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Highlights of New Company Law in KSA

Introduction

On 9th November, 2015 the council of ministers of Kingdom of Saudi Arabia approved much awaited new Company Law with dual objective of modernizing the company law framework and resolve ambiguities in existing framework in the kingdom. New law also strives to promote foreign investment and encourage small and medium scale enterprises by establishing simpler and flexible entry regulations. This law came into force with effect from 2nd May, 2016 and shall annul all the provisions of previous company law. Provisions of this new law are much in line with the Kingdom’s National Transformation Plan 2020 and the Saudi Vision 2030 to facilitate the kingdom to diversify its economy and reduce its dependence on energy and oil sector. Following are the major amendments made by New Company Law.

Widened Scope for Capital Market Authority

New law authorizes the Capital Market Authority for monitoring and regulating the operations of Joint Stock companies and to participate with the Ministry of Commerce and Industry (MoCI) in preparing the rules for implementation of new law. While MoCI still remains the primary authority, scope of capital market authority is also broadened.

Relaxed and Simpler Regulations

  • New law allows single person to form a Limited Liability Company (LLC). Earlier at least two persons are required to form an LLC. However, law prohibits single shareholder of one LLC from being sole shareholder in more than LLC.
  • Minimum shareholder for forming a Joint Stock Company (JSC) is now 2 while earlier the requirement was 5.
  • Minimum capital requirements for companies have also been reduced but these are subject to additional capital requirements under Foreign Investment Law, wherever applicable.
  • Minimum total statutory reserve is reduced to 30% from 50%. This is a welcome move as it will provide more liquidity to companies.
  • If the losses of company reach 50% of its capital and the shareholders failed to take any action within the stipulated time, the company will be deemed dissolved and shareholders cannot be held personally liable on failure to convene a meeting.
  • New confidentiality clause will be imposed on shareholders in respect of information about the company available to shareholders.
  • Change of articles of association will not be required for registering transfer of shares under new law and now the transfers can be registered only by recording them in a register specially made for this purpose.


Protection of Investor’s Interest

To protect the interest of investor and shareholders, new law imposes stringent provisions to be followed by management of the company. Some of the major provisions are:

  • Right to nominate board member will be directly associated with the percentage of shares held.
  • Board will be required to establish an audit committee which is mandatorily required to be independent to board of directors.
  • Modernization of provisions to convene general meetings.
  • Chairman and members of board are not allowed to hold executive positions in the company.


The Transformation

Companies formed under new law will consequently comply with this law and the existing companies in Saudi will now have to tighten their shoes to comply with the provisions of new law. Article 224 provides existing companies a period of twelve months to comply with the provisions of new law. However, it is advisable to transform into new law at the earliest, because the penalties will be levied from the effective date of new law.

Bottom Line

The government of KSA is taking effective steps to strengthen the economy and changes in foreign investment regulations and simpler and flexible entry provision will definitely attract investors. Stringent corporate governance norms will again boost confidence of investors. Now the management have to understand the requirements under new law take effective steps to comply with the provisions of new law at the earliest to save companies from paying unnecessary penalties.

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NEW MEASURES FOR BUSINESSES AND INVESTMENT IN BAHRAIN

Introduction

Bahrain is currently implementing changes in relation to its company’s law framework. Last year have been a year of series of new laws and amendments to existing laws with an objective to promote business activities and to attract investors coming to the region for doing or expanding their business. Various new bodies have been formed to monitor and facilitate registration and licensing requirements. This articles aims to highlight some of the major steps adopted for the same.

Establishment of Business Licensing Integrated System (‘BLIS’)

BLIS was established by Ministry of Industry and Commerce (‘MoIC’) few years ago with the objective to simplify the registration process of business, streamline licensing requirements, and ensure full transparency of procedures and to facilitate coordination amongst relevant organizations. Now this project is successfully implemented and contributing to online procedures for registration of business in Bahrain and obtaining licenses. This is saving crucial time and finance of investors and attracting people to explore business opportunities in Bahrain. The government of Bahrain has also lifted many major restrictions on foreign investments to promote international investors to come to the country for expanding their business.

