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Issue No:7 - February, March 2002
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| The past few years have brought a growing realization that Saudi Arabia must encourage foreign investment in order to stimulate its economy. To this end, the Kingdom has been actively promoting the nation overseas as a stable and attractive investment location. Anticipating a substantial increase in foreign investments, the Saudi government has been preparing local business and industry for foreign competition without preferential trade protections. A new era has dawned in the Kingdom as a direct consequence of the following favorable factors: |
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The Kingdom bases its economic system upon free enterprise and is now in the final stages of accession into the World Trade Organization. |
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The Kingdom enjoys robust trade relationships with the world’s most highly developed nations. As the largest market among Gulf nations (having 25% of total Arab GDP), Saudi Arabia has friendly relations with all other nations through bilateral and multinational trade organizations. |
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The Kingdom is transforming its economy by privatizing its former state-run companies in vital industries such as telecommunications, transportation, tourism, and utilities. When this process is completed, the private sector’s share of Saudi GDP will double to over 60%. |
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The Kingdom has a very plentiful supply of skilled labor and low overall labor costs. Although the unemployment rate among Saudi men remains relatively high, the quality of the work force continues to improve. The Saudi government emphasizes education, particularly specialized training programs to fill jobs in computer and technological sectors. Unskilled labor costs remain very low, comparable to other countries. |
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The Kingdom has a well-developed banking system, which is eager to provide financing at reasonable interest rates. Foreign-based corporations have discovered the ease of obtaining loans to finance their projects which do not require Saudi sponsorship. Since 2000, foreign investors no longer need to have a Saudi partner to operate in the Kingdom, although there are tax incentives for having a certain percentage of Saudi nationals own or work in the company. |
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Doing business in Saudi Arabia can take many forms. The most common legal entity for establishing a joint venture with a Saudi partner is a limited liability company (LLC). An LLC has fewer legal formalities and a lower minimum required capital investment than a private joint stock corporation (JSC). For example, only two shareholders are required for an LLC as opposed to five for a JSC. An LLC can be established with only SR 500,000 in capital, whereas a private joint stock corporation must have at least SR 2 million in capital.
Before the 2000 Foreign Investment Act, foreign companies needed a Saudi sponsor and partial Saudi ownership to pursue commercial activities in the Kingdom. Even today, foreign companies who do not establish a branch office or form a JSC or LLC choose sponsorship. If the work is pursuant to a contract with the Saudi government, the foreign contractor must obtain a temporary commercial registration within thirty days of entering into the contract. It must also identify a “service agent” under the Saudi Service Agent Regulations. In bidding on a government contract, the company must guarantee one percent of the total bid amount. If successful, the bidder must increase the guarantee to 5% of the total contract amount. Since June 1999, government contracts must include development of training programs for Saudi nationals and the involvement of Saudi universities whenever possible. Foreign contractors operating under government contracts must subcontract at least 30% of the contract value to wholly owned Saudi contractors unless they can demonstrate that no Saudi contractor is able to provide the required goods or services. If a foreign company has Saudi nationals as a majority of its shareholders, it need not meet this subcontracting requirement.
Foreign companies that wish to engage in the importing and local purchase of goods for resale in the Kingdom must employ a commercial agent. A qualified commercial agent must hold a valid Saudi registration allowing him to act as an agent or distributor, and he has to be completely independent of the foreign principal. All directors and authorized representatives of the commercial agency must be Saudi nationals.
Franchising offers greater flexibility than commercial agencies and does not require the establishment of a branch office or a JSC or LLC. The Saudi cmmercial agency law applies to franchises and legal advice is recommended to prevent future difficulties between franchisor and franchisee. The foreign company selects a Saudi franchisee and enters into an agreement which must be approved by the Kingdom’s Ministry of Commerce.
Clearly, foreign companies interested in investing in Saudi Arabia have a wide range of ways to do so. The Saudi government continues to liberalize its economy and has been very progressive in encouraging foreign investment. These beneficial developments have produced an unprecedented inflow of foreign capital to continue to improve the lives of Saudi citizens and enhance the Kingdom’s stature as a major player in the global community. |
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Especially since the terror attacks on the United States last September, the Saudi government has been seeking ways to curb money laundering in the Kingdom. The entire Middle East banking industry has been concerned about illicit activities caused by market liberalization, lower trade barriers, and the increased speed of global financial transactions. By one estimate, more than $1.4 trillion in illegal funds is circulating in the global banking system.
