Foreign Investment in Saudi Arabia 2024

Foreign Investment in Saudi Arabia 2024

Foreign Investment in Saudi Arabia 2024

FOREIGN INVESTMENT 2024

SAUDI ARABIA

Ibrahim Al Marbae

(Al Marbae & Partners Law Firm)

LAW AND POLICY

Policies and practices

  1. What, in general terms, are your government’s policies and practices regarding oversight and review of foreign investment?

The Kingdom of Saudi Arabia is the largest country in the Arabian Peninsula. Saudi Arabia has a strong and dynamic mergers and acquisitions market. In recent years, Saudi Arabia has undertaken several reforms and implemented various programs to improve the business environment, provide comprehensive service to investors and foster investment opportunities in key sectors of its economy. There is also strong foreign and domestic interest in the defense, retail, power, healthcare and clean energy sectors. Saudi Arabia welcomes foreign investment, which can take a number of forms, including setting up a new company, investing in an existing entity or establishing a joint venture.

Saudi Vision 2030

The Saudi Vision 2030 was announced in April 2016. This is the government’s roadmap to diversify the Saudi economy and address the challenges resulting from lower global energy prices. The plans outlined in Saudi Vision 2030 cover wide-ranging business and social elements that will, if fully implemented, result in fundamental changes, developments and opportunities across all business sectors in Saudi Arabia. The Saudi Vision 2030 sets out a wide range of strategic and economic goals aimed at reducing dependency on oil production and government spending. Particular highlights include:

  • defense industry – 50 per cent of military equipment spending to be localized by 2030;
  • mining industry – to be reformed to stimulate massive growth and 90,000 job opportunities;
  • non-oil sectors – the development of the non-oil sectors with consequent reduced dependence on hydrocarbons;
  • oil and gas – the continued localization of the sector from 40 per cent to 75 per cent development of support sectors, increased gas production with a national gas distribution network;
  • private sector investment – increasing the private sector contribution from 40 per cent to 65 per cent of GDP with particular focus on energy, healthcare, housing and municipal services
  • overseas investment – the PIF to become a global sovereign wealth fund valued at up to US$3 trillion;
  • privatizations– a wide range of government assets to be privatized;
  • renewable energy industry – to be developed with private sector participation;
  • retail and trading sector – to be developed with a view to creating a million jobs through the easing of foreign investment restrictions;
  • education – increasing private sector involvement with a target of increasing percentage of students in non-government higher education;
  • health sector – increasing the private sector contribution to healthcare expenditure with a number of public-to-private partnerships expected;
  • housing – establishment of fast-track licenses, special finance packages and partnerships to encourage private sector investment in housing projects and development of government land for housing projects;
  • foreign investment – increasing direct foreign investment and plans to significantly speed up investment approval times;
  • telecommunications industry – to develop the telecommunications and information technology infrastructure including high-speed broadband; and
  • transportation – the creation of a regional logistics hub with completed and linked internal and cross-border infrastructure.

Saudi Vision 2030 and the accompanying National Transformation Program are, therefore, essential reading for international and domestic companies investing and operating in Saudi Arabia.

Currently, there are no foreign exchange restrictions on the repatriation of capital and profits under the Saudi Foreign Investment Law. Therefore, subject to payment of applicable taxes, a foreign entity who is a shareholder in a company incorporated in Saudi Arabia may freely repatriate dividends received and proceeds of the sale of their shares in that company.

All individuals travelling abroad from Saudi Arabia are required to declare any cash that exceeds 60,000 Saudi riyals.

Main laws

  1. What are the main laws that directly or indirectly regulate acquisitions and investments by foreign nationals and investors on the basis of the national interest?

Saudi law is based on Islamic Law, or Shari’ah. The Saudi government issues rules and regulations to supplement Islamic law when the need arises. In the event of a conflict between Islamic law and government rules and regulations, Islamic law will generally prevail. There is no concept of judicial precedent in Saudi Arabia, which means that the decisions of a court or a judicial committee have no binding authority with respect to another case. In general, there is also no system of court reporting in the Kingdom.

Companies Regulations – Saudi law applicable to Saudi incorporated companies is mainly derived from the Companies Regulations the Companies Regulations cover a wide range of aspects relating to incorporation, regulation, liquidation, dissolution, mergers and acquisitions for private companies. The regulatory authority is the Ministry of Commerce.

