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NAVIGATING THE LEGAL ARENA WHEN DOING BUSINESS IN SAUDI ARABIA

GRAHAME NELSON, Head of Riyadh Office

February 2015

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14 Offices

8 Countries

49 Partners

305 Lawyers

570 Staff

45 Nationalities

The largest law firm in the Middle East

OVERVIEW OF THE FIRM

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Lawyers with local

and international

experience

25 Years

in the Middle East

Full service

capability

Practice local law

in all jurisdictions

We are a regional

law firm operating

to international

standards

We have a

reputation for

excellence and

regional experience

We find creative

and commercial

legal solutions

whilst focusing on

making the law

work for our clients

We have

experienced

international lawyers

from common law

backgrounds coupled

with local lawyers

OUR UNIQUE OFFERING

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PUBLICATIONS

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WHY DO BUSINESS IN SAUDI ARABIA?

Saudi Arabia has a globally important economy and is far and away the biggest

economy in the Middle East.

The Saudi economy is oil based and revenue from oil dominates export earnings

and government revenue. Saudi Arabia is the world's largest oil exporter.

With a view to encouraging foreign investment in Saudi Arabia, Saudi Arabia

joined the World Trade Organisation (WTO) in 2005. Amongst other things this

committed Saudi Arabia to liberalisation of its economy and the creation of a

more transparent investment and trading system in accordance with WTO

requirements.

Over recent years the government has introduced a number of measures aimed

at reducing the country's reliance on oil revenue, including limited deregulation,

the encouragement of foreign investment and privatisation in selected areas of

the economy.

Saudi Arabia provides both regulatory and financial incentives to foreign

investors.

http://en.wikipedia.org/wiki/List_of_countries_by_oil_exports









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• What about the falling oil price?

– The government’s recently issued budget is aimed at continuing its huge

social infrastructure investment programmes.

– Improving education, healthcare infrastructure and transportation are key

government priorities.

WHY DO BUSINESS IN SAUDI ARABIA? (CONTINUED)

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• Shari’ah

– Saudi Arabia is an Islamic state and the Shari’ah is the foundation of all laws.

– The Shari’ah is a collection of principles derived from different sources, but

principally the Holy Qu’ran and the Sunnah, the witnessed says and actions of

the Prophet Muhammed (Peace be Upon Him).

• Judiciary

– The independence of the Judiciary is a principle enshrined in the Basic Law of

Saudi Arabia and the Law of the Judiciary.

• The Saudi Court System

– The Law of the Judiciary provides for appeals from first instance courts to lie to

courts of appeal (known as courts of cassation) and from there to the Supreme

Judicial Council which is the highest judicial authority.

– In 2007 H.H. King Abdullah issued royal decrees with the aim of reforming the

court system. Some of the changes foreshadowed by the reforms have already

been implemented.

– Once the reforms have been fully implemented will be organised hierarchically

and expressed diagrammatically as follows.

THE LEGAL SYSTEM

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A number of committees exist for the resolution of disputes in specialist areas.

− The most important of them include:

• The Banking Dispute Resolution Committee.

• The Labour Dispute Resolution Committee.

• The Securities Dispute Resolution Committee.

• The Insurance Dispute Resolution Committee.

THE LEGAL SYSTEM (CONTINUED)

General Courts

Supreme Court

Appellate Courts

Courts of First Instance

Criminal Courts Family Courts Commercial

Courts Labour Courts

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• Contracts are fully enforceable

– The formation and enforceability of contracts is governed by and relies

upon Shari’ah principles. The Shari’ah rules relating to contracts are not

codified.

– The binding force of contracts is asserted by jurists of all schools of

Islamic jurisprudence. Shari’ah law recognises the maxim “the contract is the law of the parties”.

– Under Shari’ah, contracts which are not expressly prohibited by the Holy

Qur’an or the Sunnah are permitted as binding and valid. In practice, the

parties are generally free to agree their commercial bargain except and to

the extent that it is inimical to Shari’ah principles.

– a Saudi court has considerable discretion to apply the basic Shari’ah precepts to a particular set of circumstances. Saudi courts generally

regard themselves as competent, consistent with general Shari'ah

principles, to determine each particular case before them as it considers

is necessary to achieve a fair result in all the circumstances of that case.

THE LEGAL SYSTEM (CONTINUED)

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WHAT DOES A FOREIGN BUSINESS NEED TO DO TO EXPORT TO SAUDI ARABIA?

• The Business Visit

– Exporting to Saudi Arabia often entails visits to the country.

– Visas are required by all visitors except nationals of GCC States and

must be obtained prior to travelling.

– There is an online application process as specified by the Saudi

Embassy in the applicant’s country of residence.

– The maximum permitted stay under a business visit visa is 1 month.

