Introduction
In order to diversify the national economy and integrate it with the global economy, Saudi Arabia is undertaking comprehensive structural reforms to attract foreign capital under the Saudi Vision 2030 program. Accordingly, in addition to enhancing tax advantages and incentive programs, the legislation on commercial law is getting aligned with international liberal policies and trade practices.
In this article series titled "Investment in Saudi Arabia", we will be sharing our legal expertise and insight on investment opportunities in Saudi Arabia in light of current and future legal framework, public policies on foreign investment, and the structuring of global companies' Saudi operations.
Our first article hereby provides explanations on company incorporation processes in Saudi Arabia.
1. Company Types in Saudi Arabia Law
Pursuant to the Companies Law which came in effect in 19.01.2023 ("Companies Law"), five different types of companies may be incorporated under Saudi law, namely (i) general partnership (collective company), (ii) limited partnership (commandite company), (iii) limited liability company, (iv) joint-stock company and (v) simplified joint-stock company.
The commonly preferred types of companies are limited liability company, joint-stock company and simplified joint-stock company, as the liability is limited to the contributed capital in these structures.
1.1. Limited Liability Company ("LLC")
LLCs are capital companies that are not subject to minimum capital requirements, without prejudice to sector-based requirements. LLCs are managed by a board of managers consisting of one or more persons.
The capital structure of LLCs consists of fully paid shares with equal nominal value. Furthermore, it is not possible to divide shares into groups and issue preferred shares.
Pursuant to the Companies Law, LLC shareholders have right of first refusal, and the articles of incorporation may also provide for drag-along rights, which allow the majority shareholder to sell the shares of other shareholders while selling their shares, and tag-along rights, which allow the minority shareholder to sell their shares under the same conditions as the majority shareholder sell their shares.
1.2. Joint-stock Company ("JsC")
JsCs are capital companies whose shares are principally freely tradable and are managed by a board of directors consisting of at least three persons. –
Unlike LLCs, JsCs can form their capital structure with shares of different nominal values or with preferred shares. In addition, capital subscription is allowed and except for the 25% that must be paid at the time of issuance, share amounts can be paid within 5 years from the date of issuance. The minimum capital amount for JSCs is 500.000 Saudi riyals, without prejudice to sector-specific requirements.
Drag-along and tag-along rights can be set out in the articles of association of JsCs. In addition, other share transfer restrictions may also be specified in the articles of association, provided that they do not permanently prevent the circulation of shares.
1.3. Simplified Joint-stock Company ("SJsC")
SJsCs, a new type of company introduced by the Companies Law, are subject to the general provisions governing JSCs, but have certain flexibilities in their corporate structure.
Unlike JsCs, SJsCs are not subject to a minimum capital requirement, but they may issue shares with different nominal values and create preferred shares. In addition, the administrative structure of SJsCs may be structured to consist of only one manager, as in LLCs.
SJsCs also differ from JSCs in terms of share transfer restrictions. Provided that it is regulated in the articles of association, it may be stipulated that the shares cannot be transferred for 10 years from the date of issue, and it is also possible to require the approval of the company or shareholders for the share transfer. Accordingly, it is possible to restrict the circulation of SJsC shares more broadly compared to JsCs.
2. Company Incorporation Process in Saudi Arabia
Until 2000, foreign investment opportunities in Saudi Arabia were confined to foreign minority shareholding in a limited number of industrial projects, focused on technology transfer. Foreign participation in the service or trade sectors was not possible and the vast majority of the national economy was dominated by state-owned enterprises.
Since the enactment of the Foreign Investment Law in 10.04.2000, gradual reforms have brought a new framework that allows for the involvement of foreign investors in a wide range of business activities.
While the investment ecosystem in Saudi Arabia is currently much more open to foreign natural and legal person investors than in the past, foreign investments can be carried out under a permit-based system administered by the Ministry of Investment.
Accordingly, the processes regarding the company incorporation by foreign investors in Saudi Arabia are carried out before multiple institutions, particularly the Ministry of Investment.
- Obtaining the investment license: Prior to the incorporation of companies with foreign shareholders, an investment license must be obtained by applying to the Ministry of Investment. Investment licenses are subject to various conditions for each activity to be carried out by the company. Accordingly, the minimum capital amounts and similar criteria required for each license vary. It should be noted that in the event that it is planned to participate in an existing Saudi Arabia-based company instead of incorporating a company, the obligation to obtain an investment license stands.
- Approval and publication of the articles of association: Upon obtaining the investment license, the articles of association of the company to be incorporated are submitted to the trade registry for approval. The approved articles of association is published.
- Issuance of the commercial registration certificate: Following the approval and announcement of the articles of association, the persons in the management of the company are appointed and the registration certificate is issued accordingly. With the issuance of the registration certificate, the company is incorporated and acquires its legal personality.
- Completion of post-incorporation procedures: Following the completion of the incorporation process, certain procedures such as obtainment of permits for the workplace, completion of tax registration, initiation of social security processes for personnel and bank account opening are also required for the company to start operations. In addition, depending on the field of activity of the company, other permits and licenses may needed to be obtained from different regulatory and supervisory authorities.
Conclusion
In line with its long-term economic programs, Saudi Arabia offers a broad spectrum of foreign investment opportunities with steadily developing investment fields and structural reforms that facilitate entry into the national market.
Accordingly, the legal framework, which enables foreign direct investment processes subject to the authorization of the Ministry of Investment to be structured to meet the demands of public institutions as well as the operational needs of the investor, continues to be renewed in line with the diversification of the national economy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
