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Overview

Saudi Vision 2030, launched in 2017, implemented major reforms to incentivise foreign investors in Saudi Arabia with respect to promoting direct investment, neutrality and fairness. The Saudi Ministry of Investment (MISA) was established in 2000 and on 5 April 20222 it published the new Investment Law for public consultation. The new Law, which will further promote equal opportunities for foreign and local investors in Saudi Arabia, is currently in its draft form and subject to potential changes following the public consultation and, as such, it will not be addressed in detail in this chapter.

Saudi Arabia's current goals align with MISA's foreign direct investment strategies to increase capital sources, as well as access to management expertise, jobs and entry to new markets within the different regions of Saudi Arabia. MISA further aims to regulate the requirements and process of investing in Saudi Arabia, along with regulating the rights and obligations of investors in Saudi Arabia. There are, nevertheless, certain restrictions that limit foreign businesses from conducting certain types of activities in Saudi Arabia, such as higher capital requirements for foreign entities. To overcome further challenges associated with encouraging foreign investors in Saudi Arabia, MISA has imposed different investment principles and policies to maintain high standards and transparency between foreign and local investors, as well as issuing investment strategies to identify key benefits, sectors and entities to maximise opportunities and business profitability for foreign investors in Saudi Arabia.

Under the current regime, the Foreign Investment Law, promulgated by Royal Decree No. M/1 of 10 April 2000, and its implementing regulations regulate the requirements and process of investing in Saudi Arabia.3 Foreign investors must acquire an investment licence from MISA, and the type of licence required will depend on the type of business activity the investor intends to carry out in Saudi Arabia. MISA has provided a comprehensive investment manual, specifying the steps and requirements for obtaining the MISA investment licence for various business activities such as service activities, industrial and manufacturing activities, real estate, and retail or wholesale activities, all of which require different investment licences. This process has been digitised in recent years and may now be completed electronically through the MISA website. This has facilitated the growth of investment in several industries, including, without limitation, wholesale and retail trade, construction, manufacturing, accommodation and food and beverage, and information technology.

Moreover, considering that the foreign investment regime is constantly evolving to offer a range of opportunities in Saudi Arabia, there is an ongoing demand to ensure that efficient measures are in place to combat unlawful foreign investment and fraudulent activities in Saudi Arabia; for example, the Anti-Concealment Law, promulgated by Royal Decree No. M/22 of 22 June 2004, regulates the acts of foreign investors unlawfully operating by means of commercial concealment arrangements in Saudi Arabia.4 Additionally, the new Investment Law is one of several measures proposed recently to improve the legal landscape of foreign investment in Saudi Arabia by promoting fairness and impartiality between local and foreign investors. In this regard, and in line with other governmental authorities, MISA has established several additional platforms to promote and provide guidance to foreign investors, which will be explained in further detail below.

Year in review

MISA issued a draft of the new Investment Law and made it available for public review and consultation from 5 April 2022 to 5 May 2022.5 The draft law was prepared pursuant to (1) Royal Court Telegram No. 16917 of 5 December 2018,6 which stipulated that MISA shall review the statutory provisions relating to investment to ensure alignment with Saudi Vision 2030 and international best practice to promote and encourage foreign and local investments, achieve economic diversification and increase domestic product; and (2) the National Investment Strategy promulgated by Council of Ministers Decision No. 134 dated 5 September 2021,7 which provides for an initiative to establish an integrated system for investment in line with Saudi Vision 2030 and the National Investment Strategy objectives to replace the current Foreign Investment Law. The draft has yet to be enacted and the current Foreign Investment Law remains in effect. The draft law aims to enhance the investment regime in Saudi Arabia and to preserve foreign investors' rights. The key objectives of the draft law include facilitating and protecting the entry procedures for foreign investors and supporting the principle of competitive neutrality and fairness and ensuring equal opportunities in the treatment of foreign direct investments made by public and private investors. In this regard, the most distinctive objective of the draft is standardising the rights of foreign investors with those of Saudi investors and promoting equal treatment.

Another notable development pursuant to Council of Ministers Resolution No. 377 of 27 December 2022 is that foreign businesses without regional headquarters (RHQs) in Saudi Arabia may not be able to contract with Saudi governmental (or semi-governmental) entities or agencies, unless under certain circumstances, which will come into effect on 1 January 2024.8 MISA has issued further guidance and requirements on the Regional Headquarters Program, which aims to incentivise foreign investors to set up their RHQs in Saudi Arabia by obtaining an RHQ business licence. This decision aims to minimise tax leakage and promote foreign direct investment in Saudi Arabia, as well as increasing employment rates.

