Foreign Investment in Saudi Arabia
The aim of this dissertation is discussion and critical analysis of foreign investment laws in Saudi Arabia. Foreign investment has a very complicated history since it was first introduced by the oil companies of western developed countries. The history of investment in the oil industry through concession agreement, the establishment of the ARAMCO, the effects of the government to indigenise the industry together with the shift of power and control over the natural resources of the country led to a change in the perception of foreign investment in Saudi Arabia and the Arab world.
This dissertation, regarding the legal security of foreign investment law in Saudi Arabia, is divided into the following sections:
Firstly, it sets out the background of KSA and its relation with the WTO. In addition it sheds light on the reasons for investment in Saudi Arabia and the increased willingness of foreign companies to invest in KSA.
Secondly, it discusses the law which governs KSA: Islamic Shari'a Law. This section also considers how consistent Shari'a Law is with international law as well as examining the judicial structure in KSA and its effectiveness.
Thereafter, the study examines the history of FDI as well as legislative history in KSA.
The following section, considers the most important features of the new foreign investment laws in KSA with particular focus on the Foreign Investment Act and its rules and laws together with other relevant laws. It also considers the negative aspects of foreign investment.
The next section examines the resolutions of foreign investment disputes in KSA through litigation and arbitration after giving a brief description about litigation in KSA together with KSA's attitude towards arbitration.
The subsequent section consists of discussion and critical analysis of foreign investment in Saudi Arabia.
Finally, the dissertation summarises the findings and concludes with the main themes of the dissertation together with some recommendations.
Globalisation is the order of the day with most countries initiating reforms to liberalise their economies and integrate with global economies to achieve rapid economic development. A significant number of countries have joined the World Trade Organization (WTO) during the last five years which has further accelerated the process of globalization. Furthermore, with many countries due to join the WTO during the next three to four years, the world is progressing towards becoming a global village.
Globalization is ushering the era of low trade barriers and global competition. Companies can no more entirely depend upon their domestic markets. Besides, many developing countries have been opening up their economies to accelerate development and are striving hard to mobilize funds for developing infrastructure and industry through Foreign Direct Investment (FDI). A large number of multinational companies and investment groups are seeking entry to seize the opportunities offered by the emerging economies which offer immense prospects in the areas of telecommunications, power, transport, roads, real estate, manufacturing, banking and insurance etc.
Foreign direct investment (FDI) is defined as a long-term investment by a foreign direct investor in an enterprise which is resident in an economy other than that in which the foreign direct investor is based. The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate.
In the last few years, FDI has grown in importance in the global economy, the emerging market countries such as China and India have become the most favoured destinations for FDI and investor confidence in these countries has soared. As per the FDI Confidence Index of Kearney for the year 2005, China and India hold the first and second positions respectively, whereas United States has slipped to third position. The report also discloses that despite rising costs, Eastern Europe enjoys better FDI prospects, while Brazil and Mexico have recovered from lower confidence levels.
By establishing overseas ventures, a company can offset seasonal fluctuations in sales and increase profits in general through exposure to a greater number of prospects. Further technical proficiency is often increased by expanding into markets with greater expertise in certain areas of technology.
In addition, expanding into foreign markets can minimize a company's risk of losing market shares to customers who themselves take advantage of the global competition to source goods and services from foreign markets.
However, the decision to go international must be made with care as there are many risks and potential obstacles to consider. Cultural and language barriers are among the most obvious of these considerations. Variations in religious beliefs, societal norms and business negotiation styles all have an impact on how business needs to be conducted when dealing with foreign counterparts. Language barriers may present an obstacle when trying to communicate the benefits and advantages of a company's products and services overseas.
Other difficulties inherent when expanding into foreign markets include economic and political risks, shifting borders and the instability of some foreign governments which can pose a threat to the security of a business overseas. Foreign exchange and the issue of intellectual property protection also need to be considered. In some of the emerging economies, legal and economic systems are not as developed as those of the United States and other developed countries.
A company that wishes to establish business overseas needs to be familiar with the host country's culture and determine the feasibility of marketing its product or service in that environment. Market conditions must be assessed to ensure that a new company can win a share of the foreign market. Tariffs, duties and compliance with the host country's import, health and environmental regulations are other important issues to consider as well. As companies make overseas investments, particularly in R & D, several factors dominate their location decisions including lower costs, higher quality labour, the protection of intellectual property rights, reliable educational systems and sophisticated IT infrastructures.
This Dissertation presents a detailed study on the legal environment in the Kingdom of Saudi Arabia to evaluate the risks as well as benefits of Foreign Direct Investment.
- General Background about Saudi Arabia
- Saudi Arabia and the WTO
- Investment in Saudi Arabia
- Increased willingness of International Companies to invest in Saudi Arabia
- General Background about Saudi Arabia
Extending across most of the northern and central Arabian Peninsula, Saudi Arabia is a young country that is heir to a rich history. In its western highlands along the Red Sea, lies the Hejaz which is the cradle of Islam and the site of the religion's holiest cities, Mecca and Medina. In the country's geographic heartland is a region known as Najd (“Highland”), a vast arid zone that until recent times was a rich pastiche of warring and feuding Bedouin tribes and clans. To the east, along the Persian Gulf, are the country's abundant oil fields which since the 1960s, have made Saudi Arabia synonymous with petroleum wealth. These three elements: religion, tribalism and untold wealth have fuelled the country's subsequent history.
