Legal Developments

Liberalization of Wholesale and Retail Trade Sector – 100% Foreign Ownership Allowed

Introduction

As was described in our September 2015 KSA Update, the Saudi Arabian authorities recently made the decision to further liberalize the wholesale and retail trade sector.

Prior to Saudi Arabia’s 2005 accession to the World Trade Organization (WTO), non-Gulf Cooperation Council (GCC) investors could only hold up to 51 per cent ownership in wholesale trade and retail entities.

With the 2005 WTO accession, Saudi Arabia liberalized this restriction and allowed non-GCC investors to hold up to 75 per cent ownership in wholesale trade and retail entities.

Now, building on the decision to allow 100 per cent foreign ownership made in September 2015, the Council of Ministers have approved the Rules for Full Foreign Ownership of Retail and Wholesale Operations (the Rules).

The Rules

The Rules provide as follows:

  1. Capital requirements
    The minimum paid-up capital for a wholly foreign-owned wholesale and retail trading entity is SAR 30 million. In addition, the owner must invest at least SAR 200 million in the entity over the course of five years beginning from the date of license issuance.
  2. Applicability
    The foreign owner of a wholly-owned wholesale and retail trading entity must be of a reputable nature such that it has a local presence in at least three international markets.

    In addition, 100 per cent foreign ownership in wholesale and retail trading entities is limited to foreign manufacturers who wish to sell their own products in Saudi Arabia. That is, a foreign investor who wishes to sell a variety of other companies’ products is still limited to the existing model that requires a minimum 25 per cent local shareholding.
  3. Local requirements
    In that regard, the Rules require that the 100 per cent foreign-owned wholesale and retail trading entity manufacture a minimum of 30 per cent of its products in-Kingdom. Further, the entity must establish an in-Kingdom logistics service and distribution hub, in addition to investing at least 5 per cent of its sales in in-Kingdom research and development programs.

    However, these local requirements are waived if the foreign owner invests an additional SAR 100 million in the entity over the course of five years beginning from the date of license issuance – for a total of SAR 300 million over five years.
  4. Saudization
    Related to the local requirements, the wholly foreign-owned wholesale and retail trading entity is required to fulfil additional Saudization requirements. Particularly, the entity must train at least 30 per cent of its Saudi employees annually and commit to employing Saudi employees in leadership positions over the course of the first five years beginning from the date of license issuance.

    Further, the Rules also state that the entity must comply with Saudization requirements by employing a sufficient ratio of Saudi Arabian nationals in accordance with the requirements of the Ministry of Labor (MOL).

Analysis and Conclusion

First, the public has been made aware of only two wholly foreign owned wholesale and retail trading entities that have been licensed and established in Saudi Arabia as of yet – Dow Chemical Co. and 3M. Media reports have stated that high level talks to establish such entities for companies including Pfizer and Apple are underway. These companies provide examples of the types of foreign investors that the Rules appear to be targeting at this time. It will be interesting to see if the Saudi authorities, over time, seek to further liberalize this sector by allowing lesser known foreign investors to wholly own wholesale and retail trading entities.

Similarly, it will also be interesting to see how consistent the Rules remain and how the various Saudi Arabian authorities will apply and respond to them– including the Saudi Arabian General Investment Authority (SAGIA), the Ministry of Commerce and Investment (MOCI), and the MOL.

Particularly, Saudization requirements tend to be a moving target and can fluctuate based on several factors including market conditions, political circumstances, and the like. It will be interesting to see how foreign investors will react to the inherent unpredictability in this regard when considering establishing a wholly-owned wholesale and retail trading entity.

Similarly, the Kingdom is currently in a strong economic liberalization movement, which some experts have suggested is mostly motivated by globally low oil prices and, thus, requires the Kingdom to open up more to foreign direct investment to make up for its losses. As global oil prices continue to stabilize, it will be interesting to see if this movement continues, stagnates, or, alternatively, regresses.

Arab News – 3 July 2016

New Nitaqat from December 2016

As we have described in last month’s Update, the MOL will adopt a new Nitaqat system as part of Vision 2030. Nitaqat is one of the programs implemented by the MOL to enforce Saudization and encourage the employment of Saudi Arabian nationals. The current Nitaqat system categorizes employers based on the industry in which they operate, as well as their overall size and number of employees, and requires employers to employ a certain ratio of Saudi Arabian nationals based on such categorization.

According to media reports, the new “Balanced (Mawzoon)” Nitaqat as part of the Vision 2030 reforms will apply a different form of categorization in which employers will be grouped into one of three categories:

  1. firms having 50 to 99 employees;
  2. firms having 100 to 199 employees; and
  3. firms having 200 to 499 employees.

Such reports have not clarified how firms having 49 or less employees, or 500 or more employees, will be treated under the Balanced Nitaqat system. However, the MOL has clarified that all existing Nitaqat regulations will remain in place except to the extent that they conflict with the new Balanced Nitaqat rules.

The new system will begin implementation as of 11 December 2016.

Saudi Gazette – 29 June 2016

One-Contract Employee Health Insurance Policy – Phase One Underway

According to employee insurance regulations in force in the Kingdom, employers will be required to have a single insurance policy under which all of its employees and their families are covered. The implementation of this requirement is taking place in phases based on the number of employees employed by the company.

Phase one, covering all companies with 100 or more employees, began on 10 July 2016. Phase two, covering companies with more than 50 employees, will begin on 10 October 2016. Phase three, covering companies with more than 25 employees, will begin on 10 January 2017. The final phase for all remaining companies will begin on 10 April 2017.

Saudi Gazette – 12 July 2016

Employee Insurance – No Limit to Number of Children Allowed

The Council of Cooperative Health Insurance (CCHI), in a Twitter announcement, warned companies that limiting the number of children covered in an employee’s insurance policy is a violation of employee insurance regulations in the Kingdom. Under such regulations, employee insurance policies must cover the employee’s spouse, unmarried female children, and all other children up to the age of 25.

Arab News – 27 June 2016

Capital Market Developments

Further QFI Liberalizations

As we described in last month’s Update, the Capital Market Authority (CMA) has been studying the further liberalization of Saudi Arabia’s stock exchange, Tadawul, for Qualified Foreign Investors (QFIs). Last month, the CMA issued draft rules in that regard.

As part of the draft rules, the CMA has suggested changing references to the term “shares” to the term “securities”. Thereafter, the CMA has confirmed that, as part of the suggested changes, it is intended to permit QFIs to now invest in debt instruments as well as shares.

Arab News – 23 June 2016

SAR 2 Billion Sukuk

Bank Albilad is planning a SAR 2 billion sukuk issuance, which has received CMA approval. The sukuk will be issued for 10 years; however, Bank Albilad will have the right to redeem after five years.

Arab News – 22 June 2016