NAVIGATING THE LEGAL ARENA WHEN DOING BUSINESS IN SAUDI ARABIA
GRAHAME NELSON, Head of Riyadh Office
February 2015
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WHY DO BUSINESS IN SAUDI ARABIA?
Saudi Arabia has a globally important economy and is far and away the biggest
economy in the Middle East.
The Saudi economy is oil based and revenue from oil dominates export earnings
and government revenue. Saudi Arabia is the world's largest oil exporter.
With a view to encouraging foreign investment in Saudi Arabia, Saudi Arabia
joined the World Trade Organisation (WTO) in 2005. Amongst other things this
committed Saudi Arabia to liberalisation of its economy and the creation of a
more transparent investment and trading system in accordance with WTO
requirements.
Over recent years the government has introduced a number of measures aimed
at reducing the country's reliance on oil revenue, including limited deregulation,
the encouragement of foreign investment and privatisation in selected areas of
the economy.
Saudi Arabia provides both regulatory and financial incentives to foreign
investors.
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• What about the falling oil price?
– The government’s recently issued budget is aimed at continuing its huge
social infrastructure investment programmes.
– Improving education, healthcare infrastructure and transportation are key
government priorities.
WHY DO BUSINESS IN SAUDI ARABIA? (CONTINUED)
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• Shari’ah
– Saudi Arabia is an Islamic state and the Shari’ah is the foundation of all laws.
– The Shari’ah is a collection of principles derived from different sources, but
principally the Holy Qu’ran and the Sunnah, the witnessed says and actions of
the Prophet Muhammed (Peace be Upon Him).
• Judiciary
– The independence of the Judiciary is a principle enshrined in the Basic Law of
Saudi Arabia and the Law of the Judiciary.
• The Saudi Court System
– The Law of the Judiciary provides for appeals from first instance courts to lie to
courts of appeal (known as courts of cassation) and from there to the Supreme
Judicial Council which is the highest judicial authority.
– In 2007 H.H. King Abdullah issued royal decrees with the aim of reforming the
court system. Some of the changes foreshadowed by the reforms have already
been implemented.
– Once the reforms have been fully implemented will be organised hierarchically
and expressed diagrammatically as follows.
THE LEGAL SYSTEM
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A number of committees exist for the resolution of disputes in specialist areas.
− The most important of them include:
• The Banking Dispute Resolution Committee.
• The Labour Dispute Resolution Committee.
• The Securities Dispute Resolution Committee.
• The Insurance Dispute Resolution Committee.
THE LEGAL SYSTEM (CONTINUED)
General Courts
Supreme Court
Appellate Courts
Courts of First Instance
Criminal Courts Family Courts Commercial
Courts Labour Courts
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• Contracts are fully enforceable
– The formation and enforceability of contracts is governed by and relies
upon Shari’ah principles. The Shari’ah rules relating to contracts are not
codified.
– The binding force of contracts is asserted by jurists of all schools of
Islamic jurisprudence. Shari’ah law recognises the maxim “the contract is the law of the parties”.
– Under Shari’ah, contracts which are not expressly prohibited by the Holy
Qur’an or the Sunnah are permitted as binding and valid. In practice, the
parties are generally free to agree their commercial bargain except and to
the extent that it is inimical to Shari’ah principles.
– a Saudi court has considerable discretion to apply the basic Shari’ah precepts to a particular set of circumstances. Saudi courts generally
regard themselves as competent, consistent with general Shari'ah
principles, to determine each particular case before them as it considers
is necessary to achieve a fair result in all the circumstances of that case.
THE LEGAL SYSTEM (CONTINUED)
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WHAT DOES A FOREIGN BUSINESS NEED TO DO TO EXPORT TO SAUDI ARABIA?
• The Business Visit
– Exporting to Saudi Arabia often entails visits to the country.
– Visas are required by all visitors except nationals of GCC States and
must be obtained prior to travelling.
– There is an online application process as specified by the Saudi
Embassy in the applicant’s country of residence.
– The maximum permitted stay under a business visit visa is 1 month.
– The visa application process can give rise to unexpected problems and
untimely delays, particularly as a result of changes to the approval
system. So the application should not be left to the last minute!
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• Approvals for the Import of goods into Saudi Arabia
– The approval requirements for the import of goods into Saudi Arabia are
extensive and vary according to the nature of the goods.
– In order to obtain customs clearance, all imported goods must have a
“Conformity Certificate for the Goods Exported to the Kingdom of Saudi
Arabia”. A conformity certificate must be issued by an accepted
accreditation body authorised by the relevant official agency in the
country of origin.
– The Saudi Standards, Metrology and Quality Organisation (SASO)
formulates national standards for products including labeling, inspection
and testing. The party submitting the conformity certificate must declare
compliance of the goods with SASO’s requirements.
– Imported goods must identify the country of origin on both the shipment
packaging and the product itself.