The Commercial Register Law 2015 (‘CR Law’)  

The CR Law implemented last year applies to almost all organizations propose to carry or already carrying out commercial activities in Bahrain including the branches of foreign companies and the companies governed by Commercial company Law of Bahrain. This law provides that carrying out any commercial activity in Bahrain without obtaining a license and getting registered with appropriate is now a criminal offence. Without prejudice to any severer penalty set out in any other law, an offender have to face imprisonment of up to five years and or a fine of between BHD 1,000 to 5,000. In addition to this, the CR Law also provides investigative powers to the MoIC to conduct administrative investigations of any violation of the law upon any serious complaint or notification.

The CR Law sets out the procedure for dealing with violators and authorizes competent authorities to impose penalties or close down the company upon receiving an order from the court to safeguard the interest of stakeholders and ensure transparency.

Commercial Companies Law

Commercial Company law of Bahrain has also been amended last year to support corporate reforms in the nation and to bring it in line with current requirements and address existing ambiguities. Major amendment bought by the new law are as follows:

Liability of Shareholders and Directors

Article 18 states that directors, shareholders, promoters and management of companies can be held liable for the entire capital of company for any damages affecting the company or any of its partners, shareholders, directors and third parties in situations prescribed under the law.

The new Law also phenomenally extends the application of Code for Corporate Governance to all types of companies as opposite to previous law where it was applicable to listed companies only. This stringent corporate norms indicates that the government is in no mood to give leverage to persons who use corporate veil to fraudulently monetize the transaction for personal gains and bring Bahrain commercial laws in line with international practices.

Revised Capital Requirements

Minimum capital requirements for companies have also been reduced depending about the nature and size of company to promote medium and small scale business in the country.

Relaxed provisions for Public Companies

The requirement to have all Bahraini national in Public companies is now been waived off and Public companies can now use foreign capital and expertise subject to the laws applicable.

Article 234 which provides for three year restriction on closed joint stock companies from being able to convert and trade its shares publically is revised and now shares of such companies can be traded after payment of full value of shares. It is a welcome move and offers liquidity to investors and shareholders.

Introduction of Shelf Companies

New concept of Shelf companies is introduced. It is a company that can be registered without listing any activity under its functions. Such company may be sold afterwards, however the activity must be approved by the competent authority before sale. Life of a shelf company will be one year and all the licenses and approvals should be taken in this period only.

Foreign Ownership Restrictions

Bahrain has generally been liberal for foreign ownership requirements and allows for corporate vehicles undertaking certain activities to be wholly owned by foreign entities and/ or individuals.

Article 345 goes a little further and states activities which can be previously allowed only to Bahraini nationals or companies majorly owned by Bahraini national can now be undertaken without the requirement of majority Bahraini shareholding. It authorize the Council of Ministers to determine the activities which can be carried out by companies with foreign ownership by way of a resolution.

In a recent announcement, government have clarified that it is allowing 100 percent ownership in administrative services, manufacturing, residency and real estate, health and social work, information and communications etc. These changes are expected to be effective in near future.

Conclusion 

The new measures adopted in Bahrain to reform the business and investment environment are welcomed by business owners and investors as they phenomenally simplify registration and incorporation procedures, promote foreign investment and streamline the procedures. The government is taking effective steps to strengthen the economy and changes in foreign investment regulations and simpler and flexible entry provision will definitely attract investors from around the globe and will give a boost the economy. Successful implementation of these measures shall start giving sweeter fruits to Bahrain in coming decades.

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The New Saudi Companies Law: What You Need to Know

The new Saudi Companies Law came into effect on 2nd May 2016 (“the Effective Date”).

Implementing Regulations clarifying the operation and effect of a number of the provisions of the new law have recently been through a consultation phase and are due to be issued in the coming months.

The renamed Ministry of Commerce and Investment (“MoCI”) and the Saudi Arabian General Investment Authority (“SAGIA”) are having to get to grips with the significant changes under the new law affecting how entities in Saudi Arabia are formed and regulated, against a background where Saudi Arabia is seeking to encourage more foreign investment in line with the National Transformation Plan 2020 and the Saudi Vision 2030, which are Saudi Arabia’s roadmap to diversify its economy and address the challenges brought by low global energy prices. 