The Saudi Arabian Monetary Agency (SAMA) has established special units at all Saudi banks to combat money laundering. So far, most suspicious account holders have been non-residents of Saudi Arabia. A primary reason for this is that SAMA must pre-approve the opening of any bank accounts for non-residents. This requirement is an excellent curb on suspicious banking activities within the Kingdom.
One unintended benefit of the increased global emphasis on eradicating terrorism is the return of Saudi investors to commit their resources in the Kingdom. Saudi investors have grown increasingly cautious in investing abroad and now are investing their money in the Kingdom as investment opportunities continue to grow. SAMA reports that the Saudi money supply grew by more than 25% from October to the end of November 2001.
SAMA has promised that bank account information will remain confidential, and that monitoring will not be selectively performed or designed to target Saudi account owners. |
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Saudi Arabia’s telecommunications industry is poised for incredible growth. Saudi Telecom Company (STC) already has awarded Ericsson and Nokia an SR 2.545 billion contract to add 2.8 million lines to the Kingdom’s mobile phone network within the next two years. This will more than double STC’s current capacity of 2.2 million lines. Phone charges are expected to decline before STC is privatized and international companies enter the Saudi market.
The Saudi capital of Riyadh is expected to become the country’s premier center for telecommunications and information technology. As home to many of the nation’s scientific and educational centers, Riyadh is well-positioned to house facilities for information technology.
Currently, the Kingdom is spending over $6 billion to install additional digital lines and fiber-optic connections. Internet use is growing at 8% per month, thus stimulating the demand for modernizing and expanding the nation’s telecom infrastructure. |
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This March will mark the first anniversary of the Kingdom’s new social insurance system. Workers may participate in pension insurance by subscription, which is set at 18% of one’s salary. Employers essentially contribute one-half of this amount. Workers become entitled to receive their pension at age 60 or when disabled, whichever occurs first. Workers injured at work also receive compensation benefits through vocational risk insurance. The subscription rate of 2% of a worker’s salary is wholly paid by the employer. The pension insurance system is private and voluntary and excludes civil service employees, the armed forces and law enforcement personnel, foreign workers, and those engaged in agricultural, marketing, pastoral, and maritime activities.
Even though foreign workers are exempt from the social insurance system, the Kingdom is working on a plan to bring all expatriates into the system. If expanded, more than 7 million expatriates currently working in Saudi Arabia would be insured and entitled to receive pension benefits and compensation for injuries and deaths incurred on the job. |
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Since the beginning of the year, foreigners working in Saudi Arabia have enjoyed greater freedom of movement within the Kingdom. Under the new law, the term “employer” will replace “kafeel” or sponsor in official documents.
Currently, foreign workers account for 59% of civil servants in the country. If the current number of expatriate labor remains unchanged, jobs for Saudi citizens will diminish over the next 30 years. The Ministry of Labor and Social Affairs is pushing private companies to increase the number of Saudi employees by 5% per year and reduce the number of foreign workers by 150,000 a year.
If this is accomplished, by the year 2030, the Kingdom’s labor force would be about 13.5 million of which all but one million would be Saudi citizens. |
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| Disclaimer |
| Material contained in this newsletter is for general information only and should not be interpreted as legal advice on any particular matter. Readers are advised to consult their legal advisor directly on any issues discussed herein. Transmission of this document does not create any attorney-client relationship. Although considerable care has been taken to ensure the accuracy of the material in Legal Update, the Law Firm of Dr. Khalid Alnowaiser is not responsible for any errors contained herein. |
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12/4/2009:Ministry steps up clampdown on copyright piracy 12/4/2009:Construction of New Office is near to completion 14/4/2009:JCCI preparing black list of car rental defaulters 7/4/2009:Justice Ministry warns ‘lawyers’ without permits
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