Doing Business in Saudi Arabia 101: Investing in the Kingdom

by Dechert LLP
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President Donald Trump will be making his first official overseas trip as president to the Kingdom of Saudi Arabia, commencing May 20, 20171. During the course of the president’s trip, over US$100 billion worth of military-related agreements are expected to be concluded2. Saudi Aramco, the major state oil producer, also intends to sign several energy-related agreements with a number of major U.S. companies3. This comes against a backdrop of Saudi Aramco’s plans to list shares next year in what is expected to be the world’s largest IPO, billed by The Economist as the potential “sale of the century”4. Furthermore, the Kingdom aims to raise around US$200 billion over the next few years through privatization programs in 16 sectors ranging from oil to healthcare, education, airports and grain milling5. Given the Kingdom’s appeal as a destination for investments, here is some basic guidance on investing in the Kingdom of Saudi Arabia. 

Why now?

With its new economic strategy to reduce the Kingdom’s dependence on oil under the auspices of Vision 2030 and the National Transformation Plan 2020 introduced by HRH King Salman and his Deputy Crown Prince Muhammad bin Salman, the Kingdom has recently updated its Companies Law6, eased some of the trading restrictions on its main stock exchange, created a new secondary listing market (NOMU), is currently updating its M&A regulations7, and has revitalized the role of its sovereign Public Investment Fund (PIF). Traditional methods by which foreign companies invest in the Kingdom through a local agent or franchisee with limited overall control8, are making way to 100% directly foreign-owned limited liability companies, which are now possible, subject to specific conditions. The appeal of a foreign-owned local entity is growing as a result of these changes.  

First Steps: Foreign Investment Licensing

As a first step to having a direct, local presence in the Kingdom, foreign investors (defined as non-Gulf Cooperative Council (GCC) citizens or entities owned by any non-GCC nationals) are required to obtain a foreign investment license from the Saudi Arabia General Investment Authority (SAGIA)9. Though this license enables a foreign party to legally invest in the Kingdom, to incorporate or to buy into a company or to operate a foreign branch, a commercial registration certificate from the Ministry of Commerce and Investment is also required. 

Choice of Corporate Vehicle: The most common form of entity used by foreign investors is a limited liability company (LLC). This option is popular because its compliance operating requirements are easier than those of other entities. Other popular structures include a joint stock company (JSC) (though this is heavily regulated), a branch of a foreign company (typically only used for specific projects and restricted in that it cannot enter into joint ventures with other entities), or a professional services company, which suits certain professions like engineering consultancies (PSC)10. The main restrictions of an LLC, however, are that: its business activities are limited to its constitutional ‘object’s’ clause; statutory pre-emption rights apply on the transfer and issue of shareholding interests, which can be complex; shareholders are jointly and personally liable to pay company debts if losses exceed 50% of the stated capital; and it is costly and complicated to liquidate.

Minimum Local Shareholding: A minimum of two foreign shareholders is needed for an LLC. Though as mentioned earlier, under certain preconditions 100% ownership is possible. Unlike many of the other GCC states, there is no requirement to maintain a 49% – 51% foreign-to-local ownership  ratio. However, ownership and share capital restrictions are directly linked to the entity’s intended licensed activities. For instance, services-related industries can be 100% foreign-owned. Some other corporate activities, such as trading, do require a minimum of 25% local ownership though. Furthermore, not all areas of investment are open to foreign ownership. For instance, while foreign investors can own a large hospital, they cannot own clinics, blood banks or small medical facilities. Some areas such as oil production, security and military services, real estate consultancy, real estate brokerage, legal practice, printing and publishing, and land transportation services are still restricted to only local ownership11. It is very important to verify the latest rules before attempting to incorporate or even buy a KSA entity. This becomes particularly relevant in any M&A or private equity transactions.

Local Employee Quotas: Minimum numbers of Saudi national employees must always be maintained in order to hire expats (non-Saudis) or issue foreign visas (in accordance with Saudization and the ‘Nataqat’ quota compliance programs). This is a complex and constantly changing area of regulation that requires careful navigation, especially when buying into a pre-existing business.

Tax: Though income tax is not currently applied to foreign employee salaries, a 20% corporate tax is applied to profits. Social insurance contributions have to be made on Saudi nationals. Though there are no restrictions on cross-border capital flows, a 5% to 20% withholding tax is applied to international corporate remittances12. From July 2017, foreign employees are required to pay a monthly fee on each of their dependents13.  VAT may also be applicable from the beginning of 2018 across all GCC states14

Share Capital: The minimum capital required depends on the intended corporate activities. Though there are no minimum capital requirements for the services sector, the industrial sector requires a minimum of SAR1 million, while SAR25 million and SAR27 million are required for agriculture, and retail or trading sectors, respectively. 

Investing or Acquiring in the Kingdom?

Given the new political and economic dynamism in the Kingdom, the above brief guidelines are of course subject to change at any time.

Footnotes

1) A KSA government website has been specifically dedicated to his expected arrival.

2) US nears $100bn arms deal for Saudi Arabia in time for Trump's visit

3) Aramco plans at least 10 energy deals during Trump visit

4) Saudi Aramco: Sale of the century? and Saudi sale of the century lures foreign investment banks, PE firms

5) Factbox: Saudi Arabia's privatization plans

6) The Companies Law (1437H/2015G) was published in the Saudi Gazette (Um Al-Qura) on December 4, 2015, and came into effect on May 2, 2016.

7) Draft revised Mergers & Acquisition Regulations circulated for consultation by the Board of the Capital Market Authority on 24 April 2017.

8) Though agencies and franchise arrangements continue to be popular and cost-effective methods of doing business in the KSA, ownership and management control is fairly limited or can be absent entirely. These methods also pose difficulties in that they do not permit a foreign entity to have a legal presence, to have staff on the ground (unless sponsored by the agent), to operate bank accounts or to directly own any assets. 

9) Pursuant to the Foreign Investment Regulations and Implementing Regulations, 2000, as amended.

10) NB: an engineering consultancy requires a 25% local shareholding ownership requirement.

11)  SAGIA maintains what is known as a “Negative List” of activities restricted to foreign ownership. Inter-city passenger transport via trains and the Metro system in Riyadh are currently exempted from the restriction on land transportation systems. 

12) Some double tax treaties may apply in the Kingdom.

13) Confirmed: Dependents' fees payment linked to iqama

14) GCC Unified VAT Framework Agreement

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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