– The visa application process can give rise to unexpected problems and

untimely delays, particularly as a result of changes to the approval

system. So the application should not be left to the last minute!

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• Approvals for the Import of goods into Saudi Arabia

– The approval requirements for the import of goods into Saudi Arabia are

extensive and vary according to the nature of the goods.

– In order to obtain customs clearance, all imported goods must have a

“Conformity Certificate for the Goods Exported to the Kingdom of Saudi

Arabia”. A conformity certificate must be issued by an accepted

accreditation body authorised by the relevant official agency in the

country of origin.

– The Saudi Standards, Metrology and Quality Organisation (SASO)

formulates national standards for products including labeling, inspection

and testing. The party submitting the conformity certificate must declare

compliance of the goods with SASO’s requirements.

– Imported goods must identify the country of origin on both the shipment

packaging and the product itself.

WHAT DOES A FOREIGN BUSINESS NEED TO DO TO EXPORT TO SAUDI ARABIA? (CONTINUED)

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• Export documentation

– The commercial documents required for all shipments include:

• Commercial Invoice with Arabic translation.

• Certificate of Origin.

• Bill of Lading or Airway bill.

• Steamship or Airline Certificate.

• Insurance certificate (where goods are insured by the exporter).

• Packing List.

– There may also be additional authorisations and requirements applicable

to the particular products.


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• Exporting to Saudi Arabia without having a legal presence in the

country

– Sales to End Users

• The foreign business does not require a legal presence in Saudi

Arabia where goods are being sold to an end user in Saudi Arabia.

– Commercial Agencies

• Nor does a foreign business need a legal presence in Saudi Arabia

where the goods are imported for sale or resale through

distributorship, commercial agency or franchise arrangements, which

are commonly referred to as “commercial agencies”.

• This may be the quickest and cheapest way for a foreign business to

enter the Saudi market.


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– The parties must enter into a written commercial agency agreement and

the agency must be registered with the Commercial Registry of the

Ministry of Commerce and Industry. Failure to register can result in fines

and other penalties.

– Only Saudi nationals or companies organised under Saudi law which are

wholly owned and managed by Saudi nationals can be commercial

agents.

– The commercial agent must guarantee the quality of the products, and

provide necessary maintenance and spare parts to consumers.

– The commercial agent has no statutory right to compensation upon the

non-renewal or termination of its commercial agency.


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HOW DO WE ESTABLISH A BUSINESS PRESENCE IN SAUDI ARABIA?

• Foreign Investment Licences

– The Foreign Investment Law, issued in 2000, is the centrepiece of the

Saudi government’s foreign investment regulatory regime.

– Foreign businesses wishing to establish commercial operations in Saudi

Arabia must obtain a foreign investment licence from the Saudi Arabian

General Investment Authority, commonly referred to as “SAGIA”.

– Serious penalties (which may include criminal penalties as well as heavy

fines) can result if activities are undertaken in contravention of this

requirement under Saudi Arabia’s Anti-Covering Up Law. Breaches will

also put in peril future investment in Saudi Arabia.

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– The General Rules applicable to Licence Applications are published on

SAGIA’s website (www.sagia.gov.sa)

– What level of foreign ownership is allowed?

• Foreign investors may be allowed to own up to 100% of the capital of

the enterprise depending upon the business activity/ However,

certain business activities have prescribed minimum Saudi ownership

requirements.

HOW DO WE ESTABLISH A BUSINESS PRESENCE IN SAUDI ARABIA? (CONTINUED)

Business Activity Maximum Foreign Ownership

Services 100%

Manufacturing 100%

Trading 75%

http://www.sagia.gov.sa/







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– The Negative List

• Some business activities are completely closed to foreign investment.

This is the so-called “Negative List”.

• Business activities included in the Negative List are:

» Oil exploration, drilling and production. Except certain services

related to the mining sector.

» Manufacturing of military equipment, devices and uniforms.

» Manufacturing of explosives for civilians.

» Military catering services.

» Security and detective services.

» Real estate investment in Makkah and Madina.

» Tourist orientation and guidance services related to Hajj and Umrah.

» Recruitment and employment services including local recruitment

offices.


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» Real estate brokerage.

» Printing and publishing (subject to a number of prescribed exceptions).

» Commission agents (this includes distributorships, commercial agencies and franchises)

» Audiovisual and media services.

» Land transportation services, excluding inter-city passenger transport by trains.

» Services provided by midwives, nurses, physical therapy services and paramedics.

» Fisheries.

» Blood banks, poison centres and quarantines.


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• How long will it take to get a Foreign Investment Licence?

– The licence application period will vary according to the type of business enterprise proposed to be established and how quickly it takes for the application to be lodged with the required supporting documents.

