What is the main source of law authorising this entity form?

New Companies Law (November 10, 2015), as amended by Royal Decree No. M/79 April 11, 2018, published by the Ministry of Commerce and Investment (“MOCI”) (the “Companies’ Law”).

Give a brief summary of the entity form:

Does the entity possess separate legal personality?

The LLC has a separate legal personality.

(Maximum) period of existence

No statutory maximum period of existence, although in practice the maximum period is 99 years.

• If the license from the Ministry of Investment for Saudi Arabia (“MISA”) is tied to a government contract, the MISA License will be limited to the period of that government contract, effectively requiring that the entity cease existence with the termination/fulfilment of the government contract.

   

Governing document(s)

Articles of Association, Commercial Registration, MISA License (if foreign ownership is involved)

Liability of incorporators / shareholders

None, unless the shareholders: (i) cause, in bad faith, the company to be dissolved or its activities to be suspended prematurely; (ii) fail to separate the company’s business from their other private business; or (iii) undertake business on behalf of the company before it has legal personality (registration in the Commercial Register).

We note that this is a relatively new development and previously if a company’s losses reached 50% of its stated capital the shareholders could be held liable in certain circumstances.

While the personal creditor of a shareholder cannot collect its debt from the shareholder’s capital in the company, if a judgment is rendered by a competent judicial authority, the creditor can collect its debts from the shareholder’s share of distributed net profits.

(Governing) bodies

Either: (i) a single director (who will typically be the General Manager); or (ii) a Board of Directors. Moreover, if an entity has more than 20 shareholders then a supervisory board consisting of at least 3 shareholders must be formed to supervise the General Manager or Board of Directors.

Other particularities

(a) Prohibited from engaging in insurance or banking activities; (b) local office lease and physical address is required (no virtual office).

Can this type of entity be involved in international transactions and restructurings (e.g. cross border mergers, asset acquisitions, equity acquisitions, etc.)?

While there is no specific prohibition, it is generally difficult for a Saudi LLC to be involved in these types of transactions due to the need to conform to relevant Saudi regulations, such as those imposed by MISA, which requires a thorough vetting of all foreign ownership.

Can this type of entity be publicly listed or held?

No; it would require conversion to a Joint Stock Company.

Can this type of entity be used for a non-profit or charitable organization?

Not currently. In 2016 an initial draft of the main points of a pending Non Profit Companies Law was issued which was not codified. Subsequently, in 2020 the Saudi government issued a draft proposal for a new law (“Proposed Draft Law”, as referenced above), which would also include provisions for nonprofit organizations. Our understanding is that the Proposed Draft Law would allow for two primary forms of nonprofit company:

1. Public Nonprofit: Would take the form of a joint-stock company and does not have the right to take any other form, and does not aim to achieve a profit for the partners or shareholders in it, and aims exclusively to serve the community in general.
2. Private Nonprofit: Would take the form of a limited liability company or a joint stock company and does not have the right to take any other form, and it does not aim to achieve a profit that would accrue to the partners or shareholders.

 

Give a brief summary of the process of incorporation, formation, or organization, including:

(1) Main documents required; (2) Involvement of notary, company register, governmental authorities; (3)Timing (estimate) (4) Main costs, including registration and similar fees (excluding legal fees); (5) Is a description of the anticipated business or purpose of the entity required for incorporation, formation or organization?

**An LLC in Saudi Arabia can be established by several means: (i) an entity designed to engage in business on its own (standard license); or (ii) an entity tied to a specific government contract, which will be limited to the duration of that contract (temporary license).

1. Standard License. If a foreign investor seeks to establish an entity with a standard license; i.e., to engage in business for an open-ended term, MISA has discretion as to whether it will provide the relevant foreign investment license, and may reject granting of the license for any reason or no reason. License periods/terms typically range from 1 to 5 years.

2. Temporary License. If a foreign investor seeks to establish an entity pursuant to a Saudi governmental contract, MISA does not have discretion to reject the granting of the MISA license. From a process standpoint, the approval of the relevant governmental agency as well as the contract itself will be submitted along with the MISA application. The period/term of the license is limited to the term of the contract with the Saudi governmental agency; i.e., when the governmental contract terminates, the MISA license also terminates.