Furthermore, the General Authority of Civil Aviation recently rolled out the Special Integrated Logistics Zone (SILZ), the first special economic zone (SEZ) in Saudi Arabia, pursuant to Royal Order No. A/17 of 10 October 2018. 9 All investors wishing to incorporate in SILZ may apply directly to SILZ's department, which maintains a special registry of companies incorporated in accordance with the SILZ companies law. SILZ also offers foreign investors flexibility in employment, 50-year tax relief, suspension of import restrictions and customs duties, and VAT exemption for goods under customs suspensions. This is an attractive option for investors in the logistics field desiring to offer services and products within the region and globally. Other SEZs will be overseen by the Economic Cities and Special Zones Authority (ECSZA), pursuant to Royal Order No. A/19 of 24 February 2010.10 Furthermore, ECZCA has recently announced the establishment of four additional SEZs: (1) King Abdullah Economic City SEZ; (2) Ras Al-Khair SEZ; (3) Jazan SEZ; and (4) Cloud Computing SEZ. Each zone caters to a specific industry, such as supply chain and logistics, shipbuilding, metal conversion and cloud computing, respectively. These ECSZAs will also have their own special registry of incorporated companies, along with a separate companies law and employment law distinct from mainland Saudi laws. Such recent developments offer investors several attractive options for foreign direct investment while protecting their interests in the Saudi market.

Foreign investment regime

i Policy

All foreign investments and involvements in Saudi Arabia are subject to review. Launched and approved by the Council of Ministers, the Permanent Ministerial Committee for Examining Foreign Investments (CEFI) studies and examines all transactions involving a foreign element to better govern their direct and indirect impact on national security and their compliance with public policy. The CEFI is responsible for issuing policies, guidelines and penalties as applicable. Additionally, MISA oversees the involvement of foreign investors through its regulations and registration procedures, screening them to ensure their eligibility and compliance with the implementing regulations of the Foreign Investment Law. These regulations stipulate conditions to be satisfied for the issuance of a licence, including: (1) the products or services concerned must be in compliance with Saudi law; (2) applicants must be a legal entity or a natural person coming to Saudi Arabia for investment purposes; (3) investors must not have previously breached the Saudi Foreign Investment Law; (4) investors must not have been convicted of any commercial or financial crimes in the past, either in Saudi Arabia or elsewhere; (5) the granting of the licence must not be in breach of any international agreement to which Saudi Arabia is a party; and (6) the investment activities must not be on the Negative List of activities excluded from foreign investment in Saudi Arabia.

ii Laws and regulations

As explained, foreign investment in Saudi Arabia is governed by MISA and the Foreign Investment Law (and its implementing regulations), in addition to other laws regarding the operation of the entity concerned and its interaction with the individuals, employees and different governmental authorities. These laws include, among other sector-specific laws, the Companies Law, the Labour Law, the Social Insurance Law, the Income Tax Law, the Bankruptcy Law, the Competition Law and other Gulf Cooperation Council laws specific to certain sectors. Each of the aforementioned laws is enforced by the relevant sector-specific authority; therefore, all tax-related laws are enforced by the Zakat, Tax and Customs Authority under the auspices of the Ministry of Finance, whereas the Companies Law is enforced by the Ministry of Commerce and the Labour Law is enforced by the Ministry of Labour, and all judicial procedure laws fall within the remit of the Ministry of Justice.

iii Scope

In accordance with Decision No. 83 of 7 September 2021, the CEFI screens strategic sectors to identify any direct and indirect impact of investments on national security and public order.11 This is particularly relevant with respect to any potential investment within the defence sector, which is subject to strict screening and security clearance by the local authorities. The CEFI monitors direct and indirect foreign ownership and any securities and share warrants that are convertible into capital in any entities wholly owned by a foreign investor and entities jointly owned by a foreign investor and a Saudi national. The CEFI has yet to publish any guidelines or procedural and operational restrictions. The scope of both the screening and transactions subject to foreign investment examination are wide and include any direct and indirect involvement in any entities, whether wholly foreign-owned or jointly established with a Saudi national, including any mergers, acquisitions and joint ventures.

iv Voluntary screening

The CEFI's main objective is to monitor strategic areas of foreign investment and identify activities that may affect national security or public order. Therefore, foreign investments within certain sectors will be subject to assessment and potential restrictions. Article 3 of the Foreign Investment Law authorises the Saudi Economic and Development Affairs Council to list prohibited foreign investment activities; however, following its creation, the CEFI has imposed additional obligations in relation to prohibited activities by identifying industries sensitive to national security, publishing procedures and regulations for screening foreign investments, and creating a list of sanctioned entities. Therefore, the CEFI has the authority to exclude or limit foreign investment in the event that it determines that the investment will affect the local public policy in Saudi Arabia.