– SAGIA has recently introduced a “fast track service” to process applications for foreign investment licences within 5 business days from the date on which SAGIA has received all the required documentation.

– The aim of the fast track service is to facilitate foreign direct investment in targeted sectors of the Saudi economy:

• Information and Communications Technology.

• Downstream Petrochemicals and Mining.

• Industrial Manufacturing.

• Healthcare and Life Sciences.

• Transportation and Infrastructure.

• Human Capital Development.

• Energy and Petrochemicals.


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– The following investors businesses may use the Fast Track Service:

• Multinational companies.

• Companies publically listed in the capital market of their countries or in

international stock exchanges.

• Firms manufacturing products that are internationally classified and employ

certified process technology.

• Small and medium size enterprises which will be operating in the area of

the intellectual property rights registered in their names, or which are

classified as innovative enterprises.

• An international company aiming to setup regional centres in KSA

• A construction company classified as ‘first class’ in its home country, or a

project with a value of not less than SAR500,000,00 has executed of not

less than 2,000 employees and total assets of not less than SAR50 million.

• A company entering into partnership with other companies qualified by a

KSA government agency, or by a state owned entity or an entity in which

the government has a shareholding or with a company listed on the Saudi

Capital Market


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– Applications under the fast track process require less supporting documents .

– Depending on the circumstances one or more types of business structure may

work for the foreign investor. However, ultimately the choice of structure will

depend upon a matrix of commercial considerations. They include whether the

investor wants to go it alone or wants or needs a Saudi partner.

• Limited Liability Company

– A limited liability company (commonly referred to as an “LLC”) is suited to a

broad range of business activities and is the favoured structure of most foreign

businesses. Where a joint venture is entered into with a Saudi partner, the LLC

is invariably the business structure of choice.

– An LLC may be preferred in Government contracts (if 50% Saudi owned), and

can sponsor employees for residency. It may also be able to obtain finance on

favourable terms from the Saudi Industrial Development Fund.

– Its business activities are limited by the objects in its articles of association and

its foreign investment licence.


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– Limited Liability

• The personal liability of shareholders is limited to the shareholder’s

share contribution. However, shareholders may incur personal liability

where the company’s losses amount to 50% or more of its share capital

and the company continues to trade without those losses being

replaced.

– Minimum Capital Requirements

• A decision will be made by SAGIA or the Ministry of Commerce and

Industry about the company’s capital requirement as part of the foreign

investment licence approval process.

• The amount of capital required will depend on the company’s proposed

business activities.


Business Activity Minimum Capital

Services SAR 500,000

Manufacturing SAR 1 million

Trading SAR 26 million

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– Shares

• An LLC can have between 2 and 50 shareholders (a wholly owned

subsidiary would still need 2 shareholders). Only 1 class of shares is

allowed and different voting rights are not permitted.

• Each shareholder must hold at least 5% of the share capital.

• An LLC may not offer its shares to the public.

– Transfers of Shares

• Share transfers are allowed subject to the pre-emptive rights enjoyed

by other shareholders.

– Management

• An LLC may either have one manager or a board of directors. An LLC

with more than 20 shareholders must have a supervisory board to

oversee and advise management. There is no requirement for a

manager to be a Saudi national.


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• The Branch Office

– If the foreign business does not want or need a Saudi partner, many

foreign businesses choose to open a Saudi Arabian branch office. The

advantages of doing so are that a branch is normally the quickest entity

to establish, it can carry on a broad range of activities (as approved by

SAGIA), and usually there is a much lower minimum capital requirement.

– Because the branch is not legally distinct from the foreign business, its

business activities will be limited to those of the foreign business and the

foreign business will be liable for the debts and other liabilities of the

branch. Also, business entities with Saudi ownership are likely to be

preferred for Saudi government contracts.


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• Joint Stock Company

– A joint stock company (JSC) can be either “open” (which means that its

shares are offered to the public) or “closed” (meaning its shares can’t be

offered to the public).

– All companies listed on the Saudi Stock Exchange (the Tadawul) are open

JSCs.

– Also certain types of activities must be carried out by a JSC (either open or

closed), for example banking and finance businesses.

– A JSC has the following features:

• It must have 5 or more shareholders.

• The shareholders are exempt from personal liability on the same basis

as shareholders in an LLC.

• Directors must own shares in the company of not less than a specified

value.


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• Founders shares (i.e. shares owned by the promoters of the company)

cannot be transferred until financial statements for the company have

been published for two complete financial years.

• There will usually be a high minimum capitalisation requirement.

• Higher level of government oversight than an LLC and a branch.

• Temporary Commercial Registration

– The investor can apply for Temporary Commercial Registration (TCR) if the

proposed business activity will be conducted in KSA over a short period of

time because it will be related to the performance of a government contract

and no further business activities are contemplated.

