Issue No. 02 February / March 2001

LEGAL UPDATE

Contents

1. Saudi Arabia’s Foreign Investment Act

2. List of Prohibited Investments for Foreign Investment Act Announced

3. Foreign Investment in Saudi Gas Projects

4. Privatisation Efforts

5. Commercial Fraud Among Traders

Newsletter Articles

Saudi Arabia’s Foreign Investment Act

The Foreign Investment Act enacted in 2000 has revolutionized the climate for foreign investments in Saudi Arabia. As a service to our readers, we are reprinting the law and encourage you to contact your legal adviser on its implications and possible impact upon your business.

The Foreign Investment Act

ARTICLE 1: The following expressions and terms shall have the meaning ascribed beside each, unless the context deems otherwise:

A. The Council: The Supreme Economic Council.

B. Board of Directors: The Board of Directors of the General Investment Authority.

C. The Authority: The General Investment Authority.

D. The Governor: The Governor of the General Investment Authority and Chairman of the Board of Directors.

E. FOREIGN INVESTOR: The natural person of non-Saudi nationality or otherwise the body corporate, where all partners are non- Saudi nationals.

F. FOREIGN INVESTMENT: Investment of Foreign Capital in a licensed activity under this Act.

G. FOREIGN CAPITAL: The Foreign Capital in this Act shall mean, for example but not limited to, the following funds and rights as long as they are possessed by a Foreign Investor.

Money, securities and commercial instruments.

Foreign investment profits if they are invested to increase the capital, expansion of existing projects or establishment of new projects.

Machinery, equipment, supplies, spare-parts, means of transportation and production requirements relevant to the investment.

Legal rights i.e., licenses, intellectual properties, technical know-how, administrative skills and production techniques.

H. Production Facilities: Projects for the production of industrial and agricultural products (plant and animal).

I. Service Facilities: Service and construction projects.

J. The Act: The Foreign Investment Act.

K. The Rules: The Rules of Implementation of this Act.

ARTICLE 2: Without prejudice to the requirements of regulations and agreements, the Authority shall issue a license for a Foreign Capital Investment in any investment activity in the Kingdom, whether permanent or temporary. The Authority shall make a decision about the investment application within thirty days after the completion of documents provided for in the Rules. In the event that the specified period elapsed without the Authority rendering a decision about the application it shall be obligated to issue the required license for the investor.

If the Authority shall deny the said application within the specified period, then the pertinent decision of denial shall be justified, and the party against whom the decision of denial had been issued shall have the right to contest such decision according to regulations.

ARTICLE 3: The Council shall have the authority to issue a list of activities excluded from Foreign Investment.

ARTICLE 4: Subject to Article 2, the Foreign Investor may obtain more than one license in different activities, and the Rules shall specify the necessary measures.

ARTICLE 5: Foreign Investments licensed under the provisions of this Act, may be in either of the following forms:

1. Facilities owned by a national and a Foreign Investor.

2. Facilities wholly owned by a Foreign Investor.

The legal form of the Facility shall be determined according to regulations and directives.

ARTICLE 6: A project licensed under this Act shall enjoy all the benefits, incentives and guarantees enjoyed by a national project according to regulations and directives.

ARTICLE 7: The Foreign Investor shall have the right to reallocate his share as derived from the selling of his equity, or from the liquidation surplus or profits generated by the facility, out of the Kingdom or to use by any other legal means, and he shall also be entitled to transfer the required amounts to settle any contractual obligations pertaining to the project.

ARTICLE 8: The foreign facility licensed under this Act shall be entitled to possess the required real estates as might be reasonable for practicing the licensed activity or for the housing of all or some of the staff as per the provisions for non-Saudi nationals real estate acquisition.

ARTICLE 9: The Foreign Investor and his non-Saudi staff shall be sponsored by the licensed facility.

