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Doing Business in the Kingdom of Saudi Arabia a Tax and Legal Guide

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Doing Business in the Kingdom of Saudi Arabia a Tax and Legal Guide Doing Business in the Kingdom of Saudi Arabia A tax and legal guide www.pwc.com/me Table of Contents Welcome to this guide 3 Overview 3 Incentives for foreign investors 3 Foreign Currency Control 3 Legal and regulatory framework 3 Establishment of business 4 Introduction 4 Commercial Agency arrangements 4 Limited Liability Company (“LLC”) 4 Joint Stock Company (“JSC”) 4 Branches 5 Technical and Scientific Office (“TSSO” or “Rep Office”) 5 Minimum Capital Requirements 5 Registration Procedures for Limited Liability Companies 5 SAGIA New Requirements and incentives 5 Businesses prohibited for foreign investments 6 Incorporation process 6 Opening of the Saudi Stock Market (“Tadawul”) to foreign investors 6 Anti-Fronting Law 7 Key considerations 7 Taxation 8 Tax Overview 8 Tax rates and fiscal years 8 Tax Administration 8 Tax calculation 9 Withholding tax 9 Capital gains tax 9 Transfer pricing 9 Sales Tax/VAT 9 Custom duties 9 Municipal or property tax 10 Stamp taxes 10 Personal income tax 10 Key considerations 10 Audit and accounting 11 Audit requirements 11 Accounting books and records 11 Accounting standards 11 Filing with MOCI 11 Additional legal considerations 11 Human Resources and Employment Law 11 Minimum wage and working hours 11 Wage protection system 12 Immigration and visas 12 Unions 12 Termination of employment 12 Anti-dumping regulations 13 Competition rules 13 Anti-bribery & corruption 13 Trade facilitation 13 KSA key tax indicators 14 PwC services 15 Contacts 16 Foreign Currency Control Welcome to this guide There are virtually no currency exchange restrictions in The Kingdom of Saudi Arabia (“KSA”) is the world’s largest KSA. Payments abroad may be made freely and there oil producer and exporter, and controls the world’s second are no taxes or subsidies on purchases or sales of foreign largest hydrocarbon reserves. It is the only Arab country to currency. Officially, the Saudi Riyal (SAR) is pegged to the be part of the G-20 major economies, The Organization of International Monetary Fund’s Special Drawing Rights. Islamic Cooperation and OPEC. Since 1981, however, the Saudi Arabian Monetary Authority has instead chosen to peg the SAR to the US dollar. In addition to its global standing there are substantial business opportunities stemming from a population with Legal and regulatory framework relatively high income levels. KSA is an absolute monarchy, and has no legally binding This guide is intended to provide an introduction to the written constitution. However, in 1992, the Basic Law of KSA taxation and legal aspects of doing business in KSA, was adopted by royal decree. The Basic Law outlines the particularly from the perspective of the items an inbound responsibilities and processes of the governing institutions investor will have in mind. but is insufficiently specific to be considered a constitution. We hope you find this guide useful. Accordingly, the legal system of KSA is based on Shari’a, Dean Kern Islamic law derived from the Qu’ran and the Sunnah Middle East – Tax and Legal Services Leader (the traditions of the Islamic prophet Muhammad). Its September 2015 interpretation by judges in KSA is influenced by the medieval texts of the Islamic jurisprudence. Uniquely in the Muslim Country introduction world, Shari’a has been adopted by KSA in an uncodified form. This, and the lack of judicial precedent, has resulted in Overview uncertainty in the scope and content of the country’s laws. The government therefore announced its intention to codify • The Kingdom of Saudi Arabia (“KSA”) is the largest Arab Shari’a in 2010, but this is yet to be implemented. Shari’a state and was founded in 1932. has also been supplemented by regulations issued by royal • KSA has a total population of 28.7 million, of which 20 decree covering modern issues such as intellectual property million are KSA nationals and circa 8 million are foreigners. and corporate law. Nevertheless, Shari’a remains the • KSA possesses approximately 20% of the world’s proven primary source of law, especially in areas such as criminal, petroleum reserves. It ranks as the largest exporter of family, commercial and corporate law and the Qu’ran and petroleum and plays a leading role in OPEC. The petroleum the Sunnah are declared to be the country’s constitution. sector accounts for roughly 80% of budget revenues, 45% of GDP and 90% of export earnings. Royal decrees (nizam) are the other main source of law but • The government continues to pursue economic reform, are referred to as regulations rather than laws to indicate diversification and promoting foreign investment, that they are subordinate to the Shari’a. Royal decrees particularly since KSA’s accession to the World Trade supplement Shari’a in areas such as labour, commercial Organization (“WTO”) in December 2005. and corporate law. Additionally, other forms of regulations • The currency of KSA is the Saudi Arabian Riyal (SAR). (lai’hah) include Royal Orders, Council of Ministers