– TCRs are restricted to companies with government contracts. They require

a letter of support from the contracting government agency.

– The principal disadvantage of a TCR is that the licence is limited to the

scope and terms of the particular contract so it cannot undertake general

business activities.


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• Technical and Scientific Office

– A foreign company may establish a Technical Scientific Office (TSO) to

provide technical and scientific services to its Saudi agents, distributors

and consumers. A TSO may not engage in any commercial activities or

earn revenue. Its activities are limited to providing technical information,

market and technical research.

– The registration process is similar to that for a branch. There are no

capitalisation requirements and no requirements for Saudi nationals to be

employed. However, the regulatory authorities may set a cap on the

number of employees.

– TSOs do not enjoy the benefit of investment incentives under the Foreign

Investment Regulations.

– Usually employees of a TSO are sponsored by the foreign company’s

Saudi agent or distributor.


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DISPUTE RESOLUTION

• The Number 1 Consideration for Foreign Investors?

– Dispute resolution would rank as close to the number one legal issue for

the majority of our non-Saudi clients wishing to establish a business

relationship with a Saudi party.

– Most client concerns relate to the pace of the Saudi litigation process, its

costs and especially and the prospects of being able to enforce a

judgment in Saudi Arabia.

– There is no doubt that the Saudi court system can be frustratingly slow,

particularly to clients who may be used to a system where milestones

and dates for achieving those milestones are a strong feature of the

system. Even straightforward legal claims can take upwards of 2 years

to get a judgment in the Saudi courts.

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– However, on the other hand:

• It is my experience that the outcome of the cases we handle tends to

be much as I would expect. In fact I would go as far as to say that

unexpected wins and losses and especially outcomes resulting from

technicalities are not a strong feature of the Saudi Court system.

• If a judgment is obtained, the prospects of the successful party being

paid what it is owed are a lot better than in many countries, principally

because of the sanctions that can be applied by the court to enforce

the judgment.

• It is not apparent that any favour or advantage is enjoyed by Saudi

litigants, including Saudi government entities.

• The legal costs of the litigation process would appear to bear

favourable comparison with the costs borne by litigants many other

jurisdictions. This is because, at least to some degree, legal fees

tend to be fixed in advance.

• It’s also apparent that the pace of the litigation process in many

countries is no quicker than in the Saudi court system.

DISPUTE RESOLUTION (CONTINUED)

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• Arbitration

– Why arbitrate?

• The decision whether it is best to arbitrate or litigate in the courts may

depend upon the circumstances of the particular case.

• Where the dispute is set in an international context, arbitration tends

to be the formal dispute resolution mechanism of choice.

• Arbitration is not permitted where one of the parties is a Saudi

government entity unless permitted by the Council of Ministers.

• The parties to the dispute usually choose the arbitrator or the majority

of them.


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– Saudi Arabia’s Arbitration Law

• Saudi Arabia issued a new Arbitration Law in 2012. This sets out

requirements in relation to the arbitration agreement including the

appointment of arbitrators.

• Arbitration proceedings can proceed in accordance with the rules of

internationally recognised arbitration forums.

• They can also be conducted in a language other than Arabic.

• Once the arbitration award is final, there is only limited scope to

challenge it. Also, the decision to challenge it does not of itself

preclude the enforcement of the award.


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• How does a judgment or arbitration award get enforced in Saudi Arabia?

– Execution Law

• In 2012 a new “Execution Law” was issued. This sets out procedures for the

enforcement of judgments and arbitration awards in Saudi Arabia. This Law

sets out the framework for the enforcement of judgments and arbitration

awards. The Law applies to both domestic and foreign judgments and awards.

• The Execution Law was intended to make the enforcement of judgments a lot

quicker but in practice it can still take a period of several months for a

judgment to be enforced.

– Arab League and GCC State court judgments

• A judgment of a court in a country that is a signatory to the Arab League Treaty

on the Reciprocal Enforcement of Judgments or the Agreement on

Enforcement of Judgments, Delegations and Judicial Summonses in the

States of the GCC for the Arab States will be enforceable in Saudi Arabia

provided the judgment is not inconsistent with Islamic law or the laws and

regulations of Saudi Arabia.


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– Non-Arab State court judgments

• In practice a judgment of a non-Arab state in Saudi Arabia is unlikely to

be enforceable in Saudi Arabia.

– Non-Arab state arbitration awards

• Saudi Arabia is a party to the New York Convention relating to the

recognition and enforcement of foreign arbitral awards.

• As a practical matter, Saudi courts have rarely enforced a non-Arab

State arbitration award. That’s because the party against whom the

award is to be enforced is likely to be able to raise enough issues to

frustrate enforcement, with the Saudi court in the end declining to order

enforcement.

• What’s the best solution?

