For a Startup Business Setup in Saudi Arabia you as an investor need to know many things like why to start business in KSA, types of business forms, features, advantage and disadvantage of company types, legal requirements, types of taxes, and company incorporation process in Saudi Arabia, etc. All these things are given in this article.
Why Startup Business Setup in the Kingdom of Saudi Arabia?
The Kingdom of Saudi Arabia is a focal point to visionary business icons of the world who always search places and possibilities for their business expansion through future investments in new businesses. So visionaries of world are preferring for startup business setup in Saudi Arabia because of the Kingdom’s exciting potential and opportunities such as:
- Growing Population: The population of KSA is now 36,408,820 in 2022 which rises from 26,400,068 in 2007. And by the end of 2025 Saudi’s population is expected to reach 38,380,000 (38.38 million).
- Geographic Location: The strategic location of Saudi Arabia is the heart of major trade routes with 3 continents.
- Growing Economy: Growing economy of Saudi Arabia by 4% in 2022 as total public revenues forecasted to reach SAR1,045 billion in 2022 with an expected budget surplus SAR 90 billion (2.5% of GDP).
- Vision 2030: Vision 2030 of Saudi Arabia has opened the door for new businesses in diverse fields for foreign direct investment (FDI).
- Business Opportunities: Emerging business opportunities due to liberalization of the Kingdom’s economy in tour and travels, hospitality, food and beverage, construction, healthcare, cleaning, etc.
- Double Tax Treaties (DTT) Policy: This TTD between two nations helps both countries to get complete exemption of taxes on the import and export of goods.
- New Business Law: The New Company Law 2022 of Saudi Arabia supports the objectives set in Vision 2030, protects business interest, allows flexibility in company incorporation process, empowers private sectors, follows international business practices, and develops an ease of doing business atmosphere in the KSA.
Company Set up in the Kingdom of Saudi Arabia
Saudi Arabia is the largest free-market economy in the Middle East and North Africa (MENA). It holds an approximate 28% share of total Arab GDP due to its huge oil industry. It is the world’s largest petroleum exporter as it has nearly 16% of global petroleum and 5% of natural reserves. As per Arab News on May 23, 2022 Saudi Arabia’s economy is expected to grow by 7.6% in 2022, ahead of the Gulf Cooperation Council (GCC) combined growth of 5.9% based on the Global Economic Update report of the World Bank. All these factors open a wide door for a startup business setup in Saudi Arabia.
To reduce its dependence on oil exports’ revenue, diversify the economy and its revenue sources the government of Sausi Arabia has taken a number of economic and social policy reforms for attracting FDI, expanding private firms and MSMEs’ role in national economy, employment creation, women’s empowerment. It has also reformed tax systems, business setup legal requirements, company incorporation procedures, ease of doing business, etc. Therefore, to make all reforms successful for company setup in the Kingdom of Saudi Arabia the government took the following initiatives:
- Launched the “Saudi Vision 2030” in April 2016,
- Transformed SAGIA into MISA in 2018
- Created “Invest Saudi” a unit of Ministry of Investment of Saudi Arabia (MISA)
- Launched “National Transformation Program (NTP) 2021-2025”,
- Passed “New Company Law 2022”.
The key objectives of Saudi Vision 2030 are to build a vibrant society, a thriving economy and an ambitious nation. The Saudi Arabian General Investment Authority (SAGIA) had already undergone an important sea-change in its entity and role in 2018. It has transformed from being a licensing issuing agency to adopting a role of investment icon and transformed into the new Ministry of Investment of Saudi Arabia (MISA).
To make its objectives realized the Ministry of Investment of Saudi Arabia (MISA) created its unit ‘Invest Saudi’ and used it as a tagline for the Kingdom’s marketing campaign encouraging global investors to prefer Saudi Arabia in their investment plans.
The National Transformation Program (NTP) was launched in 2016 to realize and achieve Vision 2030 strategic objectives like government operational excellence, well structured infrastructure for achieving economic goals, and raising national standards of living through business setup in Saudi Arabia. It works with Saudi 7 government entities for achieving 34 strategic objectives. These government entities are Ministries of Commerce, Investment, Justice, HRD, Social Development, Communication, Information Technology (IT), Environment, Water & Agriculture, and Ministry of Economy & Planning.
