The principal law governing professional companies in Saudi Arabia is the Professional Companies Law which was approved by Royal Decree No. (4) on 18/2/1412H (corresponding to 26th August 1991) and is supplemented by the Executive Regulations, Ministerial Resolutions and an Explanatory Memorandum (collectively, the "Professional Companies Law"). In addition, the professional company is subject to the Companies Law 1965 in matters that do not contradict the Professional Companies Law.
The regulatory authority that is mandated to register and oversee professional companies is the Ministry of Commerce and Industry. Registration of a professional company is required and will be recorded in the 'Professional Companies Register' and maintained within the Companies General Directorate of the Ministry of Commerce and Industry. The approval process may also involve consent by other regulatory authorities.
Definition of a Professional Company
The Professional Companies Law does not include a definition of what constitutes a professional company, however, the Explanatory Memorandum does provide some insight. It states that a professional company is a juristic person established by agreement of several natural persons practicing as private professionals (the involvement of foreigners will be discussed later). Examples given of private professionals include doctors, engineers and "the like". While craftsmen are specifically excluded, it is logical to presume that professions such as legal, accounting and architecture will also fall within the intended definition of a professional company and Professional Companies Law.
While the use of the word company would indicate the entity's status is in some manner of limited liability, the reality is that a professional company is more akin to a partnership. This means that partners are liable for company debts both personally and jointly. Sometimes partners may agree otherwise between themselves, but this will not apply in regard to third parties. A person may only participate in one professional company at a time, otherwise that person would be liable to account for any fees obtained to the original professional company. Unlike an individual establishment which can be converted into a limited liability company, or a limited liability company converting to a joint stock company (open or closed); a professional company cannot be converted or alter its legal form once established.
A contract or partnership agreement must be drafted covering the following matters:
- The company name and purpose. This must include at least one partner's name and the type of profession practiced;
- The location of the head office;
- The company duration;
- The name and residency status of each partner;
- The capital of the company and how it is allocated. This capital must be divided into equal shares following each partner's capital contribution (cash or 'in kind');
- The start and end dates of the fiscal year;
- Withdrawal or expulsion of a partner;
- The method of company management; and
- The manner in which profits and losses are to be distributed.
Unless stated otherwise in the partnership agreement, distribution of revenue is to be equal regardless of the partners' shareholding amount.
The partnership agreement must be signed before a competent notary public and a summary of the agreement published in a newspaper circulated in the area where the head office of the professional company is located.
Management of the Professional Company
The professional company agreement must designate a partner, or partners, in charge of the professional company's management, the scope of their authority, duration of their position and the method of their dismissal. The management authority cannot include a delegated authority from other partners where they agree to subordinate all their powers.
Any decision beyond the scope of management powers must be passed by resolution at a meeting attended by all partners. Quorums at such meetings must consist of at least half the partners and unless otherwise stated in the partnership agreement, decisions are by majority vote. Importantly, the partnership agreement can only be amended by unanimous decision. Each partner has only one vote regardless of the amount of shares they hold unless otherwise agreed.
A Withdrawing Partner
A partner intending to withdraw from the partnership can do so with or without compensation, depending of the terms contained in the partnership agreement. The partnership agreement should state the manner in which the partner may withdraw resulting in either a capital reduction, an increase in existing partners' shareholding or the introduction of a new partner.
The professional company has a period of six months to address the withdrawal of a partner in any one of the three methods previously described. Failure to do may result it the dissolution of the professional company. Should a partner find the need to withdraw from the company, or somehow otherwise be incapacitated (through death or illness), then the professional company can retain the particular name of that person if agreed to by him, or his heirs.
If a partner is barred or suspended by the Ministry of Commerce and Industry, that person must be automatically expelled from the partnership. The expelled partner is entitled to receive his share of the company assets, at a value determined by the most recent financial position (including its inventory).
Foreigners Participation in a Professional Company
A foreigner or a foreign entity engaged in similar professions in their home jurisdictions are able to participate in the partnership of a professional company in Saudi Arabia. Surprisingly, there is no foreign investment licence required from the Saudi Arabian General Investment Authority. The approval and registration process is handled through the Ministry of Commerce and Industry. As noted earlier, a consent from other authorities may also be required as part of the registration process. Requirements for a foreign shareholder to participate include:
- No more than 75% of the share capital can be held by the foreigner; and
- At least 25% of the share capital must be held by a Saudi national licensed in the particular profession.
Market Demand for Professionals in Saudi Arabia
The demand for professionals in the Saudi Arabian market is extremely high as the country continues to move forward on its massive development projects, which are being supported by professional sectors. This has led to extensive opportunities for foreign firms to capitalise on these activities. The regulators however, fully expect there to be knowledge transfer provided as part of the foreigners' business plan and activities in Saudi Arabia. This is in line with the desire to have Saudi Nationals trained in international standards and cutting edge technology.
Foreigners that are considering entry into the Saudi market, should obtain comprehensive legal and taxation advice as well as ensuring they select their Saudi partner carefully.
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.