Resolutions, Ministerial Resolutions and, Ministerial Arabic is the first language in KSA, with English widely Circulars, and are similarly subordinate to Shari’a. Any spoken and used in business. Any correspondence with the Western commercial laws or institutions are adapted and Government bodies, however, should be in Arabic e.g. business interpreted from the standpoint of Shari’a law. agreements and contracts. Additionally, traditional tribal law and custom remain Incentives for foreign investors significant. For example, judges will enforce tribal customs pertaining to marriage and divorce. In order to ease the procedures for foreign entities setting up in KSA, the Government established the Saudi Arabian General Investment Authority (“SAGIA”). SAGIA was established to assist foreign investors in the approval process for operating in KSA, obtain a licence and labour visas and conduct other business affairs under one umbrella. SAGIA offers a number of incentives in order to attract investors to the country among them are: • 100% foreign ownership of property and companies in certain industries • Lower minimum capital requirements • No restriction on repatriation of capital • The ability for foreign investors to sponsor foreign employees • Tax incentives if the company is registered in certain “economic cities” located in the less developed provinces of KSA. Doing Business in KSA – a tax and legal guide 3 Establishment of business Further, the Saudi individuals and companies are not allowed to work as commercial agents unless they are Introduction registered in the registry designed for this purpose at Ministry of Commerce and Industry (MOCI) and they The formation and operation of entities is regulated by the should apply for the registration during the first three Companies Law which was issued under a Royal Decree in months as from the date of implementation of the 1965, as amended in 1967, 1982 and 1985 by subsequent agreement. Any agency contract should generally follow Royal Decrees. the standard format approved by the MOCI, however this is not mandatory. To establish any type of entity structure, foreign investors are required to obtain an Investment License from SAGIA Limited Liability Company (“LLC”) under the Foreign Investment Regulations. For certain forms of business, foreign investors may need to obtain a An LLC, also referred to as a “Saudi Limited Liability pre-approval from the concerned Ministry before receiving Company” is a private entity formed of two or more the SAGIA license. partners (shareholders) who are liable for company debts to the extent of their contributed capital. A maximum of In general, KSA Companies Law generally allows for eight 50 partners are allowed in such a company. The capital forms of business entity structures which are as follows: of a limited liability company shall not be less than • General Partnerships SAR500,000. The capital shall be divided into shares of • Limited partnerships equal value, which may not be represented by negotiable • Joint Ventures warrants. • Corporations • Partnerships Limited by Shares SAGIA may increase the minimum capital requirement • Limited Liability Partnerships (LLCs) from foreign investors depending on the industry • Variable Capital Companies they intend to engage in KSA (e.g. SAR 1 million for • Cooperative Companies (Joint Stock Company) manufacturing business, SAR 20 million for Trading business). Foreign investors can operate in KSA through the following structures: Depending on the industry, foreign investors can wholly own this type of company and may have one or more • Commercial agencies managers (directors) with no requirement for any to be a • Limited liability companies KSA national. For example, foreign investors can wholly • Joint stock companies own a services company, however, foreign ownership in a • Foreign office branch Trading company would be limited to 75% of shares. • Technical and scientific offices (Representative Offices) Shareholders’ agreements are permitted and enforceable The most common forms for the foreign investors are the only if the terms are in compliance with Shari’a and limited liability companies (LLC) and foreign office branch Companies Law. There must also be a supervisory board of while other forms are less common. Foreign investors may at least three members if the company has more than 20 also operate through representative offices and agencies. shareholders. Share transfers should be approved by SAGIA and MOCI and must be offered to the other partners before The ability for foreign investors to undertake business third parties. activities in KSA are limited in the absence of a formal presence in KSA. More importantly, in the absence of a Joint Stock Company (“JSC”) formal presence, such activities may potentially be in violation of the so-called “Anti-Fronting” Law, unless local A joint stock company is owned by five or more individuals agents or distributors are appointed. or entities. Capital is apportioned into negotiable shares of an equal amount, and shareholders are liable only to the Commercial Agency arrangements extent of the value of their holdings.
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