The New Saudi Arabia Professional Companies Law

Saudi Arabia has enacted a new Professional Companies Law (PCL) that will have a direct effect on professional partnerships existing in the Saudi Arabian market including those providing engineering consultancy, legal and accounting services to name a few as well as the new entrants in the market.

A Royal Decree was issued on 25th September 2019 approving the issuance of the new Professional Companies Law and the Saudi Ministry of Commerce and Investment issued the implementing Regulations of this new law on 26th March 2020 (together “The New Professional Companies Law”) that marks a welcome development in the professional services field.

The New Professional Companies Law has now entered into force and is in effect in the Kingdom of Saudi Arabia.

The New Professional Companies Law (PCL 2020) represents a sea change of its predecessor which was issued 29 years ago in 1991 in how professionals will be able to constitute their businesses. The PCL 2020 markedly addresses some of the fundamental limitations of the old law many of which are resolved in the new PCL.

The PCL defines a Professional Company as

• “a civil company that operates independently, which is incorporated by an individual (or more) who are licensed to legally carry out one (or more) profession, or with others, for the purpose of practising professions.”

The concept of Profession in Saudi Law, therefore, lies in business activities which require a professional license granted by a legally recognized regulatory body. This will include legal, audit, engineering, accounting and any other activities of identical nature.

Under the old law, professional companies could only be formed via one single vehicle of incorporation, being a general partnership with unlimited liability for their partners. Under the new PCL 2020, the vehicles of incorporation have been expanded and professional companies in the Kingdom of Saudi Arabia can now be formed as

• General Partnerships as in the old law
• Limited Partnerships
• Joint Stock Companies (including single shareholder Joint Stock Companies)
• Limited Liability Companies ( including single shareholder Joint Stock Companies)

The flexibility of choosing a vehicle under PCL 2020 for the intended professional company is a welcome improvement and will help the investors who would prefer to incorporate their businesses in a form other than General Partnerships.

The ability to form a professional company as a single shareholder limited liability company or single shareholder joint-stock company should provide investors who wish to have absolute control that flexibility and autonomy.

Another major development under PCL 2020 is the permissibility of professional companies to undertake more than one distinct profession as one professional company engaged in engineering consulting may also provide accounting services.

This new development under PCL 2020 may make inroads for strategic consortiums across different disciplines which was not a choice under the old law.

The new PCL 2020 also allows for a natural person who is not a licensed professional or a juristic person to be a partner or shareholder in the professional company incorporated as a limited liability company or a joint-stock company. The new law thus essentially permits unlicensed parties to potentially bring strategic benefits such as business knowledge, capital and liquidity to the professional company and possess its ownership.

Under this new law, however, the unlicensed parties can’t own more than 30 per cent of professional company’s capital and this threshold of 30 per cent can only be increased by the Minister of Commerce.

The new as well as the old professional companies law refers to the MOC, Ministry of Commerce as the sole regulator of professional companies.

The new PCL 2020 can be seen as a new dawn for professional companies existing in the Saudi Arabian market and desiring to restructure their holdings as well as the prospective entrants who don’t currently have a presence in the Kingdom and are looking for a professional company formation in Saudi Arabia.