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Middle Eastern Laws - Saudi Arabia Doing Business in Saudi Arabia I. ENTERING THE SAUDI MARKET Foreigners wishing to conduct business in Saudi Arabia may do so in one of the following ways: By establishing an incorporated entity By entering into a partnership By establishing a branch office By establishing a representative office By engaging a service agent II. FOREIGN INVESTMENT IN SAUDI ARABIA In 2000, Saudi Arabia implemented the Foreign Investment Act (the “Act”), which liberalizes the foreign investment laws in the Kingdom. The Saudi Arabian General Investment Authority was created under the Act, which has responsibility for licensing all new foreign investment in Saudi Arabia. Under the new Act, foreign persons and entities are permitted to invest in all industries and services except for those which are specifically excluded from foreign investment. The exempted industries include those related to the manufacture of military materials, equipment and explosives; oil exploration and production; services related to security, insurance and real estate brokerage; wholesale distribution and retail services; telecommunications services; and land, air, and space transport, among others. Foreign investors may wholly own approved foreign investments, or a foreign investor and a Saudi national may jointly own them. Licensed businesses are now permitted to own the real estate necessary for the project and to house necessary staff (with the exception of Mecca and Medinah). Foreign investors may also obtain more than one license so as to enable them to participate in more than one business venture. The minimum capital requirements for projects licensed under the Act are SR 25 million (US$6.7 million) for agricultural projects, SR 5 million (US$1.3 million) for industrial projects and SR 2 million (US$ 533,000) for all other categories of projects. A project licensed under the Act enjoys the same privileges, incentives and guarantees as a national project, with the exception of taxation. Subsidized loans from the Saudi Industrial Development Fund (SIDF) are available to both foreign and Saudi owned enterprises. Additionally, sponsorship of the foreign investor and its non-Saudi employees is undertaken by the licensed entity and not a local person/entity. III. FORMS OF DOING BUSINESS Foreigners wishing to conduct business in Saudi Arabia may do so by establishing a permanent presence in Saudi Arabia or by entering into an agency relationship for the distribution and sale of their products. Below is a summary of the business forms available under Saudi law: A. Limited Liability Company (LLC) This is the most common form for entering into joint ventures with Saudi partners; however, a Saudi partner is not required since there are no legal limitations on the percentage of foreign ownership. The minimum capital investment required to establish an LLC is SR 500,000. An LLC must have between 2 and 50 shareholders and is managed and represented by one or more managers. There is no Board of Directors, although shareholders often provide for a Board and other management arrangements in the Memorandum of Association. The LLC must also have an auditor and, where it has more that twenty (20) partners, it must establish a Board of Controllers. B. Partnerships Foreign companies seeking to do business in the Kingdom may enter into a limited partnership. The limited partnership, or “sharikat tawsiya baseetah”, is a separate business entity comprised of several individuals or companies, including general (at least one) and limited partners. The general partners are liable for partnership debts to the full extent of their personal assets while the limited partners are liable only to the extent of their capital contributions. C. Joint Stock Corporation A Joint Stock Corporation (“JSC”) is an entity with at least five shareholders holding transferable shares. The minimum capital requirements are SR 2 million for a private JSC and SR 10 million for a public JSC. Liability of shareholders is limited to the par value of each shareholder’s share capital. The JSC must be approved by license or Royal Decree published in the Saudi Official Gazette. Additionally, it must be registered with the MOC Companies Department and the MOC Commercial Registry. D. Branch Offices Foreign companies may register a wholly foreign-owned Saudi branch office, provided that they obtain the requisite license. The branch office may engage in any government contract or private sector work within the scope of its license. Branch offices are subject to the requirements of the Government Tenders Regulations, where applicable. Branch office registration follows the same general procedure as for the registration of an LLC. E. Sponsorship and Temporary Commercial Registration As an alternative to forming one of the above entities, foreign contractors have in the past performed isolated private sector projects under the sponsorship of their Saudi customer and, in contracts with the Saudi government, the foreign contractor may perform its obligation under a temporary commercial registration (TCR). With respect to sponsorships, they can be in two forms. The first is where the foreign contractor obtains a business visa, sponsored by the Saudi customer. The second form of sponsorship is where the foreign contractor ‘seconds’ its employees to the employment and sponsorship of the Saudi customer. If a foreign contractor is awarded a project with the Saudi government and it does not have a registered presence in Saudi in one of the above-discussed forms, it must obtain a TCR (Commerce Ministry Resolution No. 680 dated 10 October 1978). An application for TCR must be filed within 30 days of obtaining the contract, along with a copy of the contract. Additionally, a ‘service agent’ must be identified pursuant to