Saudi Arabia is the largest country in GCC and occupies second place in the world’s second-largest oil producer and exporter after the United States. Over the years, the kingdom has developed into an ideal hub for emerging business ventures. It continues to draw business owners and investors around the globe. The governing body of Saudi Arabia helps small and medium-sized businesses to thrive and flourish. Though setting up a business in Saudi Arabia is now much simpler due to significant reforms in government policies, the enforcement of rules and legislation is not necessarily uniform, and some laws without advance notice may change. The Kingdom of Saudi Arabia provides a wide range of investment prospects across various sectors. Business sectors that hold enormous opportunities for emerging ventures are:
i. Industrial Products and Services
ii. Tourism and Hospitality
iii. Real Estate
iv. Health Care
In the Kingdom of Saudi Arabia, any company with foreign shareholders should compulsorily obtain a foreign capital investment license under article 2 of the Foreign Investment Law. The Saudi Arabian General Investment Authority (SAGIA) was created to grant foreign capital investment licenses. There is no limit on the amount of foreign investment that may be invested in a business incorporated in the Kingdom of Saudi Arabia, except as otherwise specified in the Act. The noteworthy point is that Saudi Arabia already allows 100% of foreign ownership in wholesale and retail sectors with a minimum investment of Saudi Arabian Riyal of 30 million.
In Saudi Arabia, there are different types of business entities that have advantages. A limited liability company is the most common form of entity in which foreign companies carry out businesses within the region since there are no legal limitations on the percentage of foreign ownership.
Firstly, the LLC established in Saudi Arabia can be made of 100% foreign ownership as stated above except for some activities listed by Saudi regulators, such as Haj and Umrah investments. Secondly, a limited liability company may participate in a full range of activities that fall within its objectives and may also pursue projects in both private and public sectors. Thirdly, depending on how many employees or investors there are in a company, a small business start-up often forms an LLC as it helps avoid double taxation. When an entrepreneur selects a C-Corp corporate arrangement, double taxation typically happens because the corporation and the owner are both taxed separately. An LCC prevents this since it is taxed much like a sole proprietorship. In Saudi Arabia, taxes vary from zakah, VAT, and direct taxes of companies.
Lastly, many people opt to establish an LLC to protect their personal assets against lawsuits. Creditors cannot pursue the owner’s personal assets to recover business debts. To get the government’s approval and registration of a Limited Liability Company, the memorandum of association and the LLC’s documents shall follow the Ministry of Commerce and Industry’s memorandum of association model.
A Joint Stock Company (JSC) is very much regulated in Saudi Arabia, evident from the regulatory requirements for incorporation. JSCs are incorporated based on the resolution of the Ministry of Commerce and Investment (MOCI). Though JSCs have more regulations than LLCs and have higher compliance costs. A minimum of two shareholders is required, along with a minimum capital requirement of SAR 500,000.
The Company Law and Foreign Investment Regulations allow a foreign company to establish a branch or a subsidiary in Saudi Arabia approved by SAGIA. An application must be submitted to SAGIA by the foreign company to obtain a license to form a branch. The formation is very much similar to an LLC except that there is no requirement of approval of Articles of Association and compared to LLCs and JSCs, the key benefit of branches is that they can be formed relatively quickly.
All in all, above is an overview of company formation in the Kingdom of Saudi Arabia and why most businesses choose to establish an LLC rather than other forms of business entities. Though it entirely depends on business owners’ requirements and the type of entity they would prefer.