Doing Business In Saudi Arabia
Saudi Arabia, officially known as the Kingdom of Saudi Arabia, is the largest Arab State in Western Asia. It is bordered by Jordan and Iraq on the north, Kuwait, Qatar, Bahrain and the United Arab Emirates on the east, Oman and Yemen on the south. With a total area of 2,149,690 sq. km accounting for 80 per cent of the Arabian Peninsula, the Kingdom of Saudi Arabia (KSA) is the largest Arab state in Western Asia, with a, population of 30 million in 2014. The country has a very youthful demographic profile with a median age of 26 years.The official language is Arabic while English language is getting more popular through media. 97% of the population is Muslim. Saudi Arabia geography is mostly dominated by the Arabian Desert with almost no rivers or lakes and has very little fertile land.
The growth story of the KSA economy began in the early 1970s with the initiation of its five-year plans that, over the years, have provided the country with a highly developed infrastructure, free public education and health care facilities, and extensive social service program. For most of the last five decades, the KSA economy has been heavily dependent on oil prices. The world’s largest producer and exporter of oil, petroleum is an integral part of its economy, accounting for 80 per cent of budget revenues, 45 per cent of gross domestic product (GDP), and 90 per cent of export earnings. KSA is focusing on diversification of its economy to produce and export a wider variety of industrial goods and evolve into a regional and global economic powerhouse.
Saudi Arabia is the largest Arab state by land area and the second-largest in the Arab World. It is recognized as a powerhouse of the Middle East. Currently it’s poised to become one among the world’s top 10 most competitive nations and with that, one of the most profitable markets for strategic investment.
100% foreign investment is allowed in the service sector. However, trading and retail activities are reserved for Saudi Nationals and Saudi-owned entities only.
Services: Not specified; but recommended to maintain$0.13m
Industrial: SAR 1m ($0.27m)
Trading: SAR 20m ($5.33m)
Agriculture: SAR 25m ($6.67m)
Real estate: SAR 30m ($8m)
SAGIA may prescribe additional requirements.
After submission of requisite documents with SAGIA business set up process can be completed within 15-18 weeks.
- Service Company Taxed @20%
- Saudi Owned Local Companies Taxed @2%
The KSA has introduced its new foreign investment regulation act in 2000. The Government of the KSA also established the Saudi Arabian General Investment Authority (SAGIA) in 2000 to attract, encourage, and provide license for investment in the country to the both local and the foreign participants.Initially only nationals are privileged to do business in the KSA. With the formation of the SAGIA, foreign investors are getting permission to invest in the country as well.
- A completely filled up license application for with the applicant’s signature. The form should be include an authenticated declaration that the applicant has reviewed the Foreign Investment Regulation act 2000 and its Implementing Rules.
- An authenticated resolution of the applicant’s board of directors to incorporate a Limited Liability Company in the KSA.
- A copy of certificate of incorporation and articles of association of the applicant’s company.
- An authenticated copy of the last two or threeyears’ balance sheet of the applicant.
- A copy of passport of the proposed manager of the company with four passport-size photographs of the said person.
- Copies of passports of all the people mentioned in the articles of association of the applicant company.
After getting approval of the draft articles of association from the Ministry of Commerce and Industry, the shareholders or their authorized representatives have to submit Articles of Association before a notary public.
- A letter from the Ministry of Commerce and Industry Directorate of Companies which should be addressed to the notary public, authorizing the notarization of the articles of association.
- Original articles of association, which should be approved by the Ministry of Commerce and Industry – Directorate of Companies. The approved articles of association should be signed by the shareholders or their representatives.
- A copy of the certificate of incorporation and articles of association of each shareholder.
- A copy of investment license of the SAGIA.
- Identification cards of the at least two witnesses.
Thereafter, the summary of the articles of association is required to be published in the Official Gazette. After going through the above-mentioned procedures, a bank account in any bank in the KSA should be opened by the shareholders or their authorized representatives. They have to deposit their company’s capital to that bank account. The last and the final step would be to acquire the Commercial Registration (CR) Certificate.
- An authenticated board resolution mentioningthe names of the board members.
- Two copies of the articles of association approved from the notary public.
- Confirmation certificate for payment of the capital from the bank.
- A copy of investment license issued by SAGIA.
- A copy of document of office lease.
In recent years, the KSA has been actively focusing on attracting investment, both local and foreign, to enable sustained economic development of the nation. The primary objectives of attracting investment include:
- Diversification of sources of income within the KSA
- Export promotion
- Increased indigenization
- Development of human resources
- Increasing competitiveness of the KSA’s products and services locally and globally.
- Promotion of environment-friendly economic development
- Encouragement of uniform development of all the regions within the KSA
The SAGIA is an institution, which takes care of the investment of the KSA including foreign investment.
- Submission of electronic investment license application
- Copies of commercial registration and the enterprise’s Memorandum of Association in its country, duly attested by the competent authorities and the Consulate of the KSA
- Copy of trade name reservation issued by the Ministry of Commerce and Industry
- Draft Memorandum of Association of a limited liability company
- Draft Memorandum of Association and Articles of Association of the joint-stock company
- Shareholders’ decision to invest in the KSA, indicating their names, share capital, equity of each shareholder, address of head office, type of activity, appointment of the General Manager, and his powers, duly attested by the competent authorities and consulate
- Copy of General Manger’s passport
- Copy of the national ID and Family Register, if one of the partners is a Saudi citizen, and copy of CR certificate to show the profession or a relevant offprint from the Civil Status Department
- A detailed action plan accurately identifying the project’s capability to achieve investment objectives including:
– contribution to increasing the Kingdom’s income
– jobs to be provided to citizens
– how the project is going to contribute to fostering competition
– enhancing services
– diversifying options for consumers
– the strategic impact of the project on investment in the Kingdom
– benefits to the city and the surrounding areas where the project will be stationed
– an employment and training plan including an estimation of the number of employees and
percentage of Saudis in each department and administrative level
– personnel training and qualifying programs
– Number of branches to be opened
– An estimation of start-up cost and required financing
- A balance sheet for enterprises applying for license from outside the KSA, covering a period of three years at least and reflecting the solid financial position of the enterprise, duly certified by a recognized public accountant and authenticated by the body concerned with the trade and tax activity in the applicant’s country, and legalized by the Saudi Consulate.