It was only with the rise of the Saudi family from Najd which the country is named after and its eventual consolidation of power in the early 20th century that Saudi Arabia began to take on the characteristics of a modern country. The success of the Saudis was due in no small part to the motivating Al Salafyah, an austere form of Islam that was embraced by early family leaders and which became the state creed. This deeply religious conservatism has been accompanied by a tribalism in which competing family groups vie for resources and status which has often made Saudi society difficult for outsiders to comprehend. Enormous oil wealth has fuelled huge and rapid investment in Saudi Arabia's infrastructure. At present Saudi Arabia is looking to develop its basic structure of governments and judiciary by passing several laws.
In the mid-20th century, most of Saudi Arabia still embraced a traditional lifestyle that had changed little over thousands of years. Since then, the pace of life in Saudi Arabia has accelerated rapidly. The constant flow of pilgrims to Mecca and Medina (vast throngs arrive for the annual hajj, and more pilgrims visit throughout the year for the lesser pilgrimage: the Umrah) had always provided the country with outside contact, however interaction with the outside world has expanded with innovations in transportation, technology and organisation. More recently, petroleum has wrought irreversible domestic changes in educational and social as well as economic areas. Modern methods of production have been superimposed on a traditional society by the introduction of millions of foreign workers and by the employment of hundreds and thousands of Saudis in non-traditional jobs. In addition, tens of thousands of Saudi students have studied abroad, mostly in the United States as well as in the United Kingdom. Television, radio, and the Internet have become common medias of communication and education, in addition highways and airways have replaced traditional means of transportation.
Saudi Arabia, once a country of small cities and towns has become increasingly urban; traditional centres such as Jeddah, Mecca and Medina have grown into large cities and the capital Riyadh, a former oasis town, has grown into a modern metropolis. Many of the region's traditional nomads, the Bedouins have settled in cities or agrarian communities. The sedentary population of the country view the few remaining Bedouin who maintain a traditional desert lifestyle with deep ambivalence. They are at the same time, a link to the country's past and its solid foundation.
1.2 Saudi Arabia and the WTO
World Trade Organization (WTO) membership represents one of the key steps for a country to integrate into modern international economic relations. The basic objective of membership is the liberalisation and development of international trade in order to reach sustainable economic growth and total prosperity of signatory countries. The membership is supposed to help access to markets in other countries under more beneficial conditions, serve as an important signal to foreign investors regarding stability and predictability of the economic system, decrease risk factors for potential investors, develop the trade economy, modernise industry and reform economic legislation. The important prerequisites for WTO Membership are political support to the accession process: implementation of effective reforms of the foreign trade system and economic legislation to create a trade market and a legal system which is comparable to the systems of developed trade economies.
Saudi Arabia, the world's largest oil exporter and among the world's twenty largest economies acceded the World Trade Organization (WTO) on December 11, 2005 as the 149th Member after twelve years of strenuous negotiations and multilateral trade agreements. For the Kingdom, which is unique in its socio-economic-religious fabric unlike the other 148 members of the World Trade body, the accession is considered to be a significant move although the Kingdom is not new to international trade as this accounts for 70% of the country's GDP. The signing of the agreement was preceded by anticipation of favourable and adverse developments to the Saudi Arabia's economy and society. A year has gone by since the Kingdom joined the WTO, the issues and concerns that preceded the accession continue to exist. Furthermore, the life of common citizens has not changed much although changes on the investment and business front have been taking place albeit in a slow and steady manner. Although one cannot expect miracles in the short span of one year, it is essential to consider whether the country is progressing in the right direction to realize its intended objectives of reforms, globalisation and accession.
This dissertation reviews the objectives behind the accession, reforms undertaken and the experiences of China and India who acceded to the WTO during the last five and ten years respectively. Furthermore, this dissertation identifies that the major objective behind this accession is to explore the possibilities of Foreign Direct Investment.
It is important to remember that neither the advantages nor the challenges of WTO membership are felt immediately after accession. While some substantial changes took place during the accession process, others will take place over the coming years. The WTO membership does not guarantee success in world trade.
Instead, the WTO provides a framework for economic and other reforms which should help Saudi Arabia to become competitive in foreign markets and at the same time, provide an attractive environment for investment. Over time, new market opportunities will emerge for competitive and entrepreneurial firms to appear.
There are significant differences between Saudi Arabia and the countries that acceded to the WTO prior to it in terms of natural resources, socio-culture, agriculture, industrial and technological bases as well as the educational and skill levels of the national workforce. Currently, Saudi Arabia is largely dependent upon an expatriate workforce which to some extent may cut into cost competitiveness due to the high cost of having an expatriate workforce compared to that of China, India and other emerging Asian economies who are endowed with low cost quality workforces.
The most important factor is to raise the competitiveness of domestic products. The situation in the initial years of China's entry into the WTO reminds us of the unevenness of advantages and disadvantages in different industries and the uncertainty of their changes. Since the impact is unavoidable what we should do is to get to know, master and use the WTO rules and regulations as soon as possible in order to grasp the advantages while avoiding the disadvantages and trying our utmost to turn the challenges into opportunities.
