United Arab Emirates: Business Setup In Saudi Arabia

Last Updated: 17 April 2019
Article by STA Law Firm
Most Read Contributor in United Arab Emirates, April 2019

The Saudi Arabia company law recognized four types of business entities: the joint stock company, the limited liability company (LLC), the partnership as well as the branch of a foreign company. For overseas investors to qualify as a shareholderin Saudi Arabia, the expat shareholder or entity must obtain a foreign capital investment license granted by the Saudi Arabia General Investment Authority (SAGIA), which in practice is infrequently issued by this authority. Hence, practically, it is usually recommended that the foreign entity either register a branch of a company incorporated in any of the Gulf Co-operation Council (GCC) since they are exempt from licensing requirements, or for the foreign entity to sign an agency agreement with a local partner.

Market Condition

As the largest Arab state and the world's second largest oil producer and exporter, the Kingdom of Saudi Arabia's regional economic power is unparalleled, and it is one of the only Arab countries to be a member of the G20. Approximately, 80 percent of the private sector employees are non-Saudi nationals. The decision on the form of business presence in Saudi Arabia necessitates deliberation of several factors including the type of business to be conducted, taxation implications, etc.

There are different types of business development forms in Saudi Arabia which are identified, that individually have distinct advantages and disadvantages which needs consideration, as well as have different scopes of business activities, minimum capital requirements, and registration requisites, of which LLC is the most common form of investment for foreign businesses entering Saudi Arabia.

In particular, an LLC may engage in an array of activities which fall under the approved objects of the company and undertakes both private and public sector projects.

Regulation of Foreign Investment

At present, the Saudi Arabian investment landscape is experiencing a phase of change, and to an extent, relaxation of regulatory constraints as a result of Saudi Vision 2030. The Foreign Investment Law (issued in the year 2000) regulates foreign investments within the Kingdom of Saudi Arabia. In the same year, Saudi Arabian General Investment Authority (SAGIA) was established by the Government to monitor the business development in Saudi Arabia.

It was established to assist in providing a sophisticated and speedy investment application, company registration and business set up in Saudi Arabia. The incentive was two-fold:

1. Regulatory Incentive: The government introduced significant regulatory incentives along with the new Foreign Investment Law which includes transferring and allocation of companies' shares among the shareholders, direct property ownership for the company registered along with the distribution of residence and employees, accelerated business development in Saudi Arabia, etc.

2. Financial Incentive: The financial incentives of the government includes benefits from collateral agreements regarding taxation and investment with other countries, utility rates on a competitive level for industries including water, land, and power, losses transfer for forthcoming years concerning taxes, etc.

It is pertinent to note that severe criminal and administrative penalties may apply if activities undertaken are in contravention of the Foreign Investment Law, and such breaches jeopardize the chance of future investment and company formation in Saudi Arabia.

Setting up a Limited Liability Company in Saudi Arabia

The form of company formation in Saudi Arabia which is most sought by foreign investors is an LLC. As mentioned above, foreign entities wishing to set up business in Saudi Arabia are necessarily required to obtain a foreign investment license from SAGIA. The process of application varies depending on the type of business the enterprise wishes to engage in, and collaterally, it also depends on the time taken by the applicant to put together the documentation for the same.

There are times, depending on the nature of the activity, that certain approvals are required from other Saudi Arabian authorities, and for the same reason, the timeframe could stretch longer. The company also needs to demonstrate a minimum of a year's worth of audited accounts, hence, this possibility of using a 'special purpose vehicle (SPV)' when in the process of company formation in Saudi Arabia is relativelylimited.

While talking about the activities carried out by the company, there is a Negative List which encompasses a list that totally prohibits foreign investment. These include but are not limited to:

  1. Manufacturing of military equipment, uniforms or devices
  2. Investigation and security services
  3. Madinah and Makkah real estate investment
  4. Real estate brokerage
  5. Drilling, production, and exploration of oil
  6. Fisheries
  7. Printing and publishing (with a few exceptions)
  8. Employment and recruitment services, etc.

For activities that are not included in the Negative List, a 100 percent ownership of the capital may be allowed to foreign investors who wish to develop business in Saudi Arabia, and the same depends on its compliance with SAGIA's requirements at the time. Activities like banking and insurance have prescribed minimum ownership requirements by a Saudi Arabia national.