As with many new pieces of legislation it may take a while for the regulators and others to understand fully the new law and for it to be fully implemented in practice.

This article highlights some key issues relating to the implementation of the new law, signposts some new and impending regulations that Saudi, GCC and foreign investors need to be aware of and some of the steps that existing companies and managers now need to be considering.

The New Law

The important changes in the new law from the position under the old Saudi Companies Law are listed in the tables below.

Interim Period

Article 224 of the new law gives existing companies 12 months from the Effective Date to bring their affairs into compliance with the new law. However, this does not mean that existing entities do not have to comply with the new law until the end of the 12 months because penalties can be applied from the Effective Date. MoCI and the Capital Markets Authority (“CMA”) can also determine certain provisions of the new law which are effective during this interim period.

Template Constitutional Documents

MoCI has recently published template articles of association (“AoA”) and bylaws for the different forms of entity including LLCs and joint stock companies (“JSCs”). 

Whilst it is not mandatory for a company to have constitutional documents in this format, it is likely to be easier, certainly for any companies formed after the publication of these templates, to obtain MoCI approval using constitutional documents based on this format and they should also be considered when existing companies are considering changes to their constitutional documents.

The new template AoA for LLCs reflect , for example, the following changes under the new law:

  • Financial statements to be prepared within 3 months of year end and filed within a further 1 month (previously 4 months and 2 months);
  • Suspension of set aside of statutory reserve when it reaches 30% of capital (previously 50%);
  • Changes to statutory pre-emption process including added flexibility on valuation;
  • New procedures and effects where losses reach 50% of capital.

JSCs-MoCI and Capital Markets Authority Statements

In April and May 2016 MoCI and the CMA issued two joint statements dealing with the implementation of the new law in relation to JSCs (and holding companies) and specifying certain provisions of the new law that must be implemented immediately and others which fall within the 12 month grace period. 

Examples of provisions to be complied with are:

  • Article 90 – regulating shareholders meetings;
  • Article 95 – cumulative voting for board elections and certain situations where directors are prohibited from voting.

Examples of provisions where an extension can be granted are:

  • Article 68.1 – the number of directors;
  • Article 76 – directors’ remuneration;
  • Article 81.1 – the functions of the Chairman, Deputy Chairman and Managing Director;
  • Articles 101 – 104-certain provisions relating to Audit Committees;
  • Article 150 – dealing with losses of JSCs (although listed companies have to make a monthly announcement of their plans and actions to comply if losses incurred equal or exceed 50% of capital in the interim period);
  • Articles 182 – 186-dealing with holding companies.

However the MoCI/CMA statements make clear that any new action intended by a JSC must comply with the new law eg on appointing a new director Article 68.1 must be complied with.

Accordingly as well as bringing their procedures and affairs into line with the new law, all existing Saudi companies will need to review their existing constitutional documents and consider the changes required to be consistent with the New Law.

Foreign Investment

The Saudi Arabian General Investment Authority (“SAGIA”) announced in 2015 that international companies were being encouraged to establish 100% foreign owned trading companies. Shortly after the announcement of the Saudi Vision 2030, the Saudi Council of Ministers approved rules to implement this change in June 2016. Initial indications suggest that only very large international companies (who amongst other things will employ significant numbers of Saudi nationals) will qualify for 100% foreign ownership

On implementation of the new law, SAGIA has yet to clarify if, when and on what basis it will license foreign owned holding companies and foreign owned single shareholder LLCs.

These clarifications are likely to have a significant impact on foreign investors structuring their investments in Saudi Arabia. 

New Implementing Regulations

The draft implementing regulations (“Implementing Regulations”) for the new law have also been through a consultation phase which was completed in May 2016. The final version is expected in the next few months.