Despite the numerous challenges, accession of the Kingdom to the WTO is likely to have an extensive effect on the structure of the Saudi economy and its society. The private sector is poised to play a bigger role in diversifying the economy, sustaining the growth momentum initiated by reforms and large budgetary allocations, creating new jobs and integrating with the global economies.
1.3 Investment in Saudi Arabia
Although Saudi Arabia is the world's largest oil exporter, it is not able to fully exploit its competitive advantage in petrochemicals due to the closed nature of the EU market. In fact, Saudi Arabia imports base oil from Europe in order to make lube oil. The EU has somehow managed to exclude the oil producers in the region from some of the downstream processing. WTO accession promises to change this and will make Saudi Arabia a major petrochemical manufacturer in the world.
Moreover, with accession to the WTO Saudi Arabia can maximise its competitive advantage where it has a natural advantage. The country has the cheapest feedstock in the world. Feedstocks (natural gas, natural gas liquids or naphtha out of oil) are needed to make petrochemicals. The cost to Saudi Arabia is below $2 a barrel whether it is in gas barrel equivalents or in oil. This allows Saudi Arabia to start taking over the markets. Germany is the largest producer of petrochemicals in the world today. Despite Saudi Arabia being the third-largest exporter of German products, Germany does not cooperate with Saudi Arabia in petrochemicals or any energy-based industry. By 2015 Saudi Arabia is expected to emerge as the largest producer of petrochemicals in the world.
Another important advantage is natural gas. Natural gas is sold by Saudi Aramco to the users, whether they are electricity companies, water desalination companies, SABIC or the private sector at 75 cents per million BTUs or the equivalent of $4.35 per barrel. The Germans who are competing with the Saudis, are buying at the equivalent of $62 a barrel today. Hence there is an enormous difference between the two.
Other major fields where there is much potential for investment is in the power, agriculture and transport sectors where there are enormous opportunities and challenges available to foreign investors.
1.4 Increased willingness of International Companies to invest in Saudi Arabia
With regard to investing in projects in Saudi Arabia, foreign entities are no longer required to take Saudi partners (except banking and insurance services). Foreign investment may take one of two forms: (i) a joint venture with a Saudi partner (with no minimum share requirement for the Saudi partner); or (ii) a 100-percent foreign-owned enterprise. Also, foreign investors are now permitted to own real estate in Saudi Arabia for company and housing purposes. In addition, the Kingdom has withdrawn the minimum capital requirements that were applied to agricultural, industrial and services projects. Furthermore, the Government encourages foreign direct investment in infrastructure including power, water, telecommunications and transportation.
The Foreign Direct Investment Law, revised in the year 2000, permits foreigners to invest in all sectors of the economy except for oil exploration, drilling and production. There is no prohibition on foreign investment in refining and petrochemical development. Foreign companies are also eligible for low-cost funding from the Saudi Industrial Development Fund (SIDF) for up to 50 percent of a project cost.
The new Foreign Direct Investment Law had established minimum levels of investment for agricultural projects (USD 6.67 million), industrial projects (USD 1.33 million), and service projects (USD 0.53 million).
There are no restrictions on converting and transferring funds associated with an investment (including remittances of investment capital, earnings, loan repayments, and lease payments) into a freely usable currency at a legal market-clearing rate. There are no delays for remitting investment returns such as dividends, return of capital, interest and principal on private foreign debts, lease payments, royalties and management fees through normal legal channels. Furthermore, there is no limitation on the inflow or outflow of funds for remittances of profits, debt service, capital, capital gains, returns on intellectual property and imported inputs.
- The public law in Saudi Arabia
2.2 Islamic law and International Business Law
2.3 Judicial structure in Saudi Arabia
2.4 The effectiveness of the Saudi Arabian judiciary and application of the laws
2.1 The public law in Saudi Arabia
The dogma of Islamic legal science consists of legal opinions which are supported by one or more of the primary or subsidiary sources (masadir) or proofs (adillah) of the Shari'a. There is almost unanimous agreement among the scholars of the different schools of jurisprudence that the Quran and the Sunnah of the Prophet are the only primary sources. In view of Saudi Arabia's accession into the WTO, it has passed its own basic law so that other WTO members who are dealing with the Kingdom may know the legal risks involved in the Kingdom.
In the Kingdom of Saudi Arabia, Islamic Shari'a is the law applicable to all judicial matters. It should be applied according to the Hanbali school of jurisprudence, however if there is no rule in this school which can be applied to the case being dealt with, or if the application of some rules of the Hanbali school are not in the interests of the public, the other three schools of jurisprudence (Hanafi, Shafei and Maliki) can be consulted. However, considerable changes in the country both economically and socially, particularly over the last few decades, as well as Saudi Arabia's interest in welcoming FDI have resulted in Royal Decrees, Ministerial Decisions and Administrative Circulars being issued in many fields of activity such as business, banking, intellectual property rights, labour, social security and arbitration, etc. Such legislation is intended to supplement the Shari'a Law and is approved of by it because it is not contrary to Shari'a principles.
In 1993, the Basic Law was passed by Saudi Arabia. The Basic Law of Saudi Arabia is a charter divided into nine chapters, consisting of eighty-three articles. It is in accordance with Shari'a and does not override Islamic laws. Presently Basic Law is considered as a constitution of Saudi Arabia.
