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Forms of vehicle
What legal form of vehicle is typically used for private equity funds formed in your jurisdiction? Does such a vehicle have a separate legal personality or existence under the law of your jurisdiction? In either case, what are the legal consequences for investors and the manager?
The establishment of and offer of units in private equity funds in Saudi Arabia is regulated by the Saudi Arabian Capital Market Authority (CMA) through the Investment Fund Regulations (IFRs).
Although the IFRs recognise funds as having a separate legal personality (with the ability to buy and sell assets), funds are not incorporated legal entities and do not have a commercial registration certificate. Rather, funds are established as a contractual arrangement entered into between a fund manager who is an authorised person licensed by the CMA to conduct managing activities (the fund manager) and the holders of the units in the fund (the unitholders). These terms and conditions set out the rights and obligations of the fund manager and unitholders.
Given that funds are not separate legal entities, all actions of the fund must be carried out by a fund manager and all assets must be held a separate entity, usually a custodian or a special purpose vehicle established by a custodian.
Forming a private equity fund vehicle
What is the process for forming a private equity fund vehicle in your jurisdiction?
In Saudi Arabia private equity funds are established by way of private placement process under the supervision of the CMA and in accordance with the requirements of the IFRs.
Prior to approaching the CMA, the fund manager must appoint an independent custodian to hold the fund’s assets and an independent auditor.
The fund manager must then submit the following documents as part of the private placement offer:
- a declaration by the fund manager that the information contained in the notification to the CMA and the offering documents are clear, fair and not misleading (the form of which is specified in the IFRs);
- the fund’s terms and conditions and any other offering documents;
- the fund manager’s organisational structure;
- the fund’s compliance monitoring programme; and
- a summary of the key terms of the terms and conditions.
The IFRs stipulate that the CMA has 15 business days to review the fund’s application and offering documents. Should the CMA have no comments on the application or the offering documents, the fund manager may proceed with the offer to investors. However, in the event the CMA has comments, the 15 business-day review period will reset from the date the fund manager resubmits the application.
Private equity funds are not subject to any minimum capital requirement; however, each investor must subscribe for at least 1 million Saudi riyals for the offering to qualify as a private placement unless the investor is considered to be a ‘sophisticated investor’.
Is a private equity fund vehicle formed in your jurisdiction required to maintain locally a custodian or administrator, a registered office, books and records, or a corporate secretary, and how is that requirement typically satisfied?
Private equity funds must at all times maintain a local custodian licensed by the CMA, although there is no requirement to appoint an administrator. However, any third-party administrator appointed by a fund must be licensed by the CMA to conduct custody activities.
The fund manager is required to host the registered office of the fund and carry out secretarial functions (ie, establish and maintain a register of unitholders). The fund manager must retain all books and records for a period of 10 years (or longer in the event of any ongoing or pending litigation, claim or investigations).
Access to information
What access to information about a private equity fund formed in your jurisdiction is the public granted by law? How is it accessed? If applicable, what are the consequences of failing to make such information available?
The CMA’s website contains a register of all public and private funds, which can be accessed at https://cma.org.sa/en/Market/imf/Pages/Private_Investment_Funds.aspx.
This register includes the following information:
- the fund’s name;
- the date which the fund manager notified the CMA of its intention to establish the fund;
- the offer period dates; and
- the fund term.
Limited liability for third-party investors
In what circumstances would the limited liability of third-party investors in a private equity fund formed in your jurisdiction not be respected as a matter of local law?
Pursuant to article 77 of the IFRs, the unitholder’s liability is limited to the amount of its investment in the fund and it will not be liable for the debts and obligations of the fund, although we are not aware of the extent to which this has been tested in Saudi courts.
Fund manager’s fiduciary duties
What are the fiduciary duties owed to a private equity fund formed in your jurisdiction and its third-party investors by that fund’s manager (or other similar control party or fiduciary) under the laws of your jurisdiction, and to what extent can those fiduciary duties be modified by agreement of the parties?
Under the IFRs a fund manager is subject to a general duty to act in good faith for the benefit of the unitholders and to exercise reasonable care and skill in the discharge of its duties.
The Authorised Persons Regulations (APRs) separately provide that all authorised persons are subject to a number of prescribed fiduciary duties. Given that each fund manager is also an authorised person, fund managers are also subject to these duties, which are as follows:
- loyalty: a fund manager must act in all cases in good faith and in the interests of the unitholders;
- conflict of interest: a fund manager must ensure that no conflict of interest between its interests and the interests of the unitholders will affect the services the fund manager is providing;
- no secret profits: a fund manager must not use the unitholder’s property, information or opportunities for its own or anyone else’s benefit unless the fund manager makes full disclosure of such usage to the unitholder and obtains its consent; and
- care, skill and diligence: a fund manager owes the unitholders a duty to exercise the care, skill and diligence which would be exercised in the same circumstance by a person having both the knowledge and experience that may reasonably be expected of a person in the same position as the fund manager and the actual knowledge and experience that the fund manager has.
