Doing Business in Saudi Arabia

Getting StartedRakesh Bassi – Legal Director

DLA Piper Saudi Arabia

June 2015

Agenda

Route to market

Incorporating a legal entity - SAGIA and other processes

Considerations (including tax, renewals and Saudi labour laws)

Alternatives

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Best route to market

Offshore: Providing services from the parent company without a presence or representation in the Saudi Arabia

Direct sales: Making sales directly to customers, if permitted by law (government procurement exception)

Onshore: establishing an entity

Commercial Agency law: Regulate commercial agency, franchise agreements & distributorship arrangements

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On-shore licensing model/restricted practices

Business model that requires permanent set-up on the ground in Saudi Arabia

Spend money in Saudi Arabia

Situate employees in Saudi Arabia

Establish workshops, office, factory, etc.

Negative list activities

Supreme Economic Council replaced by Committee on Economic Affairs and Energy i.e. Oil & Gas (Expl. and Prod., Land Transport, Security

Restrictions in law - WTO

Commercial Agency law

Pharmaceuticals law

Education

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SAGIA: Initial considerations

Local Partner v 100% foreign owned

Common Forms of Entities

Limited Liability Company or Joint Stock Company

Branch of foreign entities

Professional Services Company

Technical and Scientific Offices

Share Capital

Timing

Opportunity/mandate

SAGIA License

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:

Overview of LLCs vs JSCs

Disadvantages

Joint Stock Company Limited liability Company

Approximately six months for incorporation (a feasibility study must be submitted to MOCI for approval)

Pledges over shares are less acceptable to commercial banks in Saudi Arabia in respect of financings

Less flexibility: minimum of five shareholders, minimum three board members etc. More administratively burdensome with MOCI.

Pre‑emption rights over existing shares under the Companies Law

Founding shareholders subject to a lock‑up period of at least two years before they can dispose of their shares (other than to other founding shareholders)

Preferred shares not permitted

MOCI representatives must attend shareholders' meetings of JSCs – more public scrutiny

Personal liability for shareholders (i) if losses reach 50% or more of the issued share capital and the shareholders do not meet within 30 days and resolve to support the company, or (ii) for incorrect valuations of contributions in‑kind to capital

Advantages

Joint Stock Company (JSC) Limited Liability Company (LLC)

Commercial banks in Saudi accept pledges over shares in respect of financings

Three to six weeks for incorporation (longer time frame for LLCs with foreign shareholding)

Public Offering of Shares are permitted if approved by the CMA More flexible: less capital required and easy management of the company

Shareholders liability only to the extent of value of shares No Lock‑up period required to dispose the shares

No pre‑emption rights for new cash shares unless bylaws provide otherwise

Only two shareholders required to set up an LLC (instead of five shareholders for the JSC)

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SAGIA: Popular activities' classifications

• Services: (construction, installation, maintenance, etc.)

- Local shareholding: none

- Minimum capital: No statutory minimum (500,000 SR)

• Industrial:

- Local shareholding: none

- Minimum capital: 1,000,000 SR

• Trading entity / license entity:

- Local shareholding: 25%

- Minimum capital: 26,667,000 SR

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SAGIA: Other considerations

SAGIA Policy

Proposed business activities permitted by Saudi Authorities

Pre-approval

Showcase expertise, financial stability and reputation in field

No SPV holding company

Mandate support

Entity registration process unlike any other jurisdiction Obtain foreign investment license from SAGIA and commercial registration

certificate from MoCI

Register the entity with multiple government departments

Fulfill labor law requirements

Lack of transparency on regulatory and procedural scheme

Continuing corporate compliance obligations

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Incorporation process

Prepare application form and documents to be submitted to SAGIA

Lodge application to SAGIA (Fast Track available in certain circumstances)

Other approvals (?) Obtain SAGIA License Obtain approval from MoCI for Articles of Association Notarize Articles of Association Publish summary of Articles of Association in local newspaper Open bank account Lease office Obtain Certificate of Registration from MoCI Post-incorporation registration with other ministries

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List of relevant governmental authorities

SAGIA (Saudi Arabian Government Investment Authority)

MoCI (Ministry of Commerce and Industry)

SAMA (Saudi Arabian Monetary Agency)

SIDF (Saudi Industrial Development Fund)

MoL (Ministry of Labour)

Chambers of commerce

DZIT (Department of Zakat and Income Tax)

CITC (Communications & Information Technology Commission)

SFDA (Saudi Food & Drug Authority)

MoH (Ministry of Health)

SASO (Saudi Arabian Standards Organization)

MEP (Ministry of Economy and Planning)

GOSI (General Organization of Social Insurance)

Presidency of Meteorology and Environment

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Practical Considerations going forward

Employment:

• Saudization (increasing the proportion of Saudi employees)

• Expatriates (obtain approvals from SAGIA and the MoL)

Taxation:

• Income tax (20% for all tax payers)

• Zakat (2.5% of total capital resources for Saudi Arabian or GCC-owned entities)

Extracting value - other methods

Corporate secretary:

• Ongoing corporate filing requirements, renewals and follow-ups

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Saudi Arabian Labour laws overview

Permitted to have a non-Saudi general manager

First employee must be a Saudi national (exemption for non-Saudi general managers)

Required to hire a certain percentage of Saudi nationals based on the classification of the legal entity by the MoL and according to the stated SAGIA licensed activities

Expats employees must have a work permit and work visa (issued by their employer) to work in Saudi Arabia

Expat employees may only work for their sponsor

Certain job titles are reserved for Saudi nationals only (such as HR manager, receptionists, personnel relations manager, and more)

Requirement to have separate female entrance, separate female section, and more, if females are employed

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Alternatives to establishing

Commercial Agencies

Commercial Agent - Must be a Saudi national/entity and required to be registered with MOCI

Distribution or Franchise Arrangement.