The draft Implementing Regulations cover areas such as:

  • Use of technology at JSC meetings;
  • Buy-back of JSC shares;
  • Pledge of JSC shares;
  • Preference shares

Corporate Governance

In April 2016 MoCI and the CMA issued a draft of proposed new Corporate Governance Regulations (“the CG Regulations”) which again have just been through a consultation phase. The CG Regulations will apply to both Saudi listed companies and on a best practice voluntary basis to closed JSCs (favoured by many Saudi Family owned groups). Once approved the CG Regulations will replace the existing CMA Corporate Governance regulations which apply to Saudi listed companies. Saudi family-owned groups will want to consider the CG Regulations and to adopt some or all of their provisions to reflect best practice, which as well as for family governance purposes may also be important in dealings with third parties.

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THE IMPACT OF BREXIT ON VAT

In the referendum held on 23 June 2016, the United Kingdom voted in favour of exiting the European Union. Although the two-year exit process is yet to commence, consideration should be given to the tax implications that may arise, especially with regard to customs, excise and value added taxes.

Transactions between the United Kingdom (UK) and the countries of the European Union (EU) are currently considered to be intra-community transactions, with an obligation to pay VAT (through a reverse charge mechanism) on assets sent and received. This allows for the free movement of goods, and the situation is similar for the provision of services.

After Brexit (a two-year process that is, at the time of publishing, yet to commence), the sale and purchase of assets between Italy (or other EU member countries) and the UK may no longer be considered intra-community transactions. Instead, assets shipped from Italy to the UK would be classed as export supplies, while incoming goods from the UK would be classed as imports. 

With regard to the provision of generic services pursuant to Article 7-ter of Presidential Decree 633/72, formal requirements would change. Services provided should therefore be identified as “not subject to” transactions. With regard to services received, the Italian taxable entity would be required to apply the reverse charge mechanism, issuing a self-billing invoice. Completion of the invoice received from the British service provider would no longer be necessary. In addition, it would no longer be obligatory to declare the transactions on the Intrastat summary lists pursuant to Article 50, paragraph 6 of Law Decree 331/1993.

Another consequence of a completed Brexit would be the loss of the simplifications that are currently applied among the EU member states. Entities established in the UK would therefore be able to identify themselves as non-resident entities for VAT purposes in Italy only through the appointment of a tax representative in accordance with Article 17, paragraph 2 of Presidential Decree 633/72 and no longer through the identifying procedure set out in Article 35-ter of Presidential Decree 633/72.

It is likely that a similar situation would arise when a taxable Italian entity intends to operate in the UK. It should be noted that, in the future, a British entity that purchases assets in Italy and subsequently resells them to another Italian taxable entity, not creating any domestic tax position, would need to go through a process to recover the VAT paid on the purchase. This process will be much more cumbersome than that which is currently in place for member states.

Some repercussions are also foreseen in e-commerce where, in the case of direct e-commerce, the British operator must necessarily appoint a tax representative in one of the member states. Another consequence would be the loss of the right of Italian economic entities to request a refund for taxes paid in the UK (the non-resident tax refund in accordance with Article 38-bis of Presidential Decree 633/72).

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Belgium: Parliament Approves Belgian Transfer Pricing Documentation Requirements

On June 29, 2016, the Belgian Parliament adopted the ‘programme law’ (introduced on June 2, 2016) that contains the introduction into Belgian tax law specific transfer pricing documentation requirements (published in the Belgian Official Gazette of July 4, 2016). These requirements are based on Action 13 of the Organisation for Economic Co-operation and Development (OECD)/ G20 Base Erosion and Profit Shifting (BEPS) project. Only minor adjustments with no effect on the technical content of the draft programme law were made.

The relevant articles of the programme law introduce a three-tier documentation approach as provided under BEPS Action 13: Master file, local file, and country-by-country reporting (CbCR). According to the newly adopted documentation requirements, Belgian entities of a multinational group that exceed one of the following criteria need to submit to the tax authorities a master file and a local file (the detailed form that is part of the local file only when at least one of the business units of the entity has realised intra-group cross-border transactions of more than one million euros [EUR]):

  • operational and financial revenue of at least EUR 50 million, excluding non-recurring revenue
  • balance sheet total of EUR 1 billion, or
  • annual average number of employees of 100 full-time equivalents.