the Saudi Service Agent Regulations. TCRs are limited in scope and duration to the substance and term of the government contract for which they are issued. G. Commercial Agencies Agencies and distributorships are governed by the Commercial Agencies Regulations and the related Implementing Rules (Royal Decree No. M/11, as amended by Royal decree No. M/32; Ministry of Commerce Decision No. 1897). The rules and regulations reserve a monopoly for Saudi nationals and wholly owned Saudi entities on ‘trading’ activities. Trading activities include the import and local purchase of goods for resale. Therefore, foreign companies engaging in such activities must use Saudi commercial agents and distributors, who must register their Agency Agreements with the MOC Agency Register. The agent must hold a valid Saudi commercial registration permitting him to act as an agent or distributor and the directors and authorized representatives of the agent must be Saudi nationals. The Commercial Agency Regulations bar appointment of shell agents indirectly owned or controlled by the foreign principal, therefore, the Saudi agent must be independent from the foreign principal. Agencies do not have to be exclusive, although MOC will not normally register more than one agreement for the same principal. The Regulations do specify requirements for compensation of a terminated agent. The MOC Model agency contract provides for “reasonable compensation” of the agent upon termination for “activities that may have resulted in the apparent success of the business”. Shari’a law, which is applied by both the arbitration and the Grievance Board, excludes indirect or consequential damages. MOC will not register a new agency agreement with the same foreign principal before the old one has been deregistered. This normally requires a letter of consent by the old agent or administrative cancellation by MOC upon the expiry of the contract. IV. INDUSTRIAL PROJECTS All industrial projects, whether Saudi or foreign, and joint ventures whose fixed capital exceeds SR 1million (US $267,000), excluding the value of land and buildings, must be licensed. Licenses are granted pursuant to either the National Industries Protection and Encouragement Act, which applies to projects by Saudi citizens with full Saudi capital, or the New Foreign Investment Law, which applies to projects with full foreign capital or mixed Saudi/foreign capital (see discussion above). Industrial establishments are entitled to the following incentives and exemptions under Saudi law: Certain tariff exemptions; Subsidized industrial land, housing and utilities; Subsidies for training Saudi employees and other forms of assistance for partially foreign owned Saudi businesses; Export assistance for locally manufactured products; and Public procurement preference for majority Saudi owned joint venture companies. V. IMPORT AND SALE OF GOODS IN SAUDI ARABIA This area is regulated by Royal Decree M/11 of 1962, which reserves the import of goods for resale in Saudi-to-Saudi individuals and wholly owned Saudi entities. Therefore, a foreign entity wishing to import into Saudi must use the services of a Saudi agent or distributor. However, Saudi companies with foreign participation with a license from the GIA may import products and materials necessary to perform the activities authorized by their license. VI. TAX Saudi Arabia imposes a Business Income Tax (there is no personal income tax). The Tax Regulations tax the income of foreign companies in Saudi Arabia and the foreign partner’s share of net income from mixed Saudi/foreign companies. Salaries of local workers are not taxed. However, employers employing 10 or more workers must pay a tax to the Organization for Social Insurance to cover such items as worker’s compensation and Saudi Pension benefits. VII. GOVERNMENT CONTRACTS Government procurements are governed by the Tenders Regulation and its Implementing Rules. Procurements for less than SR 1 million may be made on a sole source basis. However, the Saudi government must receive at least three bids for all contracts larger than SR 1 million (for construction contracts it must receive 5 bids). Contractors are required to apply for classification for various types of activities and to prequalify with each government agency with which they seek to bid for a project. Foreign contractors awarded government projects must subcontract at least 30% of the value of the contract to wholly owned Saudi subcontractors unless they can show that no Saudi contractor can provide the required goods or services (Council of Ministers’ Resolution 124). Foreign companies with a majority Saudi shareholding are exempt from this requirement. VIII. INTELLECTUAL PROPERTY The Saudi Patent Regulations (Royal Decree No. M/38) provide for a system of patent registration that covers any new article, method of manufacture (including improvements) or product. Patent registration is open to all natural persons and corporate bodies, whether Saudi or foreign. Foreigners, however, are required to appoint a local agent to arrange all registration formalities and to receive the registration certificate and service of process. A patent is valid for 15 years and renewable for an additional period of 5 years. Trademarks are governed by the Trademarks Regulation of 1984. Saudi Arabia follows the International Classification of Goods and Services, subject to certain limitations. For instance, trademarks regarding certain alcoholic goods may not be registered. Trademark protection is valid for ten years, and is renewable for additional periods of five years. The patent and trademark regulations are under review as part of the WTO accession process, which, once completed, will subject Saudi Arabia to the standards and obligations of the Agreement on Trade-Related Aspects of Intellectual Property. back to Middle Eastern Laws