Overview
The Kingdom of Saudi Arabia, established in 1932 by its founder Ibn Saud, operates as an absolute monarchy, unifying the four historical regions of modern-day Saudi Arabia. It stands as an Arab and Islamic sovereign state, situated on the Arabian Peninsula between the Arabian Gulf to the East and the Red Sea to the West. Geographically, it shares borders with Jordan and Iraq to the north, Kuwait to the northeast, and Bahrain, Qatar, and the United Arab Emirates to the east. Additionally, it borders Oman to the southeast and Yemen to the south. The Red Sea to the west separates the kingdom from Israel, Egypt, Sudan, and Eritrea, while the Arabian Gulf to the east separates it from Iran.
With a population of 35.95 million as of 2021 (according to United Nations data), Saudi Arabia ranks as the second-largest Arab state, following Algeria. Riyadh, with a population of 7.67 million, serves as both the capital and the largest city. The implementation of the Saudi Vision 2030, guided by Crown Prince Mohammed bin Salman al Saud, is anticipated to lead to a population increase in the coming years. Riyadh functions as the political, economic, and cultural hub of the Kingdom.
As the birthplace of Islam, Saudi Arabia holds significance as the land of the two holy mosques, Makkah and Medina. These cities serve as not only the religious capitals of Saudi Arabia but also as revered centers for the entire Islamic world.
Page Contents
Political And Legal System
The political and legal landscape of Saudi Arabia is uniquely characterized by the prominent role played by King Salman bin Abdulaziz al Saud, who serves as both the King and Prime Minister, in addition to being the Custodian of the Two Holy Mosques. As the paramount figure in both state and government affairs, King Salman is tasked with shaping the Kingdom’s overarching policies and overseeing the defense and protection of the nation. The citizens’ deep respect and affection for the king are deeply rooted in the cultural fabric of the Arab society, where individuals of full age have the opportunity to engage with the king through a traditional gathering known as the “majlis.”
In the framework of an absolute monarchy, the political leadership in Saudi Arabia is intricately tied to the governing style and personal inclinations of the reigning monarch. While the present king is known for upholding traditional views, he has demonstrated a willingness to embrace social and political reforms. A significant milestone occurred in June 2017 when King Salman appointed his son, Mohammed bin Salman, as the Crown Prince, signaling a commitment to modernize the country. Initiatives such as Saudi Vision 2030 have been set in motion to diminish the nation’s reliance on oil. The Crown Prince’s advocacy for “moderate Islam” has catalyzed various reforms, including the attenuation of the male-guardianship system, the lifting of the ban on female drivers, and the augmentation of women’s participation in the workforce.
Diverging from conventional legislative structures, Saudi Arabia operates without a formal legislative body. Instead, the locus of power resides entirely with the king, who seamlessly integrates legislative, executive, and judicial functions. Royal decrees serve as the cornerstone of the country’s legislative framework. The king, assuming the roles of King, Prime Minister, and President of the Council of Ministers, is bound by Sharia law and the Quran, effectively constituting the country’s legal foundation. The interpretation of the Quran is entrusted to the Ulama, a religious body, though recent reforms have deliberately curtailed the influence of the religious police.
The uncodified adoption of Sharia and Sunnah has given rise to legal ambiguities, prompting a response in 2007 when King Abdullah issued a series of royal decrees aimed at revitalizing Saudi Arabia’s judicial system. The establishment of the Supreme Court as the highest judicial authority, accompanied by the introduction of Courts of Appeal in various provinces, represents a strategic response to legal matters spanning rights, criminal cases, family affairs, commerce, and labor issues. The creation of Commercial Courts in 2017 further addresses commercial disputes and bankruptcy cases.
