Setting-up inSaudi Arabia
Deciding on a form of business presence in Saudi Arabia requires consideration of many factors, including the type of business to be conducted, the industry or sector, and taxation implications. For foreign (i.e. non-GCC) businesses, obtaining a foreign investment licence is a necessary pre-condition.
The foreign investment landscape is undergoing a period of change and, to some extent, relaxation of regulatory requirements as a result of Saudi Vision 2030. However, the Foreign Investment Law, issued in 2000, remains the centre-piece of the Saudi government’s foreign investment regulatory regime. Serious administrative and criminal penalties can result if activities are undertaken in contravention of the Foreign Investment Law, and even more so if the conduct involved ‘fronting arrangements’ in breach of Saudi Arabia’s Anti-Concealment Law. Breaches will also jeopardise potential future investment in Saudi Arabia.
Generally speaking, and with limited exceptions, foreign businesses wishing to establish commercial operations in Saudi Arabia must obtain a foreign investment licence from the Saudi Arabian General Investment Authority (SAGIA). The general rules applicable to a SAGIA licence application are published on SAGIA’s website (www.sagia.gov.sa).
The licence application period (and process) will vary according to the type of business enterprise to be established (and licence to be obtained), and the time taken by the applicant in putting together all the required supporting information and documentation. Once all the required information has been submitted to SAGIA, and assuming the application meets all requirements, it would typically take up to four weeks for a foreign investment licence to be issued. If, depending on the nature of the activities, approvals are required from other Saudi Arabian authorities, the timeframe could take longer. SAGIA is constantly making great efforts to reduce the period required to obtain the SAGIA licence and streamline its process but, at present, four weeks is a realistic timeframe.
It is important to note that the foreign investor needs to demonstrate its experience in the relevant field of activity by at least providing one years’ worth of audited accounts. This currently limits the possibility of using a special purpose vehicle when establishing in Saudi Arabia.
Some business activities are completely closed to foreign investment. This group of activities comprises the so-called ‘Negative List’, which sets out activities that are exclusively reserved for Saudi-owned businesses. As a result of Saudi Vision 2030 and a desire to open the Kingdom to foreign investment, the Negative List is under constant review and future changes are expected in the coming years. To better understand what is and what is not prohibited to foreign investors when deciding to invest in Saudi Arabia it is essential to obtain current, on-the-ground insight into the optimal ‘going to market strategy’ for the relevant business.
Examples of business activities included in the Negative List at the date of publication are:
Oil exploration, drilling and production
Manufacturing of military equipment, devices and uniforms
Military catering services
Security and investigation services
Makkah and Madinah real estate investment
Hajj and Umrah tourist orientation and guidance services
Recruitment and employment services
Real estate brokerage
Printing and publishing (with certain exceptions)
Distributorships, commercial agencies and franchises
Audiovisual and media services
Land transportation services (with certain exceptions)
Midwifery, nursing, physical therapy and paramedics
Fisheries
Blood banks, poison and quarantine centres
For all activities not covered by the Negative List, foreign investors may be allowed to own up to 100% of the capital of an enterprise, depending upon the business activity and compliance with SAGIA’s requirements. Some business activities (e.g. banking and insurance) have prescribed minimum Saudi ownership requirements.
Examples of maximum permitted foreign ownership for certain business activities:
Business Activity
Permitted Foreign Ownership (Maximum)
Services
100%
Manufacturing
Trading (wholesale and retail)
75%*
Professional services
75%**
* SAGIA may permit major foreign investors, making a significant, long-term contribution to Saudi Arabia’s economy, to establish wholly owned trading companies - subject to certain conditions, currently including an initial capital contribution of SAR 30 million (about USD 8 million), and a commitment to invest a further SAR 270 million (about USD 72 million) over five years or SAR 170 million (about USD 45.5 million) over five years if other specific requirements are met.
**SAGIA has announced that it is permissible (subject to certain requirements) for international companies to establish 100% foreign-owned engineering professional services companies.
After the SAGIA licence has been obtained, the foreign investor will need to seek the approval of the Ministry of Commerce & Investment for the relevant entity and obtain an appropriate commercial registration certificate for it.
Depending on the circumstances, and subject to a matrix of commercial, taxation, and legal considerations, one or more of the types of business structures referred to below may suit a foreign investor. A new Companies Law came into force in 2016, completely replacing the previous law and introducing a number of significant changes. We have set out below some further detail on the most common forms of entities formed by foreign investors wishing to do business in Saudi Arabia.
If the foreign business does not want (or require) a Saudi partner, opening a Saudi Arabian branch office (Branch) maybe a suitable choice. A Branch is normally the quickest entity to establish, it can carry on a broad range of activities (as approved by SAGIA), and the minimum capital requirement is usually SAR 500,000 (about USD 135,000).
Despite this, business entities with at least some Saudi ownership may be required in certain circumstances (e.g. government contracting), so it important to consider this in the context of assessing whether a Branch will be an appropriate means of setting-up in the Kingdom.
A Branch is not legally distinct from the foreign business itself, so the business activities of the Branch will be limited to those of the foreign business, and the foreign business will be liable for the debts and other liabilities of the Branch.