WHAT DOES A FOREIGN BUSINESS NEED TO DO TO EXPORT TO SAUDI ARABIA? (CONTINUED)
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• Export documentation
– The commercial documents required for all shipments include:
• Commercial Invoice with Arabic translation.
• Certificate of Origin.
• Bill of Lading or Airway bill.
• Steamship or Airline Certificate.
• Insurance certificate (where goods are insured by the exporter).
• Packing List.
– There may also be additional authorisations and requirements applicable
to the particular products.
WHAT DOES A FOREIGN BUSINESS NEED TO DO TO EXPORT TO SAUDI ARABIA? (CONTINUED)
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• Exporting to Saudi Arabia without having a legal presence in the
country
– Sales to End Users
• The foreign business does not require a legal presence in Saudi
Arabia where goods are being sold to an end user in Saudi Arabia.
– Commercial Agencies
• Nor does a foreign business need a legal presence in Saudi Arabia
where the goods are imported for sale or resale through
distributorship, commercial agency or franchise arrangements, which
are commonly referred to as “commercial agencies”.
• This may be the quickest and cheapest way for a foreign business to
enter the Saudi market.
WHAT DOES A FOREIGN BUSINESS NEED TO DO TO EXPORT TO SAUDI ARABIA? (CONTINUED)
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– The parties must enter into a written commercial agency agreement and
the agency must be registered with the Commercial Registry of the
Ministry of Commerce and Industry. Failure to register can result in fines
and other penalties.
– Only Saudi nationals or companies organised under Saudi law which are
wholly owned and managed by Saudi nationals can be commercial
agents.
– The commercial agent must guarantee the quality of the products, and
provide necessary maintenance and spare parts to consumers.
– The commercial agent has no statutory right to compensation upon the
non-renewal or termination of its commercial agency.
WHAT DOES A FOREIGN BUSINESS NEED TO DO TO EXPORT TO SAUDI ARABIA? (CONTINUED)
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HOW DO WE ESTABLISH A BUSINESS PRESENCE IN SAUDI ARABIA?
• Foreign Investment Licences
– The Foreign Investment Law, issued in 2000, is the centrepiece of the
Saudi government’s foreign investment regulatory regime.
– Foreign businesses wishing to establish commercial operations in Saudi
Arabia must obtain a foreign investment licence from the Saudi Arabian
General Investment Authority, commonly referred to as “SAGIA”.
– Serious penalties (which may include criminal penalties as well as heavy
fines) can result if activities are undertaken in contravention of this
requirement under Saudi Arabia’s Anti-Covering Up Law. Breaches will
also put in peril future investment in Saudi Arabia.
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– The General Rules applicable to Licence Applications are published on
SAGIA’s website (www.sagia.gov.sa)
– What level of foreign ownership is allowed?
• Foreign investors may be allowed to own up to 100% of the capital of
the enterprise depending upon the business activity/ However,
certain business activities have prescribed minimum Saudi ownership
requirements.
HOW DO WE ESTABLISH A BUSINESS PRESENCE IN SAUDI ARABIA? (CONTINUED)
Business Activity Maximum Foreign Ownership
Services 100%
Manufacturing 100%
Trading 75%
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– The Negative List
• Some business activities are completely closed to foreign investment.
This is the so-called “Negative List”.
• Business activities included in the Negative List are:
» Oil exploration, drilling and production. Except certain services
related to the mining sector.
» Manufacturing of military equipment, devices and uniforms.
» Manufacturing of explosives for civilians.
» Military catering services.
» 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.
HOW DO WE ESTABLISH A BUSINESS PRESENCE IN SAUDI ARABIA? (CONTINUED)
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» Real estate brokerage.
» Printing and publishing (subject to a number of prescribed exceptions).
» Commission agents (this includes distributorships, commercial agencies and franchises)
» Audiovisual and media services.
» Land transportation services, excluding inter-city passenger transport by trains.
» Services provided by midwives, nurses, physical therapy services and paramedics.
» Fisheries.
» Blood banks, poison centres and quarantines.
HOW DO WE ESTABLISH A BUSINESS PRESENCE IN SAUDI ARABIA? (CONTINUED)
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• How long will it take to get a Foreign Investment Licence?
– The licence application period will vary according to the type of business enterprise proposed to be established and how quickly it takes for the application to be lodged with the required supporting documents.
– SAGIA has recently introduced a “fast track service” to process applications for foreign investment licences within 5 business days from the date on which SAGIA has received all the required documentation.
– The aim of the fast track service is to facilitate foreign direct investment in targeted sectors of the Saudi economy:
• Information and Communications Technology.
• Downstream Petrochemicals and Mining.
• Industrial Manufacturing.
• Healthcare and Life Sciences.
• Transportation and Infrastructure.
• Human Capital Development.
• Energy and Petrochemicals.
HOW DO WE ESTABLISH A BUSINESS PRESENCE IN SAUDI ARABIA? (CONTINUED)
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– The following investors businesses may use the Fast Track Service:
• Multinational companies.