Types of Startup Business for Investors in Saudi Arabia
To enhance the foreign direct investment (FDI) in the KSA and develop a business ecosystem more cooperative and easy for all foreign and local investors, the Saudi New Company Law 2022 has made some changes in old company law and introduced a new company’s type so that business setup in Saudi Arabia can be preferred by foreign and local investors. Presently the types of startup business forms available for investors in Saudi Arabia are:
- General Partnership or Joint Liabilities Company (JPC/JLC),
- Limited Partnership Company LPC),
- Joint Stock Company JSC),
- Simplified Joint Stock Company (SJSC),
- Limited Liability Company (LLC)
The Saudi Company Law also allow foreign companies in Saudi Arabia to operate their businesses here with two specific business forms:
- Foreign Branch Office, and
- Foreign Representative Office.
Note: The New Company Law 2022 has introduced a new type of company, “Simplified JSC (SJSC)” and removed the old one, “Partnerships Company”. It can be the most successful entity for startup business setup in Saudi Arabia.
Features, Advantages and Disadvantages of Company Types in KSA
Each types of companies for startup business setup in Saudi Arabia has its own important features, advantages, and disadvantages for investors, for example:
1. General Partnership or Joint Liability Company in KSA
Features of General Partnerships
- A general partnership is a business enterprise of two or more individual partners who share joint responsibility and liability for the company’s duties and debts.
- The general partnership company’s name should consist of the partners’ name to show partnership.
- The share of partners in the company may not be negotiable instruments. Any partner can waive their share either with the partners’ consent or as per the contract’s terms and conditions.
- However, when a partner withdraws from the partnership, he/she shall not be liable for the partnership’s debts after one month from the withdrawal.
- Sharing of the company’s profit and loss is decided according to the agreement made before the commencement of the partnership.
Let’s know the merits (advantages) and demerits (disadvantages) of General Partnership as a startup business setup in Saudi Arabia.
Advantages and Disadvantage of Joint Liability Company in KSA
|Advantages of JLC||Disadvantages of JLC|
|Partnership business is easy to form.||It is not stable like others business firms|
|Company is exempted from taxation and all income, deductions and credits are passed to the partners.||Two or more individuals can set up partnerships, but enterprises can’t.|
|Tax exemption makes filing tax returns more easy.||Liability of each partner is not limited and all partners are jointly and severally liable to third parties for the company’s all obligations.|
|All partners provide a variety of skills to solve different tasks.||It lacks leadership because all partners are on an equal footing.|
|Partnership brings more resources and capital to conduct business collectively.||It leads to conflict frequently if the partners are not cooperative to each other.|
2. Limited Partnership Company (LPC) in KSA
Features of of LPC
Limited Partnerships companies are similar to limited liabilities partnerships companies. The features of this business setup in Saudi Arabia are as follows:
- This company is formed between two classes of partners, general partners or joint partners and limited partners or dormant partners.
- The general partners are liable for the partnerships’ debts. They are also
responsible for the day to day running and operations of the business and external management of the company.
- The limited partners are only responsible for the partnerships’ debts to the extent of their investment i.e. share in the capital. They are not involved in the day to day operation or external management of the company. However, they can participate in the internal management of partnership as per the partnership agreement.
Advantages and Disadvantages of Limited Partnership Company in KSA
Let’s know the advantages and disadvantages of this startup business setup in Saudi Arabia as given in the table.
|Advantages of LPC||Disadvantages of LPC|
|Limited Partnership helps in spreading the risk in a better manner among different partners.||All earned profits are distributed among partners in the same tax year without any option to carry over to a future tax year.|
|Limited partners have no liability for partnership obligations beyond their capital contributions.||Only general partners have full liability of the partnership obligations.|
|It attracts passive investors easily.||Limited partners can’t be involved in the company’s external management.|
3. Joint Stock Company (JSC) in KSA
Features of of Joint Stock Company in Saudi Arabia
Different characteristics of JSC for startup business setup in Saudi Arabia are as follows:
- At least two minimum shareholders are required with no maximum limit to form a joint stock company in Saudi Arabia.
