Saudi Arabia Business Law PDF

Chapter 3  The Kingdom of Saudi Arabia (“KSA”) is the largest Arab state and was founded in 1932.  KSA has a total population of 28.7 million, of which 20 million are KSA nationals and circa 8 million are foreigners.  KSA possesses approximately 20% of the world’s proven petro...

Chapter 3  The Kingdom of Saudi Arabia (“KSA”) is the largest Arab state and was founded in 1932.  KSA has a total population of 28.7 million, of which 20 million are KSA nationals and circa 8 million are foreigners.  KSA possesses approximately 20% of the world’s proven petroleum reserves. It ranks as the largest exporter of petroleum and plays a leading role in OPEC. The petroleum sector accounts for roughly 80% of budget revenues, 45% of GDP and 90% of export earnings.  The government continues to pursue economic reform, diversification and promoting foreign investment, particularly since KSA’s accession to the World Trade Organization (“WTO”) in December 2005. 5-2  KSA is an absolute monarchy, and has no legally binding written constitution.  1992, the Basic Law of KSA was adopted by royal decree and outlines the responsibilities and processes of the governing institutions.  Legal system of KSA is based on Shari’a, Islamic law derived from the Qu’ran and the Sunnah but also supplemented by regulations issued by royal decree (Nizam) covering modern issues such as intellectual property and corporate law.  Additionally, other forms of regulations (lai’hah) include Royal Orders, Council of Ministers Resolutions, Ministerial Resolutions and Ministerial Circulars, and are similarly subordinate to Shari’a.  Traditional tribal law and custom remain significant. For example, judges will enforce tribal customs pertaining to marriage and divorce. 5-3  Saudi Arabian General Investment Authority (“SAGIA”) was established to assist foreign investors in the approval process for operating in KSA, obtain a licence and labour visas and conduct other business affairs under one umbrella. SAGIA offers a number of incentives to attract foreign investors :  100% ownership of property and companies in certain industries.  Lower minimum capital requirements  No restriction on repatriation of capital  The ability for foreign investors to sponsor foreign employees  Tax incentives if the company is registered in certain “economic cities” located in the less developed provinces of KSA like Ha’il Jazan Najran Al-Baha Al-Jouf Northern territory. 5-4  The formation and operation of entities is regulated by the Companies Law which was issued under a Royal Decree in 1965, as amended in 1967, 1982 and 1985 by subsequent Royal Decrees.  Business require license from SAGIA 5-5 KSA Companies Law generally allows for eight forms of business entity structures which are as follows:  General Partnerships  Limited partnerships  Joint Ventures  Corporations  Partnerships Limited by Shares  Limited Liability Partnerships (LLCs)  Variable Capital Companies  Cooperative Companies (Joint Stock Company) 5-6 General Partnerships Limited Partnerships Equal Unequal Partners Partners Share Unlimited Passive Limited Ownership Liability Investors Liability 5-7 Joint venture as a separate legal entity established by the strategic partners to jointly develop, produce, or sell products.  They can help a company gain credibility in a new field, expand its market presence, gain access to technology, diversify offerings, and share best practices without forcing the partners to become permanently entangled. 5-8  A corporation is a legal entity with the power to own property and conduct business. A corporation can receive, own, and transfer property; make contracts; sue; and be sued. Unlike the case with sole proprietorships and partnerships, a corporation’s legal status and obligations exist independently of its owners.  The corporation is owned by its shareholders, who are issued shares of stock in return for their investments. These shares are represented by a stock certificate, and they may be bequeathed or sold to someone else. 5-9  A partnership limited by shares is a hybrid between a partnership and a limited liability company. The capital and ownership of the company is divided between shareholders who have a limited liability and one or more partners who have full liability for the remainder of the company's debts. 5-10  An LLC, also referred to as a “Saudi Limited Liability Company” is a private entity formed of two or more partners (shareholders) who are liable for company debts to the extent of their contributed capital. A maximum of 50 partners are allowed in such a company. The capital of a limited liability company shall not be less than SAR500,000. The capital shall be divided into shares of equal value, which may not be represented by negotiable warrants. 5-11  A Variable Capital Company (VCC) is an alternative form of corporate vehicle available for Collective Investment Schemes (CIS).  The VCC can be used for both open-ended and closed-ended alternative and traditional fund strategies. As a corporate vehicle with flexible capital, shares are created when investments are made, and the shares are readily redeemable by the shareholders. This kind of flexibility was lacking in the existing vehicle of corporations available under  The Companies Act that has several restrictions when it comes to capital reduction and dividend distribution.  