SUBSIDIARY ENTITY SET UP IN SAUDI ARABIA

One of the options for international companies undertaking an expansion into the Middle East would be to consider a subsidiary entity set up in Saudi Arabia to widen their global horizons. There are risks, of course, and establishing a presence in a foreign territory can be costly both in time and money; plus, the effort and financial outlay have no guarantee of bringing success. Therefore, expert guidance is essential for expansion into Saudi Arabia.

Saudi Arabia offers a powerhouse economy built on holding 15% of the world’s oil reserves and being the largest exporter of crude oil. This strength underpins Saudi’s move towards a more diverse economy, encouraging private enterprise and entrepreneurs and striving to rival the United Arab Emirates as the prime business hub for the Middle East and West Asia.

The most common choice for a subsidiary in Saudi Arabia is a limited liability company (LLC), with branch offices being another option, but making such a move is a significant commitment. The sensible alternative is to use a Professional Employer Organisation (PEO) and Employer of Record (EOR), such as Bradford Jacobs, to locate the finest local talent and administer your payroll in Saudi Arabia. Your company will be up and running in days rather than weeks or months without any risks.

How to Set Up a Saudi Arabian Subsidiary?

Step one for companies establishing their profile in the Kingdom of Saudi Arabia (KSA) is to decide the business structure that best fits their expansion plans. The most popular choice is to open a limited liability company (LLC), which operates under the Companies Law, as amended in 2016. In 2020 the Ministry of Commerce and the Capital Markets Authority published a ‘Draft Law’, which proposed lifting the restriction on a single shareholder LLC being owned by another single shareholder LLC.

There is a daunting list of requirements to form a limited liability company, including:

  • Submitting a comprehensive business and financial plan to the Ministry of Investment Saudi Arabia (MISA), formerly Saudi Arabia General Investment Authority (SAGIA) pre-2020, to obtain their pre-approval to apply for an international investment license.
  • Verifying unique company name with the Ministry of Commerce (MOC), submitting Articles of Association and making a formal application to receive a Registration Certificate.
  • Registering for taxation with the Zakat, Tax and Customs Authority (ZATCA).
  • Employers and employees must register with the General Organization for Social insurance (GOSI).
  • Securing lease agreement for business premises and registering with the appropriate municipality, a process that can take up to three months to complete.
  • Opening a business bank account.
  • There is no statutory minimum for share capital, but MISA requires foreign LLCs to have a minimum capital of at least SAR 500,000 (€130,750, US$133,180).
  • Submitting to MISA the license from the municipality, tax number, Registration Certificate, and bank’s confirmation of deposited share capital. MISA then issues the foreign business investment license. At this point, the business can start operating.
  • Publishing a résumé of the Articles of Association in the Official Gazette, registering with the relevant chamber of commerce and producing a company seal.
  • A minimum of one shareholder is required under the new Companies Law (2016), before which the requirement was for two. The shareholder can be a person or entity. There is no requirement on the number of directors.

Requirements to Set Up a Saudi Arabian Subsidiary

  • Business and financial plan submitted to the Ministry of Investment Saudi Arabia (MISA), formerly Saudi Arabia General Investment Authority (SAGIA) pre-2020, to obtain pre-approval for the application to set up the subsidiary.
  • A unique company name verified and reserved with the Ministry of Commerce (MOC).
  • Articles of Association submitted to the MOC with a formal application to be issued a Registration Certificate.
  • Registration with the Zakat, Tax and Customs Authority (ZATCA).
  • Registration with the General Organization for Social Insurance (GOSI).
  • Lease for business premises registered with the appropriate municipality.
  • Business bank account.
  • Deposited capital. Although there is no statutory minimum, MISA requires foreign LLCs to have a minimum capital of at least SAR 500,000 (€130,750, US$133,180).
  • Collated documents, including a license from the municipality, tax number, Registration Certificate, and bank’s confirmation of deposited share capital, are supplied to MISA, who then issues the foreign business investment license. At this point, the business can start operating.
  • Résumé of Articles of Association published in the Official Gazette.
  • Registration with the relevant chamber of commerce and creating a company seal.
  • A minimum of one shareholder is required under the new Companies Law (2016).

Benefits of Setting Up a Saudi Arabian Subsidiary

International companies expanding into Saudi Arabia by establishing a limited liability company (LLC) as a subsidiary will operate under the Companies Law, as amended in 2016. In 2020, the Ministry of Commerce and Capital Markets Authority issued a ‘Draft Law’. Among various proposals, it removed the restriction on a single-shareholder LLC being owned by another single-shareholder LLC.

Subsidiaries in Saudi Arabia have an independent legal identity from the parent company. The incorporation process is prolonged and differs from the procedures for Saudi companies. Those form the other Gulf Cooperation Council nations, Oman, Bahrain, the United Arab Emirates, Qatar and Kuwait.

The liability of the parent company and its shareholders is generally limited to their invested capital. The subsidiary provides the parent company with the potential for further expansion throughout the Middle East and West Asia as a stepping stone into other regional economies. Additionally, the subsidiary can ‘test the market’ by following its own business ideas and entering into different areas of operation for the owning company. The subsidiary is also free to draw up its own contracts and agreements with clients.

Other benefits for a subsidiary:

  • Easier to obtain potential benefits and incentives and enter into contracts with other Saudi and GCC companies
  • More impact with clients and suppliers, as subsidiaries imply more permanency than branches
  • Employees feel there is more stability and job security than from being with a branch

Subsidiary Laws in Saudi Arabia

The Companies Law is the governing legislation for companies operating in Saudi Arabia. It was updated in 2016, and then in 2020, the Ministry of Commerce and Capital Markets Authority issued a ‘Draft Law’. Various amendments included removing the restriction on a single-shareholder limited liability company (LLC) being owned by another single-shareholder LLC.

Registration and Documentation:

  • Obtain pre-approval for application from the Ministry of Investment Saudi Arabia (MISA), formerly Saudi Arabia General Investment Authority (SAGIA) pre-2020.
  • Confirm unique company name with the Ministry of Commerce (MOC), which must include ‘limited liability’, submit Articles of Association and make a formal application to receive a Registration Certificate.
  • Register for taxation with the Zakat, Tax and Customs Authority (ZATCA).
  • Register with the General Organization for Social Insurance (GOSI).
  • Sign the lease agreement and register with the relevant municipality.
  • Submit the lease from the municipality, tax number, Registration Certificate (which must be renewed annually), bank’s confirmation of deposited share capital to MISA, who then issue the foreign business investment license. At this point the business can start operating.
  • There is no statutory minimum for share capital, but MISA requires foreign LLCs to have a minimum capital of at least SAR 500,000 (€130,750, US$133,180). A bank account must be opened as part of the incorporation process.

Accounts and Taxation:

  • Annual returns must be filed to ZATCA.
  • Company manager(s) must prepare a report on distribution of profits to the MOC within three months of the end of the financial year.
  • Corporate Income Tax rate is 20% on net profits and generally non-Saudi investors are liable for tax on profits gained in Saudi Arabia.

Management:

  • A minimum of one shareholder is required under the new Companies Law (2016), prior to which two were required. The shareholder can be a person or entity.
  • Shareholders are generally not liable for the company’s debts beyond their own financial contribution, although certain circumstances can remove this protection.
  • Shareholders must hold at least one annual meeting within four months of the end of the fiscal year.
  • There is no legal requirement for a board of directors or regarding their nationality if there are directors.
  • The general manager must be a Saudi resident.

LOOKING TO EXPAND INTO SAUDI ARABIA?

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