- A proof of the financial capability to invest commensurately with the project’s share capital and equity of each shareholder, in line with the action plan submitted for the project.
- Any other documents, data or informationthat may be required by the SAGIA.
- Approval by the relevant government agency of the specialized activities, for which licenses can be issued but exercising the business will not be allowed until such approval is obtained. This restriction to the license should indicate the name of the governmental body whose approval is required.
There is no personal income tax on income earned by individual and employees. However, there are three type of taxes levied on the Companies based on the shareholding structures:
1. Corporate Tax:on all registered entities including companies or branch having foreign ownership.
2. Withholding Tax: on entities making payment to non-residents, such as for rent, loyalties and management fees
Zakat, a religious levy, is charged on the company’s Zakat base at 2%. Saudi citizen investors (and citizens of the GCC countries, who are considered to be Saudi citizens for Saudi tax purposes) are liable for Zakat. Where a company is owned by both Saudi and non-Saudi interests, the portion of taxable income attributable to the non-Saudi interest is subject to Corporate tax, and the Saudi share goes into the basis on which Zakat is assessed.
Corporate Tax Rate for unlisted Company is 20%
Basis for Corporate Taxation:
- Tax is on the net adjusted profits
- The share of profits attributable to interests owned by non-Saudi / non-GCC nationals is subject to income tax.
- The share of profits attributable to interests owned by Saudi / GCC nationals is subject to Zakat (religious levy).
- Rent at 5%
- Royalty or proceeds at 15%
- Management Fees at 20%
- Payments for airline tickets, air or maritime freight at 5%
- Payments for international telecommunications services at 5%
Import duty and taxes are due when importing goods into Saudi Arabia by a commercial entity on the total shipping value. The valuation method is CIF (Cost, Insurance and Freight), which means that the import duty and taxes payable are calculated on the complete shipping value, which includes the cost of the imported goods, the cost of freight, and the cost of insurance.
Duty rates in Saudi Arabia on industrial products like pumps and compressor is 5 %. There is no minimum threshold in Saudi Arabia; therefore duty is always levied on imports regardless of their value.
5% VAT is applicable in Saudi Arabia
The King of Saudi Arabia maintains control of its traditional judicial system without any separation of powers. Saudi Arabia’s legal system is founded on Sharia, which is Islamic law that stems from the Quran and Sunnah, or Muhammad’s traditions.
In 2010, Sharia was put into codes and regulations to cover modern issues such as intellectual property and corporate law. In 1932, King Abdul Aziz fostered the court system. The system is comprised of general and summary Sharia courts along with administrators to regulate and enforce the criminal procedure code, which was set up in 2001. Although the court system maintains codes, little progress has been made to restructure the judicial system.
The main Saudi Arabian statute governing employer-employee relationships is the Labour Regulation, which entered into force on 26th April 2006 superseding the earlier Labour and Workmen Regulation.
Since 18th June 2011, the Ministry of Labour has begun to implement a new program known as Nitaqat. The concept is that, based on the percentage of Saudi Arabian employees, businesses are classified as Excellent, Green, Yellow or Red, and that the employer will receive privileges or be subject to sanctions connected with the employment of foreign staff depending on the category it falls into.
A workers’ compensation plan exists under the direction of the General Organization for Health and Social Security (GOSI). For both Saudi employees and expatriate employees, employers must contribute an amount equal to 2% of their salary towards a workers’ compensation and disability plan administered by GOSI. Contributions on behalf of Saudi employees equal 18% of an employee’s wages, with the employer contributing 9% and the employee contributing 9%.
While there is no government health plan, medical and hospital care is free for Saudi citizens. For all non-Saudi employees, and for Saudi employees who want to be covered, health benefits are required to be provided by the employer depending on the number of employees in a particular geographic area.
The Regulation sets out provisions concerning end-of-service awards, to which most employees are entitled in principle unless they are dismissed for cause. Pursuant to Article 84, when a fixed term employment agreement comes to an end, or when an employer terminates an indefinite term agreement other than for cause, the employee is entitled to one-half of one month’s wages for each of the first five years of employment and a full month’s wages for each year of employment thereafter, in both cases pro-rated for part of a year’s service. An employee who resigns during the term of a contract receives no end-of-service award for the first two years of employment. There are further detailed rules concerning the end-of-service award payable to an employee who resigns in the course of a contract for periods exceeding two years.
IMC is a cross border advisory firm focusing on the AMEA (Asia, Middle East and Africa) markets. We specialize in corporate advisory services, global mobility services, private client and family advisory, international tax, corporate finance, mergers and acquisitions, investment advisory and business support and outsourcing solutions. IMC has been operating in GCC for over 10 years. With a partnership in Saudi Arabia, IMC is closer to the customer with a better understanding of the Saudi Arabia Company Laws and Practices.