Kingdom of Saudi Arabia

Bracing for Impact: The Kingdom of Saudi Arabia's Groundbreaking Commercial Transactions Law

Era of Transformation: Shaping Saudi Arabia's Legal Future
The introduction of a new draft Commercial Transactions Law (the “Draft Law”) marks a pivotal moment in the Kingdom’s evolving legal landscape, reflecting a concerted effort to modernize and align with the transformative objectives of Vision 2030. It signals the desire for strategic and comprehensive reform of Saudi legal legislation with the country's dynamic economic and societal needs in mind.

Our analysis of several key issues below is based on the assumption that the Draft Law will be passed in its current form.

Two-Pronged Legal Revolution: Commercial and Civil Synergy
The Kingdom is taking a holistic approach to the reform of its legislation. While the Draft Law will delve into the intricacies of trade and commerce, the Civil Transactions Law (the “CTL”) focuses on personal matters and non-commercial transactions. This approach will ensure a holistic and systemized coverage of legal issues in both spheres.

Through this lens, the Draft Law emerges not just as a standalone legal document but as a complementary piece to the broader legal puzzle in Saudi Arabia. It signifies a significant shift in the legal paradigm, filling numerous gaps that previously existed in the Saudi legal framework. By providing clear directives for commercial activities and transactions, it aims to foster a more transparent, efficient, and reliable commercial environment.

The introduction of a new draft Commercial Transactions Law [reflects] a concerted effort to modernize and align with the transformative objectives of Vision 2030. It signals the desire for strategic and comprehensive reform of Saudi legal legislation with the country's dynamic economic and societal needs in mind.

Emad Salameh
Partner, Head of Office - Riyadh

Mohammed Negm
Partner, Dispute Resolution

Redefining Commercial Legality: Saudi Arabia's Global Alignment
The Draft Law, which was published for public consultation on December 28, 2021, aims to modernize and simplify the legal framework for commercial transactions and align it with international standards and best practices. It is a robust piece of legislation, consisting of nine chapters covering a range of topics from commercial activities, traders, shops, commercial obligations, accounting records, commercial contracts, to commercial papers.

Embracing Diverse Business Ventures: Expansive Scope of Commercial Activities in Saudi Arabia's Market
The Draft Law identifies a range of activities as “commercial activities”, including the trade of movable goods for resale or rental, financial and banking services, various types of insurance operations, and maritime and air navigation activities. It also extends to the telecommunications and internet sectors, real estate transactions for resale or rental, and modern technological fields such as programming, website and app design, and artificial intelligence and digital technology, reflecting the diverse and evolving nature of the commercial sector.

Tackling Market Imbalances: Addressing Unfair Competition
The Draft Law empowers individuals or entities harmed by unfair competition to seek court intervention. This includes stopping or preventing imminent unlawful competitive practices. The court, upon confirming such violations, is authorized to order the cessation of these activities, seize the goods, products, and tools involved in the violation, and enforce measures for rectification and compensation for damages incurred.

Securing Business Secrets: Legal Protection for Confidential Information
The Draft Law provides robust legal protection for confidential information, including written, oral, and electronically stored data. Additionally, it empowers judicial intervention against both actual and potential misuse of trade secrets, enabling courts to prevent unauthorized disclosure or exploitation and mandate restitution or destruction of unlawfully held information. It also includes provisions for damages arising from such misuse.

Empowering Youth in Commerce: Legal Capacity for Minors
Addressing legal capacity, the Draft Law specifically allows minors who have reached fifteen years of age to engage in commercial activities under certain conditions. This progressive stance is also mirrored in the CTL, which highlights the rights of minors and acknowledges their capability to engage in commercial transactions. The legal empowerment of minors to engage in commercial activities may stimulate the growth of youth-centric markets, particularly in areas like digital platforms, e-commerce, gaming, and educational technology, tailored to the interests and capabilities of young entrepreneurs.

Revolutionizing Financial Instruments: Modernizing Commercial Securities
A key highlight of the Draft Law is its comprehensive regulation of commercial securities, including bills of exchange, promissory notes, and cheques. This legislation meticulously outlines the legal prerequisites for these instruments, detailing their form, content, and validity, as well as the rights and obligations of the parties involved. Moreover, it governs the negotiability, assignment, and recourse of these instruments, along with the procedures for payment, protest, and enforcement.