• Companies publically listed in the capital market of their countries or in
international stock exchanges.
• Firms manufacturing products that are internationally classified and employ
certified process technology.
• Small and medium size enterprises which will be operating in the area of
the intellectual property rights registered in their names, or which are
classified as innovative enterprises.
• An international company aiming to setup regional centres in KSA
• A construction company classified as ‘first class’ in its home country, or a
project with a value of not less than SAR500,000,00 has executed of not
less than 2,000 employees and total assets of not less than SAR50 million.
• A company entering into partnership with other companies qualified by a
KSA government agency, or by a state owned entity or an entity in which
the government has a shareholding or with a company listed on the Saudi
Capital Market
HOW DO WE ESTABLISH A BUSINESS PRESENCE IN SAUDI ARABIA? (CONTINUED)
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– Applications under the fast track process require less supporting documents .
– Depending on the circumstances one or more types of business structure may
work for the foreign investor. However, ultimately the choice of structure will
depend upon a matrix of commercial considerations. They include whether the
investor wants to go it alone or wants or needs a Saudi partner.
• Limited Liability Company
– A limited liability company (commonly referred to as an “LLC”) is suited to a
broad range of business activities and is the favoured structure of most foreign
businesses. Where a joint venture is entered into with a Saudi partner, the LLC
is invariably the business structure of choice.
– An LLC may be preferred in Government contracts (if 50% Saudi owned), and
can sponsor employees for residency. It may also be able to obtain finance on
favourable terms from the Saudi Industrial Development Fund.
– Its business activities are limited by the objects in its articles of association and
its foreign investment licence.
HOW DO WE ESTABLISH A BUSINESS PRESENCE IN SAUDI ARABIA? (CONTINUED)
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– Limited Liability
• The personal liability of shareholders is limited to the shareholder’s
share contribution. However, shareholders may incur personal liability
where the company’s losses amount to 50% or more of its share capital
and the company continues to trade without those losses being
replaced.
– Minimum Capital Requirements
• A decision will be made by SAGIA or the Ministry of Commerce and
Industry about the company’s capital requirement as part of the foreign
investment licence approval process.
• The amount of capital required will depend on the company’s proposed
business activities.
HOW DO WE ESTABLISH A BUSINESS PRESENCE IN SAUDI ARABIA? (CONTINUED)
Business Activity Minimum Capital
Services SAR 500,000
Manufacturing SAR 1 million
Trading SAR 26 million
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– Shares
• An LLC can have between 2 and 50 shareholders (a wholly owned
subsidiary would still need 2 shareholders). Only 1 class of shares is
allowed and different voting rights are not permitted.
• Each shareholder must hold at least 5% of the share capital.
• An LLC may not offer its shares to the public.
– Transfers of Shares
• Share transfers are allowed subject to the pre-emptive rights enjoyed
by other shareholders.
– Management
• An LLC may either have one manager or a board of directors. An LLC
with more than 20 shareholders must have a supervisory board to
oversee and advise management. There is no requirement for a
manager to be a Saudi national.
HOW DO WE ESTABLISH A BUSINESS PRESENCE IN SAUDI ARABIA? (CONTINUED)
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• The Branch Office
– If the foreign business does not want or need a Saudi partner, many
foreign businesses choose to open a Saudi Arabian branch office. The
advantages of doing so are that a branch is normally the quickest entity
to establish, it can carry on a broad range of activities (as approved by
SAGIA), and usually there is a much lower minimum capital requirement.
– Because the branch is not legally distinct from the foreign business, its
business activities will be limited to those of the foreign business and the
foreign business will be liable for the debts and other liabilities of the
branch. Also, business entities with Saudi ownership are likely to be
preferred for Saudi government contracts.
HOW DO WE ESTABLISH A BUSINESS PRESENCE IN SAUDI ARABIA? (CONTINUED)
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• Joint Stock Company
– A joint stock company (JSC) can be either “open” (which means that its
shares are offered to the public) or “closed” (meaning its shares can’t be
offered to the public).
– All companies listed on the Saudi Stock Exchange (the Tadawul) are open
JSCs.
– Also certain types of activities must be carried out by a JSC (either open or
closed), for example banking and finance businesses.
– A JSC has the following features:
• It must have 5 or more shareholders.
• The shareholders are exempt from personal liability on the same basis
as shareholders in an LLC.
• Directors must own shares in the company of not less than a specified
value.
HOW DO WE ESTABLISH A BUSINESS PRESENCE IN SAUDI ARABIA? (CONTINUED)
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• Founders shares (i.e. shares owned by the promoters of the company)
cannot be transferred until financial statements for the company have
been published for two complete financial years.
• There will usually be a high minimum capitalisation requirement.
• Higher level of government oversight than an LLC and a branch.
• Temporary Commercial Registration
– The investor can apply for Temporary Commercial Registration (TCR) if the
proposed business activity will be conducted in KSA over a short period of
time because it will be related to the performance of a government contract
and no further business activities are contemplated.
