Developments Affecting Foreign Investors in Saudi Arabia March 2016


Foreign Investment Incentives

New Companies Law

A new Saudi Companies Law will come into force on May 2, with the following significant changes from the 1965 law.

Limited Liability Companies (“LLC”s)

  • A single member may now register an LLC; previously 2+ were required.
  • 10% of profits must be contributed annually to a statutory reserve until this attains 30% of share capital, down from 50% previously.
  • LLCs may no longer continue in business if losses exceed 50% of company capital, and if the partners fail to recapitalize or dissolve; instead, they will now dissolve automatically by operation of law.
  • Once the number of shareholders exceeds 50, an LLC must within a year convert to a JSC.
  • In registering Articles of Association and amendments, these may now be published only on the Ministry of Commerce & Industry (“MoCI”) website (not on the Official Gazette or a local newspaper as before).

Joint Stock Companies (“JSC”s)

  • The number of shareholders required for a closed JSC has been reduced from 5 to 2, and to 1 only for Government agencies, public juristic persons, wholly government-owned entities and companies with SR5+ million capital.
  • Minimum capital is now SR500,000 (US$133,340), down from SR2 million (US$533,362).
  • As with LLCs, the statutory reserve need only attain 30% of share capital, down from 50%.
  • Boards must have 3-11 directors, with no share ownership requirement.
  • General meetings may be held via teleconference; failing a quorum, new meetings may be held one hour later.
  • JSCs may issue sukuks, preference shares and other debt instruments.
  • JSCs may not purchase or mortgage their shares.
  • An Audit Committee is now required.
  • The Chairman may not serve in any executive function.
  • Directors’ pay is limited to SR500,000.
  • As with an LLC, if accumulated losses exceed 50% (previously 75%) of share capital, and no shareholders meeting is called, or no resolution is adopted to continue in business or dissolve, the JSC dissolves automatically by operation of law.
  • Share par value is now SR10 (US$2.67), down from SR50 (US$13.33).
  • The first financial year must be between 6 and 18 months.
  • External certified auditors may serve up to 5 years, subject to reappointment only after a 2-year hiatus.
  • Directors are elected by “accumulated voting,” whereby shareholders may vote their shares by concentrating these on or distributing them among one or more nominees.

Other Provisions

  • Holding companies are now possible.
  • In-kind contributions of LLC or JSC capital must be valued by a certified expert.
  • MoCI is now responsible for supervising and regulating all companies except for those that are “listed,” which come under Capital Market Authority (“CMA”) jurisdiction.

Discussion: The new law aligns the Kingdom with international standards in allowing one-member LLCs and holding companies, while protecting creditors by dissolving companies automatically if and as their capital erodes, eliminating the prior option to continue with unlimited liability.  It also contemplates larger and more broadly capitalized LLCs and JSCs, and broader recognition of groups of companies united through holding companies.

Trading Licenses for 100% Foreign-Owned Investors

MoCI and the Saudi Arabian General Investment Authority (“SAGIA”) were directed by the King last September to review and revise trade and investment regulations to facilitate foreign investment and sales of wholesale and retail products in the Kingdom, including waiving the requirement for a 25% Saudi partner.

According to early reports, SAGIA’s conditions would include

  • creation of a regional distribution hub;
  • manufacture in accordance with international environmental, technology trade and retail standards;
  • SR100 million minimum investment;
  • creation of 100+ jobs, and SR 10,000 average monthly salaries.

Discussion: Despite direction to help foreign investors trade freely without local partners, these high hurdles will disqualify most if not all potential beneficiaries.  Foreign investment policy has been plagued by weak coordination among agencies with overlapping horizontal jurisdiction and protectionist pressures, even by the agency nominally responsible for promoting foreign investment.


“Balanced Nitaqat”

The Ministry of Labor (“MoL”) has announced a “Balanced Nitaqat” proposal, whereby Saudiization levels will be based on

  • overall Saudiization percentage,
  • average Saudi wages,
  • gender ratios,
  • Saudi job sustainability and
  • ratio of highly paid Saudis.

Affected parties are invited to provide comments online through

Discussion: The MoL has increasingly raised the ante with Saudiization quotas, in ways that may create new and better paid employment opportunities for some Saudis, while at the same time raising the cost of doing business along with the cost of products and services.

The MoL is to be congratulated for inviting comments, though not for increasing burdens on business while the private sector is being asked to assume greater responsibility for economic development, competing effectively globally and expanding employment opportunities.

Work Visas for Syrians

As part of the Kingdom’s efforts to assist Syrian refugees, the MoL is issuing work permits for renewable 6-month periods for Syrians in the Kingdom on visit visas through its ajeer website (, as was done earlier for Yemeni nationals.

