Doing Business in Saudi Arabia: Thoughts And Practical Advice

By - Amgad T Husein & John Balouziyeh*

Saudi Arabia features regularly at or near the top of lists of countries ranked in order of ease of doing business, both in the Middle East and across the world. But all too often, those interested in doing business with the Middle East choose to trade, or invest, elsewhere in the region. There are many reasons, but the most important is that Saudi Arabia doesn’t need to sell itself – or at least feels it doesn’t need to, due to the size of its economy, the range of its trading relationships, its political weight and its importance for the security and stability of the whole Middle East.

Opportunities for investment in Saudi Arabia abound. With 25% of the world’s proven oil reserves, Saudi Arabia’s importance as the world’s foremost producer seems certain to endure for decades, if not centuries. Even as the US moves away from its traditional dependence on Middle Eastern oil, other countries are raising their requirement for hydrocarbons and petrochemicals from the Middle East, creating demand that will more than make up for a gradual US switch to domestic supply. That demand promises to provide Saudi Arabia with the financial resources it will need for decades to come, to address the increasingly sophisticated needs of a rapidly growing and better educated population.

Riyadh has the funds to finance major projects in diverse sectors, including mining and gas exploration, solar power, construction, pharmaceutical and life sciences, education, and the development of entire “economic cities” in the Arabian desert. As the Saudi government continues to improve and modernize its infrastructure, it is not unusual for companies to win billion-dollar contracts to provide goods or services to government bodies. At the same time, the presence of banks and wealth management firms has expanded rapidly in recent years, tapping into the nation’s private wealth. New high-rises and residential towers, hospitals and schools continue to be built, giving way to opportunities in the construction, healthcare, education and other fields.

The attractiveness of Saudi Arabia’s investment environment is made evident by its expatriate population of roughly eight million – one third of the Saudi population. Hailing mainly from Asia, Europe and North America, these expatriates come to work or invest in this largely free-enterprise market economy – the world’s seventh freest according to the World Economic Forum (WEF). Other features of the Saudi legal system that attract foreign investment are flexible laws governing business organizations such as limited liability and joint stock companies, which may be wholly foreign-owned; tariff exemptions available on many commodities; and low inflation. Saudi Arabia’s tax system, ranked fourth globally for fiscal freedom by the WEF, also draws considerable foreign investment.

While investing in Saudi Arabia’s fast-growing economy has the potential to reap countless rewards, it can be a daunting undertaking. Whilst a jurisdiction with plentiful opportunities where simple strategies can lead to substantial profit growth, ambiguities in applicable rules and inconsistency in enforcement add an element of uncertainty to the legal framework to doing business. Contravention of Saudi business, company, banking and finance laws may lead to penal consequences. Failure to pay debts, soliciting bribes, certain acts of pollution and the violation of privacy laws may carry criminal consequences. Where there is an element of mens rea (a “guilty mind”), as when marketing an intentionally misleading security, or concealing property in bankruptcy proceedings, prison sentences may result.

Perhaps the greatest challenge for foreign investors is the inherent sense of legal uncertainty in Saudi law, which is in a constant state of flux. Whereas just two years ago, setting up a foreign-owned company was relatively straightforward, new regulations from the Saudi Arabian General Investment Authority (SAGIA) have significantly increased the burden. Companies, either setting up for the first time or seeking to amend existing licenses, must now be prepared for significant delays and the investment of additional time and resources. For example, new companies are now being required to sign a series of covenants, including a commitment to hire a certain number of Saudi nationals, as well as issue to SAGIA bank guarantees: hundreds of millions of Saudi riyals for some projects.

Some companies have been hit by a whole series of new regulations within the last year. Construction contractors may not employ over 25% non-Saudis; even this 25% limit can only be reached if and when necessary. Building and construction may not be consolidated with maintenance and operations, except for companies employing over 300 in their home countries. Applicants must now submit with their SAGIA applications a long list of additional documents, including a detailed business plan discussing the company’s contribution to the Saudi economy and the jobs it will create; proof of the investment capability in conformity with the enterprise’s capital; and financial statements covering at least three years. Companies considering investing in Saudi Arabia must seriously weigh the commitment of time and funds as well as the patience and persistence required to see their applications through to completion.

Legal uncertainty in Saudi Arabia is nowhere more evident than in litigation before the courts of Saudi Arabia. Predicting how a particular court will decide where legislation and Shari‘a interact is made especially difficult by the absence in Saudi Arabia of stare decisis, the legal principle by which judges are required to abide by precedents established in prior cases. When a particular point of Saudi law is unclear, parties cannot research how cases were handled or decided in the past, since judges have no obligation to follow past precedents. The most that prior decisions can offer is general guidance as to judicial reasoning and operation. The absence of binding case law and the general unavailability of published decisions, often make it difficult to render definitive legal opinions.

Companies considering investing in Saudi Arabia should be serious about the long-haul. Those with the stamina to get through the SAGIA application process and meet the requirements applicable to foreign investment, license renewals and amendments will find significant economic rewards in Saudi Arabia. But serious engagement with Saudi Arabia does mean serious – and potentially expensive – investment. It means time and money spent on getting to know the country and its markets, understanding the rules and regulations, assessing the opportunities for export and investment, and above all, identifying the long-term Saudi partners essential for any really fruitful business relationship in or with the Kingdom.

*Amgad Husein ([email protected]) and John Balouziyeh ([email protected]) are corporate attorneys resident in Saudi Arabia at the Law Firm of Wael Alissa in association with Dentons (www.Dentons.com). They are co-authors of The Legal Guide to Doing Business in Saudi Arabia (Thomson Reuters), made available by Sweet & Maxwell (www.SweetandMaxwell.com).