– TCRs are restricted to companies with government contracts. They require
a letter of support from the contracting government agency.
– The principal disadvantage of a TCR is that the licence is limited to the
scope and terms of the particular contract so it cannot undertake general
business activities.
HOW DO WE ESTABLISH A BUSINESS PRESENCE IN SAUDI ARABIA? (CONTINUED)
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• Technical and Scientific Office
– A foreign company may establish a Technical Scientific Office (TSO) to
provide technical and scientific services to its Saudi agents, distributors
and consumers. A TSO may not engage in any commercial activities or
earn revenue. Its activities are limited to providing technical information,
market and technical research.
– The registration process is similar to that for a branch. There are no
capitalisation requirements and no requirements for Saudi nationals to be
employed. However, the regulatory authorities may set a cap on the
number of employees.
– TSOs do not enjoy the benefit of investment incentives under the Foreign
Investment Regulations.
– Usually employees of a TSO are sponsored by the foreign company’s
Saudi agent or distributor.
HOW DO WE ESTABLISH A BUSINESS PRESENCE IN SAUDI ARABIA? (CONTINUED)
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DISPUTE RESOLUTION
• The Number 1 Consideration for Foreign Investors?
– Dispute resolution would rank as close to the number one legal issue for
the majority of our non-Saudi clients wishing to establish a business
relationship with a Saudi party.
– Most client concerns relate to the pace of the Saudi litigation process, its
costs and especially and the prospects of being able to enforce a
judgment in Saudi Arabia.
– There is no doubt that the Saudi court system can be frustratingly slow,
particularly to clients who may be used to a system where milestones
and dates for achieving those milestones are a strong feature of the
system. Even straightforward legal claims can take upwards of 2 years
to get a judgment in the Saudi courts.
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– However, on the other hand:
• It is my experience that the outcome of the cases we handle tends to
be much as I would expect. In fact I would go as far as to say that
unexpected wins and losses and especially outcomes resulting from
technicalities are not a strong feature of the Saudi Court system.
• If a judgment is obtained, the prospects of the successful party being
paid what it is owed are a lot better than in many countries, principally
because of the sanctions that can be applied by the court to enforce
the judgment.
• It is not apparent that any favour or advantage is enjoyed by Saudi
litigants, including Saudi government entities.
• The legal costs of the litigation process would appear to bear
favourable comparison with the costs borne by litigants many other
jurisdictions. This is because, at least to some degree, legal fees
tend to be fixed in advance.
• It’s also apparent that the pace of the litigation process in many
countries is no quicker than in the Saudi court system.
DISPUTE RESOLUTION (CONTINUED)
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• Arbitration
– Why arbitrate?
• The decision whether it is best to arbitrate or litigate in the courts may
depend upon the circumstances of the particular case.
• Where the dispute is set in an international context, arbitration tends
to be the formal dispute resolution mechanism of choice.
• Arbitration is not permitted where one of the parties is a Saudi
government entity unless permitted by the Council of Ministers.
• The parties to the dispute usually choose the arbitrator or the majority
of them.
DISPUTE RESOLUTION (CONTINUED)
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– Saudi Arabia’s Arbitration Law
• Saudi Arabia issued a new Arbitration Law in 2012. This sets out
requirements in relation to the arbitration agreement including the
appointment of arbitrators.
• Arbitration proceedings can proceed in accordance with the rules of
internationally recognised arbitration forums.
• They can also be conducted in a language other than Arabic.
• Once the arbitration award is final, there is only limited scope to
challenge it. Also, the decision to challenge it does not of itself
preclude the enforcement of the award.
DISPUTE RESOLUTION (CONTINUED)
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• How does a judgment or arbitration award get enforced in Saudi Arabia?
– Execution Law
• In 2012 a new “Execution Law” was issued. This sets out procedures for the
enforcement of judgments and arbitration awards in Saudi Arabia. This Law
sets out the framework for the enforcement of judgments and arbitration
awards. The Law applies to both domestic and foreign judgments and awards.
• The Execution Law was intended to make the enforcement of judgments a lot
quicker but in practice it can still take a period of several months for a
judgment to be enforced.
– Arab League and GCC State court judgments
• A judgment of a court in a country that is a signatory to the Arab League Treaty
on the Reciprocal Enforcement of Judgments or the Agreement on
Enforcement of Judgments, Delegations and Judicial Summonses in the
States of the GCC for the Arab States will be enforceable in Saudi Arabia
provided the judgment is not inconsistent with Islamic law or the laws and
regulations of Saudi Arabia.
DISPUTE RESOLUTION (CONTINUED)
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– Non-Arab State court judgments
• In practice a judgment of a non-Arab state in Saudi Arabia is unlikely to
be enforceable in Saudi Arabia.
– Non-Arab state arbitration awards
• Saudi Arabia is a party to the New York Convention relating to the
recognition and enforcement of foreign arbitral awards.