Foreign Investment Law

In addition to the procedures contained in the Companies Regulation, foreign shareholders have to obtain the appropriate licenses from the Ministry of Investment (MISA) The Foreign Investment Law outlines the rights and responsibilities of investors in Saudi Arabia. It provides guidelines regarding investment guarantees, repatriation of funds, ownership limitations and mechanisms for resolving disputes. This law aims to encourage and safeguard investments while upholding interests.

The General Authority for Competition

GAC supervises the enforcement of the Competition Law and its Implementing Regulations with the aim of promoting and encouraging fair competition, preventing illegal monopolistic practices, guaranteeing abundance and diversification of goods and services of high quality and competitive prices, and encouraging innovation.

Anti-cover up Law

Foreign nationals may not conduct or invest in any business in Saudi Arabia without a foreign capital investment license issued by MISA. The Anti-Cover Up Law also prohibits any Saudi person from assisting foreign nationals in any way to invest in or carry out any activity without an appropriate license. This law would, for example, prohibit ‘trust’ arrangements whereby a Saudi person or entity holds title to shares on behalf of a beneficial foreign owner.

Scope of application

  1. Outline the scope of application of these laws, including what kinds of investments or transactions are caught. Are minority interests caught? Are there specific sectors over which the authorities have a power to oversee and prevent foreign investment or sectors that are the subject of special scrutiny?

The typical forms of business acquisitions in Saudi Arabia are by way of a share purchase or an asset purchase. A company can merge with another company of the same or of a different kind. Although there is a statutory legal concept of a merger between two companies, mergers are not common in Saudi Arabia.

For sales and transfers of shares in a limited liability company (LLC) to a third party, the statutory pre-emption rights under the Companies Regulations must be waived by all the existing shareholders of the LLC. A shareholders’ resolution of the target company approving the sale and stating that the shares were offered to the other shareholders is required. An approval of the shareholders’ resolution is required by the Ministry of Commerce. In the case of a listed joint stock companies (a public listed company), acquisition of shares generally takes place via a restricted offer of shares or a takeover offer. These transactions are regulated and governed by the Capital Markets Authority, the regulator of listed joint stock companies and establishments involved in securities, asset management, investment banking and brokerage activities.

In an asset purchase arrangement, the buyer may purchase all assets of a target entity or pick certain assets in order to exclude certain liabilities. Written contracts may be required by law or to fulfil an applicable registration requirement. The agreement should clearly identify the assets to be acquired and exclude those to be retained by the seller or target company. The Companies Regulation provides for mergers in which:

  • the companies involved are liquidated and their assets and liabilities are contributed to a newly incorporated company; or
  • one or more companies are absorbed by an existing company.

Yes. Foreign investment is not permitted in a number of sectors, which are specified in a list maintained by MISA. The relevant sectors include:

  • oil exploration, drilling and production;
  • catering to military personnel;
  • security and detective services;
  • tourist orientation and guidance services related to Hajj and Umrah;
  • real estate investment in Makkah and Al Madinah;
  • recruitment offices;
  • commission agents;
  • services provided by midwives, nurses, physical therapy services and certain quasi-doctoral services;
  • fisheries; and
  • poison centers, blood banks and quarantine.

Definitions

  1. How is a foreign investor or foreign investment defined in the applicable law?

Based on my knowledge the Foreign Investment Law is the legislation, for foreign investment in Saudi Arabia. It was put into effect on 10 April 2000. According to this law, a foreign investor refers to an individual or entity from outside Saudi Arabia who invests in projects or activities within the country. Foreign investment can take forms, including establishing an owned company forming a joint venture with a local partner or acquiring shares in an existing Saudi company.

Special rules for SOEs and SWFs

  1. Are there special rules for investments made by foreign state-owned enterprises (SOEs) and sovereign wealth funds (SWFs)? How is an SOE or SWF defined?

In Saudi Arabia, an SOE is generally defined as a company or enterprise where the government, either indirectly through government-related entities holds majority ownership or control. On the other hand, an SWF refers to a state-owned investment fund or entity primarily established for managing and investing surplus funds of a country derived from commodities or foreign currency reserves.

The Investment Law of Saudi Arabia includes provisions relating to the establishment and operation of investments, including those made by SOEs and SWFs. This law provides a framework for investors, with ownership structures to invest in the country. However, specific rules and regulations may vary depending on the sector or industry of investment.

Relevant authorities

  1. Which officials or bodies are the competent authorities to review mergers or acquisitions on national interest grounds?