In consonance with the objectives outlined in Saudi Vision 2030, the Ministry of Justice has published a comprehensive sourcebook encapsulating 2323 judicial principles and legal precedents, summarizing the evolution of jurisprudence in the Kingdom over the past 47 years. Additionally, the Saudi government, in 2020, introduced the National Transformation Program to support the realization of goals delineated in Saudi Vision 2030. Aligned with this initiative, the Ministry of Justice has proposed key performance indicators, including reducing the average timeframe for concluding cases, increasing the percentage of concluded cases, enhancing stakeholder satisfaction with the legal process, decreasing the average number of incoming cases per judge, and improving Saudi Arabia’s ranking in World Bank institutions.
The Council of Ministers, colloquially referred to as the Cabinet, comprises 22 distinct government ministries and serves as an advisory body to the King. Chaired by the King, and including the Crown Prince, ministers, and ministers of state, the Cabinet is entrusted with drafting and overseeing the implementation of policies spanning internal, external, economic, education, financial, and defense domains, as well as general state affairs.
Functioning as the ultimate authority for financial, administrative, and executive matters, the Cabinet’s resolutions are non-binding unless endorsed by a majority vote, with tie-breaking decisions resting in the hands of the Prime Minister – the King – in the event of a deadlock. Operating within the parameters of the Basic System of Governance, the Cabinet collaborates with the Consultative Council (Majlis Al-Shura). Comprising 150 members appointed by the King, the Consultative Council is organized into 12 committees, each dedicated to matters pertaining to foreign affairs, health, social affairs, human rights, economy and industry, education, finance, human rights, administration, Islamic affairs, services and public utilities, information, and culture. Originally focused on discussing regulations and issues of national and public interest, the mandate of the Consultative Council was expanded in 2004 to include proposing new legislation and amending existing laws without prior submission to the King.
Economy
Saudi Arabia boasts the largest economy in the Arab world and holds a position among the top 20 global economies as a member of the G20. In 2019, the country’s Gross Domestic Product (GDP) reached 793 billion USD. Notably, Saudi Arabia is a key player in international trade, with exports totaling 268.59 billion USD and imports at 141.89 billion USD, resulting in a trade balance of 126.7 billion USD.
The nation possesses significant natural reserves valued at 34.4 trillion USD, with the world’s second-largest petroleum reserves, estimated at 258 billion barrels. As a leading oil exporter globally and a founding member of OPEC, 90 percent of the Kingdom’s export earnings stem from the petroleum sector, contributing 42 percent to the GDP.
In a positive economic development, Saudi Arabia achieved a budget surplus of 10.4 billion USD in the first quarter of 2019, marking the first surplus since 2014. This success can be attributed to a rise in both oil and non-oil revenues. To reduce reliance on hydrocarbons, the government is actively promoting diversification, emphasizing the need for the private sector to play a crucial role in propelling future economic growth.
The year 2016 witnessed the launch of Saudi Arabia’s Vision 2030, a comprehensive plan led by Crown Prince Mohammed bin Salman to modernize the country and position it as an investment powerhouse. A key objective of Vision 2030 is to diminish the country’s dependence on oil, aiming to increase non-oil revenue to 160 billion USD by 2020 and 267 billion USD by 2030. Ongoing economic reforms, including measures to make foreign investment more attractive, are integral to the Vision 2030 plan. Notably, foreign investment saw a rapid surge in the first quarter of 2019, increasing by 28 percent.
Investment Incentive
RELATIONSHIP BETWEEN GERMANY AND THE KINGDOM OF SAUDI ARABIA
Germany and Saudi Arabia established formal bilateral relations in 1929 with the Treaty of Friendship. Notably, the Kingdom, formed in 1932 through the unification of Hejaz and Nejd, forged diplomatic ties with Germany in 1954. Cultural connections between Saudi Arabia and the German government took root in 2006, marked by the presence of German schools in Riyadh and Jeddah. Saudi Arabia stands as Germany’s second-largest trading partner in the Arab World after the United Arab Emirates, with significant trade in machinery, chemicals, electrical goods, precision engineering, motor vehicles, and optical products. The Saudi Vision 2030 reform program creates promising international business prospects, further enhancing economic opportunities for both Germany and Saudi Arabia, given the high regard for German products, services, and expertise in the Arab world.