Belgian ultimate parent entities of a multinational group with a gross consolidated group revenue of at least EUR 750 million should file a CbCR. Under certain conditions, the Belgian entity that is not the ultimate parent entity of the multinational group may be required to file the CbCR directly with the Belgian tax authorities.

The master file and CbCR should be filed no later than 12 months after the last day of the reporting period concerned of the multinational group. The local file, however, should be filed with the tax return concerned.

The programme law also introduces specific transfer pricing documentation penalties, ranging from EUR 1,250 to 25,000.

Currently, the Royal Decrees covering the implementation measures of the newly adopted documentation requirements are being drafted. It is expected that these implementation measures will be finalised by the end of September or early October 2016.

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Asian Expats Affirm Ties With Dubai

DUBAI // Community leaders, businessmen and diplomats from five countries in the Association of South-East Asian Nations region met in Dubai on 21.08.2016.

The meeting was part of plans for further cooperation before the group’s 50-year celebrations next year.

The gathering of expatriates from the Philippines, Malaysia, Singapore, Indonesia and Thailand was the first in Dubai for consuls, industry leaders and citizens of Asean countries.

“This is our first public diplomacy programme and we need interaction as a prerequisite to build our community,” said Yubazlan Yusof, the consul general of Malaysia.

“If Asean wants to succeed, we must make sure to link people together, such as the civil society and the NGOs.”

Last year, Asean countries established the Asean Economic Community.

The group seeks to create a globally competitive single market, with a free flow of goods, services, labour, investments and capital across the 10 member states.

The region has a collective population of 622 million.

Filipinos make up the biggest group of Asean expatriates in the UAE, with more than 700,000.

Presently, there are about 1 million people from the Asean region who work and live in this country.

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Abu Dhabi Free Zone Signs MoU With Paris Financial Market Agency

The Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) on July 5, 2016, signed a Memorandum of Understanding (MoU) with Paris EUROPLACE, the organization in charge of developing and promoting the financial marketplace in Paris.

The MoU is intended to enable closer collaboration on possible joint financial activities and common interests that support growth and development in the financial sectors of France and Abu Dhabi.

The MOU will allow Paris EUROPLACE and the FSRA provides a framework for the exchange of information on banking, financial services, securities legislation, and regulations in each market, the ADGM said.

As part of the MOU, the ADGM and Paris EUROPLACE will explore mutually beneficial projects and discussions to facilitate long term investment opportunities, infrastructure financing, and new innovations in the areas of financial technology (fintech) and green finance.

The ADGM offers firms a number of benefits, including exemption from taxes guaranteed for 50 years, and relaxed rules on the repatriation of profits. The zone permits 100 percent foreign ownership.

For more details reach us at [email protected]

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Middle East & Africa set to see growth of 3.4%

DUBAI: The International Monetary Fund on 19.07.2016 raised its 2016 growth forecast for the Middle East and North Africa after a rebound in oil prices, but maintained its cautious outlook for Saudi Arabia.

The region, along with Afghanistan and Pakistan, is set to see economic growth of 3.4 percent this year, better than a previous projection of 3.1 percent, the IMF said.

At the same time it cut the growth forecast for 2017 to 3.3 percent, down from 3.5 percent in April, citing fallouts from “terrorism” and geopolitical tensions in its World Economic Outlook Update.

The region includes major oil exporters like the Gulf Arab states, Iraq, Iran and Algeria, as well as oil importers such as Egypt, Morocco and others.

Following the lifting of international sanctions in January, Iran’s oil exports have reached more than two million barrels per day, close to their pre-sanction levels.

“In the Middle East, oil exporters are benefiting from the recent modest recovery in oil prices while continuing fiscal consolidation in response to structurally lower oil revenues,” the IMF said. “Geopolitical tensions, domestic armed strife, and terrorism are also taking a heavy toll on the outlook in several economies, especially in the Middle East, with further cross-border ramifications,” it said.

