Doing Business in Saudi Arabia A legal perspective

Presentation ———— October 2014

Introduction

Topics

An overview of doing business in Saudi Arabia:

● Background

● Legal regime

● Practicalities

Background

Saudi Arabia

● The Kingdom of Saudi Arabia is the largest economy in the

Arab world

● It accounts for 25% of the Arab world’s Gross Domestic

Product

● Saudi Arabia has an oil based economy with strong

government controls over major economic activities. The

Kingdom possesses around 25% of the world’s oil reserves,

● The petroleum sector accounts for roughly:

• 80% of budget revenues

• 45% of GDP

• 90% of export earnings

● Saudi Arabia is ranked at 26th in the World Bank’s Ease of

Doing Business rankings.

Saudi Arabia (cont.)

● Saudi Arabia has had a period of relatively high growth and economic progress over the past few years

● However, its fast growing population means that it needs to grow very fast just to maintain the status quo

● With 50% of Saudis under 25 years old the Saudi population is one of the fastest growing in the world

• The current population of over 28 million is expected to increase to 40 million by 2025

• The large youth population struggle to provide the technical skills which the private sector needs

• Massive investment will is necessary to meet the needs of this young, growing population

● The government is also encouraging foreign companies to invest in vocational and technical training in support of Saudisation.

● The government’s budget for the 2014 fiscal year allocated 46% of total spending to:

• education and training

• health and social development

• infrastructure

Legal regime

Legal background

● The law of Saudi Arabia is based on Islamic law (Shari'ah) from two main sources being the Holy Qur'an (the divine revelation to the Prophet Mohammed) and the Sunnah (a record of the sayings and actions of the Prophet Mohammed)

● Key elements of Shari’ah Law

• Freedom of Contract

- Parties are generally free to agree their own terms of contracts

- Save where the activities contemplated are expressly prohibited

• Fairness and Good Faith

- Parties must observe and maintain principles of fairness and equity in their dealings

• Unjust Enrichment

- Contracts where one party gains unjustly at the expense of another will be invalid

Legal background (cont.)

● Key elements of Shari’ah Law (cont.)

• Speculation

- A contract that involves speculation on a future outcome will generally not be permitted and considered invalid

• Uncertainty

- There should be no deception or excessive uncertainty in any contract

• Agreements to Agree

- Agreements that envisage the future conclusion of an agreement or a material obligation may be considered uncertain and so unenforceable

• Interest

- Under Islamic Law, contracts including clauses which provide for payment or receipt of interest will generally not be enforceable

- In Saudi Arabia there is an exception to this general principle where in banking transactions the Saudi Arabian Monetary Authority Banking Disputes Settlement Committee may enforce interest provisions

Legal background (cont.)

● In addition to the principles derived from Shari’ah the Government issues specific laws and regulations where necessary to supplement Shari'ah Law.

● In the event of any conflict between Shari'ah Law and any Saudi Arabian Government laws or regulations then Shari'ah Law will usually prevail

● Where Saudi Arabian Government laws or regulations are silent then reference should be made to the relevant rules under Islamic law

● As a result, scholarly opinion rather than the authority of precedent in court decisions or legislation is the basis of the Saudi legal system

● However, the law is not static, legal scholars continue to reinterpret and develop the Shari’ah to meet the demands of modern life

Practicalities

Practicalities – foreign investment

● The Saudi Arabian General Investment Authority (SAGIA) has responsibility for licensing all new foreign investment in Saudi Arabia.

● Foreign persons and entities are permitted to invest in all industries and services, except for those which are specifically excluded from foreign investment

• Referred to as the “negative list”, it is updated by SAGIA

• It includes manufacture of military equipment; oil exploration and production and real estate brokerage

● Foreign investors are permitted 100% ownership of companies, or a foreign investor and a Saudi national may jointly own them

Practicalities – foreign investment (cont.)