ARTICLE 10: The Authority shall provide all those interested in investment with all necessary information, clarifications and statistics, together with all services and procedures to facilitate and accomplish all matters pertaining to the investments.

ARTICLE 11: Investments related to the foreign investor shall not be confiscated wholly or partially without a court order, moreover, it may not be subject to expropriation wholly or partially except for public interest against an equitable compensation according to Regulations and Directives.

ARTICLE 12:

The Authority shall inform the Foreign Investor in writing when violating the provisions of this Act and its Rules in order that such violation be rectified within a period of time determined appropriate by the Authority for rectifying such violation.

Without prejudice to any greater penalty, the Foreign Investor under the existence of the violation shall be subject to any of the following penalties:

A. Withhold all or part of the incentives and benefits allocated for the Foreign Investor.

B. Imposition of a financial fine not exceeding SR. 500,000 (Five hundred thousand Saudi Riyals).

C. Cancellation of the Foreign Investment license.

D. The imposition of the penalties referred to in paragraph (2) hereinabove, is rendered by a resolution by the Board of Directors.

E. A petition against the penalizing resolution may be brought before the Board of Grievances according to its regulations.

ARTICLE 13: Without prejudice to the Agreements in which the Kingdom of Saudi Arabia shall be a party of:

1. Disputes arising between the Government and the Foreign Investor relating to his licensed investments under this Act shall as far as possible be settled amicably, and if this shall prove to be impossible, then the dispute shall be settled according to regulations.

2. The disputes arising between the Foreign Investor and his Saudi partners relating to his licensed investments under this Act shall as far as possible be settled amicably, and if this shall prove to be impossible, then the dispute shall be settled according to regulations.

ARTICLE 14: All Foreign Investments licensed under this Act shall be treated in accordance with the Tax codes valid in Saudi Arabia and its amendments.

ARTICLE 15: The Foreign Investor undertakes to abide by all regulations, rules and directives valid in Saudi Arabia together with international agreements in which it is a part thereof.

ARTICLE 16: The implementation of this Act shall not prejudice the vested interests of Foreign Investments that legally existed before this Act shall come into force, however, these projects in conducting their activity or increasing their capital shall be subject to its provisions.

ARTICLE 17: The Authority shall issue the Rules, which shall be published in the Official Journal, and shall be effective as of the date of its publishing.

ARTICLE 18: This Act shall be published in the Official Journal, and shall be effective thirty days after its publishing, and shall invalidate the Foreign Capital Investment Act issued by the Royal Decree no. (M/4), dated 2/2/1399 (H), together with any contradicting provisions.

With the establishment of the General Investment Authority and its Comprehensive Service Center, Saudi Arabia has demonstrated a serious interest in attracting foreign companies to invest in the Kingdom, thus ensuring that the country is among the most attractive for foreign investors in the Middle East.

2. List of Prohibited Investments for Foreign Investment Act Announced

On February 11, 2001 Saudi Arabia’s Supreme Economic Council (SEC) issued a list of those investments which will remain off-limits to foreign investors. Prior to enactment of the Foreign Investment Act last April, all foreign investments were prohibited except for those specifically approved by the government. Now with passage of the Act, only those sectors on a “negative” list remain off-limits to foreign investors.

The first “negative” list sent to the SEC last summer was too long and was sent back for revision. After input from public administrations, ministries and departments, the list, which was proposed by the General Investment Authority (GIA), has now been developed.

Foreigners are not allowed to invest in projects relating to the following areas:

Oil exploration, drilling, pipelines, and production
Real estate projects in Makkah and Madinah
Military equipment and uniforms
Printing and publishing
Telecommunications
Education
Insurance
Land and air transportation
Space projects and services
National security
Manufacturing of civilian explosives
Catering services for the military
Fishing
Employment and recruiting services
Midwifery and nursing
Poison centers
Blood banks
Quarantines
Wholesale and retail distribution
Real estate brokerage services
Public electricity distribution
Tourist guidance services relating to Haj and Umrah

Development of this “negative” list adheres to the approach followed by practically all other countries, which is that everything is allowed unless it is expressly excluded from foreign investment. Although there are legitimate reasons for any country to bar foreigners from investing in certain sectors (such as national security, culture, natural resources, etc.), the trend is to attract foreign investment so as to stimulate economic growth. Countries that attract foreign investors have strong economies, are politically stable, and have policies that open up their markets to the global community. Saudi Arabia has every intention of shortening its “negative” list as more foreign investors invest in the country.