A limited liability company (LLC) is suited to a broad range of business activities. Where a corporate joint venture is entered into with a Saudi partner, the LLC is often seen as the business structure of choice.
An LLC’s business activities are limited by the activities (objects) set out in its articles of association and in the foreign investment licence issued by SAGIA. An LLC acts in its own name in its business dealings, and it can sponsor foreign employees for residency (an important characteristic for businesses looking to build their own employee base in the Kingdom). An LLC carrying out activities that require a SAGIA industrial licence may be able to obtain finance on favourable terms from the Saudi Industrial Development Fund.
As part of the foreign investment licence approval process, a decision will be made by SAGIA and the Ministry of Commerce & Investment about the minimum capital required to establish the LLC. This will be influenced by the LLC’s proposed business activities and its projected expenditure for the first five years of operation.
An LLC can generally have between one and 50 shareholders. Only one class of shares is allowed, and different voting rights are not permitted. An LLC may not offer its shares to the public, and is not allowed to engage in certain types of business activity (e.g. banking and insurance). Share transfers are permitted, subject to regulatory approvals and statutory pre-emption rights enjoyed by the other shareholders.
Generally speaking, the personal liability of a shareholder is limited to the shareholder’s contribution to the LLC’s share capital. Prior to the Companies Law 2016, shareholders could incur personal liability in certain situations (e.g. where the LLC’s losses amount to 50% or more of its share capital, and it continues to trade without following the correct procedures). Following the issuance of the Companies Law 2016, this no longer appears to be the case.
An LLC may either have a general manager or a board of directors. An LLC with more than 20 shareholders must have a supervisory board to oversee and advise management. Subject to compliance with general requirements relating to employment of foreigners, there is no specific restriction on the appointment of a foreigner (with residency, iqama, in Saudi Arabia) as a general manager of a SAGIA licensed LLC.
A joint stock company (JSC) can be either ‘open’ (which means that its shares are offered to the public), or ‘closed’ (meaning its shares cannot be offered to the public). All companies listed on the Tadawul, the Saudi stock exchange, are open JSCs. Certain types of activities (e.g. banking and insurance) may only be carried out by a JSC.
A JSC requires share capital sufficient for the JSC to achieve its purpose, subject to a minimum capitalisation requirement of SAR 500,000 (about USD 135,000). There must be at least two shareholders, unless the JSC will have a minimum share capital of SAR 5 million (about USD 1.35 million), in which case the JSC may be formed by a single shareholder.
Founders’ shares (i.e. shares owned by the promoters of the JSC) cannot be transferred until financial statements for the JSC have been published for two complete financial years.
Shareholders in a JSC are exempt from personal liability on the same basis as the shareholders in an LLC, and are also not personally liable for the debts of the JSC should such debts exceed 50% of the JSC’s stated capital.
Importantly, the annual audited financial statements of a joint stock company must be published in a Saudi Arabian daily newspaper.
An investor can apply for a Temporary Commercial Registration (TCR) if the intended business activity will be conducted in Saudi Arabia over a relatively short period of time, is related to the performance of a government contract, and no further business activities are contemplated.
The registration process is similar to that for a Branch, although less documentation is required to support the foreign investment licence application, and there is no capital requirement.
The issuance of a TCR is restricted to companies that have contracts with government or semi-government entities. The licence application must be supported by a letter of contract award, or a signed contract, from the relevant government agency.
The principal disadvantage of a TCR is that it is limited to the scope and terms of the particular contract, and cannot be used to undertake general business activities.
A foreign company may establish a Technical & Scientific Services Office (TSSO) to provide technical and scientific support to its registered Saudi agents, distributors and consumers. A TSSO may not engage in any commercial activities or earn revenue. Its activities are limited to providing technical information, market and technical research.
A TSSO is able to sponsor its own foreign employees, although a minimum number of Saudi nationals will need to be employed. The authorities impose a restriction on the number of technical employees employed by a TSSO, beyond which this number shall not be increased except with the authorities’ prior approval.
While there are various forms of entities that can carry out business activities in Saudi Arabia, a Professional Services Company is the only type of entity that can legitimately conduct engineering, architectural, accounting, and other professional services. This engineering activity should not be confused with the activities of an EPC company, the form of which would be either an LLC or a JSC.
A Professional Services Company generally requires a joint venture arrangement with a Saudi individual or entity licensed to carry out the particular profession. (For example, a foreign engineering firm could partner with a Saudi engineer or engineering firm registered with the Saudi Council of Engineers.)
Although it has some similarities with an LLC, under Saudi law, a Professional Services Company is treated more akin to a partnership than an LLC. As with a partnership, the partners of a Professional Services Company have joint and several liability for the debts and obligations of the Professional Services Company – although they are able to apportion liability as between themselves.
Establishing this type of entity currently does not require a foreign investment licence from SAGIA, and capitalisation requirements are not prescribed. Provided a foreign applicant meets certain experience and other criteria, it may own up to 75% of a Professional Services Company. There has been some talk of SAGIA removing this cap in respect of certain professional services, although no concrete details have been published.