The General Authority for Competition (GAC) is the regulatory body in charge of implementing and enforcing the Competition Law. The GAC has primary jurisdiction over any matters arising from the application of the Competition Law and the Implementing Regulations even in cases of conflict or overlap with the jurisdiction of other government bodies. New implementing regulations (the Implementing Regulations) were issued by the GAC board of directors and came into force on 24 September 2019. The GAC has also issued specific guidance regarding its interpretation of the rules relating to economic concentration transactions and the circumstances under which transactions are notifiable in Saudi Arabia (the EC Guidelines). The EC Guidelines, among other matters, set out who the GAC considers as parties to an economic concentration transaction, and the method for calculating turnover. The competent authorities to review merger applications include:

  • the Board of the General Authority for Competition; and
  • the Committee for Adjudication of Competition Law Violations (the Committee).
  1. Notwithstanding the above-mentioned laws and policies, how much discretion do the authorities have to approve or reject transactions on national interest grounds?

The authorities have full discretion and authority to approve and reject transactions conflicting with national interest. That said different countries usually have sets of rules that determine the standards, for approving or denying transactions based on interest considerations. This helps ensure that transactions are in line with a country’s political and security goals. National interest factors can include a range of aspects such as protecting industries ensuring national security promoting economic growth and maintaining political stability.

In Saudi Arabia, it is likely that authorities have some level of discretion to evaluate and decide whether a transaction serves the interest. This may involve conducting assessments and taking into account factors such as the nature and size of the transaction its impact on national security, economic implications and alignment with policy objectives.

PROCEDURE

Jurisdictional thresholds

  1. What jurisdictional thresholds trigger a review or application of the law? Is filing mandatory?

Firms intending to participate in an economic concentration transaction shall report this to the GAC and submit the required information at least 90 days before completion of the economic concentration if the total annual sales value of all firms intending to participate in the economic concentration exceeds 200 million Saudi riyals.

Filing is mandatory and must occur at least 90 days prior to the completion of a prospective transaction. The Competition Law does not apply to public establishments and fully owned state enterprises, provided that those entities are solely authorized by the Saudi government (by virtue of Royal Decree or Council of Ministers’ Resolution) to provide the goods, services or commodities subject of the transaction.

National interest clearance

  1. What is the procedure for obtaining national interest clearance of transactions and other investments? Are there any filing fees? Is filing mandatory?

Transactions resulting in an economic concentration must be notified to GAC at least 90 days prior to their completion. Failure to file can result in a fine of up to 10 per cent of the total annual sales value of the products or services subject of the violation.

Separately, the GAC has the power to require violating entities to:

  • remove a violation;
  • dispose of certain assets, shares or property rights, or perform any other act to ensure the removal of the violation;
  • pay a daily fine not exceeding 10,000 riyals until such violation is removed (that fine may be doubled if the violation is not removed within the time period specified by the GAC); or
  • temporarily close down an entity for a 30-day period if a violation is not removed within 90 days of the GAC’s notification of violation.
  1. Which party is responsible for securing approval?

The obligation to file falls on all parties to an economic concentration transaction (i.e, the seller, purchaser and target). The GAC board has set the filing fee at 0.0002 of the combined turnover of all parties participating in the transaction with a cap of 2.5 million riyals in total.

Review process

  1. How long does the review process take? What factors determine the timelines for clearance? Are there any exemptions, or any expedited or ‘fast-track’ options?

The GAC can take up to 90 calendar days to provide a decision following formal filing. The GAC can either approve or conditionally approve or reject the filing.

The 90-calendar-day period begins from the date on which the GAC accepts the completed file and can be paused if it requires additional information as part of its review and there is a delay in the provision of that information. In practice, the GAC has provided approvals within shorter time frames where they saw no competition concerns, although this cannot be guaranteed. There currently is no fast-track review procedure.

It is possible for the GAC to grant exemptions, on a case-by-case basis, to transactions that result in economic concentration if the exemptions would lead to better market performance, provide benefits to consumers that outweigh any detrimental effects of competition, and do not grant exempted entities conditions that would enable them to force competitors out of the relevant market.

  1. Must the review be completed before the parties can close the transaction? What are the penalties or other consequences if the parties implement the transaction before clearance is obtained?

GAC has the power to require violating entities to:

  • remove a violation;
  • dispose of certain assets, shares or property rights, or perform any other act to ensure the removal of the violation;
  • pay a daily fine not exceeding 10,000 riyals until such violation is removed (that fine may be doubled if the violation is not removed within the time period specified by the GAC); or
  • temporarily close down an entity for a 30-day period if a violation is not removed within 90 days of the GAC’s notification of violation.

Involvement of authorities

  1. Can formal or informal guidance from the authorities be obtained prior to a filing being made? Do the authorities expect pre-filing dialogue or meetings?