Despite Basic Law being promised since the era of King Feisal it was only implemented by King Fahd in 1992. The resulting Constitutional Government is fundamentally different from Western style social order. Article 1 of the Basic Law of Government states that 'God's Book and the Sunnah' are the substantive constitution of Saudi Arabia, being only amended by reforms of state organisation. The Saudi Arabian monarchy is religion bound and the new Consultative Council is subject to nomination and re-nomination by the king. In addition, the Kingdom has three different wings: the Judicial Council, the Executive Council and the Regulatory Council with the king being the head of these three councils.
- Islamic law and International business law (Is Islamic law inconsistent with international business law?)
The Islamic law is developed from the origin of its tradition. The main sources of this law are the Quran and Shari'a Laws whereas the international law is developed by way of customs. Under Islamic law, contracts which involve speculation are not permissible and are considered void. However, Islamic law does not prohibit general commercial speculation. Rather the concern is to prohibit forms of speculation which are regarded as akin to gambling. The test is whether something has been gained by chance rather than by productive effort. Of course this distinction presents practical difficulties. The distinction between general commercial speculation in genuine commercial trading and speculation regarded as gambling is not very clear. In each case the commercial substance of the transaction must be analysed to evaluate whether or not it is permissible under Islamic law. The best way of understanding how the distinction is drawn is to look at some examples. If an Islamic financier was to provide capital by way of an equity interest in a vehicle being set up to operate a new Shari'a compliant business, such funding would be regarded as acceptable since the speculation in this case is the commercial speculation as to whether or not the new venture will succeed. On the other hand, speculation undertaken when entering into a conventional over-the-counter derivative would not be permitted, the gain being regarded as deriving from chance rather than involving the necessary productive effort.
Contracts where one party is regarded as having gained unjustly at the expense of another party are also considered void. Again it is not clear exactly what would amount to unjust enrichment and each contract is considered on a case by case basis. It should be noted that the Shari'a principle of unjust enrichment is wider in its scope than the principle as applied by the English laws of restitution as the Shari'a not only applies to an enrichment of one party at the expense of another which cannot be justified, but also to the enrichment of one party who exercises undue influence or duress over another. For example, it is not possible for a creditor to benefit financially from penalising a non-performing or defaulting debtor by charging and retaining a default fee. Although it is possible to charge a default fee and pay the proceeds of that fee to charity since it is considered that the obligation to pay this fee would serve to encourage the debtor to discharge its contractual obligations in a timely manner.
Under Islamic law, money is regarded as having no intrinsic value and also no time value and is seen merely as a means of exchange. Since as noted above, Islamic principles require that any return on funds provided by the financier be earned by way of profit derived from a commercial risk taken by the financier, the payment and receipt of interest (riba) under Islamic law is prohibited and any obligation to pay interest is considered void. Contracts which contain uncertainty (gharrar), particularly any uncertainty as to one of the fundamental terms of the contract, such as the subject matter, price or time for delivery are again considered void. Again, the Islamic principle of gharrar is wider than the English common law principle of uncertainty. Whereas case laws such as G. Scammel & Nephew Ltd v Ouston have established that an agreement may not be binding if a definite meaning cannot be given due to the vagueness or uncertainty of certain terms, the Shari'a principle is wider in two main ways. Firstly, whereas English common law will permit some vagueness provided that it can be resolved by interpretation, or by examining the intention and/or conduct of the parties, the Shari'a requires absolute certainty on all fundamental terms. Secondly the Shari'a does not permit a contract where uncertainty may arise out of the actual subject matter or substance of a contract. For example a conventional insurance arrangement is not permitted (haram) on the basis of, amongst other things, uncertainty (gharrar) on the basis that it is uncertain whether the insured event will occur or not. However a major break through in Saudi Arabia is that an Insurance law has been passed and …
- Judicial structure in KSA
Since Saudi Arabia is an Islamic state, its judicial system is based on Islamic law (Shari'a) for both criminal and civil cases. At the top of the legal system is the King, who acts as the final court of appeal and as a source of pardon. The Saudi court system consists of three main parts, the largest being the Shari'a Courts which hear most cases in the Saudi Arabian legal system. The Shari'a courts are organised into several categories: Courts of the First Instance (Summary and General Courts), Courts of Cassation and the Supreme Judicial Council. Supplementing the Shari'a courts is the Board of Grievances which hears cases that involve the government. The third part of the Saudi court system consists of various committees within government ministries that address specific disputes, such as labour issues.
In April 2005, a royal order approved in principle, a plan to reorganise the judicial system. On October 1st 2007, a royal order approved the new system. Changes included the establishment of a Supreme Court and special commercial, labour and administrative courts. Shari'a refers to the body of Islamic law. It serves as a guideline for all legal matters in Saudi Arabia. In the Shari'a and therefore in Saudi Arabia, there is no difference between the sacred and the secular aspects of society. Muslims derive Shari'a law primarily from the Holy Qur'an and secondarily from the Sunnah, the practices and sayings of the Prophet Muhammad during his lifetime. The third source is 'Ijma', the consensus of opinion of Muslim scholars on the principles involved in a specific case occurring after the death of the Prophet. Analogy (Qias) is the fourth source of law. In Saudi Arabia the criminal law, like many other countries places the burden of proof on the state and the Shari'a presumes that a defendant is innocent until proven guilty. Only in serious crimes or in cases of repeat offenders is one likely to witness severe punishments.
