The Arab world’s largest economy is also the hardest in which to do business, requiring government approval for every form of foreign investment. Since the law theoretically allows for 100% foreign ownership in most sectors, Saudi Arabia contrasts with its Middle-Eastern neighbours in that it does not have any free zones. However, mandating the authorization of foreign-owned businesses has resulted in a tough environment for starting and operating a business with foreign participation
The Saudi General Investment Authority (SAGIA)
SAGIA is the government body responsible for approving all foreign investment applications. However, obtaining approval is a process fraught with red tape and bureaucratic hurdles. Consequently, 100% foreign ownership for Saudi Arabian businesses is far from a practical reality in most cases.
Amusingly, SAGIA boasts on its website (retrieved March 11, 2015) that the Kingdom of Saudi Arabia is considered by the World Bank as both the 11th and 22nd easiest place in the world to do business when, in fact, its 2015 ranking is 49th. Great care and experience is therefore required to succeed with an investment proposal.
Caption: SAGIA claims that it is both the 11th and 22nd easiest place for doing business worldwide. It is actually in 49th position this year.
Although the Kingdom’s overall ranking leaves it close to the top quartile, Saudi Arabia ranks as 109th in the world for the ease of starting a business. This score underlines the difficulty of entering this market as a foreigner, despite the law nominally permitting foreign ownership in all fields not on the negative list. As another amusing illustration of the current situation for foreign investment, SAGIA’s page of investor FAQs is available only in Arabic:
Caption: presumably the frequently-asked questions comprise the most useful information, but this is not available to English-speaking potential investors.
Agents and distributors
Foreigners can bypass SAGIA by appointing a local service agent, who takes a fixed fee or a share of revenue. These agents know the local market well and can help to handle government bureaucracy, but they do add significant costs to operating in the country. Indeed, agents and distributors in the Kingdom can now extract higher rents from foreigners in light of SAGIA’s current closed approach to foreigners.
Your company’s choice of agent is extremely important, as you are relying on them for their ability to market and sell your product, maintain customer relationships and handle your government relations. If the relationship with your agent or distributor sours, Saudi agency law makes it expensive to break the agreement and litigating disputes can be expensive. It is therefore vital to have an agent you can trust, so we highly recommend travelling to the Kingdom to meet several potential agents, conducting thorough due diligence on them before finalizing an engagement. Through our work in Saudi Arabia over the years, Healy Consultants Group PLC has carried out checks on a number of commercial agents – we use this experience to bolster our Clients’ chances of success.
Other challenges to foreign business
Although corporate tax for local owners is more in line with the rest of the region’s low tax policies at 2.5% (this tax being known as the Zakat), tax on foreign owners’ share of corporate profits is 20%. Although 20% is a common corporate tax rate in much of the rest of the world, it is not competitive in a region where taxes are often below 10%.
Professional services businesses are peculiar in that they are one of the sectors that require some Saudi ownership, with the minimum requirement currently set at 25%. In the UAE, professional services companies are rare in that they permit 100% foreign ownership where a 51% local owner is normally required for foreign-invested companies.
There remain opportunities for investors in Saudi Arabia, despite the challenges of starting business and higher per-capita incomes elsewhere in the region. If you think you have found an opportunity to invest successfully in the Kingdom, local knowledge, experience and project management expertise will be invaluable. Hire Healy Consultants Group PLC to drive your company’s growth in the Middle East and navigate the hurdles and pitfalls of doing business in Saudi Arabia.