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Issue No. 01 January 2001
LEGAL UPDATE
The Monthly Newsletter
1. Saudi Arabia’s Foreign Investment Law
2. Saudi Arabia’s Bid To Join The World Trade Organization
3. Proposed Gas Distribution Network To Attract New Investments
4. Manpower Development Fund Established
5. New Law To Improve Processing Of Court Cases
6. Foreign Ownership of Saudi Real Estate
7. Saudi Arabia Bans Firestone Tires
NEWSLETTER ARTICLES
Saudi Arabia’s Foreign Investment Law
A new era dawned for foreign investments in Saudi Arabia on April 10, 2000 when the Council of Ministers, following the recommendation of the Supreme Economic Council, approved a new Foreign Investment Law.
Key features of the new law provide for:
- a reduction in governmental taxes on the corporate profits of non-Saudi companies that have an annual profit of more than SR100,000;
- rights of foreign investors to own land and sponsor the housing and travel of their foreign employees; and
- the creation of a General Investment Authority (GIA) with its headquarters in Riyadh which has the duty to evaluate and act upon all foreign license applications through its Comprehensive Service Center in a timely manner.
Unlike the old Foreign Investment Capital Law, the new law permits non-Saudi companies to wholly own their investments and property in the Kingdom without a Saudi partner. Formerly, foreign investors needed both a local sponsor and a majority partner on any project and could own no more than 49% of the investment. More than 25% of the country’s population consist of expatriates who, until now, could not own property in the Kingdom. The new law also provides that foreign investments within the country may not be confiscated or subject to expropriation without a court judgment.
License applications must be acted upon by the GIA within 30 days of the submission of a complete investment application, or it is deemed approved. Any denied application may be challenged by the applicant and submitted to the GIA’s Dispute Settlement Committee. For agricultural projects, the amount of capital to be invested must exceed SR25,000,000. Capital of at least SR5,000,000 is required for industrial projects and SR2,000,000 for all other projects seeking licensing approval.
Any foreign applicant must submit an affidavit verifying that he has not been found guilty of any financial or commercial violation in the Kingdom or elsewhere. The law allows any investor to obtain a license for more than one project in the Kingdom, provided that he is in good standing with the GIA.
The old law limited investments in certain industries which were available to foreign investors. It was presumed that no foreign investment could proceed unless explicitly approved, and the approval process was often tortuous. Now under the new law, any serious investment proposal is considered and approved quickly unless it involves an area which the GIA has decided is not open to foreign investment.
This “negative list” is designed to define those areas where private investment, and specifically foreign investment, are not permitted. Those areas which are reserved to the government or which violate national core values and traditions are strictly off-limits, such as Aramco’s crude oil business or breweries and distilleries which involve products that are forbidden by Islamic law. Product standards and production processes need to be approved by Saudi laws, or if such laws do not exist, then by those laws of the European Union or the United States of America.
The purpose of the new Foreign Investment Law is to stimulate foreign investment in Saudi Arabia. Over the past decade, the Saudi economy has grown slower than the population, thus resulting in inadequate job creation and an erosion in per capital GDP. The law seeks to shift the creation of economic growth from the government to the private sector. An additional impetus is the recognition that the economy needs to be more diversified.
For the past four years, Saudi Arabia has been seeking to join the World Trade Organization (WTO), the Geneva-based group that deals with global commerce. Until the enactment of this new Foreign Investment Law, the Kingdom’s bid had been hindered by a perception that regulations favored Saudi nationals, imposed high tariffs, and subsidized exports such as petrochemicals. The new law is intended to facilitate Saudi entry into the WTO sometime this year.
With the establishment of the GIA 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.
Saudi Arabia’s Bid To Join The World Trade Organization
At this writing, Saudi Arabia is awaiting word of its acceptance as a member of the World Trade Organization (WTO), which is based in Geneva, Switzerland. The Saudi government has liberalized its foreign investment law and actively encouraged non-Saudi companies to invest in the Kingdom. Further, the government has concluded bilateral agreements with ten important trading partners: Japan, Australia, Pakistan, Uruguay, Canada, South Korea, Mexico, Brazil, Argentina, and Venezuela.
This is actually Saudi Arabia’s second attempt to apply for membership in the world organization that deals with global commerce. In 1993, the Saudi government applied for membership to the WTO’s predecessor body, the General Agreement on Tariffs and Trade (GATT). However, a GATT working group to study the request made no progress. So in May 1996, the Kingdom and its trading partners completed the first round of talks on considering Saudi Arabia’s admission to the WTO.
The Saudi government hopes that membership in the WTO will reduce trade barriers for the country to export its petrochemicals to Europe and the United States and help diversify the Kingdom’s mainly oil-dependent economy.
Proposed Gas Distribution Network To Attract New Investments
It was recently announced that a natural gas distribution network will be constructed to service factories in the Riyadh region. The project, which is expected to take one year, will reduce the cost of gas consumed by factories in the Riyadh region by 80-90%. The facility is the first of its kind in the Kingdom and initially will supply natural gas to 25 factories.
The distribution network will link the Saudi Aramco’s gas line from the Eastern Province to the Seventh Power Plant in Riyadh Industrial City II.