With regard to the judicial system in Saudi Arabia, the Judiciary Act conferred Shari'a courts with general jurisdiction over all judicial matters such as criminal, civil, property and matrimonial claims, etc. The Shari'a courts do not decline jurisdiction unless other judicial bodies have been given exclusive jurisdiction. The translation of Article 26 of the Judiciary Act reads: "The Courts (Shari'a Courts) shall have a jurisdiction over all types of disputes and crimes except those excluded by Law ...". There is another judicial body which is completely independent from the Shari'a Courts, namely the Board of Grievances which was initially formed as an administrative court. Furthermore, there are a number of committees that are empowered to adjudicate certain disputes which are linked to the Board of Grievances such as the Customs Committee, the Committee for Implementing Sea Port Codes, the Committee for Implementing Copyright and Trademark Codes, the Committee for Implementing the Private Medical Establishments Codes and the Committee for dealing with claims related to Commercial Deception. There are also a number of quasi-judicial committees which are completely independent from the Shari'a Courts and the Board of Grievances, such as the Commercial Papers Committees, the Saudi Arabian Monetary Agency's Committee for Banking Disputes and the Commissions for the Settlement of Labour Disputes.
Being of potential importance, the Shari'a judicial system was regulated in the early days of the unification of Saudi Arabia since that time, these regulations have been amended three times. The first step towards regulating the Shari'a Courts was taken in 1927 by the issuing of the Formation of the Shari'a Courts Act. This Act contained twenty-four Articles regulating Shari'a Courts, judges and other related matters. In 1938 another regulation was issued called the Concentration of the Shari'a Judicial Responsibilities Act. This Act was a significant step along the road to improving the system. It included 282 Articles giving a detailed regulation of Judges and their supervision, the Courts, their types and jurisdiction, etc. In 1952 a further regulation which maintained the same name was issued. However, this regulation did not make significant changes to the previous regulations.
Finally, the current Judiciary Act was issued in 1975. It contains several sections covering various aspects of the judicial system such as provisions securing the independence and impartiality of the courts, the types of courts and their jurisdiction, the judges, their appointment and promotions as well as the role of the Ministry of Justice.
Judges are expected to perform their judicial functions independently and impartially. The translation of Article 1 of the Judiciary Act provides that: "Judges are independent and not subject to any authority in rendering judgment.... No person shall have the right to interfere in the judicial process".
The Judiciary Act has also affirmed the independence of the judiciary in various ways such as in Article 2, which states that judges are not allowed to be discharged from their posts. Also, Article 3 provides that they are not to be transferred to other posts without their consent or as a result of promotion. Article 4 provides that judges cannot be prosecuted except according to their disciplinary regulations. To further enhance their independence, the Act, in order to distance the judiciary from the influence of the executive power, provides that the Supreme Judicial Council is the authority that deals with all aspects related to judges, such as their appointment, discharge, transfer, promotion, and discipline.
Article 5 states that the Shari'a Courts consist of:
(1) Supreme Judicial Council;
(2) Court of Appeal;
(3) General Courts; and
(4) Summary Courts.
The Supreme Judicial Council as it is today is a result of its development over many years. It has legislative, administrative and judicial powers. Its judicial powers constitute the highest in the Kingdom of Saudi Arabia. It is considered as the final Court of Appeal. The Council is composed of eleven members. Five of these members represent the Permanent Board who are full-time members appointed by a Royal Order at the rank of the President of the Court of Appeal.
The other five are part-time members. They are: the President or the Deputy of the President of the Court of Appeal, the Deputy of the Minister of Justice and three of the most senior general court judges. This is in addition to the President of the Supreme Judicial Council who is appointed by a Royal Order and regarded as the chairman of the General Assembly. The chairman of the Permanent Board is also appointed by a Royal Order.
Article 9 of the Act provides that meetings of the Permanent Board are invalid unless three members are present except when reviewing sentences of execution, amputation and stoning in which case all members have to be present. The General Assembly meetings are not valid unless all members are present. The decision of both the Permanent Board and the General Assembly require a simple majority. The head of this committee is the most senior member of the two Supreme Judicial Council members.
The Court of Appeal was initiated in 1927 by the Formation of 'The Shari'a Courts Act' and has undergone considerable changes since then. The current Judiciary Act has devoted Articles to this Court covering various aspects related to it. The draftsmen of the current Judiciary Act whilst bearing in mind the unification of the Shari'a principles which are to be applied by the General and Summary Courts, stipulated a single Appeal Court, the location of which is to be in Riyadh. However, it is permitted for some of the Court's departments to hold their meetings in another city provided that a resolution to that effect is issued by the Judiciary Act. This Court is composed of a President and a sufficient number of judges, some of whom are nominated as deputies of the President according to the seniority of their joining the Court of Appeal. The General Assembly of the Court of Appeal consists of all its judges.
The President of the Court of Appeal is the most senior member of the Court and is appointed by a Royal Order on the recommendation of the Supreme Judicial Council. The other members of the Court of Appeal are also appointed in the same way. However, in order to be appointed as a judge in the Court of Appeal there are some requirements necessary such as the requirement to be over forty years of age and to have completed a period of at least two years in the judicial post below.
