Joint Ventures/Licensing in Saudi Arabia

A Hot Tip about Law and Compliance in Saudi Arabia

Posted on: 6 May 2010

Under the Foreign Investment Act, a foreign investor may either set up his/her own project or do so in association with a local investor. If the latter option is chosen, foreign investors may structure their enterprise as a limited liability company, which is the most commonly used approach. By law, the minimum capital of an LLC with foreign participation is SR 500,000. The required amount is increased to SR 1,000,000 for industrial projects and SR 25,000,000 for agricultural projects. The Board of Directors of SAGIA may reduce the minimum invested capital requirement in projects established in specified areas, in export projects or those which require considerable technical experience. Limited liability companies must have at least two, but not more than fifty shareholders. The Ministry of Commerce and Industry must approve formation of all joint ventures.

 

Most foreign companies prefer to establish a limited liability company (LLC) because it is simple to incorporate and manage. Limited liability companies can be owned 100% by foreign investors or have a mixed ownership. Licenses should be obtained from the Saudi Arabian General Investment Authority (SAGIA). Foreign companies may qualify for a favorable tax treatment or other economic incentives from the Saudi Government, especially if Saudi investors join in the newly formed company’s capital.

 

According to Article 52 of the Company Law, the establishment of a joint stock company generally requires an authorization from the Minister of Commerce and Industry after reviewing a proposed company’s “feasibility” study. The law requires the authorization through a Royal Decree based on the approval of the Council of Ministers for the formation of any joint stock companies with concessions, undertaking public sector projects, receiving assistance from the State, in which the State or other public institutions participate, or for joint stock companies engaging in a banking business. In general, the provisions applicable to the administration of joint stock companies are more detailed than those applicable to limited liability companies.

 

The Investors Service Center (ISC) at the Saudi Arabian General Investment Authority (SAGIA) oversees all matters related to foreign investor licensing and registration process. The ISC is intended as a one-stop shop that will assist foreign investors and minimize lengthy procedures. Another very significant change in the Foreign Investment Act is the reduction in the corporate tax rate for foreign companies with profits in excess of $26,000 a year. It lowers the maximum rate from 45 to 20% and allows companies to carry forward corporate losses for an unspecified number of years.

 

Depending on the nature of the foreign investment, the Saudi Arabian Standards Organization (SASO) may be involved. SASO is the Saudi authority for establishing product standards for imports and locally manufactured goods. The Communications and Information Technology Commission (CITC) also has authority on imported telecommunications and IT products and services. Recently, the CITC has taken a more proactive role and has published a number of specifications relating to various products and services within its jurisdiction.

 

The Saudi Industrial Development Fund (SIDF) may be engaged to provide up to 50% financing for approved industrial projects, and payback period could be up to 15 years. Market intelligence also is available through the SIDF for prospective investors.

 

Other Saudi Arabian Government entities that may be involved in the process include the Ministry of Foreign Affairs (visas), the Ministry of Interior (residence permits and industrial safety and security approvals), the Royal Commission for Jubail and Yanbu (if the project is in those industrial cities), the General Organization for Social Insurance (social insurance and disability payments for Saudi employees), and the General Organization for Technical Education and Vocational Training (training programs for Saudis).

 

 

 

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Posted: 06 May 2010

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