Doing Business in Saudi Arabia

The past few years have brought a growing realization that Saudi Arabia must encourage foreign investment in order to stimulate its economy.  To this end, the Kingdom has been actively promoting the nation overseas as a stable and attractive investment location.  Anticipating a substantial increase in foreign investments, the Saudi government has been preparing local business and industry for foreign competition without preferential trade protections.  A new era has dawned in the Kingdom as a direct consequence of the following favorable factors:

• The Kingdom bases its economic system upon free enterprise and is now in the final stages of accession into the World Trade Organization.

• The Kingdom enjoys robust trade relationships with the world’s most highly developed nations.  As the largest market among Gulf nations (having 25% of total Arab GDP), Saudi Arabia has friendly relations with all other nations through bilateral and multinational trade organizations.

• The Kingdom is transforming its economy by privatizing its former state-run companies in vital industries such as telecommunications, transportation, tourism, and utilities.   When this process is completed, the private sector’s share of Saudi GDP will double to over 60%.

• The Kingdom has a very plentiful supply of skilled labor and low overall labor costs.  Although the unemployment rate among Saudi men remains relatively high, the quality of the work force continues to improve.  The Saudi government emphasizes education, particularly specialized training programs to fill jobs in computer and technological sectors.  Unskilled labor costs remain very low, comparable to other countries.

• The Kingdom has a well-developed banking system, which is eager to provide financing at reasonable interest rates.  Foreign-based corporations have discovered the ease of obtaining loans to finance their projects which do not require Saudi sponsorship.  Since 2000, foreign investors no longer need to have a Saudi partner to operate in the Kingdom, although there are tax incentives for having a certain percentage of Saudi nationals own or work in the company.

Doing business in Saudi Arabia can take many forms.  The most common legal entity for establishing a joint venture with a Saudi partner is a limited liability company (LLC).  An LLC has fewer legal formalities and a lower minimum required capital investment than a private joint stock corporation (JSC).  For example, only two shareholders are required for an LLC as opposed to five for a JSC.  An LLC can be established with only SR 500,000 in capital, whereas a private joint stock corporation must have at least SR 2 million in capital. 

Before the 2000 Foreign Investment Act, foreign companies needed a Saudi sponsor and partial Saudi ownership to pursue commercial activities in the Kingdom.  Even today, foreign companies who do not establish a branch office or form a JSC or LLC choose sponsorship.  If the work is pursuant to a contract with the Saudi government, the foreign contractor must obtain a temporary commercial registration within thirty days of entering into the contract.  It must also identify a “service agent” under the Saudi Service Agent Regulations.  In bidding on a government contract, the company must guarantee one percent of the total bid amount.  If successful, the bidder must increase the guarantee to 5% of the total contract amount.  Since June 1999, government contracts must include development of training programs for Saudi nationals and the involvement of Saudi universities whenever possible.  Foreign contractors operating under government contracts must subcontract at least 30% of the contract value to wholly owned Saudi contractors unless they can demonstrate that no Saudi contractor is able to provide the required goods or services.  If a foreign company has Saudi nationals as a majority of its shareholders, it need not meet this subcontracting requirement.

Foreign companies that wish to engage in the importing and local purchase of goods for resale in the Kingdom must employ a commercial agent.  A qualified commercial agent must hold a valid Saudi registration allowing him to act as an agent or distributor, and he has to be completely independent of the foreign principal.  All directors and authorized representatives of the commercial agency must be Saudi nationals.

Franchising offers greater flexibility than commercial agencies and does not require the establishment of a branch office or a JSC or LLC.   The Saudi cmmercial agency law applies to franchises and legal advice is recommended to prevent future difficulties between franchisor and franchisee.  The foreign company selects a Saudi franchisee and enters into an agreement which must be approved by the Kingdom’s Ministry of Commerce.

Clearly, foreign companies interested in investing in Saudi Arabia have a wide range of ways to do so.  The Saudi government continues to liberalize its economy and has been very progressive in encouraging foreign investment.  These beneficial developments have produced an unprecedented inflow of foreign capital to continue to improve the lives of Saudi citizens and enhance the Kingdom’s stature as a major player in the global community.