v Procedures

In accordance with Article 2 of the Foreign Investment Law, the overseeing authority must act on the investment application within 30 days of the submission of all documents required by the regulations. In the event that the authority rejects the application within the prescribed period, the foreign investor shall have the right to appeal the decision. Furthermore, Article 12 of the Foreign Investment Law stipulates that investors who are in violation of the Foreign Investment Law or its implementing regulations may be subject to the following penalties: (1) the withholding of all or some of the incentives given to foreign investors; (2) the imposition of a fine not exceeding 500,000 Saudi riyals; and (3) revocation of the investor's foreign investment licence. The foreign investor may appeal a penalty resolution before the Board of Grievances in Saudi Arabia.

vi Prohibition and mitigation

Generally, MISA does not disclose to the public details of any prohibited or rejected applications of foreign investors. However, because of the acceleration of foreign investment activities within Saudi Arabia, overseeing authorities are imposing stringent requirements for foreign investment standards. Depending on the sector of investment, most prohibitions relate to violations of the applicable regulations within Saudi Arabia, ensuring that the investor is reputable, in compliance with shariah laws, has sufficient solvency and has not previously failed to meet any financial obligations towards creditors, as well as being in compliance with anti-money laundering and counterterrorism financing policies and regulations.

Sector-specific requirements

i Prohibited sectors

MISA updated its latest Negative List in 2022, which stipulates the sectors prohibited for foreign investors and outlines the specific activities and licences. The Negative List further specifies the activities restricted in the industrial sector, which include oil drilling, production and exploration, except those incidental services relating to the mining sector. The service sector restrictions are wider and include real estate investment in Makkah or Madinah, tourist orientation and guidance services relating to Hajj and Umrah, recruitment and employment services, including local recruitment offices, commission agents, security and detective services, catering to military sectors and fisheries.

ii Restricted sectors

In addition to prohibiting investment in certain sectors, MISA has restricted certain licences with minimum capital or Saudi participation. The restrictions vary depending on the regulated activity and the corresponding MISA investment licence. For example, 100 per cent foreign-owned trading MISA licences require a minimum capital of 30 million riyals, while the capital requirement for a mixed (Saudi and foreign) trading MISA licence is lower, at 26.6 million Saudi riyals, with a foreign capital shareholding of not less than 20 million Saudi riyals; therefore, the minimum Saudi participation percentage is 25 per cent. Additional licences restricted by both capital and Saudi participation include property financing and public transportation. The restrictions on property financing include minimum capital of 200 million Saudi riyals and 40 per cent minimum Saudi participation.

Furthermore, various governmental agencies regulate and have jurisdiction over the different activity-specific operational licences needed, such that operations and requirements are supervised by the relevant ministry or authority. These government agencies and the corresponding sectors include the Saudi Central Bank, which is responsible for the financial services sector and the insurance sector in Saudi Arabia, the Saudi Food and Drug Authority, which regulates pharmaceuticals and medical equipment and products, and the Communications and Information Technology Commission, which oversees the information and communications technology sector in Saudi Arabia.

Typical transactional structures

i Corporate legal residency requirements

In Saudi Arabia, joint-stock companies (JSCs) are managed by a board of directors, and limited liability companies (LLCs) are managed by a minimum of one manager or, alternatively, a board of managers. Appointed managers may be either Saudi nationals or non-Saudi nationals; however, non-Saudi managers are required to obtain a residency permit to carry out daily management activities and to register with the relevant government bodies and deal with, and be the signatory for, the bank account. Notably, foreign companies may appoint a board of managers with a mix of Saudi and non-Saudi nationals. A Saudi governmental relations officer must also be appointed by the foreign company and registered with governmental bodies in the event that all the appointed managers are non-Saudi.

ii Takeover bids

The rules pertaining to takeover bids in Saudi Arabia include, but are not limited to, several factors: (1) tax considerations; (2) foreign investment restrictions; (3) merger control; (4) intellectual property rights; and (5) employment considerations.

