
  • Other company types: Joint ventures, joint liability companies (the equivalent of general partnerships) and limited partnership companies (the equivalent of limited liability partnerships) can also be selected.

While 100% foreign ownership is permitted in an increasing number of sectors (although please refer to the preceding section for sectors which restrict or prohibit foreign investment), there are distinct advantages to having a Saudi partner for foreign companies investing in the Kingdom, which include:

  • knowledge of the local market and business practices;
  • assistance in dealing with government authorities; and
  • marketing and networking opportunities.

Exit Strategy

Structuring an exit strategy can pose legal challenges.

Shareholders of LLCs enjoy statutory pre-emption rights on share transfers to third parties. Shareholders may waive their pre-emption rights in favor of a third party buyer, but such waiver is difficult to enforce in practice. Any share transfer requires the cooperation of all shareholders as the share transfer is effected through:

  • updating the share register; and
  • signing of a shareholders' resolution amending the articles of association of the LLC before a notary public.

This means that a shareholder (irrespective of the size of their shareholding) who does not wish to sign the shareholders' resolution before a notary public can effectively block the sale. Similarly, a capital increase requires the consent of all shareholders and any uncooperative or minority shareholder can effectively exercise anti-dilution rights by not turning up at the notary public to sign the shareholders' resolution authorising the capital increase.

JSC shareholders do not enjoy statutory pre-emption rights on share transfers to third parties. Any transfer of shares of the JSC is effected through a book entry in the share register of the JSC.

Saudi Tax Considerations

Tax Residence

A company is a Saudi tax resident if it is a Saudi registered capital company or if its central control or management is based in the Kingdom.

Tax Basis

A resident company is taxed on income arising in the Kingdom. A non-resident carrying out activities in the Kingdom through a permanent establishment ("PE") is taxed on income arising from or related to the PE.

Taxable Income

Income tax (20%) is levied on a non-Saudi shareholder's share in a resident company's income from any activity in the Kingdom less allowable expenses. Zakat (2.5%) is levied on the Saudi shareholder's share of the company's Zakat base. Citizens of GCC countries are treated as Saudis.

Capital Gains

A 20% capital gains tax is imposed on the disposal of shares in a resident company.

Withholding Tax

Withholding tax rates vary between 5% and 20% according to the type of service performed and according to whether the beneficiary is a related party or not. These rates are as follows:

  • 5% for dividends;
  • 5% for interest payments;
  • 15% for royalty payments; and
  • 20% for management fees.

GOSI Contributions

Both the employer and employee are required to make GOSI contributions. These are the equivalent of social insurance or pension payments. GOSI payments vary depending on whether the employee is a Saudi national, non-Saudi but GCC national or non-GCC national.

Labour Practices

An employee must be provided with an employment contract. Failure to provide a written contract will result in any term of the employment agreement being interpreted in favour of the employee.

The Saudi Labour Law permits two types of contracts: term contracts and project-based contracts. Term contracts are further divided into fixed term contracts and indefinite contracts. Any contract that:

  • exceeds four years;
  • has no provisions for renewal but has been renewed by course of conduct; or
  • has been renewed three consecutive times, becomes an indefinite contract.

The maximum number of working hours for employees is generally eight hours per day or 48 hours per week, with the exception of the holy month of Ramadan, when actual working hours for Muslim employees may not exceed six hours a day or 36 hours a week. The number of working hours may be raised to nine hours a day in respect of certain categories of employees or in certain industries and operations. The number of daily working hours may be reduced to seven hours for certain categories of employees or in certain industries or operations that are of a hazardous or harmful nature. Hours of work must be arranged so that no employee works more than five consecutive hours without an interval of rest, prayer and meals, which must not be less than 30 minutes each time. The employee cannot be required to remain in the place of work for more than 12 hours per day and in their first five years of employment employees are entitled to an annual paid leave of at least 21 calendar days. After the first five consecutive years, this period increases to 30 days.

When an employee's employment ends, the employer must pay an end-of-service benefit to the employee. Saudi Labour Law does not allow termination of employment for no cause and termination for redundancy is highly restricted. Termination of employment for cause is subject to strict rules and procedures which, if not followed, are likely to result in compensation awards in addition to payment of damages in the amount of remaining contract salary, end-of-service benefit payment and any allowances. This is particularly important in relation to indefinite term contracts as compensation awards may be significant for wrongful termination.