- Both individuals, corporate entities, and governmental bodies may be its shareholders.
- There are two types of JSC, Closed Joint Stock Company and Public Joint Stock Company.
- Closed JSC is not listed on the Saudi Stock Exchange whereas Public JSC is listed.
- A joint stock company with a single shareholder can be incorporated by an individual or corporate entity or governmental body if the capital of the shareholder is equal to or exceeds SAR SAR 500,000.
- The shareholders of JSC are liable for the debts of the company only to the extent of their capital shares.
- As per Saudi New Company Law 2022, the capital of a joint stock company must be a minimum of SAR 500,000 which was SAR 5 millions earliers.
- A joint stock company must have a board with a minimum of 3 and maximum of 11 directors as its members appointed by the general meeting to administer the company.
- The board of JSC must appoint a chairman and a vice chairman from among its member directors.
- The JSC is somehow the most regulated corporate body in Saudi Arabia as per its incorporation procedures and the degree of control of the Ministry of Commerce and Industry.
Advantages and Disadvantages of Joint Stock Company in KSA
|Advantages of JSC||Disadvantages of JSC|
|A joint stock company is permitted to sponsor its employees for residency purposes.||Activities of JSC are limited to the approval of MISA and set forth in its Articles of Association.|
|It qualifies for funding from Saudi Industrial Development Fund at discounted rates.||Its dissolution process is fairly involved and costly if partners are not cooperative.|
|It can undertake projects in both the public and private sectors throughout the Kingdom.||Its initial capital may be large depending on the company’s objects.|
|It has flexibility in shares’ transfer following a 2 years locking period.||Founding shareholders can’t dispose of their shares before 2 years of locking period.|
|Foreign company can be a partner in a joint stock company.||Its foreign company as partner is not allowed by MISA to become a partner in another company or form a branch in KSA with similar or overlapping objects.|
|It has easier access to capital through issuance of bonds (sukuk) and shares.||JSC is subject to more scrutiny and control as compared to LLC by the Ministry of Commerce and Industry.|
4. Simplified Joint Stock Company (SJSC) in KSA
Features of of SJSC
Saudi New Company Law 2022 has introduced a new form of startup business setup in Saudi Arabia named as the “simplified joint stock company (SJSC)”. The features of this company are:
- The SJSC comprises the benefits of a limited liability company (LLC) and a joint stock company (JSC).
- The aim of this company is to fulfill the needs of new investors, entrepreneurs, private equity and venture capital investors.
- Like Joint Stock Company (JSC), the capital of SJSC is issued in negotiable shares for trading in the capital market.
- Contrary to JSCs, there is no minimum capital requirement limit for SJSC.
- It can create any type of special shares such as non-voting shares or premium shares.
- It also has simple management structures and requirements as it can be managed by one or more managers, or board of directors.
Advantages of Simplified Joint Stock Company in KSA
Let’s discuss the advantage of this new startup business setting in KSA which are:
- The SJSC is more flexible to adapt to each type of business form’s features.
- Its incorporation process is very agile.
- Shareholders of SJSC have maximum freedom to establish the rules of its operation in the bylaws.
- It requires no minimum capital to incorporate.
- No percentage of capital required to be paid at the time of company formation.
- If SJSC’s purpose is not specified in its Act Constitution then the company can do any lawful business activity.
5. Limited Liability Company (LLC) in KSA
Features of LLC
Some of the most important features of a limited liability company as per Saudi New Company Law 2022 for establishing startup business in Saudi Arabia are the followings:
- The limited liability company in KSA is a private sector company which conducts businesses in agricultural, commercial, contracting and service areas with Saudi and foreign partners.
- It is not allowed to do business in insurance, banking, and investment fields.
- A minimum of 2 (old law) and a maximum of 50 shareholders are required for forming a limited liability company (LLC) in Saudi Arabia.
- As per Saudi New Company Law 2022 an individual or a company may form single shareholder limited liability companies. It has removed restrictions on a single shareholder LLC having another single shareholder LLC.