The new network should create reduced fuel costs which will make production cheaper, thus enhancing product competitiveness. Machinery is expected to last longer, and pollution should be substantially reduced.
The project is expected to meet the increase in international competition when Saudi Arabia’s membership in the World Trade Organization is approved.
Manpower Development Fund Established
On July 31, 2000 Saudi Arabia’s Council of Ministers established the Manpower Development Fund to try and solve unemployment problems among educated Saudi young men. The Fund, with its headquarters in Riyadh, is designed to extend financial and technical assistance to institutions which offer quality training to young men to enable them to meet the needs of the changing job market in Saudi Arabia.
The Fund will be financed by governmental grants, endowments, investment income, and fees established by the government. It is expected to provide loans to projects and entities so long as any loan does not exceed 2.5% of the Fund’s total annual loan allocations and is less than 30% of a project’s entire cost. All approved projects will be periodically monitored to ensure that the loan proceeds are used in compliance with Fund requirements.
Training expenses will be met by the Fund and the private company which directly benefits from the employee’s newly acquired skills. The employee who receives training and eventual employment also will share a part of the cost.
In addition to providing loans and grants, the Fund is expected to finance studies and projects to create job opportunities for Saudis. National institutions providing training programs also will receive technical and administrative advice in order to improve their programs.
New Law To Improve Processing Of Court Cases
Last August, the Council of Ministers approved a new law to make court procedures more efficient and less prone to delays. The law, with its 267 articles and 14 sections, revises existing civil procedures from the initial filing of a court case through the implementation of the verdict.
The new law also better defines the relationships between judges, lawyers, and litigants guaranteeing the rights and responsibilities of each. The Ministry of Justice sought the assistance of several legal experts in order to prepare the new procedural rules.
Special features of the new law include wider use of summary decisions, more precise rules on jurisdiction, substitution of parties who die during the course of a case, judicial visits to the scene of a dispute, and judicial use of expert opinions in order to reach a just judgment.
This new system of legal proceedings is expected to clarify court procedures, enabling people to receive justice in the Kingdom’s courts without difficulty or delay.
Foreign Ownership of Saudi Real Estate
In November 2000, Saudi Arabia began allowing non-Saudi individuals who are legal residents in the Kingdom to own real estate for their private residence with the permission of the Interior Ministry.
The new law allows foreign investors to own and rent real estate needed to house themselves and their employees, provided that they obtain a license from the Ministry, which retains the right to approve or reject all applications.
Article One of the new law currently requires that foreign investors in Saudi real estate should have capital of at least SR30,000,000 in order to obtain a license for purchasing land and buildings for selling and leasing purposes.
It is anticipated that the new law will encourage major international companies and property developers to enter the Saudi real estate market. The law prevents artificial price hikes and real estate speculation by requiring investors to retain ownership for at least five years. Previous laws permitted investors to keep properties only for three years before selling.
The new law prevents foreigners from owning properties in the holy cities of Makkah and Madinah, except through inheritance and endowments, but renting within the two cities is permitted for not more than two years, which can be renewed.
Article Three of the law now permits foreign embassies and consulates to own their headquarters and the residences of ambassadors and mission staff. International organizations can obtain licenses to own the buildings of their headquarters in the Kingdom by contacting the Foreign Ministry.
This law is consistent with the Foreign Investment Law enacted in April 2000 to encourage non-Saudi investment in the Kingdom.
Saudi Arabia Bans Firestone Tires
Last September, Saudi Arabia became the first country to ban all imports of tires manufactured by Firestone, a subsidiary of Japan’s Bridgestone Corp. The ban came after the United States’ recall of 6.5 million 15-inch tires linked to more than 100 deaths in that country.
Although Firestone protested the Saudi ban by saying that it could not be justified under the rules of the World Trade Organization which Saudi Arabia is planning to join, the Saudi government remained firm.
Ford Motor’s popular Explorer sport utility vehicles were equipped with the Firestone tires, and in August 1999, Ford offered its Saudi customers free replacements.
The unexplained tendency of the tire treads to separate from the tires has resulted in numerous deaths and injuries, and litigation in the United States has compelled Bridgestone to take action to repair its tattered public image among its customers there and around the world.
The ban instituted by Saudi Arabia demonstrates the government’s abiding interest in protecting its citizens from defective products in the marketplace.
The Law Firm of Dr. Khalid Alnowaiser is pleased to report that it is representing a company which suffered substantial losses as a direct result of the Iraqi invasion of Kuwait during the Gulf War. The case is before the United Nations Compensation Commission in Geneva, Switzerland. The claim now totals $52 million U.S. which represents compensation for profits the company lost as a result of the Iraqi aggression. The damages claimed are based upon the legal theory that the company should be restored to the position it would have been in had the Iraqi aggression not occurred.
Updated version :
The Law Firm Of Dr. Khalid Alnowaiser
P.O. Box 50100 Jeddah 21523
Saudi Arabia
TEL: (966-2) 664 5666; FAX: (966-2) 661 1352
Email: info@lfkan.com
Copyright 2000-2001, The Law Firm of Dr. Khalid Alnowaiser.
All rights reserved.
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