Discussion: As a frontline state with a clear interest in a positive outcome to the Syrian civil war, the Kingdom is wise to offer not only refuge but also employment opportunities to highly talented Syrian and other refugees.  Syrian physicians in particular contribute strongly to Saudi healthcare, and Syrian professionals have much to offer the local economy.

Wage Protection System

All Saudi companies with 100+ employees are under the Wage Protection System (“WPS”) now required, subject to suspension of MoL services, to

  • register with WPS;
  • pay employees in Riyals in local bank accounts;
  • file bank receipts with the Ministry of Labor, for cross-checking against General Organization for Social Insurance (“GOSI”), payroll and contract reports.

Compliance options include

  • fully paying expatriates locally,
  • a split payroll with partial payments both in the home country and in Saudi Arabia, and
  • continuing to pay Western expatriates in their home countries (as many prefer, to preserve social security, pension and other benefits), as well as in Saudi Arabia, subject to internal reconciliation between employer and workers.

Discussion: While ostensibly intended to ensure that workers are properly paid in accordance with contracts, the WPS could serve to ensure payment of personal income taxes should these later be imposed, as well as a measure to encourage expatriates to keep and spend their salaries within the Kingdom.

Muqeem Cards

In renewing expatriate employees’ expiring iqamas (expatriate residency visas), employers must now exchange these with the Passport Office for new five-year muqeem cards, which may be renewed annually online.

Discussion: Saudi government agencies have been simplifying regulatory renewals as part of a general e-government initiative, reducing red tape for local and foreign investors alike.

Women in the Workplace

Female employees found not to be covering their heads risk SR1,000 in fines and their employers SR5,000, SR10,000 for failing to provide separate female work areas.

Discussion: While the ratio of female workers has been growing as more women graduate from college, as the champions of traditional observance the Haia continue to favor modesty over fashion and gender segregation over equal employment opportunity.


Value Added Tax (“VAT”)

A 5% value-added tax (VAT) to be implemented by all Gulf Cooperation Council (GCC) states in 2018 was announced at a February 24, 2016 conference in Dubai, in line with International Monetary Fund (IMF) recommendations.

Essential foodstuff, healthcare, social services and education will be exempt, and treatment of financial services remains to be defined.

Assuming ratification of a GCC VAT Framework Agreement by mid-year, GCC countries will have 18 months to implement VAT by its January 1, 2018 target date.

Discussion: Plummeting oil dictate radical remedies to fill resulting fiscal deficits, including spending restraint and meaningful new taxes.  The Saudi Economic Transformation will presumably address these imbalances, including VAT and other new taxes.

“White Land”

The Saudi Cabinet has approved the Shoura Council’s proposal for 2.5% annual fees fees payable to the Ministry of Housing on undeveloped urban land zoned for residential or commercial use, to address a housing shortage and concentrate development within current city limits.  Proceeds will be applied towards public housing construction.

Discussion: With very substantial areas in major cities remaining undeveloped and serving as nonproductive “land banks,” a tax on unused land will promote development of these assets and relieve pressures to expand urban areas beyond their current bounds with all power, transportation, water and other expensive new infrastructure that this would entail.


Reductions in Scope

The Saudi government has ordered ministries to cut spending on contracts by at least 5%, at a time when many companies are already struggling with falling revenues and rising labor costs, to “rationalize spending and increase its efficiency;” and all new contracts will require Finance Ministry approval.

The Saudi government incurred a record budget deficit of nearly $100 billion last year, and has been seeking ways to narrow the gap.  In addition to new taxes (see above), spending cuts offer more immediate relief.

Article 36 of the Saudi Government Procurement Law provides as follows:

“A Government Authority may increase contractor obligations under contracts up to 10% of total contract value, or decrease them up to 20%.”

The Government may thus reduce the scope of any contract (and hence total contract price), not unit prices.

Discussion: While rougher waters may lie ahead for government contractors, the economic transformation plan could also offer attractive new opportunities, in the context of rumored privatization and deregulation.


The MoL has threatened to prosecute those guilty of giving or receiving bribes, including senior government officials.

Citizens are encouraged to report wrongdoing, with assurances of anonymity through an online tabneeh website; credible complaints will be referred to the National Anti-Corruption Commission (nazaha) or to the Royal Court.

Discussion: When King Abdullah took the public pulse in early 2011 in the heat of the Arab Spring corruption ranked high among concerns, prompting an anticorruption initiative.  While the Kingdom lacks an express law against abuse of power, corruption remains a serious concern and efforts to discourage such abuses are to be encouraged.

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About the Author

Chris Johnson

Active in the Kingdom since 1978, Chris Johnson is the founding partner of Johnson & Pump/Al-Sharif Law Office, based in Riyadh. +966-11-462-5925