- The LLC shareholders are liable for the debts of the company only to the extent of their capital shares in the firm.
- The article 179 of the New Law 2022 allows the LLC to issue tradable debt or sukuk instruments according to the Capital Market Authority Law to have multiple channels to finance the company’s activities.
- The LLC can be managed either by an individual manager or by a board of managers.
- Companies formed in the Kingdom with foreign participation under the Foreign Investment Regulations should be able to enjoy the advantages and incentives available to national companies.
- That is why the LLC is the most popular business setup and most common corporate sector for foreign direct investment (FDI) in Saudi Arabia.
Advantages and Disadvantages of Limited Liability Company (LLC) in KSA
The merits and demerits of this startup business setup in Saudi Arabia for investors are:
|Advantages of LLC||Disadvantages of LLC|
|LLC is most preferred for startup businesses to avoid double taxation.||LLC’s activities are limited to the objects approved by MISA/SAGIA and kept in its Articles of Association (AOA).|
|It requires the least continual maintenance after incorporation.||Its foreign partner can’t have complete control over the company’s management unless the other partner is an affiliate.|
|It secures the partners’ personal assets from litigation filed against the LLC.||It is not the right business form if its future plan is to go public listing. For listing on the Saudi Stock Exchange (SSE), it has to first convert to a joint stock company (JSC).|
|It can sponsor its employees for residency purposes.||In case a member dies or files for bankruptcy, the LLC will be automatically dissolved.|
|In most cases it qualifies for financing from the Saudi Industrial Development Fund (SIDF) at concessional rates.||If any member of LLC resigns it must be closed and if other members want to continue they have to incorporate a new LLC.|
|It can undertake projects in both the public and private sector and promote business throughout the KSA.||A foreign company partner of LLC is not permitted by SAGIA to become a partner in another company or form a branch with similar or overlapping objects.|
6. Foreign Branch Office in Saudi Arabia
Features of Branch Office
- The Saudi Company Law and its foreign investment regulations allow a foreign company to set up its branch in the Kingdom subject to approval by MISA/ SAGIA.
- Foreign branch office formation process is similar to that of LLC without the approval of Articles of Association (AOA).
- Its capital requirements are the same as that of LLC as per the proposed types of activities to be undertaken.
Advantages and Disadvantages of Foreign Branch Office in KSA
|Advantages of Branch Office||Disadvantages of Branch Office|
|Branch office’s incorporation is easy as it doesn’t have Articles of Association for approval.||In comparison to the Branch Office, Saudi owned companies are favored for government contracts or projects.|
|It has approved authority to conduct businesses throughout the Kingdom.||Its work activities are confined to approved licensed objects by MISA/SAGIA.|
|As per approved subjects it can work on both public and private sectors’ projects.||It can’t enter into marketing, advertising or trading businesses without a minimum of 25% Saudi equity participation and an increased capitalization.|
|There is no need for a new article of association.||Its parent company’s liability can’t be quarantined in KSA.|
7. Foreign Representative Offices in Saudi Arabia
Features of Representative Offices
- Foreign representative offices in KSA are allowed under Saudi’s law in the form of technical scientific services office (TSSO).
- Only foreign pharmaceutical business firms are legally permitted to establish a TSSO in Saudi Arabia.
- Foreign non-pharmaceutical companies can be allowed to form TSSOs with only the approval of MISA/SAGIA and MOCI.
- The TSSO formation process is similar to that of forming a branch office with the requirements of the foreign company to enter into a distributorship agreement with a Saudi distributor.
- It can’t engage in commercial activities or earn revenue except providing technical information, studying the market, and conducting technical research in products.
Advantages and Disadvantages of Foreign Representative Offices in KSA
|Advantages of Representative Offices||Disadvantages of Representative Office|
|Representative offices formation as TSSO is similar to a branch and easier to a company.||A TSSO doesn’t have an independent legal personality.|
|It doesn’t require capital for its formation.||It doesn’t have licensed objects like a branch office, so can’t perform its services outside of local promotion.|
|It may bring its employees in KSA with full control over them.||It can’t perform any fee earning work and is expected to act as a liaison office for the locally appointed Saudi distributor.|
8. Foreign Temporary Commercial Registration in Saudi Arabia
Features of TCR
- A temporary commercial registration (TCR) allows a foreign business firm to do only business in an allotted government contract.