The Court of Appeal is divided into three divisions: the Criminal Division, the Family Division and the Other Cases Division. However, it is permitted to create more divisions as the need arises. The head of each division is either the President of the Court of Appeal or one of his deputies. The Criminal Division of the Court of Appeal hears appeals from all Shari'a general courts. Normally an appeal is heard by three judges; however, five judges are required to hear appeals involving execution, amputation or stoning. The Family Division consists of three judges. It hears appeals involving matrimonial disputes, such as divorce and validity of marriage, adoption and inheritance, etc. The Other Cases Division deals with appeals which are outside the jurisdiction of the other two divisions, such as disputes involving real estate, actions founded on contract or tort, and other similar civil matters.
Akin to the Court of Appeal, the General Court came into existence as a result of the formation of the Shari'a Courts Act under the name 'Shari'a Court'. It was given the name General Court by the current Judiciary Act, which provides that the Court consists of one or more judges according to the size of the court which corresponds with the size of the town or city in which it is located. These courts are either class A or class B. Class A courts are located in cities and towns, whereas class B courts are situated in villages. The requirement of the appointment and the promotion of Judicial Members of these Courts are listed in the Act.
It should be noted that the prevailing opinion of Muslim scholars is that it is prohibited for the Court of Appeal to make a new trial in which it hears the whole evidence directly from the parties involved. Hence, the Appeal Court assumes a supervisory role over the general courts to ensure that the decisions of these courts are in compliance with the Shari'a Law. It can be said therefore that this court is more concerned with appeals on questions of law rather than of fact.
Apart from this structure, Saudi Arabia has the Board of Grievance which has been created specifically to deal with disputes which involve the government.
- The effectiveness of the Saudi judiciary and application of the laws
As earlier mentioned, Saudi Arabia has in place a strong judiciary to solve disputes. Since the King and his advisory councils respect the independence of the judiciary, there is not much interference from them. The King only interferes in rare cases where public interest is involved. In other cases he may only exercise his pardoning power. In most of the commercial contracts an arbitration clause has been incorporated. Saudi Arabia's judiciary has given respect to the arbitration clause and the judiciary's attitude towards arbitration has changed significantly. Saudi Arabian courts give a lot of reverence to commercial agreements and deliver their verdict in such cases faster than in other cases.
- History of FDI in Saudi Arabia
- Legislative History of FDI in Saudi Arabia
3.1 History of FDI in KSA
The Kingdom of Saudi Arabia has a population of around 22 million people, of whom approximately three quarters are Saudis. The growth rate of the population is over 3% and the demographic structure is very young, with 65% aged less than twenty-five in the Year 2000. At current population growth rates, the population will have more than doubled by 2020. The prospect of having to find gainful employment for the youth of today weighs heavily on the government. There is an awareness that radical steps must be taken to create the necessary jobs and a concern that if unemployment were to spiral, social unrest could ensue. As a consequence, education has become a priority for the government with most educational institutions administered by the state and private establishments not having much presence in the Kingdom. Furthermore, Saudi Arabia has invested heavily in healthcare and facilities are generally financed directly by the government through the establishment of hospitals and clinics as well as generous incentive and support programs for private-sector institutions. Nonetheless, budgetary constraints, the rapidly growing population and new medical technologies are causing the government to rethink how healthcare will be financed.
The Saudi government has been using oil revenues to finance a determined program of infrastructural, industrial and agricultural development while pursuing a far-reaching program of modernising the Kingdom's health and educational systems. In major reforms from past policies, the domestic price of petroleum products, electricity, water, telephones, visas and work permits as well as air travel were significantly increased, with the intention of reducing the reliance on oil revenue. In the sixth Five Year Development Plan (1995-99) the role of the private sector is a particularly important theme. The plan mentions the sale of government assets as a means of rationalising government expenditures but does not provide a specific privatisation program or timetable for state sales.
The government is now determined to offer set of initiatives to open up more of the economy to the private sector. A number of announcements by key ministers in past months are signalling that a wide-ranging economic reform effort is gradually crystallising. The major areas which Saudi Arabia is opening up for foreign investors are power, transport, telecommunication, insurance, ports, education, health, information technology and other related areas.
The systematic privatisation of port operations has already got under way. Acting on recommendations of the SEAPA (Saudi Seaports Authority), the government has recently approved plans for a systematic programme of privatisation that aims to raise productivity levels in the ports by providing greater incentives for private companies to invest in their running. Under the plans, the government will retain ownership of the ports and the SEAPA will maintain its supervisory role. However, private companies have now starred bidding for ten year operation, maintenance and management contracts.
Membership in the WTO will accelerate Saudi Arabia's markets becoming more liberalised. In addition, membership in the WTO will help Saudi Arabia to exports its oil and petrochemicals to world markets without any hindrance. It will also entail reviewing the country's entire trade regime. Saudi Arabia is currently enjoying the status of a developing country in the WTO and is therefore given a period of grace of between five-ten years in which to adapt legislation and trading practices. Progress is also expected in the liberalisation of the financial services sector with Saudi Arabia already having passed many commercial regulations in the fields of brokerage, insurance and commercial banking activities.