Remarkably, the law modernizes rules dating back to 1931, aligning them with current international standards. It also embraces the digital era by validating electronic securities, allowing for their issuance, transfer, and payment through electronic channels.

Concluding Reflections: A New Chapter in Saudi Arabia's Commercial Law
The Draft of the Commercial Transactions Law symbolizes a comprehensive approach to regulating Saudi Arabia's commercial sector. By addressing today's commercial complexities, it paves the way for a more robust and modern legal framework, essential for the Kingdom's ongoing economic evolution.

Contact Partners:
Emad Salameh
Mohammed Negm

Contributing Authors:
Sara AbdelGhafar
Sara AlShikh

Saudi Arabia Anticipates Implementation of New Income Tax Law, Executive Regulations for Zakat and Tax Procedures Law in 2024

In a noteworthy development, Saudi Arabia is poised to unveil new income tax legislation, along with the Executive Regulations for Zakat and the Zakat and Tax Procedures Law in 2024. This initiative comes after the completion of a public consultation period in December 2023. The forthcoming legislation aims to bring Saudi Arabia's tax laws in line with international standards, stimulate foreign and domestic investment, and enhance tax compliance and transparency.

Key Features of the Proposed New Tax Law:

Broader Taxation Scope: Partnerships, endowments, investment funds, and other partnership forms will be treated as legal entities for tax purposes.
Micro-Enterprise Tax Computation: Alternative methods of tax computation will be implemented for micro-enterprise taxpayers.
Statute of Limitations: The statute of limitation period for tax assessments will be reduced from five to three years, except in cases of non-filing, tax evasion, or agreement with the taxpayer.

The forthcoming legislation aims to bring Saudi Arabia's tax laws in line with international standards, stimulate foreign and domestic investment, and enhance tax compliance and transparency. [They] underscore ZATCA's commitment to evolving the tax environment and realizing the objectives outlined in the Kingdom's Vision 2030.

Shiraz Khan
Partner, Head of Taxation

Special Provisions: The legislation will incorporate special provisions for residency transfers, re-investment reserves, merger and demerger transactions, divergent tax treatment of financial instruments between jurisdictions, and the taxation of funds paid outside the Kingdom.
Unified Withholding Tax Rates: The withholding tax rate for services will be standardized at 10%, with a 20% rate applied to payments to related parties in jurisdictions with preferential tax regimes.
Income Exemptions: Income from employment of non-Saudi natural persons will be exempt from tax. Additionally, a tax return requirement will be introduced for capital gains derived by non-residents from asset disposals in the Kingdom.
Tax Credits and Incentives: The legislation proposes allowing tax credits for foreign taxes paid abroad, contingent on specific conditions. Moreover, tax incentives for green investments will be introduced, subject to a by-law.

Key Provisions of the Proposed Zakat and Tax Procedures Law:

Assessment Authority: Granting the Zakat and Tax Authority (ZATCA) the right to issue assessments on a deemed basis if non-filing occurs 60 days after the statutory filing date, with exceptions determined by the by-law.
Penalties for Non-Payment: Imposing a 2% per month penalty, up to 50%, for non-payment or unlawful refund of zakat or tax. An additional 1% per month penalty will be applied in case of amendments made by ZATCA.
Penalties for Tax Evasion: Levying penalties ranging from 100% to 300% of the due zakat or tax for tax evasion or participation in it.
Information Disclosure Penalties: Introducing penalties ranging from SAR 5,000 to SAR 50,000 for failure to file an information disclosure statement.

Key Features of the Proposed New Tax Law:

The list of definitions: has been expanded to include additional definitions that align with modern transactions.
Non-Zakatpayers: Detailed criteria has been introduced for individuals subject to Zakat, explicitly excluding those covered by the income tax system. Specific conditions have also been outlined for public benefit entities, granting them exemption from Zakat obligations.

