DOING BUSINESS IN
SAUDI ARABIA
OVERVIEW
The Kingdom of Saudi Arabia (“KSA”) is the largest
country on the Arabian Peninsula, bordering Jordan, Iraq,
Kuwait, Qatar, Bahrain, the United Arab Emirates, Oman
and Yemen. Like its neighbours in the Arabian Gulf,
KSA is primarily known as a petroleum-based economy.
It has the second largest oil reserves in the world and
is the world’s leading oil producer. Petroleum accounts
for more than 90 percent of its export earnings and
nearly 75 percent of government revenues. Against this
background, the Saudi government has recently
announced an intention to transform and diversify the
capabilities of its economy through its “2030 Vision”.
LEGAL BACKGROUND
As KSA is an Islamic State, there are a number of
fundamental differences between the local commercial
and legal position and Western commercial and legal
concepts. Laws in the KSA are based on Islamic law,
with four main schools of jurisprudence, namely, Hanbali,
Hanafi, Shafai, and Maliki. Courts in KSA generally apply
the Hanbali school of jurisprudence. However, the courts
may also rely on other schools of jurisprudence together
with state regulations, royal decrees (where these are
relevant), and custom and practice. In the event of a
conflict between Islamic law and government rules and
regulations, Islamic law will prevail.
STRUCTURES FOR DOING BUSINESS IN KSA
Options to conduct business in KSA depend upon,
among other things, the foreign investor’s business goals
and the types of activities that the foreign investor wishes
to undertake locally. Business structuring options may
range from establishing a distinct legal entity to entering
into a distribution or a commercial agency agreement
with a local partner.
Generally, in order to conduct business legally on the
ground in KSA, an investor must have a legal presence
locally. Once established, the corporate entity may
only conduct activities in accordance with the terms
of its foreign investment licence, issued by the Saudi
Arabian General Investment Authority (“SAGIA”), and
its commercial registration certificate, issued by the
Saudi Ministry of Commerce and Investment (“MOCI”).
Additional licences and certificates are required from other
government departments such as the Department of Zakat
and Income Tax (“DZIT”) and the General Organisation
for Social Insurance (“GOSI”). For specialized activities,
pre-approval or clearance may be required from the
relevant authorities, such as the Ministry of Education,
the Saudi Commission for Tourism and National Heritage,
and the Saudi Food and Drug Authority.
02 | Doing Business In Saudi Arabia
Foreign companies wishing to establish a legal presence
in KSA may choose to establish a corporate entity in
the form of a branch office (“Branch”), a Scientific
and Technical Offices (“Scientific Offices”), a limited
liability company (“LLC”), or a joint stock company
(“JSC”). The choice of entity will depend on the foreign
investor’s business goals and the types of activities that
the foreign investor wishes to undertake.
Entity options are discussed briefly below.
a) Branch
Wholly foreign-owned entities may establish branch
offices in KSA. Certain conditions must be met before a
foreign investment license will be issued by SAGIA.
b) Scientific Offices
Scientific offices are permitted to conduct market
surveys, undertake product research, and provide
scientific and technical services support for their
products to agents, distributors and consumers of their
products. However, they are prohibited from directly
or indirectly engaging in commercial activities in KSA,
including sales.
c) Limited Liability Company (“LLC”)
An LLC is a company with limited liability where
the number of shareholders must not exceed 50.
Each shareholder is only liable to the extent of the
paid up value of his share in the capital (subject to
Islamic Law provisions regarding limitation of liability).
Such companies cannot deal in insurance or financial
operations and are required to set aside a statutory
reserve of net annual profits. One hundred percent
foreign ownership is available in certain sectors as
directed by SAGIA.
d) Joint Stock Company (“JSC”)
A JSC must be owned by two or more individuals or
entities. Capital is apportioned into negotiable shares of
an equal amount and shareholders are liable only to the
extent of the paid up value of their share holdings. The
minimum capital requirement is 500,000 Saudi Riyals.
The issued paid-up capital upon incorporation must be
not less than 50 percent of the authorised capital. A JSC
is permitted to issue non-voting preferential shares in an
amount up to 50 percent of the authorised capital.