Does your jurisdiction recognise a ‘gross negligence’ (as opposed to ‘ordinary negligence’) standard of liability applicable to the management of a private equity fund?
The definition of gross negligence is usually specified in the terms and conditions as the relevant CMA regulations to not provide a definition of gross negligence.
Other special issues or requirements
Are there any other special issues or requirements particular to private equity fund vehicles formed in your jurisdiction? Is conversion or redomiciling to vehicles in your jurisdiction permitted? If so, in converting or redomiciling limited partnerships formed in other jurisdictions into limited partnerships in your jurisdiction, what are the most material terms that typically must be modified?
There is no guidance in the IFRs with regards to the redomiciliation of funds from foreign jurisdictions and no concept of converting any different form of vehicle to a fund in Saudi Arabia.
Fund sponsor bankruptcy or change of control
With respect to institutional sponsors of private equity funds organised in your jurisdiction, what are some of the primary legal and regulatory consequences and other key issues for the private equity fund and its general partner and investment adviser arising out of a bankruptcy, insolvency, change of control, restructuring or similar transaction of the private equity fund’s sponsor?
There is no clear guidance as to the consequences or legal issues in the case of a fund manager’s bankruptcy, insolvency, change of control or restructuring. However, article 20 of the IFRs invests the CMA with the authority to remove a fund manager in the event that such fund manager has materially failed to comply with the CMA’s laws and regulations (including the minimum capital requirements set out in the APRs), the death, incapacity or resignation of a portfolio manager appointed to manage assets of the fund or any other grounds the CMA considers reasonable.
Regulation, licensing and registration
Principal regulatory bodies
What are the principal regulatory bodies that would have authority over a private equity fund and its manager in your jurisdiction, and what are the regulators’ audit and inspection rights and managers’ regulatory reporting requirements to investors or regulators?
The CMA is the regulatory authority that oversees the financial services and asset management industry in Saudi Arabia. In addition to conducting regular audits on fund managers, the CMA has the right to inspect the books and records of a fund at any time upon request.
The fund manager must provide unitholders with annual reports (including audited financial statements) and short-form annual reports upon request and without charge.
The fund manager must also annual reports available no later than 70 calendar days from the end of the year and provide a copy of the report to the CMA within five days after delivering it to unitholders.
What are the governmental approval, licensing or registration requirements applicable to a private equity fund in your jurisdiction? Does it make a difference whether there are significant investment activities in your jurisdiction?
A fund manager must be licensed by the CMA, as must the custodian and any third-party advisers appointed to by the fund (eg, administrator). However, if the fund is investing outside of Saudi Arabia the fund may appoint custodians or advisers licensed in the appropriate jurisdictions.
Prior to establishing the fund, the fund manager must submit the terms and conditions and any other offering documents for the CMA’s approval. The IFRs stipulate that the CMA has 15 business days to review the fund’s application and offering documents. Should the CMA have no comments on the application or the offering documents, the fund manager may proceed with the offer to investors. However, in the event the CMA has comments, the 15 business-day review period will reset from the date the fund manager resubmits the application.
Registration of investment adviser
Is a private equity fund’s manager, or any of its officers, directors or control persons, required to register as an investment adviser in your jurisdiction?
There is no requirement for a fund manager or any of its officers, directors or control persons to register as an investment adviser in Saudi Arabia.
Fund manager requirements
Are there any specific qualifications or other requirements imposed on a private equity fund’s manager, or any of its officers, directors or control persons, in your jurisdiction?
The fund manager must be licensed by the CMA as an authorised person to engage in management activities. Authorised persons are governed by the APRs. Pursuant to the recently amended APRs, the minimum capital of a fund manager conducting management activities is 20 million Saudi riyals.
The following employees of a fund manager must be registered with the CMA:
- chief executive officer or managing director;
- finance manager;
- directors or partners;
- senior officers or managers;
- compliance officer;
- money laundering reporting officer;
- client functions, including sales representatives, investment advisers; and
- portfolio managers and corporate finance professionals.
Describe any rules - or policies of public pension plans or other governmental entities - in your jurisdiction that restrict, or require disclosure of, political contributions by a private equity fund’s manager or investment adviser or their employees.
All contributions in Saudi Arabia are subject to the Saudi Anti-Bribery Law. That being said, there are no specific disclosure requirements or restrictions regarding political contributions.
