By: Christian Ule (April 2007)

A. Setting up a Saudi Trading Company with 51% Foreign Participation is now allowed

Significant changes have been made to the Foreign Investment Law and Companies Law in the Kingdom of Saudi Arabia in the wholesale and retail sectors (distributorship sector) as a result of the WTO accession in December 2005. 

The Foreign Investment Law that was enacted in April 2000 was designed to liberalize the market and attract greater Foreign Direct Investment (FDI), but the implementation of the law continued to exclude foreigners from wholesale and retail distribution and in 2001 both sectors were included in a “negative list” of sectors that remained closed to foreign investors. Only firms which were majority-owned by Saudis were allowed to take part in wholesale and retail trade activities.

Saudi Arabia’s WTO commitments allow for foreign companies since April 2007 to participate in wholesale and retail trade services in the Kingdom. Upon accession, foreign companies can hold 51 percent of the equity in a wholesale or retail distribution business. By December 2008, the maximum foreign equity stake increases to 75 percent. There are significant minimum capital requirements imposed, however, which appear aimed at protecting domestic small and medium sized retailers from foreign competition. 

Each joint venture wholesale and retail distribution provider setting up business in the Kingdom will have to provide a minimum of SR 20 million (US$5.3 million) in paid-up capital, and the government can specify a minimum size for outlets, and there are requirements to hire and train Saudis.

MENA Legal is currently advising three German and one Swiss company on the establishment and registration of Saudi subsidiaries for trading purposes. Due to the high nominal capital involved in setting up a trading company, foreign investors also have the opportunity to establish 100% foreign owned branch or representation offices or even subsidiaries providing services to Saudi customers. These are all possibilities that did not exist before April 2007 and give a completely new perspective to foreign investors, who do not want to be dependent on a Saudi sponsor.

B.        Branch Office and Service Companies

Under the new foreign investment law as of April 2007 foreign investors may also establish wholly owned branch offices or subsidiaries for providing professional services in the Kingdom of Saudi Arabia

I.          Branch office

1.         Introduction

We have informed you above that the newly opened distributorship sector in the Kingdom of Saudi Arabia requires a Saudi partner in a joint venture company with 49% participation and 51% owned by the foreign party. The required nominal capital for the incorporation of a trading company in the KSA ranges between SR 20 mio. and 40 mio., depending on the decision of the Saudi Arabian General Investment Authority (“SAGIA”). We have indeed received three different responses from SAGIA in relation to wholesale/retail business. In the end the foreign investor will have a binding response from SAGIA once an official request for foreign investment has been submitted.  

2.         Branch Office

Besides establishing a trading company with 51% foreign participation, foreign companies may now also consider opening a 100% foreign owned branch office or representative office in the KSA to perform professional services. This is very easy to do these days under the new foreign investment rules and requires a nominal capital of SR 500,000. The branch would be a services office to provide operations, maintenance, technical support and training services. A sales representative office to facilitate sales made directly from Germany to the KSA is also a possibility. It may perform maintenance and warranty services in the KSA.

A branch office can only be used for services. It can be licensed to install and maintain machines/equipment/goods and the people in the office can solicit orders to be placed with the company outside of Saudi Arabia for delivery to the customer CIF Saudi Arabia. The branch office can pick the machines/equipment/goods up on behalf of the customer in customs and install or delivery them, in effect acting as subcontractor for this purpose. The branch can even collect the account receivable on behalf of the selling foreign entity.

NOTE: A branch office cannot be used as a distributor inside of the KSA. Only a joint venture trading company that is 51% foreign investor and 49% Saudi investor can perform that function. The foreign company cannot use a branch office as its distributor.

Once all of the documents are ready for submission it takes less than a month these days for registration of such a branch office if there are no issues raised about the application by SAGIA.

II.         Subsidiary for services 

A foreign investor could alternatively also establish a 100% owned limited liability company providing services to Saudi customers. A limited liability company (LLC) requires a minimum of two shareholders and requires Articles of Association to be approved by the Ministry of Commerce and Industry and other formalities to set up. This is more expensive and somewhat more complicated to operate. The incorporation of a service company also needs more time to set up (up to three months). The foreign investor would have to use one of its subsidiaries or affiliates as the other partner in the company. Alternatively a Saudi partner participates with 5% quotaholding in such a subsidiary.

The nominal capital for the incorporation of a services company is like a branch office, SR 500,000.