• As a practical matter, Saudi courts have rarely enforced a non-Arab
State arbitration award. That’s because the party against whom the
award is to be enforced is likely to be able to raise enough issues to
frustrate enforcement, with the Saudi court in the end declining to order
enforcement.
• What’s the best solution?
– There is not “best” solution but:
• Dispute Resolution (Litigation/Arbitration) in Saudi Arabia should not be
ruled out.
• (Perhaps) Arbitration in the Dubai International Finance Centre/Dubai
International Arbitration Centre arbitration forums.
DISPUTE RESOLUTION (CONTINUED)
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THE BANKING SECTOR
• The Saudi Arabian Monetary Agency
– The Saudi Arabian Monetary Agency (commonly referred to as “SAMA”)
is the central bank of Saudi Arabia and is the regulator of the banking
sector.
• Licences
– The Ministry of Finance issues licences to start up a banking business.
• Commercial Banks
– Commercial banking operations are undertaken by both Saudi financial
institutions and branches of foreign banks.
– Banks are required to separate their investment and securities business
from their banking business and hold separate licences for asset
management, advisory and securities services.
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• Recent banking industry reforms
– The Saudi Government issued a package of laws in 2012 to reform key
areas of the banking sector.
– Real Estate Mortgage Law
• This Law provides for the registration of mortgages. It also facilitates
a secondary mortgage market by allowing mortgages to be
transferred by the mortgagee and thereby gain access to the capital
markets for refinancing. It is hoped that the Law will pave the way for
the private sector to assume a greater role in housing finance leading
to reduced borrowing costs.
– Real Estate Financing Law
• This Law requires real estate finance companies to be licensed by
SAMA.
THE BANKING SECTOR (CONTINUED)
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– Law on Supervision of Financing Companies
• This Law provides for SAMA to be the regulator of an licence finance
companies operating in Saudi Arabia. Finance companies must be
joint stock companies.
– Finance Lease Law
• This Law provides for the leasing of assets. The lessee has an
obligation to use the leased asset for the agreed purpose and be
responsible for the operational maintenance of the asset.
THE BANKING SECTOR (CONTINUED)
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EMPLOYMENT LAW
• The Labour Law
– The Labour Law which was issued in 2005 is the principal legislation
governing the employer – employee relationship. The Labour Law is
administered by the Ministry of Labour.
– The Labour Law applies to all workers in Saudi Arabia and irrespective of
whether the parties nominate a foreign law as the governing law of the
employment contract.
– Amongst other things the Labour Law outlines terms for terminating
employment, prescribes annual vacation entitlement, establishes a
retirement age, end of service benefits and a minimum age of 14 for
employees.
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EMPLOYMENT LAW (CONTINUED)
• Non-Saudis
– Non-Saudis may work in Saudi Arabia provided the requisite approvals are
obtained:
• The employee must have entered the country on a valid employment visa
issued by the Saudi Embassy in the country for which the employee holds
a passport.
• The employer must obtain a work and residence permit (Iqama) for the
employee within 90 days of the employee’s arrival.
• Employment Contracts
– Employment contracts may be for fixed or unlimited periods.
– Indefinite term contracts terminate at the discretion of either party provided
written notice is given to the other party stating the valid reason for
termination. At least thirty days notice is required for contracts where the
worker is paid monthly or not less than fifteen days notice in any other case.
– Unfair dismissal may result in a number of remedies including reinstatement or
monetary compensation.
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EMPLOYMENT LAW (CONTINUED)
• Probationary Periods
– An employer may request an employee to undergo a probationary period of
no more than ninety days. This probationary period must be stated in the
contract.
– If an employee is working under a probationary period, he may be dismissed
for any reason by his employer either within or at the end of the probationary
period.
• Social and Health Insurance
– The Social Insurance Regulations require employers who have at least one
foreign employee to make monthly contributions to the General Organisation
for Social Insurance (GOSI) on behalf of each employee. These contributions
are calculated as a percentage of the employee’s wage.
– Employers must provide medical insurance that covers the employee and the
employee’s family. This is normally done at the employer’s cost.
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EMPLOYMENT LAW (CONTINUED)
• Public Holidays and Annual Leave
– Paid annual leave can vary but under the Labour Law employees are entitled
to 21 days full wages. This increases to a period of not less than 30 days if
the worker has spent five consecutive years service with the same employer.
Provisions are contained in the Labour Law dealing with parental leave,
religious leave, unpaid leave, educational leave and sick leave.
• End of Service Benefits
– At the end of the labour contract the employee is entitled to receive an end-of-
service award. Generally the amount of the award is calculated as half a
month’s wage for each of the first five years of service and one month’s wage
for each of the following years.
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EMPLOYMENT LAW (CONTINUED)
• Saudisation (Nitaqat)
– Foreign investors setting up in Saudi Arabia should be aware of the
Saudisation policy that requires a minimum number of Saudis to be
employed. This minimum number depends on the type of company and
industry.
