Saudi Arabia is one of the most important and dynamic markets in the world and in the Middle East. The reason is because they have a young and enterprising population and a diversified economy. It is important to know that it is a kingdom with changing and complex legal regulations. Essentially, now that the new companies law exists. Which affects the different forms of entities that operate or want to operate in their territory. That is why it is essential to be aware of legislative developments. Especially those that may have an impact on the Saudi business environment.
In this article, we will explore the implications of Saudi Arabia’s new companies law. With this new legal framework, significant changes are introduced that regulate commercial companies. In addition to the commercial ones, there are non-commercial, professional, and family ones in the Saudi market. We will analyze the main changes introduced by the new companies law in Saudi Arabia, its advantages, disadvantages, and other interesting aspects.
Understanding the Saudi Arabian New Companies Law
If you want to set up a company in Saudi Arabia, you must understand the new companies law in Saudi Arabia. In this way, you can start your journey through the KSA without any inconvenience. For this reason, the new Saudi companies law is in line with the Kingdom’s 2030 vision; introducing new changes, which allow greater flexibility and protect the interests of companies.
Saudi Arabia’s new companies law is in charge of regulating non-profit, commercial, and professional companies. In this way, it enables investors to establish any of the types of companies presented below:
- Joint Liability Company.
- Limited Partnership Company.
- Joint Stock Company.
- The Simple Joint Stock Company.
- Limited Liability Company.
This new law specifically introduces a new form of a company called Simple Joint Stock Company (SJSC). This new form is to adapt to the growing demands of ventures and venture capital. In addition, it is a flexible corporate entity, a group of people can manage the organization, which may have one or more managers or boards of directors.
Apart from these mentioned changes, it introduces greater ease for the legal requirements of small and micro-enterprises. In addition, it removes many restrictions on company formation, company exit, and business conduct. It even allows you to divide the company into two or more. Now, the owners of unipolar companies will be able to transfer their assets to any form of company that exists.
Key Changes Brought by the New Companies Law
The new companies law KSA introduced a series of key changes and here we will explain them:
The introduction of a Simple Joint Stock Company: This is introduced to try to meet the increasing demands of entrepreneurship and venture capital growth. In addition, it can be constituted by one person or more, where the capital will be divided into negotiable shares. For a SJSC there is no minimum capital and shares can be issued in kind.
Exemptions for micro and small businesses: The requirement to appoint an auditor is now waived for micro and small businesses, with certain exceptions. This encourages the establishment of companies in the local market. In addition, regulations are what determines what qualifies as a micro or small business.
Multiple classes of shares: Allows a company to issue preferred, common, and redeemable shares as described in article 108 of this law. However, it also allows a company to have its bylaws provide for other classes of shares; and grant or restrict certain privileges or rights. Thus, the flexibility of a company’s structures plays a crucial role in enhancing its ability to attract investments.
More Variety in Company Names: Restrictions on company names have been reduced. Now, they may be in a language other than Arabic and may be derived from purpose, shareholders, or a combination of these.
Encourage employee participation: Supports the incentive of talent within companies. In this way, it is confirmed that shareholders do not have preferential rights when companies issue shares that are assigned to employees. However, additional controls and procedures are likely to be implemented for the allocation of shares to employees.
Company Formation and Registration
When forming and registering a company it is important to follow a series of steps. For this reason, we will present the steps you must follow below:
Step 1 (planning and strategy)
The most important thing to do at the beginning is to understand how to open your company in the KSA. During this process, you must choose what will be the name of your business and what type of business entity you want to establish. In this way, you will be able to know which trade license in Saudi Arabia you will need to acquire to operate legally.
Step 2 (incorporation)
Once you have everything from the first step ready, the process of establishing the company will begin. For this, you must comply with the following:
Investment license: It is a business license for foreign investors who do not belong to the CCG. To obtain it, you must submit your application to the General Investment Authority of Saudi Arabia.
Statutes: Submitted to the Ministry of Trade and Investment.
Register your company name: Must be reserved in the Unified Center and then approved before submitting other forms.
Register in the MERAS.
Issuance of SAGIA foreign trade license: This business license guarantees the proper functioning of your company in Saudi Arabia.
Creation of the company seal.
Register with the Chamber of Commerce.
Step 3 (Opening a Bank Account)
You must open a local bank account. within 90 days of the date the LLC business certificate was issued. Also, opening your corporate bank account must be done after your business registration number is issued. On the other hand, foreigners must obtain an Iqama in advance.
