In general, foreigners may have 100% ownership of locally established businesses in Saudi Arabia. According to Foreign Investment Law, foreign companies who wish to invest in Saudi Arabia are subject to special rules and requirements. One of such requirements is obtaining a foreign investment license and any related license with respect to the nature of the business. Once the foreign investment license is obtained and all other requirements have been met, the foreign corporation may carry its business in Saudi Arabia. Moreover, it is essential to note that foreign investors are prohibited from conducting certain business activities that fall within the Negative List, which is discussed below:
The Negative List
Some businesses are limited to Saudi owned companies only. The negative list provides the list of business activities that are generally not open to foreign investments. However, the continuing development of the Kingdom's regulatory framework in alignment with Vision 2030 may subject the negative list to change. Examples of the Negative List activities are:
- Oil exploration, drilling and production
- Tourist orientation and guidance services related to Hajj
- Catering to military sectors
- Security services
- Fisheries
It is generally permitted for companies to be 100% foreign-owned given their business activities are not among those on the Negative List. However, the Ministry of Investment sometimes mandates a minimum rate of Saudi ownership based on the business type.
Legal Entities Forms
Foreign corporations conducting business in Saudi Arabia should consider different types of business structures depending on the company's circumstances. Below are the most common forms of business structures for foreign investors.
Branch Office
Foreign companies who wish to operate in Saudi Arabia on behalf of a parent company can establish a branch office to run their business. A branch office is an extension of a foreign company that does not constitute a separate legal entity in Saudi Arabia. Moreover, each branch has its own rules and requirements depending on the type of business undertaken.
Temporary Licenses
Foreign companies can obtain temporary licenses to conduct specific activities in Saudi Arabia in relation to governmental or semi-governmental contracts. Such licenses are provided only for a limited period of time and for a specific type of activity, as such, no other business activities may be undertaken.
Scientific and Technical Office
Foreign companies that have a Saudi agent distributing the company's products in Saudi Arabia may establish a scientific and technical services office. The scientific and technical services office is prohibited from conducting any commercial activities or investments in Saudi Arabia directly or indirectly. However, the office may conduct research studies and and provide the parent company with activity reports. An annual summary of the office's activities must be submitted to the Ministry of Investment
Professional Services Company
Foreign companies may establish a professional service activities company to conduct professional activities business in Saudi Arabia. Moreover, a Professional Services Activities company requires a Saudi partner with a share not less than 25%.
Franchise
The new Franchise Law was enacted under the Royal Decree No. M/22, October 8, 2019. The aim of the law is to promote franchise activities in Saudi Arabia by establishing a legal framework that regulates the relationship between franchisors and franchisees Among its other aims are
- Ensure the franchisor and franchisee are protected, particularly after the franchise agreement expires;
- Increase the quality of goods and services within Saudi Arabia while ensuring the sustainability of those services.
- Ensure that the rights, duties, and risks related to the franchise are disclosed to the prospective franchisee (s) so they can make informed decisions about investing;
Commercial Agencies
Commercial agents are intermediaries who are contracted with companies or who represent them in their countries of origin in order to conduct business deals on their behalf with other businesses and are compensated in return with commissions, profits, or other forms of payment. A foreign person, whether natural or legal, may not operate as a commercial agent in the Kingdom of Saudi Arabia. Saudi companies operating as commercial agents must have a 100% Saudi capital, and all authorized signatories and members of the board of directors must be Saudi.
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.