The IMF maintained its growth projections for Saudi Arabia, the world’s top crude oil exporter, at 1.2 percent for this year and raised it slightly to 2.0 percent for 2017.

The economies of the Kingdom and its oil-exporting peers in the Gulf Cooperation Council (GCC) states have been hit hard by the slide in oil prices which began more than two years ago. They have lost hundreds of billions of dollars in revenues, prompting them to take austerity measures and resort to borrowing to plug the huge budget deficits.

The IMF has praised the reform measures while insisting that more needs to be done.

In a report last month, the IMF said the value of oil and natural gas exports in the GCC states and Algeria was projected to fall by almost $450 billion this year compared with 2014.

For more details reach us at [email protected]

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Saudi Arabia: Study identifies key elements for Vision 2030’s positive success

RIYADH: A researcher has defined three key elements in the differences and similarities between the policies of the positive representation the United States has adopted during its renaissance in over 50 years of progress, and the Saudi Vision 2030 launched by Deputy Crown Prince Mohammed bin Salman, noting that the assets of the Kingdom at the historical and cultural levels that qualify the country to realize the objectives of this vision in a similar way to the effects of the correctional policies followed by the US.

The researcher, Dr. Fadel Al-Omari, said in a recent study he conducted on the policies of positive representation, he defined three key elements to apply such policy here in the Kingdom, with some similarities and differences due to the nature of the institutions and the regulations in the country.

The US differs from the Kingdom in that America intended to compensate minorities that suffered de jure discrimination and exclusion resulting in inadequate qualifications and this is accepted in the United States. While in the Kingdom there is Islamic Shariah law that protects all groups in society in a just way.

In present times, the US differs from the Kingdom in seeking to prevent discrimination against individuals, especially minorities, and therefore enacted policies to amend state law and policies in dealing with some categories. While in the Kingdom such legislation already exists.

The similarities between the US and the Kingdom present in the diverse nature of society at the level of the race, color, sex, belief and other forms of diversity, and the need to protect this diversity.

This diverse nature is not confined only to the two countries, but it is the characteristic of most developed large nations and countries worldwide. And although the mechanisms to realize this diversity is different, it is an acceptable goal in Saudi society as it is in the United States.

For more details reach us at [email protected]

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Singapore: Tax Treaty updates

Update India-Singapore treaty

The 2005 Protocol to the India-Singapore treaty (the ‘2005 Protocol’) provides for exemption of Indian tax on gains from the alienation of shares in an Indian company by Singapore residents, subject to certain conditions being met. However, this exemption is contingent upon the availability of similar benefit to a tax resident of Mauritius under the India-Mauritius treaty.

The government of India issued a press release on May 10, 2016, announcing that India and Mauritius had signed a protocol amending the India-Mauritius treaty. This protocol will give India the right to tax capital gains on the alienation of shares in an Indian company, subject to certain grandfathering provisions during the transition period from April 1, 2017 to April 1, 2019.

Given the amendment to the India-Mauritius treaty, there is uncertainty over the capital gains tax treatment under the 2005 Protocol.

Other treaty updates

Ecuador – A new tax treaty with Ecuador was ratified and entered into force on December 18, 2015.

Luxembourg – A revised treaty with Luxembourg was ratified and entered into force on December 28, 2015, which replaces the existing agreement. However, the tax sparing relief provisions of the 1993 treaty will continue to apply for five years from the date the new treaty takes effect.

Rwanda – A new treaty with Rwanda entered into force on February 15, 2016.

San Marino – A new treaty with San Marino was ratified and entered into force on December 18, 2015.

Seychelles – A new treaty with Seychelles was ratified and entered into force on December 18, 2015.

Thailand – A revised treaty with Thailand entered into force on February 15, 2016.

United Arab Emirates – The Second Protocol amending Singapore’s standing tax treaty with the United Arab Emirates entered into force on March 16, 2016. The revised terms in the Second Protocol include longer threshold periods to ascertain the presence of a permanent establishment (PE) and lower withholding tax (WHT) rates for dividends and interest income.

For more details reach us at [email protected]

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