23 September 2012
The World Bank recently ranked the Kingdom of Saudi Arabia 12th among 183 countries on the ease of doing business. This reflects the huge efforts that the kingdom has made in recent years to improve its business environment and develop some of the most liberal foreign investment laws in the region. Nevertheless, private equity investors have voiced concerns about how these laws are applied in practice.
Unlike in other Gulf Cooperation Council countries, there is no general limit on the amount of foreign investment that can be made in a Saudi company and the establishment of 100% foreign-owned companies is permitted. The only exceptions are strategically significant sectors such as defence, oil exploration and media.
When licensed under the investment laws, a foreign-owned entity enjoys all the privileges and incentives offered to wholly Saudi-owned companies, including the right to own freehold property in connection with its licensed activity. KSA has also entered into numerous international treaties granting relief from double taxation and offering guarantees as to repatriation of profits and compensation in case of expropriation.
But beyond the black letter law, the reality is more complicated. All foreign companies that wish to set up in KSA are required to obtain a foreign capital investment license from the Saudi Arabian General Investment Authority, or SAGIA. SAGIA is obliged to respond to an application within 30 days after issuance of a receipt acknowledging that the application is in the prescribed form. If SAGIA does not do so, the application is deemed to be accepted.
In reality, however, SAGIA has considerable discretion in deciding whether or not an application is in order. It is not uncommon for SAGIA to request documents and information in support of the application over and above what is required by the SAGIA application form and the investment laws generally. If further information or documents are required by SAGIA, they must be provided within 60 days of the request, otherwise the application lapses.
Ever since SAGIA announced the appointment of Abdullatif bin Ahmed Al-Othman as its new governor in May 2012, there has been intense speculation that this would lead to a shake-up of the rules on licensing foreign-owned companies in KSA, especially for small and medium-sized businesses. The speculation was so intense that the ministry of foreign affairs felt compelled to issue a formal statement in June 2012 confirming that there had been no change in the kingdom's foreign investment laws or SAGIA regulations and reaffirming the international treaties to which KSA is a party.
Whilst the public pronouncements have laid to rest some fears, there are lingering concerns that it is becoming progressively more difficult for foreign-owned companies to obtain a business license in KSA, especially where the business is a start-up. This would be unfortunate as SMEs, especially those backed by private equity and venture capital, have the potential to transform the Saudi economy and create much-needed private sector jobs.
Sandeep Dhama joined SJ Berwin's Middle East office as a senior associate in 2012 and has been practicing in the UAE for over two years. He has also practiced in London and Singapore and specializes in M&A, joint ventures and private equity; with expertise in capital markets and restructuring.
Majed Almarshad is an associate with SJ Berwin (MENA) and is qualified to practice law in Saudi Arabia. He specializes in Saudi Arabian laws and advising international firms develop their businesses into the Saudi market.
The article was part of Zawya's Private Equity Monthly Insight, September 2012 issue.
Zawya 2012
The World Bank recently ranked the Kingdom of Saudi Arabia 12th among 183 countries on the ease of doing business. This reflects the huge efforts that the kingdom has made in recent years to improve its business environment and develop some of the most liberal foreign investment laws in the region. Nevertheless, private equity investors have voiced concerns about how these laws are applied in practice.
Unlike in other Gulf Cooperation Council countries, there is no general limit on the amount of foreign investment that can be made in a Saudi company and the establishment of 100% foreign-owned companies is permitted. The only exceptions are strategically significant sectors such as defence, oil exploration and media.
When licensed under the investment laws, a foreign-owned entity enjoys all the privileges and incentives offered to wholly Saudi-owned companies, including the right to own freehold property in connection with its licensed activity. KSA has also entered into numerous international treaties granting relief from double taxation and offering guarantees as to repatriation of profits and compensation in case of expropriation.
But beyond the black letter law, the reality is more complicated. All foreign companies that wish to set up in KSA are required to obtain a foreign capital investment license from the Saudi Arabian General Investment Authority, or SAGIA. SAGIA is obliged to respond to an application within 30 days after issuance of a receipt acknowledging that the application is in the prescribed form. If SAGIA does not do so, the application is deemed to be accepted.
In reality, however, SAGIA has considerable discretion in deciding whether or not an application is in order. It is not uncommon for SAGIA to request documents and information in support of the application over and above what is required by the SAGIA application form and the investment laws generally. If further information or documents are required by SAGIA, they must be provided within 60 days of the request, otherwise the application lapses.
Ever since SAGIA announced the appointment of Abdullatif bin Ahmed Al-Othman as its new governor in May 2012, there has been intense speculation that this would lead to a shake-up of the rules on licensing foreign-owned companies in KSA, especially for small and medium-sized businesses. The speculation was so intense that the ministry of foreign affairs felt compelled to issue a formal statement in June 2012 confirming that there had been no change in the kingdom's foreign investment laws or SAGIA regulations and reaffirming the international treaties to which KSA is a party.
Whilst the public pronouncements have laid to rest some fears, there are lingering concerns that it is becoming progressively more difficult for foreign-owned companies to obtain a business license in KSA, especially where the business is a start-up. This would be unfortunate as SMEs, especially those backed by private equity and venture capital, have the potential to transform the Saudi economy and create much-needed private sector jobs.
Sandeep Dhama joined SJ Berwin's Middle East office as a senior associate in 2012 and has been practicing in the UAE for over two years. He has also practiced in London and Singapore and specializes in M&A, joint ventures and private equity; with expertise in capital markets and restructuring.
Majed Almarshad is an associate with SJ Berwin (MENA) and is qualified to practice law in Saudi Arabia. He specializes in Saudi Arabian laws and advising international firms develop their businesses into the Saudi market.
The article was part of Zawya's Private Equity Monthly Insight, September 2012 issue.
Zawya 2012