- Its registration process is similar to that of a foreign branch office in KSA.
- If a foreign firm is a prime contractor it must first obtain a temporary license from SAGIA/MISA then it can apply to MOCI for a TCR.
Advantages and Disadvantages of Foreign TCR in Saudi Arabia
|Advantages of TCR||Disadvantages of TCR|
|TCR doesn’t require capital for its formation.||A foreign company can’t obtain TCR before having a government contract.|
|It can’t be applied without having a government contract.||A TCR license is limited to the scope and duration of the allotted contract only.|
|It can be obtained for consulting projects.||A foreign company given a TCR can’t promote its businesses in KSA.|
|A temporary commercial registration (TCR) may be converted into a permanent commercial registration (PCR) later on.||Generally TCRs are not available with subcontracts on government projects with some exceptions.|
Legal Requirements For Setting of Startup Business in Saudi Arabia
Any investor either local or foreigner who wants to open a startup business setup in Saudi Arabia has to fulfill some legal requirements. It requires a unique trading name and registered address before company incorporation in the KSA. Other legal requirements for setting of startup business in Saudi Arabia are given in the table:
|Requirements||General Partnership||Limited Partnership||Joint Stock Company||Simplified JSC|
|Number of Shareholders||Two or more||Two partners||Two to unlimited||N/A|
|Capital Requirement||No minimum capital requirement.||No minimum capital requirement.||Minimum of SAR 500,000.||No minimum capital requirement.|
|Requirements of License*||License is required from SAGIA/MISA.||License is required from SAGIA/MISA.||License is required from MOCI.||N/A|
|Management||Managed by all partners||Both general and limited partners involved internal management but day to day operation is managed only by general partners.||Governed by a board of directorsappointed by general meeting.||Managed by one or more managers or board of directors.|
|Work Scope||As per approved subjects by MISA/SAGIA & mentioned in AOA.||As per approved subjects by MISA/SAGIA & mentioned in AOA.||As per approved subjects by MISA/SAGIA & mentioned in AOA.||As per approved subjects by MISA/SAGIA & mentioned in AOA.|
|Liability||Joint liability of partners||General partners have liability for partnerships’ debts.Limited partners have liability as per capital’s share.||All shareholders have liability of debts as per their capital’s share.||N/A|
|Shares Transfer||N/A||N/A||Shareholders don’t have constitutional preemption protection in shares transfer.||N/A|
|Requirements||Limited Liability Company||Branch Office||Representative Office|
|Number of Shareholders||One to fifty||N/A||N/A|
|Capital Requirement||No minimum capital requirement except some SAGIA approved businesses that require minimum capital.||Capital requirements are the same as that of LLC.||No capital requirement.|
|Requirements of License*||Foreigners- foreign capital investment license from SAGIA. Others- business license from MOCI.||License from SAGIA.||License from SAGIA.|
|Management||Managed either by an individual manager or by a board of managers.||Managed by parentCompany through a legal representative appointed in KSA.||Managed by head office.|
|Work Scope||Agricultural, commercial, contracting and service fields.||As per approved subjects by MISA/SAGIA & mentioned in AOA.||Market study & technical research in products.|
|Liability||All shareholders have liability of debts as per their capital’s share.||N/A||N/A|
|Shares Transfer||Constitutional pre-emption privilege is applicable to shares transfers to third parties.||N/A||N/A|
*Note: All foreign companies and those individuals who are not nationals of the Gulf Cooperation Council (GCC) and they want to invest for a startup business setup in Saudi Arabia need approval and investment license from the SAGIA.
Types of Taxes for Company Setup in Saudi Arabia
Any company as a business setup in Saudi Arabia are taxed on categories like:
- Service Company Tax – 20%
- Local Saudi Companies Tax – 2%
Types of Taxes on Shareholder Companies
There are three types of taxes applicable to shareholder of companies and related startup business setup in Saudi Arabia, for examples:
1. Corporate Tax – 20%: The regular corporate income tax rate is 20% on income earned by a non-resident Saudi from a Permanent Establishment (PE) in Saudi Arabia.