We also note that – unless noted otherwise – the following requirements involve foreign ownership in the LLC (it is irrelevant whether foreign ownership is direct or indirect; i.e., through a holding company). If the LLC is being formed solely by domestic (Saudi) owners, then establishment is typically a far simpler process.

For creation of a standard LLC, the two primary documents needed are: (i) MISA License (assuming there is foreign ownership, either direct or indirect); and (ii) Commercial Registration.

MISA License: The most time consuming and complicated part of establishing an entity is obtaining the MISA license. MISA License requirements do change from time to time without notice, but historically require the following (all documents translated into Arabic with authentication from a licensed translator prior to submission):

1. providing a local law firm with a POA from the owner(s) authorizing the law firm to act as its representative for the establishment of the entity;
2. specific detail regarding the objectives/activities of the entity (specificity/transparency of purpose is essential, and overbroad or ambiguous objectives will be subject to critical scrutiny and likely rejected);
• For an entity tied to a government contract, the objective(s) will be the objective(s) in the government contract.
3. letter agreeing to a specific Saudization percentage – the number fluctuates, but if the Saudization percentage is 20%, this would require the company to employ at least 20% Saudi nationals (we note that there may be exceptions for certain critical functions wherein sufficient Saudi expertise is not available);
4. copies of all corporate governance documents (Articles of Association, bylaws, resolutions, etc.) of the parent company(ies), with all amendments;
5. copies of passport of Manager of the owner(s);
6. financial statements of past 3 years of the owner(s) (if corporate entity(ies)), or bank statements if dealing with an individual; and
7. law firm would need to follow up with MISA immediately prior to beginning the process to ensure no other requirements have been added (or current ones changed) that have not been published.

A best case scenario from a time perspective is 3-6 weeks.

Capitalization: No minimum amount of capitalization under the Companies’ Law, but MISA may unilaterally impose a “capital sufficiency” requirement for a standard license (usually no less than SAR 500k). Once the Commercial Registration is issued, the entity will have 90 days to appropriately capitalize the company, and the bank will provide a certificate, which must be presented to MOCI. Takes about 1 week to process and obtain the necessary certificate from the bank.

Commercial Registration: Once all necessary documents have been obtained, they must be presented to MOCI for review and comment. Officially, MOCI has 30 days to review and offer comments, after which it will approve and issue the Commercial Registration (if it has not provided comments). Typical response from MOCI is 1-2 weeks.

Publication of Articles of Association: Must be published on the MOCI website within 30 days of formation.

Additionally, during this process if a foreign manager is planning to become established in KSA to run the entity, it will be necessary to begin the procedure to obtain an Iqama (residence permit), which he/she will need in order to interact with the various KSA governmental agencies.

Post-Commercial Registration Requirements: Once the Commercial Registration is obtained the entity will formally be established. However, in order for it to become functional it will be necessary to establish accounts with certain KSA governmental agencies, including:

• Chamber of Commerce;
• General Authority of Zakat and Tax (“GAZT”);
• General Organization of Social Insurance (GOSI);
• Municipality; and
• Labor Office.

Each of the above is a simple process, and takes about 1 day (collectively, about a week).

Overall Time from Inception to Obtaining Commercial Registration: Minimum 6-10 weeks from the receipt of all necessary documents, depending on various factors. Despite claims to the contrary, it is rare that establishment of a functional entity in KSA takes less than 2 months from the time the process is commenced.

Minimum number of incorporators / shareholders and residency requirements

Minimum of 1, with a maximum of 50 shareholders. If more than 50 shareholders, conversion to a Joint Stock Corporation is required. While a foreign manager may need to obtain an Iqama (residence permit), there is no requirement for that manager to spend a minimum amount of time in Saudi Arabia.

If the company only has 1 shareholder, then its name must reflect that it is an LLC owned by 1 person.

Potential Concern: The Companies’ Law states that an LLC may be converted into a JSC following a request by the shareholders holding more than 50% of the shares, unless the Articles of Association specify a lower threshold (as opposed to a majority or supermajority or unanimity).