Use of intermediaries and lobbyist registration
Describe any rules - or policies of public pension plans or other governmental entities - in your jurisdiction that restrict, or require disclosure by a private equity fund’s manager or investment adviser of, the engagement of placement agents, lobbyists or other intermediaries in the marketing of the fund to public pension plans and other governmental entities. Describe any rules that require a fund’s investment adviser or its employees and agents to register as lobbyists in the marketing of the fund to public pension plans and governmental entities.
There are no specific disclosure requirements or restrictions in Saudi Arabia in relation to placement agents, lobbyists or other intermediaries in the marketing of the fund to public pension plans and other governmental entities. The fund manager and its employees are not required to register as lobbyists to market to public pension plans and other governmental entities.
Describe any legal or regulatory developments emerging from the recent global financial crisis that specifically affect banks with respect to investing in or sponsoring private equity funds.
The Saudi Arabian Monetary Agency (SAMA) is the authority governing and regulating investments by banks in Saudi Arabia. SAMA requires banks to maintain specific liquidity ratios but does not restrict banks from investing or sponsoring private equity funds.
Would a private equity fund vehicle formed in your jurisdiction be subject to taxation there with respect to its income or gains? Would the fund be required to withhold taxes with respect to distributions to investors? Please describe what conditions, if any, apply to a private equity fund to qualify for applicable tax exemptions.
Tax in Saudi Arabia is regulated by the General Authority for Zakat and Tax (GAZT). Pursuant to Saudi Arabia’s tax regulations, private equity funds are deemed as ‘capital companies’, which contemplates that they are subject to the following:
- 2.5 per cent zakat (tax on wealth) in the case that the fund is owned by Saudi Arabian nationals or Gulf Cooperation Council (GCC) nationals (ie, Bahrain, United Arab Emirates, Kuwait, Oman and Qatar);
- 20 per cent tax on profits in the case that the fund is owned by non-GCC unitholders; and
- 5 per cent withholding tax on payments of all dividends and capital gains to unitholders.
However, since 2006, the GAZT has not assessed any taxes on private equity funds in Saudi Arabia or its unitholders. This is not deemed a formal exemption and GAZT reserves the right to begin taxing funds at any point in the future (including on a retroactive basis).
Local taxation of non-resident investors
Would non-resident investors in a private equity fund be subject to taxation or return-filing requirements in your jurisdiction?
Non-resident unitholders in Saudi Arabian funds are not obliged to file tax returns or pay tax to the GAZT with respect to any units held in any private fund.
Local tax authority ruling
Is it necessary or desirable to obtain a ruling from local tax authorities with respect to the tax treatment of a private equity fund vehicle formed in your jurisdiction? Are there any special tax rules relating to investors that are residents of your jurisdiction?
There is no requirement to obtain tax rulings from the GAZT or any other local tax authority for the purpose of establishing a private equity fund.
Must any significant organisational taxes be paid with respect to private equity funds organised in your jurisdiction?
No organisational taxes are required to be paid with respect to private equity funds.
Special tax considerations
Please describe briefly what special tax considerations, if any, apply with respect to a private equity fund’s sponsor.
A Saudi fund manager or entity receiving such payments is be required to report the management fees in its tax or zakat returns and pay income tax or zakat due from such returns.
Please list any relevant tax treaties to which your jurisdiction is a party and how such treaties apply to the fund vehicle.
Saudi Arabia has double tax treaties with several countries including Austria, Bangladesh, Belarus, China, the Czech Republic, France, Greece, Hungary, India, Italy, Japan, Korea, Luxembourg, Malaysia, Malta, the Netherlands, Pakistan, Poland, Romania, Russia, Singapore, South Africa, Spain, Syria, Tunisia, Turkey, Ukraine, the United Kingdom, Uzbekistan and Vietnam.
Given that Saudi Arabian funds are currently not assessed for taxes by the GAZT, the treaties have a limited impact. However, the treaties with some countries reduce payments of dividends and capital gains to zero per cent and therefore may be useful if the tax treatment of funds is altered in the future.
Other significant tax issues
Are there any other significant tax issues relating to private equity funds organised in your jurisdiction?
Unitholders and fund managers in Saudi Arabia must be aware that while funds are currently tax-free, the GAZT reserves the right to begin taxing funds at any point in the future (including on a retroactive basis).
Selling restrictions and investors generally
Legal and regulatory restrictions
Describe the principal legal and regulatory restrictions on offers and sales of interests in private equity funds formed in your jurisdiction, including the type of investors to whom such funds (or private equity funds formed in other jurisdictions) may be offered without registration under applicable securities laws in your jurisdiction.
An offer of units in a private fund is a private placement where the offerees are ‘sophisticated investors’ or the minimum amount payable per offeree is not less than 1 million Saudi riyals. All funds must be registered with the CMA and there are no exemptions to such registration.
Types of investor
Describe any restrictions on the types of investors that may participate in private equity funds formed in your jurisdiction (other than those imposed by applicable securities laws described above).
