Legal Protection of Foreign International Corporates in Saudi Arabia

As known, Saudi Arabia is one of the largest economic countries in the world since it occupies the 4th place of the strongest economy in the world and the first strongest economy in the Arab world. Saudi has supported foreign investment within its borders through publishing laws and regulations which organize and ease the business investment to go smoothly, and also protect the business from either domestic or international disputes that may arise from the commercial deals and agreements.

First I will start presenting corporate structuring in Saudi Arabia and will present the procedures and how it goes and the duration of corporate structuring.

Procedures of Corporate Structuring in Saudi Arabia

Generally, in order to establish a foreign entity in Saudi Arabia, The Foreign Investment Act and the Executive Rules (collectively, the Foreign Investment Law) provides the ground rules for foreigners wishing to establish a legal entity or acquire an interest in a Saudi entity. In such a case, the Saudi Arabian General Investment Authority (SAGIA) is the body responsible for granting licenses to foreign investors.

The Foreign Investment Law permits up to 100% foreign ownership of a KSA Entity unless the proposed activities appear on a “negative list” which restricts any foreign ownership. Also, certain activities which do not appear on the negative list may still fall into a sector where foreign ownership is restricted in amounts ranging from 25% to 75%. It is important that a thorough examination of the proposed activities is undertaken to ascertain if any of these restrictions apply.

In general, foreign investment is permitted most in manufacturing, technical services and trading activities. Moreover, we have to differentiate between the type of entities which are common subjects in establishing legal entities in Saudi Arabia. Such entities are joint venture companies and limited liability. Within this article, we will start with JV and its practical issues and the applicable laws and regulations towards its systems, conflicts and agreements.

Joint Venture Company

It is a commercial enterprise undertaken by two or more parties (business entities) for the purpose of a specific project or other activity which otherwise retain their distinct identities, and such entity may be established relying on 100% foreign investors or in partnership with a Saudi party either an individual or corporate. It is typical for investors in a KSA entity to enter into a JV Agreement in order to address respective investor rights and options in more detail than would be found in the Articles.

The areas that are commonly included in a KSA JV Agreement include provisions related to the management and decision-making process, plans for the KSA Entity’s business (including strategic plans for the company’s first few years), plans for the future restructuring of the KSA Entity (such as planned capital increases shareholder’s review of the KSA Entity’s annual budget).

In addition, there's planning the distribution between the founding shareholders of the responsibilities and expenses involved in the incorporation and operation of the KSA Entity dispute resolution and governing law provisions with non-competition provisions preventing the shareholders in the KSA Entity from competing with, or from owning a competing business. Confidentiality provisions requiring the shareholders in the KSA Entity to keep confidential the KSA Entity’s information and provisions dealing with exit and deadlock.

Practical Issues

There are a number of additional practical issues to consider when entering into a potential joint venture in KSA and such practical issues can be referred to as:

1- Visas

A visa is required for every foreign visitor to the KSA. The type of visa will depend upon the purpose for entering the KSA. For example, in common with other GCC countries, employers in the KSA are required to secure work permits and residence permits (Iqama) for foreign employees from the labour office.

2- Legal and Court System

The fundamental law of the KSA is the Shariah. The Shariah is a collection of principles derived from different sources, but principally the Holy Qur’an and the Sunnah (the witnessed sayings and actions of the Prophet Mohammed, peace be upon him). Shariah principles are often expressed in general terms, which provides the KSA courts with considerable discretion as to how to apply those principles.

The practical consequences of the application of Shariah should be considered in respect of:

– Financing (the prohibition of interest payments in the KSA may mean that Islamic financing is insisted upon although options for conventional financing may also exist);

– The prohibition against uncertainty (which may exclude the use of derivative contracts or the inclusion of a liquidated damages clause for potential economic losses);

– The inability to provide a waiver in respect of future rights (powers of attorney are always revocable, regardless of any language to the contrary in the instrument); and

– There is no recognition of “self-help” remedies and it is not possible to obtain effective security over future assets.

3- Saudization

There are minimum requirements in terms of the nationality of the workforce to be employed by businesses in the KSA and advice should be sought in respect of employment requirements for KSA citizens. In practice, the minimum number depends on the type of company and industry. In general, 30% of the workforce is required to be Saudi unless the business relates to a particular sector (e.g. construction companies can in certain circumstances have a requirement as low as 5%).

4- Tax

Income tax on business profits and Zakat (a form of wealth tax based on Shariah law principles) are levied by the Saudi Arabian Department of Zakat and Income Tax. In summary, the key tax requirements are:

– Any person that is not a national of one of the GCC countries (or a corporate entity that is not owned, directly or indirectly by nationals of one of the GCC countries) must pay tax at the rate of 20% of the taxable income that is attributable to its shareholding in the KSA company. For example, a UK national who owns 50% of a KSA company that makes USD 1 million profit will pay tax at the rate of 20% of USD 500,000 (i.e. USD 100,000) – assuming that all profits are distributed to shareholders;

– The tax laws also provide for withholding tax, at varying rates, from 5% to 20%, to be charged on certain payments which are made by companies registered in the KSA to any company established outside the KSA; and

– Nationals of GCC countries pay Zakat on ownership interests in KSA Entities (at the rate of 2.5% of the capital employed).

– Also VAT (value-added tax) has been applied recently after the regulation of VAT law which has been published on H1438/11/4 and was applied on 1st January 2018 (H1439/4/14).

This was a brief about JV entities in Saudi Arabia, we shall continue discussing LLC within the next article which shall be released soon.

Written by:

Shehab Alsaleh | Shehab Alsaleh Law Firm​