Minimum number of directors (or other applicable officers) and residency requirements

Either: (i) a single director (who will typically be the General Manager); or (ii) a Board of Directors. Moreover, if an entity has more than 20 shareholders then a supervisory board consisting of at least 3 shareholders must be formed to supervise the General Manager or Board of Directors. No residency requirement for Directors.

Minimum share capital, or equivalent, and payment requirements (including opening a bank account)

No minimum amount of capitalization under the Companies’ Law, but MISA may unilaterally impose a “capital sufficiency” requirement for a standard license (usually no less than SAR 500k). Once the Commercial Registration is issued, the entity will have 90 days to appropriately capitalize the company, and the bank will provide a certificate, which must be presented to MOCI.

Is the physical presence of incorporators / directors required in the jurisdiction for incorporation, formation or organization?

Not necessarily, but if a foreign manager is planning to become established in KSA to run the entity, the foreign manager must obtain an Iqama (residence permit), which he/she will need in order to interact with the various KSA governmental agencies. This will require the physical presence of the Manager for issuance of the Iqama.

Is a tax identification number, or equivalent, required? If so, how is it obtained?

An entity must register with GAZT once it has received its Commercial Registration. Additionally, it will need to register with GAZT under Saudi Arabia’s new Value Added Tax, where it will receive a dedicated VAT account number, and will receive a VAT certificate.

Registration for VAT requires the following information:

• Detail of whether entity is importer or exporter.
• IBAN number (for refunds) – not required if already logged with GAZT.
• VAT eligibility start date.
• VAT taxable supplies (expected over next 12 months).
• VAT taxable supplies (past 12 months).
• VAT taxable purchases (expected over next 12 months).
• VAT taxable purchases (past 12 months).
• Financial Representative details.

 

What is the title of the applicable company registry?

Commercial Register.

What types of information must be filed at the (company) register, and which of them will it be publicly available, e.g.:

MOCI charges SAR 100 for a printout of basic company information, but this typically does not include the Articles of Association. Although the Articles of Association must be published on the MOCI website within 30 days of issuance of the Commercial Registration, it is often not subsequently retrievable.

• The kind, name, object, and head office of the company.
• The shareholders’ names, residence addresses, occupations, and nationalities.
• The names of the members of the board of directors, if any.
• The amount of the capital and the amount of contributions in cash and in kind, as well as a detailed description of the contributions in kind, their value, and the names of contributors in kind.
• A statement by the shareholders that all the capital shares have been allotted and paid up in full.
• The method of distribution of profits.
• The dates of the commencement and expiration of the company.
• The form of the notices to be served by the company on the shareholders.

 

What is the title of the executive body and its members? What are their main duties, tasks and responsibilities?

Board of Directors, which have the required authority to run day-to-day operations to the extent granted to them by the shareholders in a Shareholders’ Resolution or the Articles of Association.

How are the members of the executive body appointed, dismissed and replaced?

The initial Manager(s) or Board of Directors will be appointed in the Articles of Association (or by separate Shareholders’ Resolution), and then listed on the Commercial Registration. Dismissal/replacement requires amendment of the Articles of Association (if the appointment was made directly in the Articles of Association) and the Commercial Registration.

Is it possible to appoint corporate directors or must all directors be natural persons?

No.

Is there a requirement to have non-executive directors? How are they appointed, dismissed and replaced? Do non-executive directors serve on a separate body (two-tier structure) or can a one-tier board (with executive and non-executives) be appointed, or is some alternate structure used?

Yes; in a one-tier Board of Directors

What is the title of the body of owners / shareholders / members, and what are the main tasks / responsibilities / powers of that body?

The company must have a General Assembly consisting of all Shareholders, and it must occur within 4 months of the end of the company’s fiscal year and address the following:

• Hearing the report of the company’s directors on the activity of the company and its financial position during the financial year, the auditor’s report and the report of the Supervisory Board, if any.
• Discussing and ratifying the financial statements.
• Determining the profit percentage distributed to shareholders.
• Appointing the company’s directors and the members of the Supervisory Board, if any, and determining their remuneration.
• Appointing the auditor and determining his fees.
• Other matters related to the competence of the Assembly subject to the rules of the company or its Articles of Association.