Regulation Concepts: These regulatory updates encompass crucial concepts such as residence, the main administrative headquarters, and trading.
Transfer Pricing: Including the application of transfer pricing for Zakat taxpayers.
Zakat Threshold: The regulations have established a minimum threshold for the Zakat base, while simultaneously defining an upper limit beyond which Zakat imposition is not applicable.

Aligning with Vision 2030
These proposed laws underscore ZATCA's commitment to evolving the tax environment and realizing the objectives outlined in the Kingdom's Vision 2030. It is advisable for taxpayers to thoroughly review the proposed legislation and assess its potential implications on their business operations and tax obligations.

Contact Partner:
Shiraz Khan

Contributing Authors:
Nashmi Al Otabi
Sabeeha Moolla
Sara AbdelGhafar

Regional Headquarters Program - Government Contracts in the Kingdom of Saudi Arabia

The Kingdom of Saudi Arabia (“KSA”) is ushering in a new era for government contracts, propelled by its Regional Headquarters (“RHQ) Program. This initiative, a collaborative effort between the Ministry of Investment (“MISA”) and the Royal Commission for Riyadh City, seeks to induce multinational companies to establish their regional headquarters within the Kingdom. In February 2021, the government announced its intention to cease contracting with companies which lack regional headquarters in the country in line with KSA’s Vision 2030 plan to revitalize and diversify the KSA economy. Fast forward to 27 December 2022, the KSA Council of Ministers approved groundbreaking regulations governing government agencies' contracts with entities lacking regional headquarters in the Kingdom.

RHQ (Regulations now in force)
On 1 January 2024, the RHQ Regulations came into force. This transformative legislation bars government agencies from engaging not just with companies devoid of an RHQ in KSA but also their associated entities during their procurement processes and project execution.

Companies seeking a stake in the vibrant Saudi Arabian market must navigate this evolving landscape with foresight and strategic planning to ensure compliance and capitalize on the opportunities that lie ahead.

Samer Qudah
Partner, Head of Corporate Structuring

Hesham Al Homoud
Partner, Head of Corporate Structuring - Saudi Arabia

MISA Takes Charge: A Dynamic List of Non-Compliant Companies
One pivotal aspect of the Regulations entrusts MISA with the responsibility of compiling and maintaining an online portal listing companies failing to meet the RHQ requirement. The definition of such companies is outlined in the Regulations as "foreign companies without an RHQ in KSA but with an RHQ in the Middle East and North Africa Region, featured in the list maintained by MISA."

Extensive Scope: Applicability Across all Government Agencies
Crucially, these Regulations extend their influence across all government agencies, encompassing ministries, governmental entities, public bodies, departments, institutions, and independent agencies with a public legal personality. Unlike previous regulations, this initiative is not limited to entities subject to the KSA Government Tenders and Procurement Law established in November 2019.

Exceptions to the Rule: When and Why?
While the Regulations impose sweeping restrictions, certain exceptions provide leeway for government agencies to engage with companies lacking an RHQ in specific scenarios. These include cases where only one technically acceptable offer is available, the non-RHQ offer is the best technically and is 25% more valuable than the second-best offer, or in situations where no qualified company with an RHQ in KSA is available for particular works.

Emergency Situations and Specialized Needs: A Legal Necessity
The Regulations recognize emergency situations as a distinct category, allowing direct contracting with non-RHQ companies if public safety, security, or health is under imminent threat. Additionally, if certain works or procurements can only be serviced by companies without an RHQ in KSA, exceptions are made.

Scrutiny and Transparency: Reporting Requirements
Government agencies seeking exceptions must diligently prepare reports detailing the reasons justifying their engagement with non-RHQ companies. These reports must be submitted to the KSA General Auditing Bureau and the Expenditure and the Project Efficiency Authority within 30 business days of contract signing.

Exemptions and Special Committees: A Delicate Balancing Act
The Regulations also outline a process for government agencies to seek exemptions for certain companies or projects, subject to the formation of a special committee. This committee will evaluate applications based on adherence to the Regulations and the broader public interest.

