Entering the Saudi Market

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Saudi Market

The Kingdom of Saudi Arabia (KSA) is a powerful economy, with its strength built on holding 15% of the planet’s known oil reserves while also being the largest global exporter of crude oil. As Saudi Arabia increases its international profile, the government is striking a balance between attracting foreign investment into an increasingly entrepreneurial environment, at the same time it seeks to protect the Saudi workforce.

Most private sector workers are expats, which the government is countering with its Saudization, program known as Nitaqat. This sets quotas for the balance between expats and locals in the private sector. Launched in 2011, the program has accelerated since 2018. In certain sectors, only Saudis can be employed and by September 2023 employees such as branch managers, supervisors, customer services and sales agents will all have to be locals.

Even so, Saudi Arabia has issued over 40 licenses to multinationals such as PepsiCo, Deloitte and Unilever as it seeks to rival the United Arab Emirates as the No. 1 business hub for the Middle East and West Asia. By 2023 only companies with a regional headquarters in KSA will be allowed a license.

International companies seeking a foothold in the region by moving to Saudi Arabia must set up a subsidiary in order to hire staff in the country and operate their payroll. The most popular route is to open a limited liability company (LLC), which operates under the Companies Law, as updated in 2016. In a further move, the Ministry of Commerce and the Capital Markets Authority published a ‘Draft Law’ which removed the restriction on a single shareholder LLC being owned by another single shareholder LLC.

Even so, there is a long list of requirements, regulations and responsibilities that go with establishing a legal entity in Saudi Arabia, as well as dealing with several Saudi authorities. They include:

  • The Ministry of Investment Saudi Arabia (MISA), formerly theSaudi Arabia General Investment Authority (SAGIA) – to obtain pre-approval for the application for an international investment license by submitting a comprehensive business and financial plan
  • The Ministry of Commerce (MOC) – reserve unique company name and submit Articles of Association
  • Zakat, Tax and Customs Authority (ZATCA) – company registration is required
  • General Organization for Social Insurance (GOSI) – employers and employees must be registered for making health, social security, pension, and unemployment insurance contributions
  • Submit municipality lease, tax number, registration certificate, bank’s confirmation of deposited share capital to MISA, who then issue the foreign investment license. At this point the business can start operating
  • A minimum of one shareholder is required under the new Companies Law (2016), prior to which the requirement was for two. The shareholder can be a person or entity. There is no requirement on number of directors

Additionally:

  • Sign lease agreement for business premises and register with the appropriate municipality. This process can take up to three months
  • Open business bank account. There is no statutory minimum for share capital, but MISA requires foreign LLCs to have minimum capital of at least SAR 500,000 (€130,750, US$133,180)
  • The subsidiary must publish a résumé of the Articles of Association in the Official Gazette, register with the relevant chamber of commerce, and produce a company seal

Expanding Business into Saudi Arabia

Opening a business in any overseas territory brings issues. Moving staff across the world means lengthy processes to obtain visas and work permits. When employees are in place, who will handle payroll? How will your company deal with regulations on entitlements and benefits, termination, and severance in Saudi Arabia? Drawing up an expansion blueprint is not enough. Your business plan will have to deal with all these issues.

Saudi Arabia is a magnet for foreign investment and workers … but there are inevitably issues in complying with the relevant employment legislation. In Saudi Arabia, this revolves around the Labor Law and the Saudization program, which sets quotas to protect the number of local workers in the expat-dominated private sector.

There are other issues, too. Where will you find manufacturers, offices, and distributors?

Saudi Business Facts

  • Capital – Riyadh
  • Population – 34 million
  • Regions/Provinces – Geographically there are six regions: Eastern, Central, Northern, Northwest, Midwest and Southwest. The provinces are Riyadh, Makkah, Eastern, Madinah, Al Baha, Al Jawf, Northern Borders, Qassim, Ha’il, Tabuk, Aseer, Jizan, Najran
  • Official language – Arabic
  • Economy and world ranking – US$842 billion (2021), 19th
  • Main exports – Mineral fuels and oil, plastics, organic and inorganic chemicals, fertilizers, aluminum, iron and steel, gems and precious metals, honey and dairy products, copper
  • Main imports – Machinery, mechanical appliances, electrical equipment, transportation equipment, chemical products, vegetables
  • Main trading partners – China, UAE, Turkey, France, Germany, Italy, Singapore, Belgium, Egypt, US, Kuwait, South Korea, Malaysia
  • Government – Absolute monarchy, based on Islam
  • Currency – Riyal

Advantages and Challenges of the Saudi Market

Advantages of expanding into the Saudi Arabia Market include:

  • Economy:  Diversification away from oil sees growth in hydrocarbons, natural gas, as well as an increase in tourism and consumer spending
  • Manufacturing:  Output expected to increase alongside investment in domestic industries
  • Finance:  Insurance and business services expected to grow based on increased private sector credit
  • Vision 2030:  The initiative aims to increase role of private sector companies, SMEs, entrepreneurs and innovators

Challenges of expanding into the Saudi Arabia Market include:

  • Oil: Dependency on international prices and economy heavily dependent on the industry
  • Labor force: Relatively high unemployment among local population, which the government seeks to redress with the Saudization program enforcing quotas for numbers of expats in the private sector
  • Stability: Potential tensions due to land borders with Yemen and Iraq, while neighbor Iran is seen as a potential regional rival
  • Business operation: Late payment is common, not legally regulated, and late payment interest is not allowed
  • Bureaucracy: Lacks transparency; legal process can stretch over months and courts are not bound by precedents

Limited Company / Subsidiary or Branch in Saudi Arabia?

For foreign companies to hire staff and operate payroll in the Kingdom of Saudi Arabia (KSA) they must establish a legal entity in the country, with the most popular choice being a limited liability company (LLC). The subsidiary operates under the 2016 amendments to the Companies Law. The subsidiary could also be affected by the ‘Draft Law’ which was published in 2020 by the Capital Markets Authority and the Ministry of Commerce. This lifted the restriction on single shareholder LLCs being owned by another single shareholder LLC.

Another option is to open a branch, but there are differences in how they are established and their operation; procedures can take exceed three months.