SAUDI VISION 2030 AND ECONOMIC TRANSFORMATION
Launched in 2016, Saudi Vision 2030 represents Saudi Arabia’s commitment to diversify its economy, fostering an environment attractive to both local and foreign investors. The initiative, championed by Crown Prince HRH Prince Mohammed bin Salman al Saud, introduces new regulations to facilitate the transformation into a more diverse and sustainable economy, reducing dependence on oil. The goals of Saudi Vision 2030, coupled with reforms by the Crown Prince, encompass crucial aspects for building a thriving economy and enhancing the business environment:
- Developing capabilities to enhance service quality and reliability.
- Collaborating with legislative authorities to review and improve existing regulations, emphasizing contract enforcement.
- Strategically utilizing government real estate reserves.
- Allocating prime areas in cities for educational, retail, entertainment, and industrial projects, with coastal zones dedicated to tourism.
- Adapting financial products and services to sector-specific needs, from large project capital funding to short-term working capital for small businesses.
- Streamlining licensing procedures based on national economic priorities.
- Enforcing international legal and commercial regulations to foster a long-term investment-friendly environment.
- Facilitating the movement of people and goods while simplifying customs procedures at ports.
Saudi Arabia, known for its pivotal role in the global economy through oil policies, is actively diversifying its international non-oil sectors. A government aim is to increase foreign direct investment’s (FDI) GDP contribution from 3.8 percent to 5.7 percent. To realize diversification plans, Saudi Arabia intends to further restructure economic cities, attracting both local and international investment. Specialized economic zones are being created for logistics, tourism, industrial development, and financial services. The country is also committed to maintaining a modern digital infrastructure crucial for contemporary industrial activities. Emphasizing its dedication to supporting investors, the Ministry of Investment was established in February 2020, providing specialized consultation to companies across different sectors.
INVESTMENT INCENTIVES
When establishing a business in the Kingdom, the Saudi Industrial Development Fund (SIDF) provides loans ranging from 50 to 70 percent of the project costs over a period of 15 to 20 years, with no interest fees in accordance with Sharia law. During repayment, 2.5 percent of the loan becomes due, and an annual administrative cost is factored in. Specifically, with 50 percent SIDF financing, the breakdown includes 25 percent equity from the foreign investor, 25 percent from a local bank’s commercial loan, and 50 percent from SIDF.
Additionally, technical know-how can be considered as an investment and a contribution in kind, subject to evaluation by an auditor, which may take several months. Foreign investors also have the option to invest in various Tadawul – Investment Funds on the Saudi Arabian stock market.
The Saudi Arabian market is appealing for foreign investment due to its commitment to enhancing the economy and its access to a domestic market comprising 20 million consumers from neighbouring GCC countries. Notably, the framework includes the free convertibility of the Saudi Riyal and unrestricted profit and currency transfer, making it an attractive proposition for foreign investors.
Legal Framework of Foreign Investment
The Foreign Investment Law (FIL) became effective in April 2000, marking a crucial step in the formalization of economic liberalization. This law governs foreign investment in the Kingdom, outlining conditions, procedures, privileges, guarantees, and specifying the rights, obligations, and penalties for foreign investors. The Ministry of Investment is responsible for issuing the regulations associated with this law.
To engage in foreign investment or economic services in Saudi Arabia, foreign investors were initially required to register with the Saudi Arabian General Investment Authority (SAGIA) to obtain a license authorizing economic activities and investments. As of February 25, 2020, SAGIA has been elevated to ministerial status and renamed the Ministry of Investment Saudi Arabia (MISA), underscoring the government’s emphasis on attracting foreign investors.
For a smoother setup process and to avoid imprudent decisions, it is recommended to seek assistance from a locally registered legal firm. Generally, investment projects from Germany are consistently approved when complying with legal requirements. In contrast to some other GCC countries, foreign ownership and investment projects in Saudi Arabia can be fully foreign-owned, as per the provisions of the Foreign Investment Law. Foreign projects also enjoy privileges and incentives akin to those granted to national projects, a critical factor in Saudi Arabia’s accession to the World Trade Organization (WTO).
