Saudi Arabia is attracting increasing levels of interest from developers and investors in a broad range of sectors, in particular, the hotel and leisure industry. In July this year the NCB Market Review and Outlook reported a “prosperous and steady growth” in the Saudi hotel industry.

The aim of this updater is to highlight some of the key legal issues which should be considered by those interested in developing and investing in hotel projects in Saudi.

Who can invest in/own land in Saudi Arabia?

A key consideration is the issue of licensing. It may well be that regulatory consents are required in order to carry out the proposed investment activity.

GCC nationals and foreigners (GCC nationals being GCC individuals or GCC entities with 100 per cent GCC ownership and foreigners being non-Saudi and non-GCC nationals) are entitled to own land in Saudi Arabia for development, sale or lease, provided that such GCC nationals and foreigners have a legal presence in Saudi Arabia (i.e. set up a local Saudi company to hold the land) and, in the case of foreigners, are licensed to carry out real estate investments. However, neither GCC nationals nor foreigners can own property in the holy cities of Makkah and Madinah. These restrictions will be of key importance for those considering investing in/developing hotels in these areas.

Foreigners must be licensed by the Saudi Arabian General Investment Authority (SAGIA) to carry out real estate investments in Saudi Arabia, and if the license allows the purchase of buildings or land for the construction of buildings for investment purposes, whether through sale or lease, the total cost of the project, both land and construction, must not be less than SR 30 million.

The Council of Ministers may amend this amount. A special authorisation is required to be issued by SAGIA for each project and will be submitted to the relevant Notary Public in order to register the land under the name of the foreigner. Investment in the form of real estate development must occur within five years of purchase of the real estate. Foreigners are not allowed to conduct real estate brokerage activities.  

Summary: if a company wants to carry out real estate investments, it must fall into one of three categories:

  1. be fully owned by Saudis and registered in Saudi Arabia;
  2. be fully owned by GCC nationals and registered in Saudi Arabia; or
  3. be fully or partially owned by GCC nationals or foreigners and licensed by SAGIA to carry out real estate investments in Saudi Arabia.

In all three cases, the company will be able to either acquire or lease property for development and investment purposes: the Makkah/Madinah exception will apply in cases (2) and (3). What are the conditions for obtaining a licence from SAGIA?

The conditions for granting a Foreign Investment license include the following:

  1. The investment activity to be licensed should not be in the List of Excluded Activities for Foreign Investment.
  2. The intended Product should comply with Saudi Arabia’s rules and regulations, or the laws of the European Union or the United States of America in the absence of those laws, in terms of standards and specifications, raw materials and production processes.
  3. The foreign investor should not have been convicted in the past for financial or commercial violations whether in Saudi Arabia or in other countries.
  4. The grant of a license shall not result in the breach of any international or regional agreement to which the Kingdom is a party.

How long will it take to obtain the licence?

Current estimates are that the process takes about three months.

Hotel Operator Licences

Hotel operators require a hotel operating licence from the Saudi Commission for Tourism and Antiquities. The hotel operation licence can be obtained by any foreign company even if its operation falls within Makkah province. However it should be noted that if the hotel operation is in Makkah or Madinah, all the staff and employees must be Muslims in order to perform their work.

How is property owned and how are ownership rights protected?

Freehold

There is a concept of freehold ownership of property in Saudi Arabia and real estate registration is free to encourage price transparency in the real estate market. Also, in an effort to modernize the system and to provide efficiency and inject transparency into the land transfer and registration process, the government of Saudi Arabia has initiated the task of identifying all land in Saudi Arabia (and all property interests in particular parcels of land) and incorporating that information into a real estate register for each designated realty area. The main benefit of the new system is that it will provide an investment friendly environment with technically accurate land identities to facilitate property dealings.

Leasehold

Saudi Arabia has not issued any laws regulating leasing of real property but instead has issued circulars and ministerial resolutions providing that certain general principles must be followed. For example, a ministerial resolution has been issued addressing the case where a landlord is entitled to terminate the lease.

There are no laws or regulations identifying a special registration process for a property lease. Under Saudi law, a lease agreement is not registered in any official register or at any official department in Saudi Arabia. The only requirement is that two witnesses must witness the signing of the lease. Generally, therefore, a tenant is only protected through the inclusion of binding obligations in the lease.

What taxes are imposed on foreign investors?

Non-Saudi shareholders in companies are subject to tax on Saudi sourced income, which includes the income of an entity doing business in Saudi Arabia. They are taxed at a flat rate of 20 per cent. Saudi shareholders in companies are subject to a “Zakat” rate of 2.5 per cent. Withholding tax is payable on payments made to non-Saudi residents for services performed in Saudi Arabia (rent is taxed at 5 per cent, management fees are taxed at 20 per cent, other services at 15 per cent).

There are no tax incentives offered to a foreign investor in case of establishing a joint venture with a Saudi national or company, however, a new income tax system was introduced in Saudi, accordance with Royal Decree No.M/1, dated 15/01/1425 (H) corresponding to 07/03/2004 (G). The system introduced a number of incentives to encourage foreign investment.

In relation to leases, other than the withholding tax issue referred to above, payments of rent are not subject to any charges or taxes (whether on the grant or termination of the lease). Furthermore, there are no taxes applied for the sale or transfer of property.

Are there any new laws governing property ownership and development in the pipeline?

Off-plan sales

On 9 April 2009 the Council of Ministers issued Resolution No.73 (the Resolution) which requires any real estate developer promoting and selling off-plan units to approach a special committee at the Ministry of Commerce and Industry for approval before proceeding with any such project. Approval will be given on a case by case basis and will apply to commercial, residential, office and industrial property. It will stay in effect until the issuance and commencement of the “Real Estate Development Credit Account Law” which is expected to take effect in late 2009.

The Committee will undertake a variety of functions, including issuing licenses for real estate development activities; setting relevant financial and technical qualifications for developers to meet; setting conditions and procedures for the operation and withdrawal of funds from a guarantee account (containing instalment payments received from purchasers); setting conditions and procedures clarifying ownership rights and implementing a mechanism for the prevention of consumer fraud and setting conditions and procedures for the implementation and operation of a special register relating to the sale and purchase of off-plan units.

The Committee has the power to order any developer violating the terms of the Resolution to discontinue work on their project. The Committee shall refer any developer indicted for fraudulent activities or stalling buyers’ rights to another committee who will refer the matter to the appropriate penal court for it to impose an appropriate punishment.

Licensing Scheme

The Resolution also aims to develop a licensing scheme, whereby the Ministry of Commerce and Industry will create a real estate developers register and a separate register of sale agreements between the developer and purchasers of the units with the aim of showing the ownership history of the units and thereby prevent multiple sales of the same unit.

All developers promoting and selling off-plan units must approach the Committee to obtain a license for each existing project. The Committee shall review and study each application on a case by case basis and issue approvals accordingly.

The new laws regarding the promotion and sale of off-plan units will be a major benefit for the real estate sector and its consumers in that it will clarify ownership rights, protect consumers from fraudulent activities, ensure that developers are financially able to complete projects undertaken, meet technical standards, and cut down on speculative transactions in the property market.