– There is not “best” solution but:

• Dispute Resolution (Litigation/Arbitration) in Saudi Arabia should not be

ruled out.

• (Perhaps) Arbitration in the Dubai International Finance Centre/Dubai

International Arbitration Centre arbitration forums.


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THE BANKING SECTOR

• The Saudi Arabian Monetary Agency

– The Saudi Arabian Monetary Agency (commonly referred to as “SAMA”)

is the central bank of Saudi Arabia and is the regulator of the banking

sector.

• Licences

– The Ministry of Finance issues licences to start up a banking business.

• Commercial Banks

– Commercial banking operations are undertaken by both Saudi financial

institutions and branches of foreign banks.

– Banks are required to separate their investment and securities business

from their banking business and hold separate licences for asset

management, advisory and securities services.

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• Recent banking industry reforms

– The Saudi Government issued a package of laws in 2012 to reform key

areas of the banking sector.

– Real Estate Mortgage Law

• This Law provides for the registration of mortgages. It also facilitates

a secondary mortgage market by allowing mortgages to be

transferred by the mortgagee and thereby gain access to the capital

markets for refinancing. It is hoped that the Law will pave the way for

the private sector to assume a greater role in housing finance leading

to reduced borrowing costs.

– Real Estate Financing Law

• This Law requires real estate finance companies to be licensed by

SAMA.

THE BANKING SECTOR (CONTINUED)

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– Law on Supervision of Financing Companies

• This Law provides for SAMA to be the regulator of an licence finance

companies operating in Saudi Arabia. Finance companies must be

joint stock companies.

– Finance Lease Law

• This Law provides for the leasing of assets. The lessee has an

obligation to use the leased asset for the agreed purpose and be

responsible for the operational maintenance of the asset.

THE BANKING SECTOR (CONTINUED)

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EMPLOYMENT LAW

• The Labour Law

– The Labour Law which was issued in 2005 is the principal legislation

governing the employer – employee relationship. The Labour Law is

administered by the Ministry of Labour.

– The Labour Law applies to all workers in Saudi Arabia and irrespective of

whether the parties nominate a foreign law as the governing law of the

employment contract.

– Amongst other things the Labour Law outlines terms for terminating

employment, prescribes annual vacation entitlement, establishes a

retirement age, end of service benefits and a minimum age of 14 for

employees.

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EMPLOYMENT LAW (CONTINUED)

• Non-Saudis

– Non-Saudis may work in Saudi Arabia provided the requisite approvals are

obtained:

• The employee must have entered the country on a valid employment visa

issued by the Saudi Embassy in the country for which the employee holds

a passport.

• The employer must obtain a work and residence permit (Iqama) for the

employee within 90 days of the employee’s arrival.

• Employment Contracts

– Employment contracts may be for fixed or unlimited periods.

– Indefinite term contracts terminate at the discretion of either party provided

written notice is given to the other party stating the valid reason for

termination. At least thirty days notice is required for contracts where the

worker is paid monthly or not less than fifteen days notice in any other case.

– Unfair dismissal may result in a number of remedies including reinstatement or

monetary compensation.

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• Probationary Periods

– An employer may request an employee to undergo a probationary period of

no more than ninety days. This probationary period must be stated in the

contract.

– If an employee is working under a probationary period, he may be dismissed

for any reason by his employer either within or at the end of the probationary

period.

• Social and Health Insurance

– The Social Insurance Regulations require employers who have at least one

foreign employee to make monthly contributions to the General Organisation

for Social Insurance (GOSI) on behalf of each employee. These contributions

are calculated as a percentage of the employee’s wage.

– Employers must provide medical insurance that covers the employee and the

employee’s family. This is normally done at the employer’s cost.

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• Public Holidays and Annual Leave

– Paid annual leave can vary but under the Labour Law employees are entitled

to 21 days full wages. This increases to a period of not less than 30 days if

the worker has spent five consecutive years service with the same employer.

Provisions are contained in the Labour Law dealing with parental leave,

religious leave, unpaid leave, educational leave and sick leave.

• End of Service Benefits

– At the end of the labour contract the employee is entitled to receive an end-of-

service award. Generally the amount of the award is calculated as half a

month’s wage for each of the first five years of service and one month’s wage

for each of the following years.

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• Saudisation (Nitaqat)

– Foreign investors setting up in Saudi Arabia should be aware of the

Saudisation policy that requires a minimum number of Saudis to be

employed. This minimum number depends on the type of company and

industry.

– In 2011 the Ministry of Labour introduced the Nitaqat Programme by

which employers are penalised if they fail to achieve the Saudisation

targets which are applicable to them.

