Since Saudi Arabia’s accession to the World Trade Organisation in December 2005, the government has made significant progress towards developing and maintaining policies that favour an open legal and business environment amenable to foreign capital investment. Many of the Kingdom’s economic sectors have been opened to foreign investment such that it is now one of the more open economies in the Gulf Cooperation Council and within the broader Middle East.
The Foreign Investment Law (Royal Decree No. M/1 dated 5/1/1421H, corresponding to 10/4/2000G)) and its implementing regulations provide the regulatory framework for foreign investors seeking to invest in Saudi Arabia.
While welcoming foreign capital investment and technology, the government has incorporated certain policy and procedural safeguards in its economic structure to support, promote and protect sectors of the economy that are of national interest to Saudi Arabia. Primary regulatory oversight and policy development is provided by the Supreme Economic Council ( established pursuant to Royal Decree No. 111, dated 17/5/1420H, corresponding to 29/8/1999G), which was formed to further the economic policy of the Saudi Arabian government based on the concepts of comprehensive social welfare, free economy, and an open market system for capital, goods, services and products. The regulatory overseer of licensing and policy implementation appointed under the Foreign Investment Law is the Saudi Arabian General Investment Authority. Policy-driven procedural regulation continues to be implemented through various government entities with wide discretion to affect policy and approve practices under its jurisdiction. These include the Ministry of Commerce and Industry, the Ministry of Petroleum and Minerals, the Capital Market Authority (the securities regulator), the Saudi Arabian Monetary Agency (the Central Bank), the Ministry of Education, the Ministry of Health, and the Communications and Information Technology Commission. Each regulator has wide discretion to approve or reject transactions (including those involving foreign investment) that fall within its sector.
The general rule is that foreign investment (i.e. investment by nationals of states outside the GCC) is permitted across all sectors of the economy other than those on the “negative list” issued and periodically reviewed and updated by the Supreme Economic Council. The negative list currently prohibits foreign investment in exploration, drilling and production of oil and gas, road transportation, real estate investment in Makkah and Medina, publication, television and radio broadcasting and recruitment services. Foreign investment is permitted, but restricted in domestic rail transport, telecommunications, insurance, banking, trading and franchise. However, in practice, certain sectors (including education at all levels) remain closed to foreign investment even though they are not listed on the negative list.
Specific limitations may also arise under other laws, regulations and policies in the form of industry-specific licensing requirements, minimum capital requirements or statutes that expressly prohibit or restrict foreign participation in certain business activities.
For example, a business licence to undertake professional services (e.g., engineering or legal services) in the Kingdom, permits foreign investors to hold an ownership interest of up to 75%, but the remaining 25% ownership interest must be held by at least one licensed professional who is a Saudi Arabian national. Similarly, a business licence to engage in wholesale or retail distribution activities in Saudi Arabia permits foreign investors to hold an ownership interest of up to 75%, provided the initial foreign capital contribution is at least SR20m ($5.3m).
The foreign investor must obtain a foreign investment licence from the Saudi Arabian General Investment Authority, which will take the form of an industrial licence, a service licence or a trading licence. In addition, the approval of other governmental bodies with jurisdiction over certain sectors of the economy (e.g. Ministry of Education, Ministry of Health, the Saudi Arabian Monetary Agency [with respect to banking and insurance], and the Communications and Information Technology Commission [with respect to investments in the telecommunications industry]) may also be required to carry on business activity in a particular economic sector.
There are no regulatory restrictions on converting and transferring funds associated with foreign investments into a freely usable currency at a legal market-clearing rate. There are also no regulatory limitations on the remittance of investment returns such as dividends, interest or management fees through normal legal channels. Such remittances may, however, be subject to taxation under the Saudi Arabian tax laws.
Foreign Investment In Capital Markets
The Capital Market Law (Royal Decree No. M/30 dated 2/6/1424H, corresponding to 31/7/2003G) together with its implementing regulations established both the Capital Market Authority and the Saudi Arabian Stock Exchange (Tadawul) and sets out the framework for investment in the capital market.
The Capital Market Authority has primary jurisdiction over public companies and firms that are involved in securities, investment banking and asset management activities and has the authority to regulate and develop the Saudi Arabian capital market by issuing the required rules and regulations for the implementation of the provisions of the Capital Market Law (e.g. licensing of financial intermediaries, initial public offerings, private placements, protection of investors and the general public from unfair and unsound practices and regulating and monitoring the full disclosure of information related to securities and their issuers).
Foreign investment in public companies listed on the Tadawul may only be conducted through an authorised person licensed by the CMA (authorised person). As a rule, the Tadawul is closed to direct foreign participation. However, the CMA does permit foreign investors, whether individual or institutions, to enter into arrangements with CMA authorised persons to transfer the economic benefit in shares of the companies listed on the Tadawul, pursuant to CMA Circular No. 2-28-2008 dated 17/8/1429H (corresponding to 18/8/2008G) as amended by Resolution No. 3-10-2010 dated 30/3/1431H (corresponding to 16/3/2010G). Capital gains on these arrangements may be remitted to the foreign investor with relatively limited tax effect under the Saudi Arabian tax laws.
There have been recent indications that the current restriction on foreign investors being able to access the capital markets only indirectly through an authorised person is expected to soon be lifted in lieu of a regime that permits certain foreign investors to purchase shares directly in listed companies. If implemented, this will go a long way towards diversifying the investor pool and expanding the investor base, but may introduce greater volatility as the Tadawul will no longer be insulated from direct effects of the global economy.
Although Saudi Arabia’s antitrust merger control regime is still in relative infancy, it is possible for foreign investment transactions to trigger government oversight and review under the Competition Law (Royal Decree No. M/25 of 2004 and the Implementing Regulations to Competition Law, Resolution No. 13/2006 dated 25/11/1427H, corresponding to 16/12/2006G, as amended by Resolution No. 25/2008 dated 9/9/1429H, corresponding to 9/9/2008G). The Competition Law requires the approval of any proposed business combination by any entity or group of entities which would be in a “dominant position” or which would create an “economic concentration” to be approved by the Competition Council established under the law. This law applies to all business entities operating in the Saudi Arabian market but does not apply to any state-owned enterprises.
A “dominant position” means either (a) an entity or a group of entities that has a market share of at least 40% of the total sales for a period of 12 months; or (b) an entity or a group of entities that is in a position to influence the prevailing price in the market. “Economic concentration” means a market share of at least 40% of the total supply of a commodity in the market.
Any combination that is, or may potentially be, subject to these provisions should be notified to the Competition Council, usually by the prospective acquirer, at least 60 days prior to completion. Companies found in violation of the Competition Law are subject to fines not exceeding SR5m ($1.3m) per violation. The Competition Council may order violators to take actions to remove the violation, which actions could include unwinding the underlying transaction.
According to the World Bank’s Doing Business 2012 report released in October 2011, Saudi Arabia ranked as the 12th most business-friendly country out of 183 economies worldwide and has consistently led the GCC on this list. Although down from the 10th position attained in 2010, Saudi Arabia continues to improve in a number of categories and foreign investment in the Kingdom continues to be an attractive option for many foreign investors.