Legal Update from Saudi Arabia

Government Contracts

Saudi Arabia’s 2016 construction spending on development projects is projected to attain $229 billion, a 20% reduction from last year, with similar projections for 2017.1 To achieve these savings, projects must either being scaled back, cancelled or delayed. Priorities under Vision 2030 will include education, healthcare, science, technology, and e-governance.

With 30%+ of the workforce employed in infrastructure and construction, such substantial cutbacks in these sectors cannot fail to have a strong negative impact on the local economy.

New funding models that rely more heavily on private investment will include public-private partnership (PPP), already used in completing Madinah Airport last year and planned for the new Taif Airport.

The Saudi Tenders Regulations provide as follows:

“A Government Authority may increase the obligations of the contractor within the scope of the contract to an extent not exceeding 10% ten percent of the total value of the contract or decrease such obligations to an extent not exceeding 20% twenty percent. The Implementing Regulations shall set forth the necessary controls.”2

Government agencies may under this provision reduce a contract’s scope and price, though not unit prices. While government contractors may face rough waters, the economic transformation plan could also offer new opportunities in its widely discussed privatization and deregulation initiatives.

Foreign Investment

Foreign Investment License: “Investor” Status

The Saudi Arabian General Investment Authority (SAGIA), recently made a department under the Ministry of Commerce and Investment, consistent with Deputy Crown Prince Mohammed bin Salman’s Vision 2030 agenda and in a departure from SAGIA’s policy in recent years of cancelling licenses for individual investors, has issued guidelines for individual foreign investors to apply for “investor” status, similar to a U.S. green card.

Under the new guidelines, a foreign investor may qualify for “investor” status by satisfying one of the following criteria:

  • innovative and promising enterprise, with registered patent(s) for products to be produced in Saudi Arabia;
  • export of products meeting the standards of the Saudi, GCC or other international standards organizations;
  • 50+ employees with commitment to 75% Saudiization ratio, with expatriates at 10% managerial/specialists and 15% workforce; or
  • SR37.5+ million capital.

Individual applicants must demonstrate technical proficiency, a college degree, no criminal or litigation record, 10+ years’ experience and majority ownership of the entity applying for licensing.

These guidelines seem to be aimed at encouraging entrepreneurs to invest in Saudi Arabia. SAGIA is soliciting applications, and licensed individual foreign investors have been given a December, 2017 deadline to comply.

SAGIA’s onerous requirements raise insuperable obstacles for many if not most likely investors; while Vision 2030 professes to favor foreign investment, SAGIA seems conflicted between the imperative to open doors and an institutional instinct to disqualify and control, to the detriment of hopes to create opportunities for Saudis. Despite extensive Saudiization initiatives, the Saudi labor force grew last year by only 46,000, the slowest in decades, while private sector Saudiization rates fell for the first time since 2011.

While nominally creating a regional free trade area, GAFTA’s tariff preferences in non-GCC Arab countries are more a matter of case-by-case negotiation with local government agencies, such as Customs, than broadly recognized or enforced principles.

Greater Arab Free Trade Area (GAFTA)

As member in the Greater Arab Free Trade Area (GAFTA), Saudi Arabia is at least in theory subject to its:

  • Executive Program on Facilitating and Developing Inter-Arab Trade for Establishing a Pan-Arab Free Trade Area (http://www.bilaterals.org/?arab-free-trade-area-agreement),
  • Agreement to Facilitate and Develop Trade Among Arab States, and
  • Regulation of Dispute Resolution and Detailed Rules of Origin for Arab Goods, collectively providing as follows:
    • Rules and principles: goods produced with 40%+ value added in a member state are treated as national for rules of origin, specifications, measurements, health and security safeguard requirements and tax purposes.
    • Trade liberalization: intent to reduce customs duties and taxes.
    • Non-tariff barriers: assure exemption from non-tariff trade restrictions. o Disputes: may be referred to a committee for resolution.

Discussion: While nominally creating a regional free trade area, GAFTA’s tariff preferences in non-GCC Arab countries are more a matter of case-by-case negotiation with local government agencies, such as Customs, than broadly recognized or enforced principles. As with the Kingdom’s commitments under the WTO, application of GAFTA has in many instances been honored largely if not exclusively in the breach.[/x_columnize]

 

Labor

Foreign Missions: Sovereign Immunity from Legal Actions

Based on the 1961 Vienna Convention, foreign diplomatic and other official missions in Saudi Arabia are obliged to “respect” host state law.

At the same time, the Labor High Court has held that “embassies in Saudi Arabia are subjects of their own States, immune from the jurisdiction of Labor Committees over disputes between them and their employees.”1

This means that while the relations between Embassies and their non- diplomatic employees are subject to Saudi Labor Law, disputes may only be resolved directly with the Embassy, or under procedures applied in that Embassy’s home jurisdiction, not before the Saudi labor courts.