– Companies are categorised as falling within one of four categories:

Excellent, Green, Yellow and Red. The classification is based upon the

percentage of Saudisation of the company. Companies in the Excellent

or Green categories have the greatest privileges for visa requests for

foreign workers. Companies in the Yellow and Red categories are subject

to various restrictions in relation to visa applications and work permits.

They are also not able to restrict their employees from moving to a

company in a higher category.

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• Visas

– Foreign workers must initially obtain a work permit visa and then with the

assistance of their employer make application for a residency permit, the

Iqama.

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GOVERNMENT CONTRACTING

Supplies of goods and services to all government agencies and most

government owned companies are regulated by the Government Bids

and Procurement Law, issued in 2006 and its associated Regulations

(Procurement Law).

The more important features of the Procurement Law are summarised

below:

• Tenders

– All government tenders are announced and publicised.

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• Bidders

– Bidders must be appropriately licensed in the particular activity, with a

recognised legal presence in Saudi Arabia.

– Priority is given to bidders with nationally manufactured goods and

services (to be disclosed by the bidder in the bid).

• Bids

– Bids must generally include a preliminary bank guarantee of 1-2% of the

contract value.

– Bids must be valid for 90 days from the date specified for the opening of

bids. If a bidder withdraws a bid during this period, the preliminary bank

guarantee is forfeited.

GOVERNMENT CONTRACTING (CONTINUED)

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• Contract phase with successful bidder

– The prevailing language of all contracts is Arabic. The contract forms are

prepared by Ministry of Finance and can be bilingual, although the Arabic

version prevails.

– Government Authorities must submit contracts with an execution period of more

than one year and a value exceeding SAR 5 million to the Ministry of Finance for

review prior to entering into the contract.

– The period of continuing service contracts may not exceed 5 years without the

approval of the Ministry of Finance.

– The successful bidder must submit a final bank guarantee of 5% of the contract

value, usually within 10 days of being awarded the tender. If it doesn’t, then the

preliminary guarantee is forfeited and negotiations commence with the next

bidder.

– Government Authorities may increase the obligations of a contract within the

scope of the contract by up to 10% of the value or decrease those obligations by

up to 20%.

– Contract payment entitlements, termination, penalties and extensions of contract

are all regulated in the Procurement Law.

GOVERNMENT CONTRACTING (CONTINUED)

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REAL ESTATE

• Who can own land?

– Ownership of land in Saudi Arabia is generally restricted to Saudi citizens, but

this is subject to certain qualifications:

• A GCC company (with shareholders who are all GCC nationals) or an

individual (who is a GCC national):

» may lease or purchase land to use it to conduct any licensed business

activity from the land.

» may own residential properties in KSA, subject to a number of

restrictions and conditions. This concession does not apply to properties

within the vicinity of Mecca and Medina.

• Even the smallest equity interest held by a non-GCC entity will make a

corporate entity “foreign”, triggering the requirement for a foreign investment

licence including conditions stipulating the amount of capital that must be

invested and the timeframe for the investment by the foreign entity.

• A non GCC entity may own Saudi real estate which is required for:

» the conduct of its professional, technical or economic activities;

» private residences for housing employees of a licensed project; or

» residential use by individuals with normal legal residency status.

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REAL ESTATE (CONTINUED)

• New Land Title System

– In an effort to modernise the land transfer and registration process, the

Saudi government has initiated the massive and ambitious task of

identifying all Saudi and (and all property interests in particular parcels of

land) and including that information on a real estate register for each

designated realty area

– The main benefit of the new system is that it will provide an investment

friendly environment with technically accurate land identities to facilitate

property dealings.

• Strata/fractional Ownership

– The System of Ownership of Units, a law issued in 2002, provides for

fractional or “strata” ownership of buildings, that is, buildings which are

subdivided into individual ownership units.

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REAL ESTATE (CONTINUED)

– Off the Plan Sales

• In recent years KSA has taken a number of significant steps to regulate

the sale and marketing of lots off-the-plan through in order to:

» protect the rights of buyers and developers;

» raise the level of transparency;

» discourage property speculation (and prevent real estate bubbles);

» reduce the cost of ownership of real estate units; and

» increase the supply of developed real estate throughout Saudi

Arabia.

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MINING

− Saudi Arabia has extensive deposits of phosphate and bauxite and

commercially viable deposits which include gold, silver, lead, zinc and

copper, iron ore and rare earths. Saudi Arabia also has large deposits of

many of the key minerals used in the construction industry.

− The Ministry of Petroleum and Mineral Resources has an extensive data

base of geological data, maps and reports.

− A new Mining Code was adopted in 2004 to facilitate investment in the

mining sector. There are no mineral royalties.

− Non-exploitation and exploitation licences are available to companies

and individuals.

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MINING (CONTINUED)

− Non-exploitation licences include reconnaissance and material collection

licences, valid for 2 years, and exploration licences, which are valid for 3

years. Exploration areas are limited to 100 square kilometres.

