In this edition of Middle East exchange, we look at some of the structuring considerations in relation to an investment in Saudi Arabia and report on labour law changes in Bahrain
1.Structuring investments in Saudi Arabia
Saudi Arabia remains an interesting investment opportunity for foreign investors. However, inward investment into the country is not without its challenges. Amongst these are:
- tax liabilities;
- dispute resolution and enforcement;
- protection from state intervention – which is a particular concern when dealing with government entities in certain sectors, such as energy and infrastructure companies.
Recent developments in Saudi law and practice have brought about changes which may make investment in Saudi Arabia more attractive legally for foreign investors.
Income tax is levied on non-Saudi companies, including Saudi incorporated companies which are owned by non-GCC nationals. The current rate of income tax, which includes capital gains tax, is 20%.
For inward investors, one way to manage Saudi tax liabilities is by use of double taxation treaties.
In order to reduce the tax bill for withholding, income and capital gains taxes, one commonly used structure is to insert an intermediate holding company between the investor and the investment entity, incorporated in a jurisdiction which has entered into tax treaties with the country in which the investment is based, and with the home country of the investor. This is particularly helpful in circumstances where there is no direct tax treaty between the country in which the investment is based and the jurisdiction of the investor.
Saudi Arabia has entered into a number of double taxation treaties including with China, France, India, Japan, Korea, Malaysia, Spain and the United Kingdom. One of the most recent double taxation treaties is between Saudi Arabia and the Netherlands, which came into effect on 1 January 2011. The Netherlands/Saudi Arabia treaty is interesting to foreign investors because it contains a concession which does not feature in the other taxation treaties: a Dutch resident entity is not subject to capital gains taxation in Saudi Arabia, provided that it beneficially holds at least 10% of the shares in the Saudi Arabia entity and such shares are acquired after 13 October 2008 (the date on which the treaty was signed). Capital gains tax may also be deferred until the investment is sold where it would otherwise arise on a restructuring, even if the Dutch company's holding is less than 10%.
The ease of exit from an investment is one of the key considerations of foreign investors and therefore, these concessions have the advantage of enabling a Dutch shareholder to sell on its investment without the payment of capital gains tax.
The Netherlands has long been a preferred jurisdiction for the establishment of an intermediate holding company. This is because the Netherlands has entered into a significant number of tax treaties with other nations, including all of the GCC countries and many Asian jurisdictions (including China, Hong Kong, South Korea, India, Japan, Malaysia and Vietnam). The Netherlands also benefits from being a member of the EU and, therefore, has the tax advantages of such as between other EU member states. In addition, the Netherlands does not levy withholding taxes and has a sophiscated tax ruling system.
Dispute resolution and enforcement
As noted in our Middle East exchange e-bulletin for July 2012, the new Saudi Arbitration law has moved the Kingdom a step forward in assuring foreign investors that a viable dispute resolution procedure is available within the country. The benefit for foreign investors of opting for a local dispute resolution process is that it may make the enforcement of any successful claim easier. The track record of the Saudi court of grievances in enforcing foreign arbitral awards under the New York Convention is not perceived as encouraging for investors.
Other alternatives include choice of a dispute resolution process based in another state which is a signatory to a regional enforcement treaty, such as the Riyadh Convention or the GCC treaty. DIFC court jurisdiction or DIFC-LCIA arbitration is one potential solution which is designed to be attractive to overseas investors, although there is some doubt over the Saudi courts' approach to enforcement of decisions of DIFC courts or arbitral tribunals.
The two main investment protection concerns when making an overseas investment are:
- Discrimination, ownership and expropriation - governments may treat foreign investors differently from the way they treat their own nationals. Furthermore, governments may not respect ownership structures that have been put in place; and
- Ease of exit and repatriation of funds - governments may impose restrictions on the transfer abroad of capital, operating profits or proceeds of sale, or liquidation of the investment.
The use of a holding company in a jurisdiction which has a bilateral investment treaty with the country in which the investment is to be made may help to mitigate these risks. Saudi Arabia has entered into a number of bilateral investment treaties. Countries with which the Kingdom has entered into both a double taxation treaty and a bilateral investment treaty include China, India, Malaysia, South Korea and, in the European Union, France and Spain.
2.Bahrain introduces a new Labour Law
The Kingdom of Bahrain has introduced a new labour law for the private sector (Law No. 36 of 2012), issued by the King of Bahrain at the end of July. According to reports, the new Labour Law includes the following measures:
- an increase in annual leave from 21 days (or 28 days after five years' service) to 30 days;
- an increase in sick leave from 45 days per year (15 days at full pay, 15 days at half pay and 15 days without pay) to 55 days (15 days at full pay, 20 days at half pay and 20 days without pay);
- an increase in paid maternity leave from 45 days to 60 days, plus the right to take a further 15 days of unpaid leave;
- compensation for the employee in the event of unfair dismissal;
- new penalties for employers for failure to comply with the new Labour Law, in particular imprisonment in certain cases for failure to implement adequate health and safety policies.
It is also reported that implementing regulations will be brought into force within six months.