https://www.youtube.com/watch?v=a4aUX5u90oA 5-12  A joint stock company is owned by five 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 value of their holdings. The minimum capital requirement is SAR 2 million or no less than SAR 10 million if its shares are offered for public subscription. The par value of each share cannot be less than SAR 10, and, upon incorporation. Prospective joint stock companies involving businesses such as minerals exploitation, administration of public utilities, banking and finance require authorization by Royal Decree prior to incorporation. The management is composed of a board of directors appointed by the shareholders, must have a minimum of three members. Directors must own at least 200 shares of the joint stock company. 5-13  Prohibited investment activities by foreigners in KSA fall within two categories: the Industrial Sector and the Service Sector.  Industrial Sector Oil exploration, drilling and production. Except services related to mining sector listed at (CPC 5115+883) in the International Industrial classification codes. Manufacturing of military equipment, devices and uniforms. Manufacturing of civilian explosives. 5-14  Service Sector Catering to military sectors. Security and detective services. Real estate investment in Makkah and Madina. Tourist orientation and guidance services related to Hajj and Umrah. Recruitment and employment services including local recruitment offices. Real estate brokerage. Printing and publishing. Except certain related activities determined by Foreign Investment Law. Commission agents internationally classified at (CPC 621). Audio-visual and media services. Land transportation services, excluding the inter-city passenger transport by trains. Services provided by midwives, nurses, physical therapy services and quasi-doctoral services internationally classified at (CPC 93191). Fisheries. 5-15  From April of 2014 that as of June 15, 2015, Qualified Foreign Investors (“QFI”) will be allowed to invest in shares listed on the Saudi Stock Exchange “Tadawul”.  QFIs are defined by the CMA regulations as financial institutions such as banks, brokerages, fund managers and insurance companies with at least $5 billion in assets under management. The CMA reserves the right to lower that limit to $3 billion.  A single foreign investor will be able to own no more than 5% of any listed firm, while all foreign institutions combined can own no more than 20%.  According to the CMA, QFIs can own no more than 10 percent of KSA’s stock market by value.  Foreign institutions, including central banks, will be required to apply for permissions or licenses from the CMA to be allowed to invest on the Tadawul. 5-16  The KSA Anti-Concealment Law (also known as the Anti Fronting Law) prohibits non-KSA investors from engaging or investing in business activities in KSA without an appropriate license.  Any KSA national that enables a non-KSA investor to engage or invest in business activities from which that non-KSA investor is prohibited, either by means of that KSA national’s name, license, commercial registration or any other means, commits an act of concealment.  Any act of concealment is subject to incarceration up to two years and/or a fine up to SR 1 million.  After completion of the applicable sentence and payment of the applicable fine. A non-KSA investor convicted for engaging or investing in unlicensed business activities will be required to settle any outstanding taxes and other liabilities, and will be deported from KSA. 5-17  There are two main types of taxes in KSA, Zakat which is based on Islamic concepts, and income tax. Zakat is applicable to the ownership in a KSA company by nationals of KSA or other GCC countries (United Arab Emirates, Oman, Qatar, Kuwait, and Bahrain). Zakat is assessed at 2.5% compared to a higher amount for income tax.  Zakat is applicable on the KSA/GCC ownership of the higher of net income or net wealth in a KSA company. Whereas income tax is applicable on the non-GCC ownership of a KSA company’s net income.  The government authority which administers and collects zakat and tax liabilities is the Department of Zakat and Income Tax (DZIT) which is a department within the Saudi Ministry of Finance 5-18  Tax rates and fiscal years The income tax rate on taxable net income allocated to foreign shareholders is generally a flat rate of 20%. The corporate income tax rate would differ for companies involved in the oil and natural gas business, these rates are as follows: 30% for companies engaged in natural gas investment (where the rate of internal return exceeds 8%, graduated tax rates up to 85% will be applied). 85% for those engaged in oil and hydrocarbon production. 5-19  KSA is part of the GCC Customs Union, which was established in 2003 to remove customs and trade barriers among the GCC member states. The implementation of the GCC Customs Union is still in progress. The GCC member states apply a Common Customs Law and a Unified Customs Tariff with a standard customs duty rate of 5% of goods’ Cost, Insurance and Freight value. However, there are certain items that are subject to a 12% duty rate, and certain commodities which are produced locally are subject to custom duties at 20%, in order to protect local production. KSA law prohibits importation of the following products: weapons, alcohol, narcotics, pork, pornographic materials, distillery equipment, and certain sculptures. The GCC Customs Law does not levy export customs duties. 5-20