The new Foreign Investment Act is attracting a great deal of interest from potential foreign investors, and many had been waiting for the Kingdom to identify which sectors of its economy would be opened up. Now with the development of the foregoing list, foreign investors clearly know which projects can be pursued without having to be at the mercy of a bureaucrat. And with the 30-day time frame for approval of license applications by the GIA, foreign investors now understand that Saudi Arabia is serious about opening its economy to them.

Apparently, the Foreign Investment Act has attracted much interest abroad. There has been a forty-fold increase in the amount of foreign investment in the last few months compared with the same period a year ago. Although the total is only about SR5 billion ($US 1.3 billion), this is still progress, and the SEC’s recent announcement of the “negative” list should contribute to even more interest from foreign investors.

3. Foreign Investment in Saudi Gas Projects

The Minister of Petroleum and Mineral Resources recently stated that foreign companies could own a 100% stake in the major gas projects being offered under the Kingdom’s energy opening to be signed by April 1, 2001. Direct investments worth SR150 billion ($US 40 billion) are expected, with each dollar invested in the gas sector resulting in the investment of five to eight dollars in other economic sectors.

Last year, the government short-listed a dozen international firms for investing in the country’s upstream gas sector –-- off-limits since Saudi Arabia nationalized its energy sector in the 1970s. They are ExxonMobil, Royal Dutch/Shell, BP, TotalFinaElf, Phillips, Chevron, Texaco, Conoco, Enron-Oxy, Eni, and Marathon. Final deals are expected to be signed by the end of this year.

4. Privatization Efforts

In early February, the Supreme Economic Council (SEC) assumed the responsibility of overseeing Saudi Arabia’s privatization program. As part of its economic reforms, the Kingdom has been seeking to privatize some state-owned services. For instance, it has restructured its telecommunications and electricity sectors to give private investors a greater role in the Saudi economy. Last October, two contracts were awarded to international consultants to prepare a study for the privatization of Saudi Arabian Airlines with the hope that privatization can be completed within the next 17 months.

A state-of-the-art railway network is also earmarked for privatization in order to persuade the private sector to become more involved in the country’s economic development initiatives. Such a network is expected to help transport large volumes of cargo at a relatively low cost.

The SEC now must decide which activities are to be privatized after receiving Cabinet endorsement and then develop a strategic plan and timetable to accomplish the transition. The recent action is a continuation of the program launched in 1997 to encourage the private sector to grow independently of a government whose investment capacity relies on fluctuating oil prices.

5. Commercial Fraud Among Traders

A top official in the Commerce Ministry branch in Jeddah recently reported that more than 15% of area traders engage in commercial fraud. The illegal practice involves sales of items contrary to regulations, smuggling, and trading in forged foreign currencies.

The Jeddah Chamber of Commerce and Industry has formed a special committee to curtail this illegal activity and to alert consumers to these frauds. If apprehended, the offenders must pay huge fines and close their businesses.

Meanwhile, the Commerce Ministry has been finalizing the regulations against market flooding. Many Saudi products are adversely affected by foreign manufacturers flooding the market with their goods. It is hoped that these new regulations will address this increasing problem as Saudi businesses cope with less restrictions and more competition caused by the global economy.

The Law Firm Of Dr. Khalid Alnowaiser
P.O. Box 50100 Jeddah 21523
Saudi Arabia
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Email: info@lfkan.com
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