Firms may initiate discussions on the planned economic concentration transaction before reporting it to GAC. GAC may participate in such discussions based on a written proposal by a party to the economic concentration.

  1. When are government relations, public affairs, lobbying or other specialists made use of to support the review of a transaction by the authorities? Are there any other lawful informal procedures to facilitate or expedite clearance?

We are not aware of such procedures.

  1. What post-closing or retroactive powers do the authorities have to review, challenge or unwind a transaction that was not otherwise subject to pre-merger review?

Closing a transaction prior to receiving clearance from the GAC can result in the same fines as those that apply for failure to file. The GAC may also require the parties to terminate or unwind the transaction. To date, there are no public records of the GAC imposing a fine on parties for closing a notifiable transaction prior to receiving clearance.

SUBSTANTIVE ASSESSMENT

Substantive test

  1. What is the substantive test for clearance and on whom is the onus for showing the transaction does or does not satisfy the test?

The General Authority for Competition (GAC) is required to maintain and encourage fair competition in Saudi markets when reviewing economic concentration. GAC to take into account the following factors:

  • the structure of the relevant markets and level of actual or potential competition between firms in KSA and/or abroad;
  • Parties the financial positions;
  • availability and existence of alternative commodities or services that are available to consumers and clients;
  • product differentiation;
  • the potential impact of the transaction on prices, quality, diversification, innovation or development in the relevant market;
  • actual or potential harm or benefits to competition as a result of the transaction;
  • growth in supply and demand and trends in the relevant market or commodities;
  • barriers to entry or exit in the relevant market, including the continuation or expansion of such barriers and regulatory barriers;
  • whether the transaction will create or strengthen a significant market concentration or dominant entity (or group of entities) in a relevant market;
  • the level and historical trends of anti-competitive practices in a relevant market, either by parties to the transaction or entities influential in such markets; and
  • the views of the public, the parties and sector-specific regulators.

The Implementing Regulations further require that conditional approvals and rejections be reasoned.

  1. To what extent will the authorities consult or cooperate with officials in other countries during the substantive assessment?

We are not aware of such authority.

Other relevant parties

  1. What other parties may become involved in the review process? What rights and standing do complainants have?

Parties affected by economic concentration, including competitors, customers, suppliers, distributors and stakeholders.

Prohibition and objections to transaction

  1. What powers do the authorities have to prohibit or otherwise interfere with a transaction?

If the entities complete the economic concentration before a decision is issued in this regard or the statutory period for its study expires – assigning these establishments to adjust their conditions and end the economic concentration within a specified period, and the establishments must comply with that.

  1. Is it possible to remedy or avoid the authorities’ objections to a transaction, for example, by giving undertakings or agreeing to other mitigation arrangements?

Yes, it is possible to remedy competition issues, for example, by giving divestment undertakings or behavioral remedies. Yes, GAC may adopt a clearance decision subject to conditions.

Challenge and appeal

  1. Can a negative decision be challenged or appealed?

The Committee’s resolutions may be appealed before the competent court within 30 days of the date the violator is notified of the resolution. The Committee decisions become final after 30 days have lapsed and there has been no appeal by the defendant before the competent court as of the date of notification of it or from the date specified for delivering the decision to the parties to the case.

Confidential information

  1. What safeguards are in place to protect confidential information from being disseminated and what are the consequences if confidentiality is breached?

The Authority’s request to provide reports, data, and information from the relevant entities and authorities is not prejudiced. It adheres to the principle of confidentiality to which these establishments and entities are committed.

RECENT CASES

Relevant recent case law

  1. Discuss in detail up to three recent cases that reflect how the foregoing laws and policies were applied and the outcome, including, where possible, examples of rejections.

A conditional approval for the acquisition of Wamid technology to buy 51 per cent of Direct is to merge Arabian Shield Cooperative Insurance Company with Alinma Tokio Marine Insurance.

UPDATE AND TRENDS IN FOREIGN INVESTMENT IN SAUDI ARABIA

Key developments of the past year

  1. Are there any developments, emerging trends or hot topics in foreign investment review regulation in your jurisdiction? Are there any current proposed changes in the law or policy that will have an impact on foreign investment and national interest review?

In May 2023, the Rules governing foreign investment in securities were approved.

* The information in this chapter was accurate as at October 2023.

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“The article’s content refers to the regulations that were applicable at the time of its creation and is intended solely for reference purposes. To obtain accurate information, it is advisable to seek the guidance of a consulting lawyer.”

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