Looking Ahead: Anticipated Guidance and Future Developments
Companies eyeing government contracts in KSA must strategically evaluate their corporate structures. A proactive approach involves considering the establishment of their RHQ in KSA, aligning with the country's strategic vision for economic growth and diversification. While the current Regulations provide a comprehensive framework, further guidance and regulations related to the RHQ Program are anticipated in the coming months.

Conclusion: A Paradigm Shift in Government Contracts
The Regulations of Government Agencies Contracting with Entities lacking Regional Headquarters in KSA marks a significant turning point in how the Kingdom engages with multinational corporations. As the government endeavors to reshape its economic landscape through Vision 2030, these regulations underscore a commitment to fostering local and regional business partnerships. Companies seeking a stake in the vibrant Saudi Arabian market must navigate this evolving landscape with foresight and strategic planning to ensure compliance and capitalize on the opportunities that lie ahead.

Contact Partners:
Samer Qudah
Hesham Al Homoud

Contributing Authors:
Dr Abdulrahman Alajaji
Ahmed Mahomed
Sabeeha Moolla
Sara AbdelGhafar

The Transformation of the Health Insurance Sector in the Kingdom of Saudi Arabia

The Kingdom of Saudi Arabia (KSA) is undergoing a major reform of its health sector as part of its Vision 2030 and the Healthcare Sector Transformation Strategy. The reform aims to improve the quality, efficiency, and accessibility of health services for the population, as well as to diversify the economy and foster innovation. This will involve the establishment of new entities and mechanisms to regulate, finance, and provide health services.

According to the roadmap, we can expect that there will be significant development this year, which will contribute to the ambitious plans.

In this article we provide an insight into some of the main updates that are projected to further develop the sector in 2024.

Universal Health Care plan

This plan is intended to cover Saudis working in the public and private sectors, their family members, and some non-Saudis residing in the Kingdom, who are not covered by the cooperative health insurance. The establishment of the National Health Insurance Center (“NHIC”) in 2022 essentially signalled the emergence of a form of universal health coverage in the Kingdom, which will be effected in stages.
This will change the way health financing and administration is managed, which will have positive implications for the larger comprehensive health insurance vision for Saudi citizens in due course.

The concept of Health Clusters

As part of the reforms, a Health Holding Company (“HHC”) was formed in 2022, which is expected to establish Health Clusters that are independent companies to provide public healthcare services. It is proposed that the responsibility of all public health services is transferred from the Ministry of Health.
While it was previously announced that each cluster will amount to approximately 20-30 geographically defined, vertically integrated, “Accountable Care Organisations”, serving around 1-2m people each, we understand that the optimal structures and leadership organization of these Health Clusters are still under flux. We expect further announcements in 2024 concerning how the clusters will be established as “corporatised” public bodies, with substantial and defined decision rights.

Development of the KSA National Institute of Health Research

The formation of this institute was approved in August 2023. Its focus is to supervise and promote the value of translational research and clinical trials and is intended to enhance the research, development, and innovation sector in KSA. This is one of the objectives of Vision 2030 and the Healthcare Sector Transformation Strategy.

[The transformation of the health sector in KSA] will require careful planning, implementation, and evaluation, as well as the engagement and collaboration of all the relevant actors, and we expect this to take further shape in 2024. The reform will ultimately aim to achieve the vision of a high-quality, efficient, and accessible health system.

Andrea Tithecott
Partner, Head of Regulatory and Healthcare

Compared to the almost 36 million population, there are not enough clinical trials conducted in KSA particularly relating to the specific genome of the Saudi population. We expect to see increased funding flowing through the SNIH and the Kingdom seeking to further attract clinical trials.
It is anticipated that the creation of this new body will create new opportunities and partnerships for the health research community at large.

Conclusion
The transformation of the health sector in KSA is a bold and ambitious reform, which will have significant implications for the future of the health system. It will require careful planning, implementation, and evaluation, as well as the engagement and collaboration of all the relevant actors, and we expect this to take further shape in 2024. The reform will ultimately aim to achieve the vision of a high-quality, efficient, and accessible health system that meets the needs and expectations of the population and contributes to the economic and social development of the Kingdom.

Contact Partner:
Andrea Tithecott

Contributing Author:
Christina Sochacki