– In 2011 the Ministry of Labour introduced the Nitaqat Programme by
which employers are penalised if they fail to achieve the Saudisation
targets which are applicable to them.
– Companies are categorised as falling within one of four categories:
Excellent, Green, Yellow and Red. The classification is based upon the
percentage of Saudisation of the company. Companies in the Excellent
or Green categories have the greatest privileges for visa requests for
foreign workers. Companies in the Yellow and Red categories are subject
to various restrictions in relation to visa applications and work permits.
They are also not able to restrict their employees from moving to a
company in a higher category.
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EMPLOYMENT LAW (CONTINUED)
• Visas
– Foreign workers must initially obtain a work permit visa and then with the
assistance of their employer make application for a residency permit, the
Iqama.
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GOVERNMENT CONTRACTING
Supplies of goods and services to all government agencies and most
government owned companies are regulated by the Government Bids
and Procurement Law, issued in 2006 and its associated Regulations
(Procurement Law).
The more important features of the Procurement Law are summarised
below:
• Tenders
– All government tenders are announced and publicised.
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• Bidders
– Bidders must be appropriately licensed in the particular activity, with a
recognised legal presence in Saudi Arabia.
– Priority is given to bidders with nationally manufactured goods and
services (to be disclosed by the bidder in the bid).
• Bids
– Bids must generally include a preliminary bank guarantee of 1-2% of the
contract value.
– Bids must be valid for 90 days from the date specified for the opening of
bids. If a bidder withdraws a bid during this period, the preliminary bank
guarantee is forfeited.
GOVERNMENT CONTRACTING (CONTINUED)
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• Contract phase with successful bidder
– The prevailing language of all contracts is Arabic. The contract forms are
prepared by Ministry of Finance and can be bilingual, although the Arabic
version prevails.
– Government Authorities must submit contracts with an execution period of more
than one year and a value exceeding SAR 5 million to the Ministry of Finance for
review prior to entering into the contract.
– The period of continuing service contracts may not exceed 5 years without the
approval of the Ministry of Finance.
– The successful bidder must submit a final bank guarantee of 5% of the contract
value, usually within 10 days of being awarded the tender. If it doesn’t, then the
preliminary guarantee is forfeited and negotiations commence with the next
bidder.
– Government Authorities may increase the obligations of a contract within the
scope of the contract by up to 10% of the value or decrease those obligations by
up to 20%.
– Contract payment entitlements, termination, penalties and extensions of contract
are all regulated in the Procurement Law.
GOVERNMENT CONTRACTING (CONTINUED)
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REAL ESTATE
• Who can own land?
– Ownership of land in Saudi Arabia is generally restricted to Saudi citizens, but
this is subject to certain qualifications:
• A GCC company (with shareholders who are all GCC nationals) or an
individual (who is a GCC national):
» may lease or purchase land to use it to conduct any licensed business
activity from the land.
» may own residential properties in KSA, subject to a number of
restrictions and conditions. This concession does not apply to properties
within the vicinity of Mecca and Medina.
• Even the smallest equity interest held by a non-GCC entity will make a
corporate entity “foreign”, triggering the requirement for a foreign investment
licence including conditions stipulating the amount of capital that must be
invested and the timeframe for the investment by the foreign entity.
• A non GCC entity may own Saudi real estate which is required for:
» the conduct of its professional, technical or economic activities;
» private residences for housing employees of a licensed project; or
» residential use by individuals with normal legal residency status.
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REAL ESTATE (CONTINUED)
• New Land Title System
– In an effort to modernise the land transfer and registration process, the
Saudi government has initiated the massive and ambitious task of
identifying all Saudi and (and all property interests in particular parcels of
land) and including that information on a real estate register for each
designated realty area
– The main benefit of the new system is that it will provide an investment
friendly environment with technically accurate land identities to facilitate
property dealings.
• Strata/fractional Ownership
– The System of Ownership of Units, a law issued in 2002, provides for
fractional or “strata” ownership of buildings, that is, buildings which are
subdivided into individual ownership units.
48
REAL ESTATE (CONTINUED)
– Off the Plan Sales
• In recent years KSA has taken a number of significant steps to regulate
the sale and marketing of lots off-the-plan through in order to:
» protect the rights of buyers and developers;
» raise the level of transparency;
» discourage property speculation (and prevent real estate bubbles);
» reduce the cost of ownership of real estate units; and
» increase the supply of developed real estate throughout Saudi
Arabia.
49
MINING
− Saudi Arabia has extensive deposits of phosphate and bauxite and
commercially viable deposits which include gold, silver, lead, zinc and
copper, iron ore and rare earths. Saudi Arabia also has large deposits of
many of the key minerals used in the construction industry.
− The Ministry of Petroleum and Mineral Resources has an extensive data
base of geological data, maps and reports.
− A new Mining Code was adopted in 2004 to facilitate investment in the
mining sector. There are no mineral royalties.
− Non-exploitation and exploitation licences are available to companies
and individuals.