Private equity funds may be offered to ‘sophisticated investors’ or investors who subscribe for a minimum of 1 million Saudi riyals.
Sophisticated investors means any of the following:
- authorised persons acting for their own account;
- clients of a person authorised by the CMA to conduct managing activities provided that:
- the offer is made through authorised person and all relevant communications are made through the authorised person; and
- the authorised person has been appointed as an investment manager on terms that enable it to make decisions concerning the acceptance of the private offers of securities on the client’s behalf without reference to the client;
- the government of Saudi Arabia, any supranational authority recognised by the CMA, the Saudi stock exchange and any other stock exchange recognised by the CMA or the Depositary Centre;
- institutions acting on their own account;
- professional investors (a definition of which is set out in the CMA’s Glossary of Defined Terms); or
- registered persons with an authorised person if the offer is made through the respective authorised person itself.
Identity of investors
Does your jurisdiction require any ongoing filings with, or notifications to, regulators regarding the identity of investors in private equity funds (including by virtue of transfers of fund interests) or regarding the change in the composition of ownership, management or control of the fund or the manager?
The fund manager must establish and maintain a register of unitholders that includes each unitholder’s name, ID, nationality, date of registration in the fund register, details of transactions conducted by such unitholder, the running balance of the number of units and any restrictions or rights attached to such units.
The fund manager must make the register of unitholders available to the CMA for inspection upon request.
Changes in ownership of the fund manager must be approved by the CMA and 30 days’ advance notice must be given prior to any proposed change of control of the fund manager.
Licences and registrations
Does your jurisdiction require that the person offering interests in a private equity fund have any licences or registrations?
Private equity funds in Saudi Arabia may only be established, and units of such funds may only be offered by a fund manager (licensed by the CMA to conduct management activities), following the expiry of the 15 business-day non-objection period, following which the fund is registered with the CMA.
Describe any money laundering rules or other regulations applicable in your jurisdiction requiring due diligence, record keeping or disclosure of the identities of (or other related information about) the investors in a private equity fund or the individual members of the sponsor.
A fund manager must comply with all obligations under the CMA’s Anti-Money Laundering Law and Counter Terrorism Financing Rules.
A fund manager must appoint a senior employee as a money laundering reporting officer. The money laundering reporting officer is responsible for ensuring compliance with the requirements of the Anti-Money Laundering Law and its implementing regulations and reporting to the governing body on matters relating to money laundering and terrorism financing.
Furthermore, all unitholders must complete know-your-customer forms (acceptable to the CMA) and provide supporting documentation, and the fund manager must disclose to the CMA a list of all investors who subscribe to units in the fund.
Finally, the fund manager must take a risk-based approach to conduct due diligence on investors; however, lower due diligence requirements are set (ie, beneficial shareholding confirmation is not required) if the investor is:
- regulated and licensed by a government authority;
- based in a jurisdiction that complies with the Financial Action Task Force recommendations; and
- applies anti-money laundering and counter-terrorism requirements that are consistent with Saudi Arabia’s regulations and the Financial Action Task Force recommendations.
Are private equity funds able to list on a securities exchange in your jurisdiction and, if so, is this customary? What are the principal initial and ongoing requirements for listing? What are the advantages and disadvantages of a listing?
Private equity funds are not permitted to list on the Saudi stock exchange. Only exchange-traded funds and real estate investment-traded funds are permitted to be listed.
Restriction on transfers of interest
To what extent can a listed fund restrict transfers of its interests?
Private equity funds are not permitted to list on the Saudi stock exchange. Only exchange-traded funds and real estate investment-traded funds are permitted to be listed.
Participation in private equity transactions
Legal and regulatory restrictions
Are funds formed in your jurisdiction subject to any legal or regulatory restrictions that affect their participation in private equity transactions or otherwise affect the structuring of private equity transactions completed inside or outside your jurisdiction?
Although the IFRs refer to funds as having some of the attributes of a legal entity, such as buying and selling assets, it should be noted that funds are not incorporated entities and do not have a commercial registration certificate, but are a form of a contractual arrangement that does not make a fund a juristic person and therefore may not participate directly in private equity transactions. Pursuant to the APRs, the assets of a fund must be held by a custodian.
Compensation and profit-sharing
Describe any legal or regulatory issues that would affect the structuring of the sponsor’s compensation and profit-sharing arrangements with respect to the fund and, specifically, anything that could affect the sponsor’s ability to take management fees, transaction fees and a carried interest (or other form of profit share) from the fund.
Only a person authorised by the CMA (licensed to conduct management activities) may be paid management fees. If the fund has multiple sponsors, all fees must be paid to the CMA-regulated sponsor by the fund, who can then pay these fees on to the other sponsors. There are no such restrictions on carried interest or other profit-sharing, which can be paid directly to non-regulated entities.