● The Foreign Investment Law provides foreign investors the

same privileges and incentives as national companies:

• It allows 100% foreign ownership of companies and real

property

• The ability to carry forward losses indefinitely

• Repatriation of dividends

• Sponsorship of a workforce

• Tax-free importation of industrial equipment and

machinery

• Allowing more than one licence in different activities

● The Foreign Investment Law also provides a number of

specific guarantees to foreign investors, including protection

against confiscation, expropriation, and double taxation

Practicalities – forms of company

The three most common ways to setup in Saudi Arabia are:

● Limited Liability Company (LLC)

• Requires a minimum of two shareholders

• The minimum capital requirement is SAR500,000 except for specific types of activities which may require more significant capital

• Other requirements or limitations may apply depending on the type of intended activity.

● Joint Stock Company (JSC)

• A JSC is usually used for businesses that are, or intend to go, public or for specific types of activities

• The establishment requires a minimum of five shareholders

• The minimum capital requirement is SAR2 million, unless other requirements or limitations apply (depending on the intended type of activity)

● Branch office

• Establishing a Branch Office requires the appointment of a branch manager by the parent company

• The manager may be a non-Saudi national

• The minimum capital requirement is SAR500,000, except where other requirements or limitations apply depending on the intended type of activity

• A branch is deemed to be carrying out its activities on behalf of the parent company which assumes all liabilities resulting there from.

Practicalities - agents

● Most business in Saudi Arabia requires an agent, even if you are in an area which does not require it, having an agent can be beneficial

● 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

● If you are going to undertake trading activities in Saudi Arabia without a physical presence in the Kingdom you will need to appoint an agent

● If you are going to be directly involved in the buying and selling of goods in Saudi Arabia then you will have to have an office in Saudi Arabia

● Selecting an agent is a very important step and can dictate whether you will succeed or fail

• Do you want an active partner who pushes your business forward, or a sleeping partner who just deals with bureaucracy?

• Decide what you want initially and make sure roles and responsibilities are clearly agreed

Practicalities – employment

● The Labour Law generally regulates employment, outlines

clear terms for terminating employment, provides for annual

vacation entitlement, establishes a retirement age, provides

for increased employment of the disabled, creates end of

service benefits, enables employees to obtain leave without

pay, and establishes employment offices

● The terms of any contract must comply with the requirements

of the Labour Law

● During the holy month of Ramadan, working hours decrease

● Friday is the weekly day off

● Depending on the types of activities licensed, businesses

need to hire a certain percentage of Saudi nationals

constituting their workforce

Practicalities – employment (cont.)

● In 2011, the Ministry of Labour introduced the Nitaqat Programme

• Nitaqat refers to the Saudi Government’s efforts to promote the employment of Saudi nationals

• The Nitaqat Programme classifies companies in four categories being Excellent, Green, Yellow and Red

• The classification is based on the percentage of Saudisation held by each of the companies. Companies classified as Excellent or Green would be granted the most privileges in visa requests and operations for non-Saudis.

● Hard to operate effectively if you are not Green or Excellent

● Companies with less than 10 employees are exempt from the program, but still need to employ at least one Saudi citizen

● The Ministry of Labour bans recruitment of non-Saudis for 56 categories of jobs, such as administrative managers and their assistants, procurement managers, secretaries, and public relations jobs, as well as in many retail establishments

● The banking and insurance sectors are also highly localised

Practicalities – disputes

● It is common for parties doing business in the Kingdom of Saudi Arabia to select binding arbitration in Saudi Arabia or in a preferred neutral foreign jurisdiction as the method for dispute resolution

● The Saudi Arbitration Law confirms the right of parties to agree to settle their disputes through arbitration

● Saudi Arabia acceded to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958

● Accordingly, any final arbitral award rendered in any member state of the New York Convention will be enforceable in Saudi Arabia

● Generally, the Board of Grievances has jurisdiction with respect to the enforcement of foreign judgments and arbitral awards in the Kingdom of Saudi Arabia

• In order to enforce a foreign judgment from outside the GCC, the party seeking enforcement must demonstrate:

- that such foreign judgment contains nothing that contravenes the Shari’ah or public policy of the Kingdom of Saudi Arabia

- that the courts of the issuing country would recognize and enforce a Saudi Arabian judgment

Contact

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