LPA Middle East | Smart Alert – Foreign investments into Saudi Arabia

December 6, 2021

LPA Middle East | Smart Alert – Foreign investments into Saudi Arabia

Following a general trend in the Middle East, (please refer to our previous Smart Alert on this matter), the Kingdom of Saudi Arabia (KSA) has been liberalizing the conditions of entry to its corporate market by relaxing the minimum Saudi participation to the share capital requirements and allowing licenses to be issued to companies fully owned by foreign individuals and/or entities.

The conditions of entry for foreign investors in the Saudi Arabian market are dependent on the sector and activity prescribed by the license.  Generally, full foreign ownership of local businesses is now permitted with a foreign investment license, provided that the business operates in a sector which is not on the Negative List,[1] or in a sector providing for minimum Saudi participation. The requirements set for specific sectors (as minimum Saudi participation or capital requirements) can be found in the table below:

[2]

Focus on retail business in KSA

Since 2016 the KSA allows foreign investors in the activity of wholesale and retail trade and e-commerce in the KSA to obtain a 100% foreign commercial license from MISA.  This 100% foreign shareholding may be obtained either by the establishment of a newly created entity or by the acquisition of the shareholding held by the local partner in an existing company (the “KSA Company”).

In order to obtain said license a number of conditions must be met by the foreign investor:

1. The foreign company must already have a presence in at least 3 regional or international markets;
2. The foreign company must have at least one year of existence prior to entry to the KSA market;
3. The foreign company must comply with the following standards during the first five years starting from the date of obtaining the 100% foreign license from MISA:
4. The KSA Company must employ Saudi nationals at ratios determined by the KSA Ministry of Human Resource and Social Development. The KSA Company shall develop and implement a plan to employ Saudi nationals in leading positions during the first five years and to retain such employees on continuous basis;
5. The KSA Company must train (30%) of Saudi employees annually; and
6. The KSA Company must invest over the first five years of 300 million Saudi Riyals in the KSA (including the 30 million SR as the cash capital of the KSA Company), unless the KSA Company achieves one of the milestones below[3], whereby the required investment is reduced to 200 million Saudi Riyals over the same period.

What would be considered as “Investments” in order to meet the required threshold described above ?   

As of today, no further clarification or criteria has been provided by Misa to identify the scope of Investments that would fall under this definition and hence allow a foreign investor to meet the required threshold and benefit from the exemption described above.  It is highly likely that any CapEx such as property, plant, and equipment (PP&E), shall be considered by Misa as part of an “Investment”. On the contrary VAT charged on sales and rent of premises shall certainly not be computed in the total investment amount. However, a number of other disbursements may be deemed to qualify from time to time as “Investment” such as the acquisition of intangible assets or the purchase of an existing shareholding in the company. However, this qualification will mostly depend on the structure and the purpose of such disbursement. As a consequence, any disbursement will need to be assessed by Misa on a case by case approach to determine whether it falls in the category of Investment.

Investing or Acquiring in the KSA?

As part of Saudi 2030 vision, the Kingdom is aiming to become a global investment powerhouse as it continues the liberalization of its economy and improves the conditions of investment for foreigners. In order to encourage foreign firms to open a permanent, in-country regional presence that would help create local jobs, the KSA Minister of Investment announced in February 2021 that Saudi Arabia will no longer sign contracts with foreign companies which do not have a regional headquarters in the Kingdom after 2023.[4] Updates related to this policy will be the object of a new Smart Alert in due time.

[1] The Negative list includes 10 main sensitive sectors listed hereafter where no foreign ownership is allowed:

These sectors are (1) oil exploration, drilling and production (subject to certain exceptions), (2) catering to military sectors, (3) security and detective services, (4) real estate investment in Mecca and Medina, (5) tourist orientation and guidance services related to Hajj and Umrah, (6) recruitment services, (7) commission agents’ services, (8) fishing/hunting marine living resources, (9) poison centers, blood banks and quarantine, and (10) services provided by midwives, nurses, physical therapy services and quasi-doctoral services.

[2] Ministry of Investment of Saudi Arabia (MISA). Service Manual. January 2020

[3]

[4] Reuters | Saudi Arabia won’t work with foreign firms without regional HQ from 2024