For this reason, claims by non-diplomatic personnel against embassies may only be addressed directly with the embassy, or under whatever procedures their home jurisdictions allow.

Some embassy employees have filed claims against their embassy employers in the Saudi labor court; when this happens, the correct procedure is for the court to refer the matter to the Ministry of Foreign Affairs, which notifies the Embassy of the claim, and essentially defers to the Embassy to resolve matters as it deems fit.

Discussion. While courts in other jurisdictions do in many cases accept jurisdiction over claims by non-diplomatic employees against embassies and other official missions of foreign states, the Saudi labor courts recognize the sovereign immunity of embassies in such matters, and defer first to the Ministry of Foreign Affairs and then to the embassy itself in resolving such claims in accordance with their own internal or national procedures for claims against the state. While this approach is consistent with the principle of sovereign immunity and spares foreign missions the potential embarrassment of accountability to the host country’s courts, it also places employees of foreign missions at the mercy of their employers in addressing labor claims. Fortunately many if not most countries do their best to conform their policies to local law as required under the Vienna Convention, and offer reasonable and fair procedures for resolving employment disputes against government employers in their home jurisdictions.

Marriage on Hajj/Umrah Visas

Saudis courts may issue marriage certificates to foreign visitors on normal visit visas, though not to foreign visitors on hajjorumrah visas. Some Saudi courts however, perhaps in ignorance of the restriction, have issued marriage certificates to visitors who have then sought to use them in support of applications to join their newly-contracted “spouses” in Europe.

Discussion. Some would-be asylum seekers from countries in distress like Syria or Libya have sought to short circuit normal asylum screening procedures in European countries of refuge by contracting fictitious marriages in some cases for hire, to benefit fromgenerous family reunion policies. In such cases, the validity of Saudi marriage certificates issued to foreign nationals married on hajj and umrah visas may become an important issue in the country of intended asylum.

Host countries in these cases often seek to verify the legitimacy of unions so contracted, given the potential for abuse. Since such marriage certificates are invalid under the Resolution, European host countries are in evaluating spousal refugee applications entitled to view these as invalid, and deny asylum sought on this basis.

Work Visas for Syrians

Syrians 18 – 60 years old living in Saudi Arabia may now apply for six-month work permits through the Labor Ministry’s electronic portal, and work for companies other than their sponsors under the ajeer system.

Discussion. As a frontline state committed to promoting a favorable outcome to the Syrian civil war, the Kingdom offers not only refuge but also employment access to highly talented Syrian and other refugees. Syrian physicians in particular play a key role in Saudi healthcare, and Syrian professionals generally contribute strongly to the local economy.

http://www.arabnews.com/saudi-arabia/news/881866

Wage Protection System

The MoL has progressively enforced a wage protection system requiring salaries of local staff to be paid from the employer’s to the employee’s local Saudi bank account. While the system initially applied only to larger companies, under current Labor Law as amended all companies are now obliged to comply, subject topenalties in the event of labor inspection.

Discussion. While ostensibly intended to ensure that workers are properly paid in accordance with their contracts, the wage protection system could also ensure payment of rumored personal income taxes, andencourage expatriates to retain and spend their salarieslocally.

MuqeemCards

Since last October, the muqeem card as replaced the iqama as the official identity card for expatriates in the Kingdom. While the card is valid for five years, it must to continue in effect be renewed annually online by the sponsor.

Muqeem cards are upon online application delivered by Saudi Post, eliminating the need to visit official offices.

Discussion. The new system for issuance and renewal of residence visas is an example of a broader e-government initiative to simplify regulatory licensing and renewals, reducing red tape for local and foreign investors alike.

 

Taxes and Tariffs

Shoura Council Considers Water Rate Increases

In considering consumer complaints over utility rate increases, the Shoura Council is studying a Ministry of Water and Electricity report on its 50% tariff increase for water and sanitation services to government, industrial and commercial clients, which went into effect last December.

Discussion. Plummeting oil prices and resulting fiscal deficits dictate radical remedies, including meaningful rate increases for utilities to reduce spending on current high subsidies; Vision 2030 seeks to address budget shortfalls by increasing rates for water, power, gas and other utilities, a politically sensitive issue in a culture long accustomed to widespread subsidies. Protests have however been modest, in the context of a generally favorable response to the government’s plan to adjust to new market and economic realities. The Saudi Economic Transformation can be expected to further address these imbalances, including reduction or elimination of subsidies, along with imposition of new taxes.

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1. [Faithful+Gould report.]
2. [Saudi Government Procurement Law, Royal Decree No. M/58, 4/9/1427, Art. 36.]

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Chris Johnson

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