Publication
ContentsA new Investment Law (Royal Decree No. M19/1446) looks set to bring in a new wave of investment into the Kingdom of Saudi Arabia, potentially offering wider opportunities for investors in domestic companies than ever before, with enhanced investor protections.
What is changing for investors?
The reform of the foreign investment regime builds on an extensive programme of legal reform and supports initiatives to attract investment and supporting economic diversification under the Vision 2030 and National Investment Strategy. The implementation of the new regime is timely. Opportunities for foreign investors are being created by the Privatisation Programme and the opening up of the Saudi Exchange (Tadawul). The vast investment needed in the giga-projects is further driving domestic and foreign investment. Data published by the Ministry of Investment (“MISA”) shows that Saudi Arabia saw a growth rate in foreign direct investment inflows of SAR 72 billion in 2023, up over 12 per cent from 2022.
The new Investment Law has been developed following a rigorous process of consulting with experts in the relevant field, benchmarking legal and regulatory frameworks in other jurisdictions (including Indonesia, Singapore, Germany, United Arab Emirates, Turkey, United States of America) so as to draw on aspects of international best practice and consultation.
The new Investment Law will replace the existing Foreign Investment law issued by Royal Decree No. (M/1) and dated 5/1/1421 AH and its implementing regulations (issued by the resolution of the Board of Directors of the General Authority for Investment No. (274/) dated121435/5/ H), when it comes into force in February 2025 (180 days from the date following its publication in the Official Gazette on 16 August 2024). Implementing regulations are expected to be made under the Investment Law within this timeframe.
It is anticipated that the modernised regime should help Saudi Arabia to improve its global rankings and drive greater foreign investment. The impact of the new regime will not be fully ascertainable until the implementing regulations are issued.
What is the general rule on who can invest in Saudi Arabian companies and how is it changing?
Under the existing regime, which regulates foreign investment only, a foreign investor may invest in minority, majority or wholly-owned equity stakes in a company incorporated in Saudi Arabia, provided that it operates in a sector which is open to foreign investment. The maximum level of foreign ownership permitted varies depending on the sector. For Saudi Arabian companies operating in sectors on the “Negative List” published in the MISA Service Manual, either partial foreign ownership is permitted or there is a complete restriction on foreign investment. Where only partial foreign ownership is permitted, foreign investors will need to partner with a Saudi national shareholder who will hold a specified minimum percentage of the share capital in the company. It is mandatory for a business in Saudi Arabia with foreign ownership to obtain a foreign investment licence issued by MISA.
The incoming regime regulates investment in Saudi Arabian companies by both domestic and foreign investors, the general principle being that there is freedom of investment for both domestic and foreign investors. Investors may invest in minority, majority or wholly-owned equity stakes in a company incorporated in Saudi Arabia, provided that it does not carry out activities that are included in the list of “excluded activities” which will be issued by the Permanent Ministerial Committee for the Examination of Foreign Investments (“CEFI”).
Investors will be registered in a new national register of investors to be established and maintained by MISA, and the registration process and requirements will be specified in the implementing regulations. The stated intention of this change is to provide for a simple registration process to replace the existing licensing requirement.
While foreign investment licences will not longer be required for foreign ownership of domestic companies (provided they are not engaged in excluded activities), it seems clear that there will still be some form of oversight of foreign investment as new pre-notification procedures will apply. Going forwards, foreign investors will have to register with MISA prior to making any investment (other than in listed securities, debt instruments and investment funds that are subject to the provisions of the Capital Market Law) and liaise with MISA to obtain the necessary licences and permits for the relevant sector in which the company is active. At the consultation stage, a de minimis threshold was under discussion.
Foreign investors wishing to invest in domestic companies engaged in “excluded activities” will still need apply for approval to MISA. It is not yet clear whether this will result in a broadly similar foreign investment licence requirement as under the current regime. Foreign investors who proceed to invest in companies that engage in these activities will also have to register, in advance, any changes in ownership.
Are there any exclusions or exemptions?
Yes. Some restrictions on foreign investment will remain as set out in a list of “excluded activities” to be published by MISA.
It is not clear to what extent the list of excluded activities may align with the current Negative List (as published annually by MISA), although we would expect that similar overarching concerns would apply: protecting national security and vital economic interests, and preserving public order. It is also not clear whether the list of excluded activities will set out the maximum percentages of direct and indirect ownership by foreign investors in the share capital of Saudi Arabian companies operating in the excluded sectors. Currently, foreign ownership in shares in companies incorporated in Saudi Arabia is prohibited or restricted where those companies are engaged in specified activities or sensitive and strategic sectors on the Negative List. For example, no foreign investment is permitted in companies engaged in oil exploration, drilling and production (subject to certain exceptions) and real estate investment in Mecca and Medina and limited foreign investment is permitted in companies engaged in communications and healthcare and education sectors.
Companies incorporated in Special Economic Zones might be subject to different investment requirements depending on the laws of the relevant Special Economic Zone.
Investors should also note that MISA has a statutory discretion to suspend any foreign investment for the purpose of protecting national security, provided that the suspension decision is based on objective grounds and is consistent with the Kingdom's obligations under international agreements to which it is a party. The implementing regulations are expected to provide a fuller picture as to parameters of this discretion.
What are the key features of the new regime for investors?
Many of the changes are positive developments for investors.
From a practical perspective, the administrative burden on foreign investors should be less to the extent that only registration is required rather than a licence application (for non-excluded activities). Government procedures are expected to be more streamlined. Relevant decisions of MISA can be appealed before a competent court within 30 days of notification of the decision.
Robust legal rights and protections for investors are more extensive than under the current regime (see below).
Investors may be able to benefit from investment incentives granted by the competent authority, which now have a clear statutory footing. It is expected that incentives will be framed according to specific objectives and pre-announced eligibility and evaluation standards.
Investors must comply with all relevant Saudi Arabian laws and international treaties and agreements to which the Kingdom is a party.
What are the consequences of breach?
There are new penalties for breach, which will vary depending on whether the breach is categorised as serious or non-serious.
- Penalties for non-serious breaches may include a warning, a fine up to SAR 300,000 (which may be doubled in the case of repeat violation) or the cancellation of an investor’s registration. Fines will vary according to the gravity and frequency of the violation and the size of the establishment, and will be determined by a new committee (to comprise up to three persons, one of who must be a legal specialist).
- Penalties for serious violations are to be specified in the implementing regulations.
Looking ahead
The Investment Law will come into force in February 2025. The first step in assessing the viability of an investment in Saudi Arabia - whether setting up a new company, investing in a local company or establishing a branch - is to determine whether the industry in question is open to foreign investment. Foreign investors will be keen to find out whether there will be any significant changes to the sectors and activities in which foreign investment controls apply when the new regime comes into force and the list of excluded activities is published by MISA. Investors will also need to familiarise themselves with the new registration requirements and the situations when approvals are required in readiness. Investors should also seek advice as to their obligations as shareholders of Saudi Arabian companies, notably the corporate governance and other rules to which they must comply, and the consequences of any failure to comply.
As previously, investors will still need to consider any other restrictions that may apply in the relevant sectors (for example, MISA minimum capital requirements for the foreign and Saudi Arabian partners) and should seek advice as to whether competition clearance from the General Authority for Competition or any other sector-based governmental approvals may be required.