− Exploitation licences include mining and quarry licences, both valid for 30

years. Small mine licences are valid for 20 years and building materials

quarry licences for 5 years.

− Exploration and exploitation licences may be transferred with the

approval of the Ministry of Petroleum and Mineral Resources.

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INTELLECTUAL PROPERTY LAW

• Patents Law

– The Patents Law provides the means by which legal protection can be

obtained for:

• Patentable inventions

• Layout designs of integrated circuits

• Plant varieties

• Industrial designs.

– The Patents Law is administered by King Abdul-Aziz City of Science and

Technology. Its General Directorate of Patents (Directorate) operates as

the “Patent Office” in Saudi Arabia, receives applications and has the

authority to grant patents in the country.

– Applications may be made by both Saudi citizens and foreign persons.

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INTELLECTUAL PROPERTY LAW (CONTINUED)

– The protection periods are:

• Patents: 20 years from the date of filing the application.

• Layout Designs: 10 years from the date of filing the application or 10

years from the start date of its commercial exploitation anywhere in the

world but subject to a maximum protection period of 15 years from the

date of creation of the design.

• Plant patents: 20 years from the date of filing the application but the

protection period for trees is 25 years.

• Industrial designs: 10 years from the date of filing the application.

– Saudi Arabia acceded to the Patents Cooperation Treaty (PCT) in 2013. Any

international application filed on or after that date will automatically include

the designation of Saudi Arabia. In addition, nationals and residents of Saudi

Arabia are entitled to file international applications under the PCT.

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• Trademarks

– The Trademarks Law of 2002 sets out procedures for the registration of

trademarks (including service marks). Applications may be made by both

Saudi nationals and foreign persons.

– The registration process is handled by the Ministry of Commerce and

Industry and the Ministry maintains a register of trademarks which is

available for public inspection.

– The infringement of trademarks may attract heavy fines and criminal

penalties. Claims for compensation may be made by anyone who has

suffered loss as a result of the infringer’s actions. There is also provision

for the owner of the trademark to apply for “precautionary measures” such

as the seizure of goods and papers (including imported items) prior to the

commencement of any civil or criminal lawsuit which infringe the owner’s

rights.

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• Copyright

– The Copyright Law of 2003 protects works created in the fields of literature,

art and science, irrespective of their type, means of expression, importance

or purpose of authorship.

– The Law also protects derivative works such as translations, compilations

and databases.

– The copyright work must be attributed to the author, for example, by

mentioning his name on the work.

– The period of copyright protection is the life of the author and the period of 50

years after his death. A lesser period of 20 years applies to broadcasters

from the date of first transmission.

– The Law prescribes the penalties applicable to infringement, which may

include fines, confiscation of infringing materials, closure of the business

establishment and imprisonment.

– Saudi Arabia is a member of the Universal Copyright Convention and the

Berne Convention for the Protection of Literary and Artistic Works.

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COMPETITION LAW

Saudi Arabia adopted a Competition Law in 2004 and the Law came into effect in

January 2005. The Competition Law and the associated Regulations and

Competition Rules make up Saudi Arabia’s competition law regime and they are

enforced by a Competition Council.

• Who does the Competition Law apply to?

– It applies to all firms, i.e. any corporation or company and business doing

business in Saudi Arabia. A non-Saudi entity can be a firm. The Competition

Law does not apply to public (i.e. government) corporations and fully–owned

state enterprises.

• What does the Competition Law do?

– The broad aim of the Competition Law is to protect and encourage fair

competition and combat monopolistic practices that affect competition. It seeks

to achieve this by:

• Prohibiting agreements and arrangements between firms if their objective

or effect is to restrict commerce or competition.

• Restricting the ability of a firm to acquire a dominant position in the market.

• Making abuses of dominant market position by a firm illegal.

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COMPETITION LAW (CONTINUED)

• What sort of practices and agreements are prohibited?

– Article 4 of the Competition Law says that practices, agreements or contracts among current or potential competing firms, whether the contracts are written or verbal, expressed or implied are prohibited, if the objective of such practices, agreements or contracts or their effect is the restriction of commerce or the violation of competition between firms.

– Any practice, alliance or agreement, explicit or implicit, between competing entities which violate, restrict or prevent competition is prohibited.

– The Competition Council may decide not to apply the prohibitions contained

in Article 4 of the Competition Law to practices and agreements in violation

of the Competition Law which are deemed to improve efficiency and realise

benefits to consumers which outweigh their anti-competitive effect.

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• Dominating Position

– “Domination” may arise through:

• Sales of at least 40% of total sales in the market for a period of 12

months; or

• An entity or group of entities being in a position to influence the

prevailing price in the market.

