Further to our previous article in September 2015, the Council of Ministers of the Kingdom of Saudi Arabia (the Kingdom) has approved, on 13 June 2016, the issuance of licenses permitting foreign investors (companies) 100% ownership of companies working in the wholesale and retail trade sectors (Trading Activities). Such decision comes shortly after the announcement of the Kingdom's National Transformation Plan and the Vision 2030; the Kingdom's roadmap to diversify its economy and address the challenges brought by low global energy prices.

Prior to the above announcement, foreign investors (i.e. non-GCC nationals/entities) were only able to conduct Trading Activities through a joint venture with a Saudi national/entity in the form of a limited liability company (Trading JV). According to the Kingdom's commitments to the World Trade Organization (WTO) and the requirements of the Saudi Arabian General Investment Authority (SAGIA) - the governing authority for foreign direct investment in the Kingdom - foreign investors' equity in such JVs is limited to a maximum 75%. Additionally, there is a minimum foreign share capital requirement of 20 million Saudi Riyals. However, foreign investors (companies) wishing to conduct Trading Activities now have the option to start their business with 100% equity in the form of a limited liability company or branch (Fully-owned Trading Entity). The table below sets out the differences between the two options and the rules and requirements for each one:

Trading JV Fully-owned Trading Entity

Foreign equity limited to 75%.

100% Foreign ownership.

Local partner is required with a minimum of 25% equity.

No local partner is required.

Must be in the form of a limited liability company.

Can be in the form of a limited liability company or branch.
N/A Foreign investor must have a presence in at least three international markets.

Minimum foreign capital investment of 20 million Saudi Riyals (approx. US$ 5.3 million).

Minimum foreign capital investment of 30 million Saudi Riyals (US$ 8 million).

N/A

The company must invest an amount of not less than 200 million Saudi Riyals (approx. US$ 53.3 million) (inclusive of the company's initial cash capital). Such investment must be made during the first five years starting from the date on which the foreign investment license is issued by SAGIA.

Minimum of 15% Saudi employees to be trained each year.

Minimum of 30% Saudi employees to be trained each year.

N/A

The company must employ Saudi nationals at ratios determined by Ministry of Labour and Social Development. The company must develop a plan to employ Saudi nationals in leading positions during the first five years and retain such employees on continuous basis.

N/A

During the first five years, the company must achieve one or more of the following:

  • Manufacturing: 30% of its products which are distributed locally must be made in the Kingdom.
  • Research & Development Programs: At least 5% of total sales must be allocated for establishing research and development programs in the Kingdom.
  • Logistics Services & Distribution: The company must establish an integrated centre providing logistics, distribution and after-sale services.

Companies that invest an amount of not less than 300 million Saudi Riyals (US$ 80 million) (inclusive of the company's initial cash capital) during their first five years of licensing are exempt from fulfilling any of the above requirements regarding manufacturing, research & development programs and logistics services & distribution.

It should be noted that the board of directors of SAGIA has the discretion to exempt a foreign investor from any of the above requirements relating to Fully-owned Trading Entities provided that such exemption is pursuant to general, clear and non-discriminatory exemption criteria.

It is also worth mentioning that SAGIA has recently issued two licenses for a Fully-owned Trading Entity in respect of DOW Chemical Company and 3M. SAGIA is also currently considering issuing a third license for a Fully-owned Trading Entity to Pfizer. This goes to show the level of investors SAGIA wishes to attract with this new announcement.

In addition to licensing Fully-owned Trading Entities, SAGIA will also be studying applications from existing foreign investors wishing to amend their trading licences to become Fully-owned Trading Entities provided that they meet the rules and requirements mentioned above.

As with many new important announcements like the above, it may take some time for the whole impact of the announcement to be absorbed by the market and to be fully reflected in practice.