The foreign investor and the target company should also appoint an accredited independent financial adviser, along with an independent legal adviser, to obtain proper advice on the potential takeover. Generally, the buyer will carry out a due diligence assessment of the target company by obtaining documents relating to material contracts, financial matters, litigation, tax, intellectual property and data protection compliance. In this way, the bidder will conduct a due diligence assessment of the target's compliance with the above-mentioned commercial aspects of the target's business.

iii Asset and share purchasesShare purchase

Once the outcomes of the legal and financial due diligence reports are satisfactory to the acquiring entity, the contracting parties need to undergo negotiations to execute a share purchase agreement (SPA) to govern the sale and purchase of shares. The SPA is the conclusive agreement in the sale of targeted assets and shares. Such an agreement stipulates the terms of the transaction, identifying the respective parties' obligations, rights and liabilities (if any), and creates a contractual protection from any undisclosed risk or liability of any party.

There is no specific mandatory legal form for an SPA in Saudi Arabia. SPAs are generally drafted and structured in a way that includes terms and conditions associated with the following clauses:

  1. identifying the contracting parties;
  2. background information on the acquisition transaction;
  3. definitions;
  4. details of the shares and assets relating to the acquisition;
  5. consideration and price of the assets or shares;
  6. transactions;
  7. the acquisition transaction method and how it will occur;
  8. indemnities, warranties and remedies;
  9. conditions precedent;
  10. confidentiality;
  11. tax provisions;
  12. governing law; and
  13. dispute resolution.

As there is no specific form for drafting the SPA, this is not an exhaustive list of clauses but rather the most common and most important clauses when purchasing shares.

Asset purchase

Asset purchases are distinct from share purchases in that the buyer can be flexible in determining the assets and, to a certain degree, excluding liabilities. Certain considerations must be taken into account when pursuing an asset purchase in Saudi Arabia and, initially, the investor must establish a licensed entity prior to concluding any acquisitions. In the event that the asset subject to purchase (e.g., a factory or plant) is owned by a foreign entity, the investment licence and commercial registration are to be amended to reflect the new owner, along with the articles of association, which must be notarised before a Saudi notary public or the competent authority's representative. Upon amending and updating the incorporation documents, the parties will be required to execute a sale and purchase agreement.

Key differences

A share purchase is less time-consuming to execute and is more common in Saudi Arabia; however, note that when purchasing shares, any liability of the targeted shares is inherited, regardless of whether or not these liabilities have been disclosed. Therefore, a higher level of due diligence is required when purchasing shares or when involved in a sale of shares. Additionally, purchases of shares include certain rights attached to the shares where those rights would normally be guaranteed by buying or having shares in the company. These rights are attached to the shares and cannot be restricted, including the right to attend shareholders' meetings and to vote on company resolutions; the right of first refusal in buying the shares of an existing shareholder; the right to receive dividends, financial statements and managers' reports; the right to appoint or remove board members; and the right to access and review the company records.

iv Joint ventures

Joint ventures can be an attractive method of investment in Saudi Arabia for foreign investors as these are commonly used in all sectors in Saudi Arabia. Equity joint ventures are commonly used as a means to gather resources for large-scale projects, as foreign businesses rely on equity joint ventures with Saudi Arabian parties to acquire local connections and expertise. Furthermore, Saudi Arabia also offers incentives to foreign investors, such as favourable financing conditions for joint ventures involved in manufacturing and industrial projects through the Saudi Industrial Development Fund.

Minority investor protection in Saudi Arabia is currently somewhat primitive in that it lacks proper legislative safeguards for foreign investors. However, protection exists in that a qualified majority is required for certain decisions. For instance, amending the articles of association under an LLC, changing the capital, extending the company's term, liquidating the company or merging the company under a JSC requires approval by 75 per cent of the shareholders. Minority investors seeking to ensure their own protection in a Saudi entity are advised to include specific appropriate provisions such as increasing the statutory minimum to 100 per cent of the shareholders' approval, within the joint venture agreement. Additionally, the new Companies Law promulgated by Royal Decree No. M/132 dated 01/12/1443 H (corresponding to 30/06/2022 G) has introduced protections for minority investors, such as tag-along rights.12 Upon the majority shareholder's transfer of shares to a third party, the minority shareholder may obligate the majority shareholder to include the minority shareholder's shares in the sale of shares for the same value and conditions offered by the third party to the majority shareholder.

There are further restrictions that may impact foreign investors and joint ventures operating in Saudi Arabia, particularly with regard to the application of shariah law and financing, whereby loans, interest rates and conventional financing are not permitted in Saudi Arabia. These can, nevertheless, be somewhat mitigated through proper structuring and operation of the joint venture.

v Other corporate structures for ownership

The main corporate structures in Saudi Arabia include LLCs, JSCs, simplified JSCs and branches of a foreign company, with the main aspects of each form of entity, and advantages and disadvantages associated with each form, provided in detail below.