Once MISA issues the license and completes the administrative process, the newly established company sponsors all foreign employees, registering their visas under its sponsorship in accordance with the Saudi Arabian residence system.
Notably, investments related to licensed projects receive full legal protection, with confiscation only permissible through a judicial judgment. The generated income, including proceeds from share sales, liquidation surplus, corporate profits, and amounts for contractual obligations tied to the investment project, can generally be transferred abroad or utilized for legal purposes by the foreign investor.
To make reinvestment within the Kingdom more appealing, the Income Tax Law imposes a withholding tax of 5 percent on the total amount for repatriation of dividends sent to a foreign country. Foreign investors are free to engage in any economic sector unless explicitly restricted, and sectors inaccessible to foreign investors are outlined in a “Negative List” by SAGIA, a requirement also applicable to MISA license applications. Establishing an auditing company mandates a minimum 25 percent participation of a Saudi National.
The Process of Obtaining a Misa License
Securing a MISA license involves an electronic application process through the MISA website. Detailed guidelines on the application and company registration procedures, along with a list of required documents, can be found in the manual provided on the MISA website. During the online application, scans of the following documents must be attached:
1. Copy of the commercial registration of the entity in its original country, authenticated by the Saudi Embassy.
2. Financial statements for the last year, prepared by an internationally acclaimed legal office and authenticated by the Saudi Embassy.
All documents from points 1 to 5 must be translated into Arabic by a licensed translating office in Saudi Arabia. It is advisable to consult with a locally registered law firm to ensure a smooth and efficient registration process.
When submitting the application electronically, the foreign investor (applicant) must acknowledge several formal obligations. For example, they commit not to engage in economic activities before obtaining the MISA license and to employ a minimum of 75 percent Saudi Arabian workforce if applicable. The entire application process typically takes up to one and a half weeks. The cost of obtaining a new license is SAR 2,000 per year, and the issued license is usually valid for five years. Additionally, an annual payment of SAR 10,000 is required to be made to MISA.
For investments or company setups in contracting and engineering, obtaining a contractor’s classification from the Ministry of Municipal and Rural Affairs (MOMRA) is mandatory. While this process can be time-consuming, the usual five-year license duration allows investors ample time to meet all criteria and gather necessary documents.
It is essential to note that if information is withheld or if MISA discovers violations against the Foreign Investment Law (FIL) and/or its export regulations, penalties will be applied (details on how are mentioned on page 160). In 2013, SAGIA published a Code of Conduct outlining potential offenses by investors and the corresponding punishments.
Types of Corporate Entities
The Companies’ Regulation, implemented in 2016, governs the activities of foreign investors in MISA-registered businesses. The Ministry of Commerce and Investment recognizes two forms of corporations for foreign commercial investments: the GmbH and the AG, along with the Professional Partnership for independent professionals. Additionally, foreign companies have the option to establish legally dependent branches, regulated in Articles 235-241 of the Companies’ Regulations.
1. Professional Company: Auditors, tax advisers, and legal offices must form a Professional Company by partnering with a Saudi expert and registering with the Ministry of Commerce and Investment (MoCI). Foreign legal offices can operate in the kingdom only after signing a cooperation or association agreement resulting in a Professional Company with a Saudi National. The company must have an excellent reputation, a minimum of 10 years of existence, expertise, and a permanent delegate residing in Saudi Arabia for at least 9 months annually. A minimum of 25% of shares must be held by a Saudi National independent professional.