50
MINING (CONTINUED)
− Non-exploitation licences include reconnaissance and material collection
licences, valid for 2 years, and exploration licences, which are valid for 3
years. Exploration areas are limited to 100 square kilometres.
− Exploitation licences include mining and quarry licences, both valid for 30
years. Small mine licences are valid for 20 years and building materials
quarry licences for 5 years.
− Exploration and exploitation licences may be transferred with the
approval of the Ministry of Petroleum and Mineral Resources.
51
INTELLECTUAL PROPERTY LAW
• Patents Law
– The Patents Law provides the means by which legal protection can be
obtained for:
• Patentable inventions
• Layout designs of integrated circuits
• Plant varieties
• Industrial designs.
– The Patents Law is administered by King Abdul-Aziz City of Science and
Technology. Its General Directorate of Patents (Directorate) operates as
the “Patent Office” in Saudi Arabia, receives applications and has the
authority to grant patents in the country.
– Applications may be made by both Saudi citizens and foreign persons.
52
INTELLECTUAL PROPERTY LAW (CONTINUED)
– The protection periods are:
• Patents: 20 years from the date of filing the application.
• Layout Designs: 10 years from the date of filing the application or 10
years from the start date of its commercial exploitation anywhere in the
world but subject to a maximum protection period of 15 years from the
date of creation of the design.
• Plant patents: 20 years from the date of filing the application but the
protection period for trees is 25 years.
• Industrial designs: 10 years from the date of filing the application.
– Saudi Arabia acceded to the Patents Cooperation Treaty (PCT) in 2013. Any
international application filed on or after that date will automatically include
the designation of Saudi Arabia. In addition, nationals and residents of Saudi
Arabia are entitled to file international applications under the PCT.
53
INTELLECTUAL PROPERTY LAW (CONTINUED)
• Trademarks
– The Trademarks Law of 2002 sets out procedures for the registration of
trademarks (including service marks). Applications may be made by both
Saudi nationals and foreign persons.
– The registration process is handled by the Ministry of Commerce and
Industry and the Ministry maintains a register of trademarks which is
available for public inspection.
– The infringement of trademarks may attract heavy fines and criminal
penalties. Claims for compensation may be made by anyone who has
suffered loss as a result of the infringer’s actions. There is also provision
for the owner of the trademark to apply for “precautionary measures” such
as the seizure of goods and papers (including imported items) prior to the
commencement of any civil or criminal lawsuit which infringe the owner’s
rights.
54
INTELLECTUAL PROPERTY LAW (CONTINUED)
• Copyright
– The Copyright Law of 2003 protects works created in the fields of literature,
art and science, irrespective of their type, means of expression, importance
or purpose of authorship.
– The Law also protects derivative works such as translations, compilations
and databases.
– The copyright work must be attributed to the author, for example, by
mentioning his name on the work.
– The period of copyright protection is the life of the author and the period of 50
years after his death. A lesser period of 20 years applies to broadcasters
from the date of first transmission.
– The Law prescribes the penalties applicable to infringement, which may
include fines, confiscation of infringing materials, closure of the business
establishment and imprisonment.
– Saudi Arabia is a member of the Universal Copyright Convention and the
Berne Convention for the Protection of Literary and Artistic Works.
55
COMPETITION LAW
Saudi Arabia adopted a Competition Law in 2004 and the Law came into effect in
January 2005. The Competition Law and the associated Regulations and
Competition Rules make up Saudi Arabia’s competition law regime and they are
enforced by a Competition Council.
• Who does the Competition Law apply to?
– It applies to all firms, i.e. any corporation or company and business doing
business in Saudi Arabia. A non-Saudi entity can be a firm. The Competition
Law does not apply to public (i.e. government) corporations and fully–owned
state enterprises.
• What does the Competition Law do?
– The broad aim of the Competition Law is to protect and encourage fair
competition and combat monopolistic practices that affect competition. It seeks
to achieve this by:
• Prohibiting agreements and arrangements between firms if their objective
or effect is to restrict commerce or competition.
• Restricting the ability of a firm to acquire a dominant position in the market.
• Making abuses of dominant market position by a firm illegal.
56
COMPETITION LAW (CONTINUED)
• What sort of practices and agreements are prohibited?
– Article 4 of the Competition Law says that practices, agreements or contracts among current or potential competing firms, whether the contracts are written or verbal, expressed or implied are prohibited, if the objective of such practices, agreements or contracts or their effect is the restriction of commerce or the violation of competition between firms.
– Any practice, alliance or agreement, explicit or implicit, between competing entities which violate, restrict or prevent competition is prohibited.
– The Competition Council may decide not to apply the prohibitions contained
in Article 4 of the Competition Law to practices and agreements in violation
of the Competition Law which are deemed to improve efficiency and realise
benefits to consumers which outweigh their anti-competitive effect.
57
COMPETITION LAW (CONTINUED)
• Dominating Position
– “Domination” may arise through:
• Sales of at least 40% of total sales in the market for a period of 12
months; or
• An entity or group of entities being in a position to influence the
prevailing price in the market.