LLCs

LLCs are the most common type of legal form adopted in Saudi Arabia because of the simple incorporation steps and fees, as an LLC does not have a minimum capital requirement (subject to any minimum capital requirement stipulated by the relevant MISA investment licence). The share capital of a foreign LLC must be fully paid up following incorporation and may be managed by a board of managers, a single general manager or two general managers. It may also be owned by a single shareholder. The main feature of an LLC is that the liability will be limited to the individual shareholder's share in the capital; therefore, shareholders are not held liable for any of the liabilities imposed on the company.

JSCs

JSCs can be either a public JSC (listed) or a closed JSC (unlisted) and are subject to higher supervision by the Ministry of Commerce and the Capital Market Authority. Establishing a JSC entails higher costs, lengthier incorporation periods and stricter compliance requirements. JSCs allow the company to have an authorised share capital and an issued share capital. All JSCs must have a minimum capital of 500,000 Saudi riyals, which must be fully paid within five years of incorporation, with 25 per cent of this to be paid at the time of incorporation. Additionally, JSCs must be managed by a board of directors consisting of at least three members. Furthermore, as with LLCs, the liability of a JSC is also limited to its share ownership.

Simplified JSCs

The new Companies Law introduced a new form of legal entity, the SJSC, as a recognised legal form in Saudi Arabia that offers flexibility to investors by combining the main features of both LLCs and JSCs. Investors (1) may structure the company's management in any desirable method, such as by a single manager, two managers or a board of managers; (2) are not restricted to a minimum capital requirement; (3) may state both an authorised and issued share capital; (4) may issue different classes of shares (being ordinary shares, preferred shares or redeemable shares); (5) may enforce certain restrictions or conditions on the transfer of shares, such as including a 'lock-in' period or imposing conditions under which a shareholder is obligated to transfer their shares; and (6) are protected from liability, as the liability is limited to the shareholders' share ownership in the company.

Branches of foreign companies

Branches of JSCs or LLCs are regarded as extensions of the parent company and do not create a separate legal entity. The parent company is therefore exposed to risks and all liabilities that the branch may be subject to. However, the requirements are more lenient than forming an LLC, as the incorporation process does not require drafting new articles of association, nor does it impose a minimum capital requirement. This form is usually adopted by entities that contract with local companies directly through their overseas business and subsequently establish a branch to perform the same activities in Saudi Arabia, thereby meeting their obligations in accordance with the agreement between the parties.

Other strategic considerations

Mergers

Foreign investors must obtain approval from the General Authority for Competition (GAC) in the event of a takeover (whether through a merger or an acquisition of shares), in accordance with the provisions of the Competition Law. GAC, in accordance with the Competition Law, supervises economic concentration transactions in Saudi Arabia. Economic concentration is when a merger or an acquisition (or both) takes place and ownership is transferred in the course of acquiring the target assets, shares, interests, rights or obligations. GAC assesses the prospective economic concentration prior to any transactions of this kind. GAC must be notified within (at least) the 90 days prior to the closing of an acquisition transaction where that acquisition would result in the acquiring party being in a dominant position (having 40 per cent of the market share in the region is considered a dominant position in the market) or where the total annual sales of all parties involved in the acquisition (up to the level of the ultimate beneficial owners of both parties) exceed 100 million Saudi riyals.

Outlook

In terms of Saudi Vision 2030, the primary goals are to increase sources of income and encourage foreign investors to participate in a range of investment activities throughout Saudi Arabia. This is reflected in the implementation of rules and legislation to ensure that Saudi Arabia's goals are reached while preserving foreign investor rights. The new Investment Law will impose the same approval requirements for both local and foreign investors with respect to business activities and licence and permit requirements. There will be further provisions imposing heavy fines for any violations of the new Investment Law or its implementing regulations. Under the new Investment Law, foreign investors will be free to manage, sell or otherwise dispose of their investment projects, ensuring that foreign investors can expand their operations with ease and eliminating any commercial barriers that were previously in place.

Furthermore, in line with the National Investment Strategy, which aims to boost foreign investment streams to over US$100 billion by 2030, the Saudi Green Initiative was launched to create investment opportunities in the field of sustainability. Foreign investors are also incentivised to establish their RHQs and further utilise the SEZs established in Saudi Arabia to obtain tax incentives aimed at encouraging and attracting international investors to enter the Saudi market.

Investment in Saudi Arabia has increased rapidly over the past few years, and its impact on the economy has prompted local authorities to implement programmes, policies and regulations to further promote business continuity and expansion of small and medium-sized enterprises, in line with Saudi Vision 2030. The competent authorities will continue to implement regulations and policies to ensure that stringent measures are in place to improve foreign investment confidence throughout Saudi Arabia.