Doing business in Saudi Arabia

It is generally accepted, that the Kingdom of Saudi Arabia (KSA) is one of the leading oil producing countries in the world. A private sector currently provides an impressive 48% of the country’s GDP, and given the country’s strategy to increase this contribution to 65% by 2030, the sector is expected to grow. Therefore, if you are interested in opening a business in Saudi Arabia, we recommend you familiarizing yourself with this material.

Features of KSA economy

Being an active member of WTO since 2005, this jurisdiction has widely available to the global market, contributing to job creation and further encouraging investment activities in Saudi Arabia.

A developed economy and infrastructure, an active oil production and attracting foreign investment provide a unique and favorable business environment, full of business opportunities. However, for those, who plan to register a company in Saudi Arabia, strongly recommend contacting first YB Case and receive qualified advice on investment regulation in KSA from experienced professionals, to select a most suitable business structure and understand how local legislation applies to specific investments.

Key objectives of the reforms

It is expected, that until 2030, a country:

• will become a jurisdiction with one of the 15 largest world economies;
• will increase a share of non-oil exports in GDP from 16% to 50%;
• will increase revenues from a non-oil sector by 513%;
• will increase a private sector contribution from 40% to 65% of GDP;
• will increase FDI from 3,8% to 5,7% of GDP;
• will increase the assets of mutual investment funds (PIF) (from 600 billion to more than 7 tons).

Saudi Arabia is also a member of free trade agreements, especially within the framework of the Gulf Cooperation Council (GCC). All customs procedures were unified in GCC member states by virtue of the Unified Customs Law, adopted in 2003, which provides for a number of privileges on import duties. However, if you are interested in starting commercial activities in KSA, it is worth considering, that at this moment a number of customs duties are imposed on the import and export of goods.

A legal system

If you are interested in registering a business in Saudi Arabia, please note, that a legal system of the Kingdom is based on Islamic principles (sharia). Sharia takes precedence in accordance with the Constitution of KSA.

Sharia is a collection of principles, derived from various sources. The main sources are the Holy Quran and the Sunnah of the Prophet Muhammad.

In the event of a conflict between Islamic principles and government rules, Islamic principles will prevail.

The establishment of a business in Saudi Arabia in accordance with the Law on Foreign Investments

A regulation of foreign investment in Saudi Arabia is carried out in accordance with the Law on Investments, which consists of:

• Foreign Investment Regulation promulgated by Royal Decree No. M/1 of April 10, 2000; and
• Rules of execution published on August 16, 2002.

The Anti-Concealment Act (together with the Rules for its Enforcement) also applies in this jurisdiction.

This Law contains a broad prohibition for persons, who conduct business in KSA or assist any other investor in conducting business (regardless of whether such an investor is a legal entity or an individual) without first obtaining an appropriate license.

A business regulation in Saudi Arabia

100% foreign ownership in KSA is allowed, unless the proposed activity is indicated on the Restrictive List.

Foreign investment in KSA is permitted in most industrial, specialized and non-specialized services, including:

• trading activities;
• an agriculture;
• a contracting and engineering;
• purchasing
• a construction consulting, etc.

Obtaining a business license in Saudi Arabia

You can obtain a license in Saudi Arabia in:

1. Saudi Arabia General Investment Authority (SAGIA);
2. Ministry of Commerce and Investment (MoCI);
3. other government departments.

SAGIA has simplified procedures for obtaining a foreign business license in Saudi Arabia (FIL) and made significant changes to facilitate the inclusion of FDI.

The main changes in the procedure for obtaining a license for a foreign business in KSA:

• SAGIA has launched a new service, that allows foreign investment to apply for an instant license;
• the adoption of the International Standard Industrial Classification of All Economic Activities (ISIC).

Investment instruments and structures

Investments in KSA can be carried out:

• by direct entry into the market through a commercial presence in accordance with the Law on Foreign Investments (a direct presence); or
• through a commercial agency or franchise agreement (an indirect presence).

It should be noted, that a foreign company, that intends to enter the market of Saudi Arabia, must seek professional legal assistance, since companies will need to provide various documents to the relevant state bodies for the purpose of legal presence. YB Case specialists will provide the necessary support for your business in the Kingdom of Saudi Arabia.

Often, a period for establishing a foreign enterprise in KSA is from 4 months, including the completion of the necessary secondary registrations after obtaining a license for SAGIA foreign business and a certificate of commercial registration MoCI.

• A direct presence

The main options, that are usually available for a foreign entrepreneur, who wants to establish a company in KSA:

• Limited Liability Company (LLC)

LLC is widely considered the preferred option for any foreign companies, that intend to establish a subsidiary in Saudi Arabia. The main reason for this is that the liability of each shareholder is limited by their contributions to the capital.

LLC should not offer its shares to the public, and it is not allowed to engage in commercial activities in the field of commercial banking or insurance. In general, there is no minimum capital requirement for foreign investors (with the exception of certain activities).

• Branches

A license for foreign investment will allow a foreign enterprise to open a branch in KSA (a free from any local participation), with the exceptions applicable to certain types of activities. Typically, a subsidiary can carry out most of the activities, that an LLC can undertake.

A distinctive feature of the branch is that it does not have a separate and independent legal personality, and thus, a foreign investor, acting in the KSA through the branch, can be prosecuted in his country in connection with a lawsuit, arising from his activities in KSA.

• A temporary commercial registration

A foreign organization, contracting with the public sector, may obtain a license for «temporary commercial registration» from Saudi Arabia. A temporary commercial registration is usually available for foreign investors, who submit applications for participation in state tender projects and as a precondition.

In most cases, this is not available to subcontractors, working on government contracts, especially, because one of the requirements is to conclude a contract directly with a government agency.

• Joint-Stock Company (JSC)

The registration of a JSC in Saudi Arabia is necessary for certain types of activities (such as insurance or banking) or in cases, where a public offering of shares/IPO is planned in KSA.

A proposed activity of the JSC will determine its capital requirements (but not less than SAR 500,000). Shareholders are only liable to the extent of their paid share price. JSC in KSA, as a rule, should belong to at least two shareholders.

• Professional companies

In early 2020, the Law on Professional Companies entered into force. Such enterprises, according to the law, can provide more than one professional service in different business sectors.

An indirect presence

If a foreign legal entity provides services or products outside KSA to customers in the country, and these actions do not require an onshore presence in KSA, this person can conduct its activities on an offshore basis. Such activities can be carried out by appointing an agent or distributor in KSA, to sell the foreign person’s products to customers in the country.

Agent requirements:

• Only a KSA citizen can act as an agent;
• The agreement must be registered by the agent in the Register of commercial agents within 3 months from the date the agreement enters into force;
• The agreement must include certain provisions (a subject matter of the agreement, termination procedures, etc.).

Obtaining a franchise in Saudi Arabia

Franchising is an opportunity for foreign companies to gain access to the KSA market. A jurisdiction is rapidly developing a legal framework for commercial relations between the franchisor and the franchisee with simplified procedures.