WHAT ARE THE LEGAL REQUIREMENTS TO BE CONSIDERED BEFORE COMPANY FORMATION IN SAUDI ARABIA?
1. Minimum Capital Requirement
The legal structure of the firm and the nature of activity determine the size of the share capital. Most of the Limited Liability Companies (LLCs) are not required to have share capital; however, it is advised that they have at least SAR 50,000 worth of shares.
Instead of the previous law’s requirement of five shareholders, a Joint Stock Company (JSC) must now have a minimum of two shareholders. A JSC can be formed with just one shareholder if it is established by the government or by government-owned businesses and has a minimum capital of SAR 5 million.
The new law reduces the minimum share capital requirement for JSCs from SAR 2,000,000 to SAR 500,000. For LLCs, there is still no set minimum capital requirement (except for a few instances).
2. Management Structure
The general manager of the business is its primary representative and management authority. The company’s Articles of Association sets down the general manager’s responsibilities and powers. There are five basic types of companies in Saudi Arabia that are open to both domestic and foreign businesses in terms of their organisational structure. They are:
- Limited Liability Company (LLC)
- Regional Headquarter (RHQ)
- Joint Stock Company (JSC)
- Branch of a foreign company
- Simplified Closed Joint Stock Companies (SJSC) (introduced in the New Companies Law)
In Saudi Arabia, an LLC can be run by a single management, a board of managers, or both. As a result, LLC business organisations in KSA may elect to have a board of directors or a single general manager to oversee operations.
3. Liability
Shareholders of an LLC are not individually liable for the debts of the entity under Saudi Arabia’s New Companies Law of 2022. A shareholder of an LLC is not personally liable for the debts or losses of the firm unless:
- If a partner intentionally causes the business to dissolve or be suspended.
- If they partner fails to maintain their personal affairs apart from those of the business.
- If a partner started carrying out business operations on the company’s behalf before finishing the correct formation procedure.
Due to a lack of the requisite regulatory framework, creating an LLC security instrument in Saudi Arabia in the past was virtually difficult. Sukuks (lease certificates) can be issued by LLCs under the New Companies Law 2022, and they can also pledge their shares.
4. Transfer of Shares
Shares of an LLC are transferrable to third parties in the Kingdom of Saudi Arabia, subject to the pre-emption rights of the LLC’s own owners. An LLC’s shares that are transferred must be included in the company’s share register, which is on record with MOCI.
The company’s (LLC’s) Articles of Association (AOA) shall be revised to reflect by being signed in front of a Saudi notary public. The partner shareholders are allowed to choose a mechanism for valuing their ownership interests in the company under the LLC’s Articles of Association.
5. Scope of Work
The Commercial Registration (CR) Certificate is the document that is to be obtained during CR. Obtaining a company CR in Saudi Arabia requires the following steps:
- Contact Creation Business Consultants who will assist you in obtaining the certificate.
- Creation will register & submit your application to the Ministry of Commerce & Industry (MOCI).
- The CR Certificate will be issued.
- Creation will assist you in completing the post-incorporation registrations with the Saudi Arabian Government departments such as:
- Ministry of Human Resources & Social Development (MHRSD).
- General Organisation of Social Insurance (GOSI)
- Zakat, Tax and Customs Authority (ZATCA).
- Register your office’s national address with government authorities.
- Balady & civil defense.
- Absher, Muqeem, Qiwa & Mudad.
- Bank account opening services.
- General Manager Iqama & employee visas.
The list of compliance requirements for Saudi companies is not unified as it is often defined by the business model, team structure and legal type of the company. Nevertheless, a new company in KSA should complete the registrations with the Saudi Arabian Government departments, register with MOCI to receive the Chamber of Commerce (CoC) certificate, activate the CoC account and register the company with:
- Ministry of Human Resources and Social Development (MLSD).
- General Organisation of Social Insurance (GOSI).
- Zakat, Tax and Customs Authority (ZATCA).
- Register your office’s national address with government authorities.
- Balady and Civil Defense certificate.
- Create Absher, Sadad, Qiwa, Mudad and other platforms.
6. Licensing Requirements
In Saudi Arabia, the Ministry of Commerce (MOCI) has the authority to regulate and license professional services. Professionals including accountants, auditors, lawyers and legal consultants, architects, engineers and engineering consultants, translators and translation bureaus must be licensed by MOCI. Individuals wishing to obtain a business license in Saudi Arabia should possess the prerequisite qualifications and experience and seek the proper licensing from the MOCI resolution of the jurisdictional issue.
- Zakat, Tax and Customs Authority.
- Saudi standards, metrology, and quality organisation.
- Communications and information technology commission.
- Ministry of Commerce.
- Gulf Cooperation Council (GCC).
7. Tax Structure
In Saudi Arabia, investors who are not Saudis are typically subject to income tax. Most of the time, investors who are Saudi citizens (as well as GCC citizens, who are regarded as Saudi citizens for tax purposes in Saudi Arabia) must pay the Islamic tax known as Zakat. When Saudi and non-Saudi interests jointly own a company, the Saudi interest forms the basis for calculating Zakat, while the non-Saudi interest’s share of taxable income is subject to income tax.
The net adjusted profits are taxed at a 20% rate. Withholding Tax (WHT) rates range from 5% to 20%. And 2.5% of the company’s base is charged as zakat. Please note that the entity’s net worth as determined for zakat purposes is represented by the zakat base.
It should also be noted that even though the standard income tax rate is 20%, there are two different rates that apply to the income from the following two activities.
Tax rates on income from the production of oil and other hydrocarbons range from 50% to 85%.
A person’s tax base should be separate from their tax base for other activities if they work in the natural gas investment industry.
8. Activities Prohibited for Foreign Investors
The Foreign Investment Law, which consists of the Foreign Investment Act and the Executive Rules, lays out the general guidelines for foreigners looking to create a legal entity or purchase a stake in a Saudi entity to create a foreign entity in Saudi Arabia. MISA in this case oversees granting licenses to foreign investors.
According to the Foreign Investment Law, a KSA entity may have up to 100% foreign ownership unless the proposed activities are listed on a “negative list” that forbids foreign ownership. Additionally, even if an activity is not on the “blacklist”, it might still be included in a sector that cap foreign ownership from 25% to 75% of the market.
TAKEAWAY
There are various procedures and requirements that you need to prepare and take into consideration for your Saudi Arabia commercial registration. From selecting the right structure for your company to drafting the correct documentation to office registration, visa services, banking support, accounting, bookkeeping, payroll, and tax services, Creation Business Consultants will help you throughout the entire process. Our expert Corporate Structuring team will leverage our experience to help simplify the process while simultaneously providing you with all the details needed to set up your company in Saudi Arabia and the GCC. Contact a member of our team for your free expert consultation on your Saudi Arabia entity, email [email protected], or call Saudi Arabia at +966 54 511 2494 UAE +971 4 878 6240 today.