Step 4 (comply): Finally, you must comply with all the laws established in the country concerning companies and national commerce.
Capital Requirements and Financing Options
Tax Structure in Saudi Arabia: Employee income is not subject to any personal income tax. However, companies must pay taxes according to the type of company and configuration. In addition, all registered companies are under the jurisdiction of the company tax, including companies and branches owned by foreign investors.
Activities prohibited for foreign investors: Below, it will be seen what activities are prohibited:
Manufacture of military equipment or equipment that is related to it.
Real estate brokerage companies
Oil and gas (drilling and exploration)
Minimum paid-up capital: There is no legal requirement regarding the minimum capital. However, the SAGIA requires that foreign LLCs have a minimum capital of 500,000 SAR. In addition, according to the activities, the minimum capital requirements that must be paid are:
100% foreign business: Must have SAR 30 million with an investment commitment of at least SAR 200 million for the first 5 years.
Commercial, but with a 25% Saudi partner: You must have 7 million SAR. In addition, there must be a minimum contribution of 20 million SAR by the foreign investor.
Real estate services and investments, real estate is 30 million SAR.
Transportation services are 500,000 SAR
In agriculture, the amount is 25 million SAR.
For hiring you must have 500,000 SAR.
Governance and Reporting Standards
One of the most important issues for all international and local companies today is corporate governance. The Kingdom of Saudi Arabia is undergoing substantial design changes in recent years. This has different reasons, the first and most important is to comply with the best practices of the Organization for Economic Cooperation and Development (OECD). In addition, to improve transparency, the integrity of the business environment, and accountability.
Corporate Governance Model: KSA’s corporate governance approach is based on a combination of recommendations, legal frameworks, and optional practices. The main regulatory body in charge of overseeing the country’s corporate governance is the Capital Market Authority (CMA). In addition, it has other functions such as developing rules, recommendations, and regulations.
The CMA is in charge of all matters of the Corporate Governance Regulations (CGR) and Convergent Generation Communications (CGC). Which offers a complete framework for KSA’s corporate governance procedures. For instance, audits, risk management, shareholder rights and treatment, disclosure and transparency, and more.
Corporate Governance Sources: To foster and build effective governance practices, corporate governance at KSA focuses on a variety of sources. Among the most important resources are codes, recommendations, standards, and regulatory frameworks worldwide.
Below you will see all the regulations and laws that stipulate the corporate governance requirements in KSA.
- Saudi New Companies law.
- Capital Market Authority (CMA) Law.
- Corporate Governance Regulation.
- Corporate Governance Code.
- Quotation Rules.
- International standards and guidelines.
- Shari’ah principles.
- Industry best practices and guidelines.
- Jurisprudence and legal precedents.
Corporate authorities in KSA: The functions of the Saudi corporate authorities are to monitor and control different aspects. Specifically, those from corporate governance and commercial operations. In addition, they are in charge of setting rules, ensuring compliance with corporate laws, and issuing instructions. The main corporate authorities are:
Capital Market Authority (CMA)
Ministry of Commerce (MoC)
Adapting to the Saudi Arabia New Companies Law
All companies have to adapt to the new companies law. For this, it is good to consider the following measures, especially before it enters into force. Next, you will see all the possible strategies that you can follow to be able to implement the new companies law in your company.
Documentation: It is important to review all the constitutional documentation of the company in Saudi Arabia, according to the new companies law. In particular, all necessary modifications to the minimum capital requirements must be made. This is because of the reduction of the minimum capital rules. In addition, you have to execute the relevant modifications to the quorum voting rights. The reason for this is due to the change in minimum shareholder requirements.
For JSCs, they must add the cumulative voting process; in particular for the election of the members of the board of directors. Also, they have to remove the qualifying stock requirement for board members. Finally, an independent audit committee must be assigned to the company.
For Corporations, they have to verify that the president of the board is not part of an executive position.
Finally, LLCs must remove any provision that investors or partners are personally liable. It is important to highlight that in case they do not take the necessary strategies the company’s losses are at least 50% of the capital.
Registries: The company has to create a registry of special investors for LLC. Thus, they can include all individual shares, over the shares of the company.
Create links with the financial department: That is, the board must serve as a link with the department of the company. It can also be with accountants and financial advisors. Thus, they can carry out efficient financial management, after reducing the legal reserve by 20%.