What are the majority and quorum requirements for decisions by the shareholders? Can they be varied or changed?

Quorums for Shareholders’ Meeting are as set forth in the Articles of Association.

The Manager or Board of Directors, the supervisory board, the auditor or shareholders representing at least half of the capital may request a general meeting.

Decisions require approval of holders of majority of share capital, unless the Articles of Association provide differently.

Articles of Association may be amended by a majority of the shareholders holding at least 75% of share capital, unless the Articles of Association provide otherwise.

Amending the company’s nationality and increasing shareholders’ financial obligations need a unanimous approval of all shareholders.

Any special governance regimes (e.g. depending on size, being listed at a stock exchange, or other criteria)?

If an LLC reaches more than 50 shareholders, it must be converted to a Joint Stock Company.

• The Proposed Draft Law contemplates removing this requirement (and allowing for LLC’s with more than 50 members).

What are the periodic accounting obligations incumbent upon the entity? To whom must those accounts be submitted?

A company’s financial statements, including the proposed distribution of profits and the appointment of an auditor, has to be prepared each fiscal year and audited by auditors licensed in Saudi Arabia. Upon completion, an annual shareholders’ meeting is required to approve submission to MOCI.

Is the entity permitted to determine its own financial year?

Yes.

Is the entity subject to any statutory (external) auditor obligations?

Annual audits are required, and must be completed by an external auditor within 3 months from the end of the company’s fiscal year, and then provided to MOCI within 1 month from the date that the external audit is completed.

Requirements to appoint other persons (officers, secretary, internal auditor / accountants). If so, what are their functions? Are there any residency requirements?

No.

What is the title designated for 'ownership interests' (e.g. shares, quota, interests, membership)?

Shares.

Are different classes of ownership interests possible? If so, what are some examples of different classes?

No.

The Proposed Draft Law contemplates different classes of shares for JSC’s (unclear if this also may apply to LLC’s).

What documentation is required for the transfer of ownership interests?

Shareholders’ Resolution authorizing transfer, and amendment of Articles of Association. In certain instances, a Share Purchase Agreement or other relevant document may be required.

Are there any additional formal requirements required for the transfer of ownership (notary, approvals, stamping, filings, corporate records)?

Shareholders have statutory preemptive rights for a period of 30 days for any transfer of shares to a non-shareholder (N/A for inheritance).

Are there any applicable stamp duties imposed when transferring ownership interests?

MOCI stamp and Notary stamp – costs are nominal.

How are shares issued? (including information on payment obligations, registration requirements)

Established in the Articles of Association and Commercial Registration, and revised ownership will be reflected in the Articles of Association and Commercial Registration (no physical share certificates).

Further information on equity contributions, e.g., non-cash payments on shares, (share premium) contributions without issuances of shares, can partially paid shares/ownership interests be permitted and what are the restrictions on them?

In kind contributions are permitted, and require independent valuation. However, the shareholders are jointly liable to third parties for incorrect valuation of shares in-kind (if action is initiated within 5 years of registration of Commercial Registration).

Any increase in the financial obligations of the shareholders, including increase in company’s capital (through the increase of the nominal value of the company’s shares or through the issuance of new shares) requires unanimous approval of the shareholders.

Any requirements with respect to share cancellation, share repurchase and other capital reductions

Both a unanimous Shareholders’ Resolution supporting the action and an amendment of the Articles of Association are required.

Any requirements with respect to distributions to shareholders?

Must follow the process set forth in the Articles of Association. Distribution amounts will default to pro rata percentage ownership, unless otherwise specified in the Articles of Association or Shareholders’ Agreement.

Can the owners or shareholders adopt a restrictive or governing agreement among themselves such as a Shareholders Agreement?

Yes. This is suggested in Saudi Arabia, as the Articles of Association typically follow a standard format in order to satisfy bureaucratic norms.

Which are the typical annual maintenance costs of maintaining the existence and legal good standing of such an entity (excluding legal fees)?

MISA license registration and renewal fees are SAR 60,000 annually.