• Acquiring a Dominating Position

– Firms involved in merger discussions or desiring to acquire assets, shares

etc. which will result in them having a dominating position are required to

notify the Competition Council at least 60 days in advance.

– A similar requirement applies to firms wanting to combine different

managements into one if that will result in a dominant position.

– The Competition Council will review all necessary information before

deciding whether to approve or not allow the proposed merger etc., giving

reasons.

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• Abuse of Dominating Position

– The existence of a dominating position in the Saudi market is not of itself

prohibited. The abuse of that dominating position is.

– “Abuse” of a dominating position requires an act of the kind described in Article

4 of the Competition Law or Article 6 of the Competition Law Regulations.

Broadly speaking those provisions target any practice which restricts

competition between firms, in particular:

• Price control.

• Restricting the free flow of goods and services.

• Barriers to entering and leaving markets

• Forcing out competitors.

• Partitioning markets.

• Customer Discrimination.

• Compelling or agreeing with a client to refrain from dealing with a

competing entity (third line forcing).

• Making the sale of a commodity or offer of service contingent on the

purchase of another commodity or service (first line forcing).

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• Economic Concentration

– The Dominating Position provisions of the Competition Law are

reinforced by other provisions which focus upon the acquisition of

ownership which is referred to in the Regulations as “Economic

Concentration”.

– Economic Concentration happens where an entity acquires a position of

domination of an entity or group of entities through merger, takeover,

acquisition or the combination of managements.

– An entity intending to achieve Economic Concentration in order to

dominate 40% of a commodity’s total supply in the market is required to

make written application to the Competition Council and provide

prescribed information including a report detailing the consequences of

the proposed Economic Concentration, in particular its positive effect on

the market. The entity can proceed to complete the Economic

Concentration if the Council notifies its approval or if the Council doesn’t

notify its refusal within 60 days of the application date.

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• Complaints

– A party claiming to be affected by conduct which it believes breaches the Competition Law or its Regulations may request the Competition Council to conduct an investigation to determine whether breaches of the Competitions Law have occurred. The Competition Council may also initiate investigations without any prior complaint.

• Penalties

– The Competition Council may require prohibited conduct to stop, dispose of assets and take other action to remove the effects of the violation. Violators may also become subject to financial penalties.

• Compensation

– Anyone suffering harm caused by conduct prohibited under the Competition Law may apply to the court for compensation.

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TAXATION

• Corporate Income Tax

– A foreign partner or shareholder in a resident KSA company and

a non-resident who does business in KSA through a permanent

establishment are subject to corporate tax income rate on income and

realised capital gains.

– Registration of a company or branch with the Department of Zakat and

Income Tax is mandatory.

– The rate of tax is 20% except for specified business. The shares of

Saudi and GCC nationals in corporate structures are subject to a

religious levy (Zakat) of 2.5%.

– Saudi Arabian Tax Law does not distinguish between different

categories of income. Capital gains are treated as ordinary income.

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TAXATION (CONTINUED)

• Customs Duty

– Rates of duty vary depending on the type and quantity of the commodity.

Most basic consumer products are duty free.

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CHALLENGES AND OPPORTUNITIES

• These are some of the main challenges for a foreign businessman - not listed in

any order of priority or magnitude.

– In many situations knowledge of spoken Arabic is required. All written communications to and from Saudi government entities must be in Arabic.

– Setting up a business presence in Saudi Arabia can be reckoned to take a lot longer for the foreign investor than most other places in the GCC region. However, the new “fast-track” system for of obtaining foreign investment license is expected to reduce the application periods.

– A lot of Saudi laws aren’t easily accessible.

– Unforeseen and unannounced changes by Government Departments to policy and administrative requirements can lead to unexpected delays.

– The Dispute Resolution Process in the Saudi courts is slow moving and the recent changes aimed at modernising the court system remain a work in progress.

– Dissolving a joint venture or other commercial relationship will be difficult unless all parties are in agreement.

– Enforcing a foreign judgment or arbitration award in Saudi Arabia.

– If the rules aren’t adhered to, getting things back on track may not be quick, straightforward or cheap.

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CHALLENGES AND OPPORTUNITIES (CONTINUED)

– But (and it is a big but!):

• The Saudi market dwarfs other markets in KSA. The GCC (it’s about 46% of total GCC GDP have business operations in KSA. Saudi Arabia’s reserves of oil and gas will not be exhausted for many years.

• There are many, and growing business opportunities in areas unrelated to oil and gas.

• Many of the largest companies in the world have business operations in Saudi Arabia. Doesn’t that tell us something?

• Saudi Arabia has developed much of the legal architecture that would be found in Western Countries

QUESTIONS?

THANK YOU

Al Tamimi & Company @AlTamimiCompany

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