• Acquiring a Dominating Position
– Firms involved in merger discussions or desiring to acquire assets, shares
etc. which will result in them having a dominating position are required to
notify the Competition Council at least 60 days in advance.
– A similar requirement applies to firms wanting to combine different
managements into one if that will result in a dominant position.
– The Competition Council will review all necessary information before
deciding whether to approve or not allow the proposed merger etc., giving
reasons.
58
COMPETITION LAW (CONTINUED)
• Abuse of Dominating Position
– The existence of a dominating position in the Saudi market is not of itself
prohibited. The abuse of that dominating position is.
– “Abuse” of a dominating position requires an act of the kind described in Article
4 of the Competition Law or Article 6 of the Competition Law Regulations.
Broadly speaking those provisions target any practice which restricts
competition between firms, in particular:
• Price control.
• Restricting the free flow of goods and services.
• Barriers to entering and leaving markets
• Forcing out competitors.
• Partitioning markets.
• Customer Discrimination.
• Compelling or agreeing with a client to refrain from dealing with a
competing entity (third line forcing).
• Making the sale of a commodity or offer of service contingent on the
purchase of another commodity or service (first line forcing).
59
COMPETITION LAW (CONTINUED)
• Economic Concentration
– The Dominating Position provisions of the Competition Law are
reinforced by other provisions which focus upon the acquisition of
ownership which is referred to in the Regulations as “Economic
Concentration”.
– Economic Concentration happens where an entity acquires a position of
domination of an entity or group of entities through merger, takeover,
acquisition or the combination of managements.
– An entity intending to achieve Economic Concentration in order to
dominate 40% of a commodity’s total supply in the market is required to
make written application to the Competition Council and provide
prescribed information including a report detailing the consequences of
the proposed Economic Concentration, in particular its positive effect on
the market. The entity can proceed to complete the Economic
Concentration if the Council notifies its approval or if the Council doesn’t
notify its refusal within 60 days of the application date.
60
COMPETITION LAW (CONTINUED)
• Complaints
– A party claiming to be affected by conduct which it believes breaches the Competition Law or its Regulations may request the Competition Council to conduct an investigation to determine whether breaches of the Competitions Law have occurred. The Competition Council may also initiate investigations without any prior complaint.
• Penalties
– The Competition Council may require prohibited conduct to stop, dispose of assets and take other action to remove the effects of the violation. Violators may also become subject to financial penalties.
• Compensation
– Anyone suffering harm caused by conduct prohibited under the Competition Law may apply to the court for compensation.
61
TAXATION
• Corporate Income Tax
– A foreign partner or shareholder in a resident KSA company and
a non-resident who does business in KSA through a permanent
establishment are subject to corporate tax income rate on income and
realised capital gains.
– Registration of a company or branch with the Department of Zakat and
Income Tax is mandatory.
– The rate of tax is 20% except for specified business. The shares of
Saudi and GCC nationals in corporate structures are subject to a
religious levy (Zakat) of 2.5%.
– Saudi Arabian Tax Law does not distinguish between different
categories of income. Capital gains are treated as ordinary income.
62
TAXATION (CONTINUED)
• Customs Duty
– Rates of duty vary depending on the type and quantity of the commodity.
Most basic consumer products are duty free.
63
CHALLENGES AND OPPORTUNITIES
• These are some of the main challenges for a foreign businessman - not listed in
any order of priority or magnitude.
– In many situations knowledge of spoken Arabic is required. All written communications to and from Saudi government entities must be in Arabic.
– Setting up a business presence in Saudi Arabia can be reckoned to take a lot longer for the foreign investor than most other places in the GCC region. However, the new “fast-track” system for of obtaining foreign investment license is expected to reduce the application periods.
– A lot of Saudi laws aren’t easily accessible.
– Unforeseen and unannounced changes by Government Departments to policy and administrative requirements can lead to unexpected delays.
– The Dispute Resolution Process in the Saudi courts is slow moving and the recent changes aimed at modernising the court system remain a work in progress.
– Dissolving a joint venture or other commercial relationship will be difficult unless all parties are in agreement.
– Enforcing a foreign judgment or arbitration award in Saudi Arabia.
– If the rules aren’t adhered to, getting things back on track may not be quick, straightforward or cheap.
64
CHALLENGES AND OPPORTUNITIES (CONTINUED)
– But (and it is a big but!):
• The Saudi market dwarfs other markets in KSA. The GCC (it’s about 46% of total GCC GDP have business operations in KSA. Saudi Arabia’s reserves of oil and gas will not be exhausted for many years.
• There are many, and growing business opportunities in areas unrelated to oil and gas.
• Many of the largest companies in the world have business operations in Saudi Arabia. Doesn’t that tell us something?
• Saudi Arabia has developed much of the legal architecture that would be found in Western Countries
QUESTIONS?
THANK YOU
Al Tamimi & Company @AlTamimiCompany
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