Importantly, an LLC's business limited to the foreign investment license granted by SAGIA and the objects as mentioned in its articles of association. A limited liability company may act in its name during the business transactions,and it can also sponsor foreign employees for residency (an essential characteristic for entities that seek expansion of their employee base in Saudi Arabia).

While the license is in the process, Ministry of Commerce and Investment along with SAGIA decides what the minimum capital requirement should be for the company formation in Saudi Arabia. The decision of the abovementioned authorities may be influenced by the proposed business activities and the projected expenditure for the initial five years of operation from its inception.

Coming to the liability of the shareholders, generally speaking, it is limited to the shareholder's contribution to the proposed LLC's projected share capital. Shareholders could incur personal liability before the Companies Law 2016 in certain situations. An example of this situation is when the LLC's losses that amount to 50 percent or more of its share capital and the said LLC continues to trade without complying with the prescribed procedures. Undoubtedly, with the introduction of Companies Law 2016, the same no longer happens.

The limited liability company may have either a board of directors or a general manager. But in the case where there are more than 20 shareholders, the LLC must have a supervisory board to monitor and regulate advise management. As long as the LLC is complying with the requirements which are related to employing foreign national (with residency, iqama, in Saudi Arabia), there is no strict restriction or limitation on the appointment of a foreigner as the general manager of the SAGIA licensed LLC.

Taxation

It is compulsory that a Saudi Company or a branch of a foreign company gets registered with the General Authority for Income Tax and Zakat. For clarity, GCC and Saudi nationals who are part of different corporate structures in the country are subject to Zakat which is a religious levy at the rate of 2.5 percent. Where foreign shareholders or partners are concerned, as well as non-residents that do business in Saudi Arabia through the setup of a permanent establishment, the rate of income tax is 20 percent which is on the net profits (with certain exceptions to sectors like the hydrocarbon).

Certain Specific Provision related to Company Formation in Saudi Arabia

  1. The minimum capital investment requirement for the establishment of an LLC is SAR 500,000 which the equivalent of approximately USD 130,000.
  2. The minimum capital investment requirement for a limited liability company with foreign participation is SAR 100,000 which equivalent to USD 26,000 approximately
  3. For industrial ventures, the required capital amount increases to SAR 5,000,000 which is equivalent to USD 1,333,000 (approximate value).
  4. For agricultural projects, the minimum requirement is SAR 25,000,000 which is equivalent to USD 6,666,000.
  5. The LLC must appoint at one Director.
  6. It is essential that the LLC Company must have a minimum of two shareholders and not more than 50 shareholders in total, and at least one manager must manage the same. It is not necessary that the General Manager needs to be a Saudi Arabia national.
  7. An auditor in the LLC is necessary,and where there are more than 20 shareholders, it is essential that a Board of Controllers be established. The annual accounts must be audited the same must be submitted per annum (annually).
  8. To give an approximate timeline, it could take up to six months for the company formation in Saudi Arabia. (The same could take longer depending on the nature of the activity to be carried out by the proposed legal entity)
  9. It is not necessary that a Saudi Arabia national with 51% shareholding be required for the setup of every LLC.
  10. Foreign national investors may own a company in Saudi Arabia limited to a few industries without the requirement of a Saudi National in the same.
  11. It is pertinent to note that both natural persons and corporate entities can be named as shareholders of the proposed LLC.
  12. The LLC is required to hold at least one annual meeting within 4 months of the closing date of that particular financial year.
  13. The renewal of the foreign investment license which is granted by SAGIA and commercial registration certificate issued by the Ministry of Commerce and Investment upon its expiry is necessary and compulsory.
  14. If the LLC decides to have more than fifty shareholders, which is not allowed, the same will have to be incorporated into a Joint-stock company.
  15. For dissolution, it must be done mentioned in the memorandum and articles of association; in the absence of such details, a liquidator must be appointed from either the shareholders or any other third party.
  16. The LLC must lease an office locally and must have a local address. A virtual office in the LLC in Saudi Arabia is not allowed.

Memorandum of Association

To avoid delay and rejection of the Memorandum of Articles by the government, the same along with the LLC's governing legal documents must comply with the requirements of SAGIA and Ministry of Commerce for appropriate application, speedy approval, acceptance, and registration thereafter.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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