The Kingdom of Saudi Arabia realised that in order to achieve its dream economic goals, it requires a steady flow of technology and expertise from world markets. Therefore, its policy is to welcome foreign capital and invite it to participate in economic development projects in cooperation with Saudi businesses. The government's established policy is not to impose any restrictions on the movement of capital in and out of the Kingdom and to always respect private ownership.
In addition, foreign investment which fulfills the requirements of the Foreign Capital Investment Code enjoys all the privileges of national capital and is entitled to the same treatment, protection and incentives awarded to national capital. The Code requires that foreign capital be invested in economic development projects other than negative lists and that it is accompanied by technical knowledge. Development projects are defined by the Ministry of Industry and Electricity.
Saudi Arabia actively encourages foreign investment, especially if the projects have a strong and fundamental developmental effect on the country's economy and promote industrialisation and technology transfer. Saudi law requires that technology transfer should occur in any foreign invested projects. Moreover, foreign investors can invest and own their property in their own name. However, the petroleum and mineral extraction industries are owned and controlled by the government and are generally closed to foreign investment.
3.2 Legislative History of FDI in KSA
Saudi Arabia has a vast number of competitive advantages in many strategic sectors at regional and global levels which yield significantly higher returns on investment. Of course, it is no surprise that Saudi Arabia is ranked first with regard to prices of energy provided for investment projects. As a consequence, many foreign countries are attracted by Saudi Arabia's opportunities. As such, Saudi Arabia continues to be a natural choice for investors in all energy intensive industries. However, the competitive advantages in today's Saudi Arabia run much deeper than just energy. Rather it is about creating a world-class business environment that combines an ease of conducting business with low costs. It is also about unfettered access to regional markets and financial services. Above all, it is about Saudi Arabia's vision and its shared commitment. To fulfil its commitment in the international scenario Saudi Arabia has passed many laws which will help foreign investors to continue investing in it without any fear of losing their investment unjustly. WTO membership also acted as a catalyst to make the Kingdom's legal environment more stable.
Due to Saudi Arabia's domestic needs as well as its willingness to share the benefits of a free market, it has passed many laws including the Foreign Investment Act 2000. With regard to investing in projects in Saudi Arabia, foreign entities are no longer required to take Saudi partners (except banking and insurance services). Foreign investment may take one of two forms: (i) a joint venture with a Saudi partner (with no minimum share requirement for the Saudi partner); or (ii) a 100-percent foreign-owned enterprise. Also, foreign investors are now permitted to own real estate in Saudi Arabia for company and housing purposes. In addition, the Kingdom has withdrawn the minimum capital requirements that had applied to agriculture, industrial and services projects. The Government encourages foreign direct investment in infrastructure, including power, water, telecommunications and transportation.
The Foreign Direct Investment Law revised in 2000, permits foreigners to invest in all sectors of the economy except for oil exploration, drilling, and production. However, there is no prohibition on foreign investment in refining and petrochemical development. Foreign companies are also eligible for low cost funding from the Saudi Industrial Development Fund (SIDF) for up to 50 percent of a project's cost.
The idea for an Arab-wide investment promotion association came from the Saudi Arabian General Investment Authority (SAGIA), the Economic Development Board of Bahrain and the Dubai Development and the Investment Authority (DDIA). Prince Abdullah bin Faisal bin Turki, the SAGIA's governor, stated that Arab governments had taken few steps to unify their approach. "There has been too little work to effect cooperation; there has been no clear mechanism to guide inter-Arab cooperation in the area of FDI regulation and promotion," he told an international conference on investment. He said the formation of the proposed Arab-wide investment promotion institution would enhance national efforts and complement the efforts of specialised agencies like the Inter-Arab Investment Guarantee Corporation and the Arab Monetary Fund.
Saudi Arabia has established a cooperative insurance system based on Islamic Law and has taken a number of steps to liberalize the regime as permitted by Islamic Law. The most important steps are: (i) permitting the distribution of surplus insurance operations between shareholders and policy holders at a ratio of 90/10 respectively; (ii) allowing foreign insurance providers to establish and operate branches in Saudi Arabia (implementing regulations expected before May 2006); and (iii) providing a three-year transition period (starting April 13, 2005) during which foreign entities already providing non-cooperative insurance services in The Kingdom may continue to do so and moreover, may offer new products and services to clients, as set out in the Saudi Services Schedule. Foreign consulting firms are allowed to establish an office in Saudi Arabia without a Saudi partner except for offices practicing law, accounting and auditing offices, design, architectural, and engineering, civil planning, healthcare services, dentistry and veterinary services. These services mentioned in the latter paragraph can be established in Saudi Arabia although the foreign partner's equity cannot exceed 75 % of the capital.
In compliance with the TRIPs agreement of the WTO, Saudi Arabia has established new IPR laws and enforcement mechanisms to provide full protection for copyrights, trademarks, geographical indications, trade names, commercial data and protection of confidential data, border measures and patents, layout designs of integrated circuits, plant varieties and industrial designs. Provisions for penalties for violations have been substantially strengthened. Furthermore, measures have been taken to streamline the application process and reduce the patent backlog by hiring new patent examiners.
The corporate tax rate for foreign companies is fixed at 20%. However, separate rates will apply to investments in natural gas and in oil and hydrocarbon production. The new rate replaces a tiered system that went as high as 45%. While this is a welcome step toward a more balanced treatment for foreign and Saudi owned capital, there are privileges and preferences that favour Saudi Arabian companies and joint ventures with Saudi participation. For example, domestic corporate partners do not pay corporate income tax, but are subject to a 2.5 % tax on net current assets (Zakat).