Prospective JSCs involving businesses such as minerals
exploitation, administration of public utilities, banking
and finance, and insurance require authorisation by Royal
Decree prior to incorporation. The management of a
JSC is composed of a board of directors. This board,
appointed by the shareholders, must have a minimum of
three members.
e) Commercial Agencies
Commercial agency and distributorship arrangements
are regulated by the Law of Commercial Agencies
supplemented by the related Executive Regulations
(together the “Agency Law”).
The Agency Law is primarily concerned with mandatory
registration procedures and the penalties resulting from
non-compliance with these procedures. The Agency
Law also contains provisions concerning the relationship
between the principal and the agent, primarily intended
to secure the interests of the consumers.
The Agency Law does not differentiate between
the terms “agent” or “distributor” in terms of legal
status, but governs the relationship between any Saudi
entity which enters into an agreement with a foreign
producer to perform commercial activities, whether as
an agent or as a distributor in any manner for a certain
profit, commission or other benefit of any other kind.
The meaning of “commercial activities” includes the
purchase of goods or produce for resale either directly
or after manufacture or processing.
EMPLOYMENT ISSUES IN KSA
Labour matters in KSA are governed by Labour Law
and its Implementing Regulations issued by the Ministry
of Labour (both as recently amended and together the
“Labour Law”). Generally, the Labour Law applies to
all staff and employees working in KSA, whether KSA
nationals or expatriates. It is essential for any client
wishing to establish a legal entity in KSA to consider
key employment issues, such as visas, secondment of
employees and locally compliant employment contracts.
It is generally more difficult to attain visas for female
expatriate employees.
The Ministry of Labour also requires legal entities to
comply with its ‘Nitaqat’ system, which aims to deal
with national unemployment concerns by amending the
existing Saudization system. The previous requirement
of a 30 percent Saudi workforce has been replaced
with minimum Saudization requirements that are based
on an updated set of categories of workplace activity
and size of workforce. The exact level of Saudization
for each legal entity is calculated by the Ministry of
Labour accordingly.
REAL ESTATE IN KSA
Subject to obtaining the approval of the relevant
licensing authority, foreign investors, whether they are
natural persons or corporate entities, are permitted
to own real estate required for the conduct of their
licensed professional, technical or economic activities.
However, non-Saudi persons may not obtain the title
of use of real estate located within the city limits of
Mecca and Medina.
TAX IN KSA
The corporate tax rate on foreign investor profits
(excluding investors in hydrocarbons) is a flat 20 percent.
Saudi shareholders do not pay corporate income tax, but
are subject to a 2.5 percent tax on net current assets,
or Zakat in line with Sharia laws. Please note that the
tax regime in Saudi Arabia is currently under review as a
result of the 2030 vision.
GENERAL
This guide highlights high-level issues which may be
relevant to a potential foreign investor in KSA. It does
not constitute legal advice nor does it purport to
address every legal issue or summarise all current rules,
structures or regulatory frameworks.
The regulatory system in KSA is dynamic and subject
to frequent changes in application and interpretation.
This guide is based on material available to DLA Piper
as at October 2016 and is subject to amendment from
time to time as legislation is amended or new policies or
interpretations are adopted by government authorities,
courts and/or regulators. Detailed registration and
licensing requirements to establish a legal entity must be
confirmed with relevant Saudi authorities on a case by
case basis with regard to the proposed activities of the
new entity. We recommend that you obtain legal advice
on how the law applies to foreign investors in respect
of a particular investment or business activity at the
relevant time.
We hope you find this guide useful and invite you to
contact us if you have any queries regarding the material
set out in this guide or if you require specific legal advice
in respect of an establishment in KSA.
www.dlapiper.com | 03
FOR FURTHER INFORMATION, PLEASE CONTACT
Dr Eyad Reda
Country Managing Partner
DLA Piper Saudi Arabia
T +966 1 1201 8989
[email protected]
Ben Gillespie
Head of Corporate
Middle East
T +971 4 438 6305
[email protected]
The information contained in this briefing does not constitute legal advice. Specific legal advice should be taken
before acting on any of the topics covered.
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DLA Piper Saudi Arabia is the trading name of the association between DLA Piper Middle East LLP and Dr. Eyad Reda Law Firm, Practice Licence
(115/31), issued from the Ministry of Justice in the Kingdom of Saudi Arabia.
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