2. Legally Dependent Branches Legally Dependent Branches of a foreign parent company are established in accordance with Articles 235-241 of the Companies’ Regulations. These branches lack legal personality, are controlled by the parent company, and do not require a Saudi National sponsor. Two types of legally dependent branches can be set up:
Scientific and Technical Office (STO): This form is commonly used for local client support and commercial agents. It is not allowed to engage in commercial activities, has a limited number of employees (usually seven), and serves as a support system and information gathering tool. An STO must have a written consent agreement between the parent company and the commercial agent, is under the authority of the parent company, and requires no minimum investment capital.
Permanent Branch: A permanent and dependent branch suitable for long-term business activities in Saudi Arabia. It is not a legal entity but is legally dependent on the parent company. The minimum investment capital is SAR 500,000, and a MISA license and commercial registration are required. It does not have a legal status, and only one branch manager can be registered. Conversion into an LLC is possible but involves a laborious process.
Temporary Branch: Established to participate in officially published tenders, a temporary branch requires no minimum capital. Registration is project-specific, valid for one project at a time, and must be deleted upon completion. The signed contract with the client is necessary for setting up the temporary branch. It cannot be applied for in the private sector and is restricted from subcontracts in the public sector. Projects not directly related to the Saudi State or state-owned companies cannot be undertaken under a temporary branch.
Legally Independent Companies
The Ministry of Commerce and Investment (MoCI) allows for two primary forms of corporation for foreign commercial investment:
1. Limited Liability Company (LLC):
> Foreign investors commonly choose to establish an LLC due to its straightforward structure, ease of control, and legal independence.
> Since the implementation of the Companies Regulations in 2016, a one-person LLC is permissible.
> The LLC can be utilized as a branch for various corporate activities, excluding those listed in SAGIA’s “Negative List” and subject to limitations in the Company Law, observed during MISA license applications (e.g., Banking and Insurance Sector, financial services).
> An LLC is recognized as a Saudi Arabian legal entity, enabling it to act as a sponsor for its employees. No Saudi local sponsor is required, and investments below SAR 500,000 have been authorized since 2007.
> The LLC’s management structure is flexible, requiring at least one General Manager. Optionally, a Board of Directors, headed by a Chairman or Managing Director, can be established, along with the appointment of an Executive Manager, General Manager, or CEO.
> MISA handles the license application, and annual reporting to the MoCI with an audited balance sheet and management report is mandatory. The LLC must also submit yearly tax returns and register for Value Added Tax (VAT) payments on a quarterly basis. Legal planning for an exit strategy and potential liquidation is advisable and governed by Saudi Companies’ Law.
2. Joint Stock Company:
> Uncommon in foreign investments, Joint Stock Companies are required for Banks and Insurance Companies.
> A feasibility study must be presented to the Minister of Trade for project approval by decree. The minimum capital, represented in shares, is SAR 500,000, with a minimum share value of SAR 50, and a minimum of two shareholders.
> An application for stock market listing can be submitted to the Capital Market Authority (CMA) no earlier than two years after the initial company setup.
> The legal structure and investment opportunities in NEOM, a significant offshore zone and tourist destination in the Kingdom’s northwest, are yet to be clarified and implemented.
In light of numerous incentives and ongoing reforms like the Saudi Vision 2030, which enhances the market’s appeal, new foreign investors are advised to consult with an experienced legal team with a presence in Saudi Arabia to ensure a successful business setup.
General Tax Incentive
Tax Incentives for Foreign Companies:
The Saudi government’s current focus is on developing economic cities across various locations in the Kingdom, such as Ha’il, Jazan, Najran, Al Baha, Al Jouf, and the northern region. The government aims to attract foreign investors through enticing tax incentives. Foreign companies establishing themselves in these economic regions benefit from the ability to deduct training and salary costs from taxes. There are plans for a future economic zone at Riyadh airport, offering additional deductions for projects exceeding government-set investment capital limits. Customs duty exemptions are also granted in certain cases, particularly when local sourcing for machines and raw materials is not feasible. However, such exemptions require prior application before goods importation.