Ensuring Compliance with the New Companies Law
It is important to ensure compliance with the new companies law, in companies. To do this, the first step is to make all shareholders aware of the new duty of confidentiality and all other aspects.
Indeed, the new companies law has not entered into force, it is estimated that it will provide greater flexibility to establish and manage companies. All thanks to a new regulatory framework that is more in line with international standards. Currently, according to the Ministry of Commerce, there is no deadline to modify the statutes of existing companies.
However, it is extremely important to start with the revision of the association agreements and the statutes. Taking into account the context of the new companies law. Thus, you can assess if any modification is required. In addition, to consider how to take better advantage of the new regulatory framework of the new law.
Transition Period and Implementation
In principle, the company will go through a transition period before being able to apply the regulations of the new companies law. Once the law enters into force, according to the Ministry of Commerce, a period of 12 months or 1 year will be granted for existing companies to adjust to the new provisions. There are some exceptions and if you are part of them, you do not have to comply with this at this time.
Existing companies have to amend their bylaws, reduce or increase their share capital, and dissolve or change their legal form. Of course, everything will depend on complying with the new companies law. The transition period includes the revision of the company’s bylaws and policies. Thus, you can have what are the changes that you have to make. Once you have that, you can go through the implementation stage, which is to apply everything relevant that you observed in the transition period.
In case of not complying with the policies of the new companies law; the Ministry of Commerce can impose fines or sanctions on the company. In other words, the company is exposed to very serious consequences. The first is that the Ministry of Commerce can impose fines of between 5,000 and 500,000 Saudi Riyals.
The second is a little more serious, the Ministry of Commerce can dissolve the company. You can also appoint a liquidator, suspend activities, or prohibit its administrators from trading. Another sanction is that the Ministry can publish the name of the infringing company and the type of infringement in the media.
Finally, the business may face criminal or civil lawsuits from creditors, partners, or other interested parties. In particular, for the damages suffered due to the breach of the new companies law.
Legal and Financial Implications for Existing Businesses
There are different legal and financial implications for existing companies in the KSA thanks to the new companies law. Below, you will see some of these implications.
Family Businesses: All family businesses can enter into a binding family charter as part of a company’s articles of association. The other option is to create it separately in order to regulate family ownership in the company. Thus, they can avoid succession conflicts.
Limited Liability Companies: These companies can issue tradable debt tools. For instance, bonus or Sukuk. A sukuk is a financial instrument similar to a bond, however, it complies with Sharia or Islamic law. This is in order to finance the activities, provided they meet certain requirements.
Financial statements: All companies must present their financial statements which must be audited by the Ministry of Commerce and the General Mercantile Registry. This must be done within four months of the end of the fiscal year.
Final Implications: Companies must comply with compliance auditing and accounting standards. The Saudi Professional Standards Authority is the setter of these standards or policies. In addition, all companies must obtain the necessary permits to start and carry out their business activities. For instance, the fiscal registry, the commercial registry, the environmental registry, and the labor registry.
Leveraging Opportunities under the New Companies Law
This new companies law brings many opportunities to entrepreneurs in KSA. That is why it is important to comply with all the above strategies. Especially, knowing everything that this regulatory framework involves. Next, you will see all the opportunities that you can enjoy with this new law.
Facilitates the operation and constitution of companies: This is because many processes are minimized or facilitated. Among them, allowing the participation of foreign partners, reducing the minimum capital requirements, and simplifying administrative procedures.
Promotes entrepreneurship and innovation: The new companies law introduces new legal forms. For example, the family company, the individual company, and the innovation company.
Protects the interests and rights of minority partners: How control, responsibility and transparency mechanisms of corporate bodies and administrators are established.
Promotes the social and economic development of the country: One of the intentions of this new companies law is to encourage investment in different strategic sectors. Among them, are industry, commerce, services, and energy.
Conclusion: Embracing the Future of Business in Saudi Arabia
The new law for companies in Saudi Arabia introduces very significant changes in the legal framework. In addition, this law aims to encourage foreign investment, protect the rights of minority shareholders, simplify administrative processes, etc. Many relevant changes need to be taken into account when trying to understand this new law.
One of these is the removal of the requirement for a Saudi partner in order to incorporate an LLC or a branch of a foreign company. Now allowing 100% foreign ownership in much of the KSA’s economic sectors. Now, the rights and obligations of shareholders are expanded.
Thanks to these changes, there are new opportunities for foreign investors who want to expand into the Saudi market. In addition, those local entrepreneurs who want to diversify their activities will be able to do so more easily.