Consortium - offshore

Contractual JV with local entities sub-contracting Saudi work

Direct sales (if buyer permitted)

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Questions

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Some questions we can help with

What is the best route to market and appropriate structure?

How do I find a good partner?

Are there any restrictions on carrying out our business?

Are there any restrictions and/or requirements on the actual investing company?

Can I buy an off the shelf company? How long is the incorporation process in practice (SAGIA and MoCI) ? How can you assist us in the SAGIA and MoCI process?

As a shareholder in an LLC, do I always have limited liability?

What are the possible management structures that we can put in place?

What are our Saudization requirements? How does it work?

Can the legal shareholding and profits split be different?

Are there statutory reserved matters? What are they and the thresholds?

Is there any statutory pre-emption right – does it apply to an intra-group transfer?

Does Shari'a affect the interpretation of contracts? If so, how?

Can we put in place and enforce options in shareholders' agreements?

What are the most common approaches to "deadlock"?

What rights do minority shareholders have?

Is there anything we can do to give us greater protection and control over the other shareholder(s)?

Can we insert protections within the articles of association that we would typically see in a private equity transaction?

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We are one of few international law firm to provide its clients with Saudi lawyers who are both internationally and locally trained. Through its presence in Riyadh, Jeddah, and very soon Al-Khobar, DLA Piper has over 25 lawyers who permanently live in Saudi Arabia and have trained and qualified in either the UK or the US, as well as those licensed by the Ministry of Justice in Saudi Arabia, and 5 female lawyers - a distinctive offering unrivalled in the Kingdom

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DLA Piper in Saudi Arabia

DLA Piper's lawyers have experience working on ground-breaking matters in Saudi Arabia. Our local and international clients are investing in large scale, unique and highly complex undertakings, as well as diversifying their interests through investment opportunities abroad. These government developers, financial institutions and corporations value DLA Piper's highly commercial, strategic and pragmatic advice, locally or globally.

DLA Piper has offices in Riyadh and Jeddah and soon Al-Khobar in association with Dr Eyad Reda law firm as the required local partner, providing a full range of legal services throughout Saudi Arabia. This genuine 'on the ground' presence in Saudi Arabia offers our clients the best of both international and local experience under one single entity.

The team has extensive knowledge and practical experience across various legal fields including having been deeply involved in the drafting of laws and regulations for the economic cities and SAGIA.

DLA Piper Saudi Arabia is the trading name of the association between DLA Piper Middle East LLP and Dr. Eyad Reda, Practice Licence (115/31) in the Kingdom of Saudi Arabia

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DLA Piper in Saudi Arabia

Dr Eyad Reda, is the Country Managing Partner for DLA Piper in Saudi Arabia and leads the team there. He is a Saudi Arabian lawyer with 15 years' experience advising local, regional and international organisations and is both well connected and very well regarded in the Kingdom.

The team of bi-lingual (Arabic and English) legal practitioners are internationally trained with local know-how and an in-depth understanding of Saudi Arabia’s regulatory environment, market drivers, legal practices and customs. They have extensive knowledge and practical experience across many legal fields and in each case they have experts on the ground in the Kingdom as well as a large pool of experts they can access from around the Middle East and the wider network.

The team is experienced in helping clients successfully navigate the complex regulatory framework associated with corporate and operating structures, which can vary greatly from business to business and across jurisdictions within the region.

Lawyers in Riyadh and Jeddah and soon in Al-Khobar are also experienced in meeting with SAGIA and MoCI as well as other government bodies and contractors.

DLA Piper's Saudi offices pride themselves on providing a first-class service through our:

understanding of the commercial landscape in which you operate - the drivers, the players, the challenges

in-depth understanding of Saudi Arabia and its place in the wider region, its regulatory environments, legal framework, practices and customs

worldwide experience of large-scale projects and transactions, of a size and complexity only recently being seen in the kingdom and the wider MENA region

strong local capability, providing full on-the-ground support and guidance for your local, regional and global transactions in cooperation with all our relevant offices as required

regional network of offices in strategic locations throughout the Middle East, offering a seamless service in all the markets in which you work

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Corporate practice

The Saudi Corporate team advises clients throughout the MENA region on a wide range of transactions, including:

restructuring and joint ventures

mergers and acquisitions (both buy and sell

side)

corporate finance (including equity capital

markets)

corporate establishments and company

secretarial

private equity (investments and

divestments).

general corporate advisory

In terms of acquisitions, restructurings and joint ventures we have a long history and practical experience of advising multinational entities on establishment, complex structurings and negotiating the transaction documents, exists, restrictive covenants and liquidation.

The Middle East Corporate practice is fully integrated into DLA Piper's global

business and is well placed to advise on a broad range of local, regional and

cross-border transactions

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If you have any questions please do not hesitate to contact us.

Rakesh BassiLegal Director, Head of Jeddah office

rakesh.bassi@dlapiper.com M: +966 54 447 0140

DLA Piper is a global law firm operating through various separate and distinct legal entities. For further information please refer towww.dlapiper.com. DLA Piper Saudi Arabia is the trading name of the association between DLA Piper Middle East LLP and Dr. Eyad Reda, Practice License (115/31) in the Kingdom of Saudi Arabia

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