Disputes are dealt with by local Commissions for Settlement of Labour Disputes and practice shows that these are generally pro-employee.

Saudisation

The Kingdom's "Saudisation" program is a broad nationalisation plan, aimed at bolstering the Saudi private sector workforce with Saudi nationals in a bid to improve youth employment. Specific percentage requirements of national employees are imposed by the Ministry of Labour ("MOL") on individual entities, and will depend on such entity's activities, size, and the Saudi province in which it is based. Certain positions are restricted solely to Saudi nationals, such as HR, receptionists, treasurers and civil security guards. Certain sectors have been targeted more than most, such as the mobile phone retail sector which seeks to achieve 100% Saudisation. Saudisation also requires employers to engage in training programs for Saudi nationals. In general, the greater the number of base employees in an entity, the larger the percentage of local employees that will be required through Saudisation.

The Saudisation regulations are administered under the Nitaqat system by the MOL. Each employer is awarded a rating (red, yellow, low green, mid green, high green and platinum) that is based on specific requirements for the industry, size of the employer's enterprise and other factors. These requirements are subject to regular change. The Saudisation program is being implemented in stages and the third stage has been recently postponed until further notice. It is worth noting that the Nitaqat rating is one of the determining factors in the renewal of the SAGIA licence.

Directors' Obligations

Directors of entities in the Kingdom are not required to be nationals or residents.

Key principles of Shariah Law form the basis of directors' fiduciary duties, requiring directors to act within the scope of their authority and in the best interests of the company, to treat all shareholders fairly, and to act with all reasonable care, skill and diligence.

Directors can also be sanctioned for any wrongdoing. Under the Companies Law, directors can now face fines of up to SAR5 million and / or up to five years' imprisonment as a result of wrongful activity, such as including false or misleading information in a company's financial statements or reports or using company funds for personal gain.

Financing

Many loans in the Kingdom are Government-funded and overseen by the Ministry of Finance. The banking community is generally robust, with many commercial banks extending credit and financing to numerous businesses in the Kingdom, including foreign investors. Typically, lending occurs against corporate earnings rather than assets, due to the difficulty of perfecting security under Shariah law.

Legal and Judicial Environment

Shariah law lies at the core of the Saudi legal system, supplemented by more specific laws and regulations. Shariah law is used as an interpretative tool in the Kingdom, although there is no concept of "precedent" within the Saudi judicial system and very few publicly available legal records.

Foreign law governed contracts are traditionally difficult to apply in the Kingdom, due to the fact that the Kingdom does not apply conflict of laws doctrine. Saudi courts and adjudicatory authorities are required to apply Saudi law to any dispute litigated in the Kingdom. More importantly, foreign arbitral awards are difficult to enforce in the Kingdom; while the new arbitration law of July 2012 allows parties to choose non-Saudi governing law and international arbitration, the enforcement of foreign arbitral awards can be challenging due to the strict enforcement conditions imposed by the law (including the condition that the foreign arbitral award does not violate Shariah law) and remains an issue of concern for foreign investors.

Impact of Saudi Vision 2030

The Kingdom's "Saudi Vision 2030" and the subsequent "National Transformation Program 2020" launched in April and June 2016 respectively, were developed with the aim of propelling the Kingdom into sustainable economic prosperity, by reducing the Kingdom's reliance on oil as a source of national wealth and diversifying its economy. Through such initiatives, the Kingdom aims to raise non-oil Government revenue from SAR163 billion to SAR1 trillion by 2030, and SAGIA aims to raise foreign direct investment from SAR30 billion to SAR70 billion by 2020. As a result, foreign investors can expect the Kingdom to become an even more friendly investment environment over time and opportunities for foreign investors can be expected to rise.

Other proposals, including the privatisation of up to 146 state-owned entities in a number of industries, will allow for the purchase of Government assets and shares in Government-owned companies by foreign investors. A proposed simplification of listing processes and access to stock markets will also increase transparency and encourage foreign investment in the public market. Given the estimated total US$4 trillion investment required for the initiatives' aims to be achieved, the scope for foreign investment in the Kingdom has undoubtedly been broadened.

Footnotes

1 See http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf

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
 
In association with
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