> International Tax Law: Saudi Arabia has signed Double Tax Agreements with over 50 countries, including France, Austria, and Switzerland. Ongoing negotiations with Germany and other countries are in progress, following the model of the Organization for Economic Cooperation and Development (OECD). These agreements cover aspects like withholding tax on dividends, interests, capital gains tax, and license fees.
> National Tax Law: Saudi Arabia levies various taxes, including zakat (based on Islamic concepts), income tax, withholding tax, and corporation tax.
> Personal Income Tax: Currently, only foreign companies or investors pay corporate income tax. No personal income tax has been introduced.
> Corporation Tax: If a company has both Saudi and non-Saudi shareholders, the non-Saudi share is subject to corporate income tax (20 percent on net profits), and the Saudi share is subject to zakat.
> Zakat: Administered by the Zakat, Tax, and Customs Authority (ZATCA), zakat is payable by Saudi nationals and Saudi companies. It is calculated at a rate of 2.57 percent on taxable net income or 2.5 percent on adjusted annual profits, whichever is higher.
> VAT (Value Added Tax): Introduced in 2018, VAT applies to goods and services supplied in Saudi Arabia. The rate increased to 15 percent from July 1, 2020, as part of economic measures. Discussions are ongoing regarding a potential reduction.
General Tax Situation: The Saudi VAT model shares similarities with the European system. Registration is required for entities providing taxable services with an annual turnover exceeding SAR 375,000.
> Withholding Tax: Service payments to foreign residents by Saudi-based companies are subject to withholding tax at rates of 5 percent, 15 percent, or 20 percent, depending on the service type and relationship between the parties. Timely payment is crucial to avoid fines imposed by the Zakat, Tax, and Customs Authority.
It’s important to stay updated on tax laws and regulations, especially considering ongoing developments and reforms in Saudi Arabia. Foreign investors are encouraged to seek advice from experienced legal teams with a presence in the country.
Legal Framework
> Legal Framework in Saudi Arabia
In contrast to other Islamic countries where Sharia Law’s influence has diminished due to secularization, Saudi Arabia maintains a legal framework deeply rooted in Sharia Law, considering Islam as the primary source of law. Despite recent shifts towards more progressive structures, Sharia Law remains fundamental, particularly in criminal and family law, with limited impact on commercial and corporate legal matters.
> Judicial System:
Following a comprehensive reform, Saudi Arabia has five Sharia Courts, including general courts, criminal courts, personal courts, labor courts, and special commercial courts established in June 2020. The legal hierarchy consists of first-instance courts, superior courts of appeal, and the Supreme Court, responsible for reviewing procedural errors and ensuring jurisprudential consistency
> Prosecution:
Due to Sharia Law’s authoritative influence, pursuing legal claims can be complex and time-consuming. As a result, a comprehensive evaluation of goals and attempts to settle disputes out of court are advisable. Arbitration procedures, meeting international standards, offer an alternative for conflict resolution. While legal representation is not mandatory, consulting a Saudi registered lawyer is recommended. Court proceedings are conducted in Arabic, necessitating certified translations for foreign language documents. Each party bears its court dispute costs, making pre-agreed cost-sharing agreements common.
> Recognition of Foreign Judgements:
Foreign judgments may be partially recognized and enforced in Saudi Arabia. The general courts’ enforcement departments handle recognition and enforcement, contingent on conformity with Sharia Law and reciprocity, often requiring international agreements, currently lacking with Germany.
> Out-of-Court Settlement:
Settling disputes out of court is culturally significant in Saudi Arabia, aligning with societal values. Mediation and arbitration are preferred, with arbitration law, enacted in 2012, conforming to international standards and providing flexibility for parties to structure proceedings. An arbitration agreement is necessary, and while it can be informal, formal agreements prior to disputes are recommended for legal security. The law allows parties to determine various aspects independently, such as applicable law, court location, arbitration law, and procedure commencement. Witnesses can be called in, providing procedural flexibility for disputing parties.
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| Author | Organization/ Affiliation | |
| Main Author | myCACFO | [email protected] |
| Co-Author | Astik Dubey | [email protected] |