Commercial Registration and renewal fees are SAR 1,200 annually.

Chamber of Commerce registration and renewal fees are SAR 10,000 annually.

We note that these fee amounts are routinely revised without notice.

What are the general corporate tax rates? (Specify if there is a national versus local distinction).

The corporate tax rate is 20% (other withholding tax rates vary from 5-20%; e.g., licensing fees, management fees, etc.).

VAT of 15%.

Zakat of 2.5% is charged on company’s Zakat base if there is a Saudi partner, but only on the Saudi partner’s shares.

Summary of any specific matters, e.g. recent or prospective major legal developments

A new value added tax (“VAT”) law came into effect as of January 1, 2018, requiring a levy of 5%. The VAT rate was increased to 15% effective July 1, 2020.

Companies are required to set aside an amount equivalent to 10% of their net profits each year as a statutory reserve, up to 30% of the company’s capital.

• The Proposed Draft Law contemplates removing this statutory reserve requirement, and allowing companies to set their own statutory reserve requirements in their Articles of Association.

If a company incurs losses of 50% or more of its stated capital (i.e., liabilities amount to the value of its assets, plus 50% of its capital), the managers must notify the shareholders, and the shareholders must meet within 90 days to determine whether to dissolve or maintain the company. In either case, the decision must be published on the MOCI website. If the shareholders decide to continue the existence of the company then they must inject further capital. If the managers fail to convene a meeting or fail to pass a resolution to continue or dissolve the company, then the company shall be deemed to have terminated by law.

• The Proposed Draft Law would:
1. not automatically terminate the company by operation of law in the event of such losses. Rather, a party with an interest would need to petition for the dissolution of the company with the relevant court;
2. provide for definitive requirements regarding the distribution of dividends; e.g., entity must have sufficient liquidity and retained profits, ability to meet financial obligations for 12-month period subsequent to dividend, etc.;
3. increase the requirements for managers/directors and relatives to disclose conflicts of interest and seek approval from shareholders/members;
4. allow LLC’s to issue tradeable debt/sukuk instruments subject to Saudi Capital Market Authority requirements;
5. subject to relevant Implementing Regulations (drafts of which have not yet been provided) provide for share option arrangements (e.g., put/call, drag/tag, etc.), which are unclear under the Companies’ Law; and
6. for LLC’s, restrictions on single shareholder LLC’s owning another single shareholder LLC would be removed.

Holding companies are permitted (objective must be specified as “controlling another entity by holding a majority of their capital or controlling the formation of the Board of Directors), although a subsidiary may not own shares in a holding company, nor may a single shareholder LLC own another single shareholder LLC.

• The Proposed Draft Law would allow holding companies more latitude to operate in regard to permitted economic activities (still unclear what this means), and the current restriction on a holding company owning another holding company would be eliminated.

Saudi Arabia follows Sharia’h law, and in the event of any discrepancy between a codified provision and Sharia’h, Sharia’h will prevail.

As part of Saudi’s efforts to promote its Vision 2030 program, Saudi’s investment arm for foreign ownership is no longer the Saudi Arabian General Investment Authority (SAGIA), and is now the Ministry of Investment of Saudi Arabia (MISA), effective as of February 25, 2020. The intent is to transform SAGIA from its licensing “gatekeeper” role into a full government Ministry promoting foreign investment.

Saudi instituted a VAT increase from 5% to 15%, effective as of July 1, 2020. The purpose was to combat falling oil prices and the effects of COVID-19. We are not aware of any intent by the government to modify VAT (increase or decrease) in the future. Saudization/localization (employment of Saudis) is a key component of Vision 2030, and we expect an ancillary effect of higher VAT is that will continue to discourage lower income expatriate workers from coming to or staying in Saudi, thereby further opening up employment for Saudi citizens.

As noted in this document, Saudi Arabia is in the process of adopting a new Companies’ Law (referred to as “Proposed Draft Law” in this document) that would provide for a number of changes. However, the Proposed Draft Law has not been formally approved, and there is no guarantee that it will be enacted. Accordingly, the comments relating to the Proposed Draft Law herein are informative of likely impending revisions, but should NOT be relied upon.