2. Withholding Tax – 5%, 15%, and 20%: The withholding tax is imposed on businesses which earn money from non-residential activities like rent, royalties, and management fees, etc. given below:
- Rent 5%
- Royalty or proceeds 15%
- Management fees 20%
- Earning from airline tickets, air or maritime freight 5%
- Earning from international telecommunications services 5%
3. Zakat Tax (Islamic wealth tax) – up to 2.5%: The Saudi citizens investors and citizens of the GCC investors are liable for Zakat tax.
Company Incorporation Process in Saudi Arabia
The company incorporation process for different startup business setup in Saudi Arabia consists of three phases, planning phase, registration phase, and post registration phase.
A. Company Pre-incorporation Process (Planning Phase)
During the planning phase of business setup in Saudi Arabia, investors think about the following things:
1. Deciding their business or company’s name.
2. The type of business or company
3. Preparing documents related to company formation like:
- Certificate of incorporation,
- Power of Attorney,
- Business License,
- Article of Association,
- Board Resolution, etc.
B. Company Incorporation Process (Registration Phase)
After planning phase of startup business setting in Saudi Arabia, the company registration process in starts with different steps with the following procedures given below:
1. Application for Investment License
- Application to SAGIA for investment license by foreign inventors to conduct 100% foreign owned business operation in Saudi Arabia.
- A comprehensive report related to the scope and scale of investment activity including financial data regarding the company’s operations will be submitted to SAGIA.
- Then SAGIA will grant a pre-approval certificate whether the company can be listed and will have 100% foreign ownership.
Important: This investment license is required by non-GCC foreign investors which are applicable in commercial businesses that are not the “Negative List.”
2. Article of Association (AOA) Submission for Business Setup in Saudi Arabia
- Article of Association is submitted to the MOCI.
- After acceptance, application is to be signed in front of a notary public for a CR certificate.
- Then, the company’s name and articles of incorporation are published in newspapers.
3. Company’s Name Registration
Company’s name registration for different startup business setup in Saudi Arabia must be reserved with the Unified Centre and get approved before submitting company incorporation forms, articles of association (AOA), and the deed of establishment.
4. Registration with MERAS
- Companies can register with a municipality giving a physical office’s address under MERAS.
- Company’s certificate of registration (CR) issued in 6 weeks is used for tax registration.
- Companies under MERAS can notarize the AOA online, register the Ministry of Labor and Social Development (MLSD), General Organization for Social Insurance (GOSI), and General Authority of Zakat & Tax (GAZT), etc.
5. SAGIA Foreign Business Investment License
After submission of required documents like the CR, tax registration, municipality license and bank’s share capital deposit letter and approval, SAGIA issues foreign business investment license (FBIL) to the company and allows it to sign contracts, issue invoices and hire employees.
6. Creating Company Seal for Business Setup in Saudi Arabia
- Company seal must have the company’s name and its CR number.
- Company seal is required for attesting signatures at the Chamber of Commerce, register with general organization for social insurance, and company’s invoices.
- It is also needed for contractual agreements, shareholders and management resolutions, Government documents, Official letters and notices.
7. Registration at Chamber of Commerce
Within 30 days of CR registration, all business entities seeking company registration in Saudi Arabia are required to submit an application to the Chamber of Commerce and Industries (CCI) for a certificate of membership.
8. Opening of Bank Account
A local bank account must be opened within 90 days of issuance of Commercial Certificate.
C. Post-incorporation Process (Post Registration Phase)
Once the company is incorporated for any type of startup business setup in Saudi Arabia, the following activities need to be carried out for completion of the entire process of company formation in Saudi Arabia.
- Personal bank account should be converted to a corporate account.
- Saudi Employment Visas and Iqama are required if the company hires foreign employees.
For foreign investment, company formation in the Kingdom of Saudi Arabia, and other legal help and services contact Fahad Al Tamimi qualified and experienced lawyers who are available 24×7 at reasonable fees in the Saudi legal market.