Until recently, foreign investors were not able to make direct investments in shares listed in the Saudi Stock Exchange market (“Tadawul”). However, on May 4, 2015 the Capital Market Authority of Saudi Arabia (“CMA”) published a new regulation setting Rules for Qualified Foreign Financial Institutions Investment in Listed Shares.
Since June 1, 2015 large and experienced foreign investors may directly invest on the Tadawulunder the status of qualified foreign investors (“QFIs”).
Luxembourg and the Netherlands are typically suitable jurisdictions for foreign investors to structure direct investments in Saudi Arabia.
1. New investment opportunities in a growing capital market
Saudi Arabia is the largest economy in the Gulf Region. Tadawul, the only stock exchange of the Saudi Arabia, lists 169 publicly traded companies (as of January 1, 2015) and has a capitalization of more than $560bn.
Further to this new regulation, foreign investors are allowed to directly invest in the Tadawul. This market opening is a major milestone for the Saudi Arabia capital market.
1.1 What is a QFI
Only foreign investors registered with the CMA as QFIs could acquire shares listed on theTadawul.
QFIs should be:
- Brokerage and securities firms;
- Fund managers; or
- Insurance companies.
QFIs must have at least SAR 18.75bn ($5bn) or an equivalent amount of assets under management (with possibility of reduction granted by CMA to SAR 11.25bn ($3bn)). These entities should have accumulated at least a 5 years’ experience in securities and investment activities.
1.2 Investment limitations
A specific QFI may not acquire more than 5% of listed shares of one single issuer, and, collectively, QFI’s are not allowed to invest more than 20% in a single listed company (for all foreign investors, both residents and non-residents, including interests under swaps the maximum portion is in aggregate 49% of shares of any issuer). Moreover, at the overall market level, QFI ownership may not exceed 10% of total market capitalisation.
Under certain circumstances, QFIs may also invest on behalf of its clients.
It has to be noted that Gulf Cooperation Council entities are considered non-foreign investors and are thus not eligible as QFIs.
2. Luxembourg and Netherlands: Preferred jurisdictions to structure investments in Saudi Arabia
Luxembourg and the Netherlands domestic tax law as well as their respective Double Tax Treaty (“DTT”) networks make these two countries preferred jurisdictions to structure investments in Saudi Arabia.
Luxembourg, leading investment fund center, is also considered as a hub for Islamic finance structuring and has a longstanding track record and a domestic tax and legal environment that allow for tax efficient shariah compliant financing structures. It is currently the most important domicile for Islamic funds within Europe and the third worldwide (after Malaysia and Saudi Arabia). Recently (in September 2014), Luxembourg has been the first jurisdiction of the Eurozone to issue a sovereign Sukuk.
Luxembourg is the second investment center in the world just behind the United States and has a diversified and reputed set of investment vehicles (non-regulated, semi regulated and fully regulated). Providing investors with the expected level of excellence and flexibility some of the global major players are developing their investment activities through Luxembourg entities.
Typically designed for well informed investors, the Luxembourg specialized investment fund (SIF) is a tax neutral investment platform. It is exempt from Luxembourg corporate income tax, municipal business tax and net wealth tax. Dividends and interest payments are not subject to withholding tax. The SIF is only subject to a subscription tax of 0.01 % of its net asset value (NAV). In this context, the SIF could be, inter alia, a suitable vehicle to carry out shareholding activities in Saudi Arabia listed companies. This vehicle is qualifying for many Luxembourg DTTs. Furthermore, in principle, capital gains realized on the disposal of shares traded on the Saudi stock exchange should be tax exempt in Saudi Arabia.1
In parallel, the most widely used Luxembourg standard holding company (SOPARFI) should also be an interesting option namely for financing activities. The recently amended Luxembourg-Saudi Arabia DTT, which is in force since 1st of January 2015, provides for a full exemption from withholding tax on interest payments. This exemption allows the debt structuring in Saudi Arabia via a Luxembourg entity. The SOPARFI carrying out intermediary financing activities should only be subject to Luxembourg corporate income tax on a limited arm’s length financing margin.
Furthermore, according to the Dutch participation exemption, dividends received from a subsidiary (e.g., Saudi Arabia resident company) are exempt from corporate income tax at the level of the Dutch entity, provided that certain conditions are met (i.e., the Dutch entity owns at least 5% of the nominal paid-up share capital of the subsidiary, and the entity holds the shares in the subsidiary with the intention to manage such shareholdings actively).
According to the Netherlands-Saudi Arabia DTT, Dutch corporate shareholders should be protected against the capital gains tax levied upon a sale or a transfer of the shares of a Saudi Arabia subsidiary if it beneficially holds at least 10% of the shares of the Saudi entity and if the shares are acquired after the date the treaty was signed (i.e., after 13 October 2008).