As part of the commitment to the WTO, multilateral dispute settlement to resolve international trade disputes has been adopted. Furthermore, disputes between foreign investors and the government can be solved by the Board of Grievance together with effective arbitration regulations being put into place to solve foreign investment disputes.
4.1 Foreign Investment Act Rules
4.2 The Executive Rules of the Foreign Investment Act
4.3 Negative List (Except Investment)
4.4 Company Laws
4.5 Relevant Laws
- Foreign Investment Act
This law contains eighteen articles. It commences with various definitions and terminology and explains that the Supreme Economic Council is responsible and has the authority to issue laws and legislation for foreign investors. It also contains a list of fields which are excluded from being invested in by foreign investment as referred to in Article 2. In addition the Act allows investors to obtain more than one license in different fields. It also offers overseas investors the opportunity to own their business without any restrictions or become business partners with local nationals as mentioned in the fourth and fifth Articles.
Some of the privileges and advantages that are available to foreign investors is that they have all the comfort and flexibility guarantees that are provided by the national project. Another privilege is that they can resell their share in the market as well as have the right to transfer the necessary amounts of money to fulfil their money obligations as stated in Articles 5 and 6. Furthermore, they have the right to own real estate which is necessary to carry out their legal business or for accommodation purposes as mentioned in the previous article.
On the security side, foreign investors are protected when resolving any disputes as stated in Article 11, under no circumstances is the confiscation of any assets belonging to foreign investments allowed except by a ruled government law. In addition, it is not permissible to force the change of ownership partially or wholly with the exception of where it is in the interest of the general public. In this case, fair trade compensation will be awarded according to regulations and the law.
In the case of any legal infringement, it will be necessary for the General Investment Authority to notify the foreign investor in writing and in advance depending on what violation has been committed. However, if an investor continues to break the law then action will be taken against them through the investment authorities in Saudi Arabia. The penalty will be either taking some or all of their privileges or the setting of a fine which will not exceed (500000 SAR) which is equivalent to (71000 British pounds). In extreme cases breaking the law could result in the foreign investor's business license being cancelled. This decision and ruling can only be issued and passed by the Board of Directors of the General Investments Authority in Saudi Arabia. The foreign investor has the right to appeal against this ruling to a higher authority entitled Diwan al Madhalem.
In the case of a dispute occurring between a foreign investor and the Saudi Arabian government in relation to an investment, it is stated in Article 13 that the issue should be resolved in an amicable manner. If the matter still remains unresolved then it will be settled according to regulations. The articles also states that all foreign investors in Saudi Arabia are required to adhere to taxation laws and any other amendments they hold. This is also considered to be an advantage for foreign investors due to the low tax rate and customs tariffs in Saudi Arabia which are set by 5%. In order to benefit from this, foreign investors have to obey the Saudi Arabian law rules and regulations and the international agreements that are part of this.
- The Executive Rules of the Foreign Investment Act
This Act consists of eight chapters and contains twenty-six articles. It commences with various terminology and definitions. The second chapter discusses different investments fields in Saudi Arabia. The third chapter shows the benefits, incentives, privileges and guarantees that foreign investors will enjoy. The fourth chapter contains Articles 6, 7 and 8 which explain the conditions and rules of the license. These four chapters were already mentioned in the previous chapter of the Foreign Investment Act and are repeated here.
The fifth chapter discusses in detail (eight articles) how to obtain a temporary or permanent license as well as the limitations of each. It also lists the necessary documents, paperwork, forms and information required for a foreign investor to obtain a license. Furthermore, it lists the offers, privileges and guarantees that the foreign investor will enjoy.
This executive rule also explains the commitments the foreign investor has to make such as: following and executing the correct steps when making investments and in accordance to a time scale presented by the Investment Authority in Saudi Arabia. Additionally, carrying out and fulfilling all the conditions and the main objective of the investment which is based on the license granted to them and agreed upon. Furthermore, it is not permissible for a foreign investor to add any extras or make any amendments to the license without the permission of the Authority in Saudi Arabia, as well as following the regulations by having an appointed accountant for their facilities and a budget approved by one of the charter accountants' offices.
The seventh chapter is regarding the infringement of the investment laws in Saudi Arabia by foreign investors. The investment authority has formed a committee whose main focus is to carry out inspections and to check through investors' books, documents and all related paperwork. If any contraventions are found, they will create a report and present it to a board consisting of three members. One of the members will be a law consultant who will look into the case and review the license's conditions; the board members will listen to the defendant's testimonies, study the case and then suggest what it sees as a suitable resolution. In the case of a major law violation, the board will take appropriate action. The foreign investor has the right to object to this ruling and re-appeal to the investment authority within thirty days. The investment authority will look into the case and will pass its verdict within a period of thirty days of the re-appeal day.
In the case of foreign investors who have been accused of infringement, the investor can take the case one step further to the Diwan al Madhalem within a period of sixty days.
The last chapter is assigned to deal with the settlement of disputes between foreign investors and their local Saudi partners. A committee which is assigned by the investment authority (an independent authority) is called the 'Investment Disputes Settlement Committee'. This committee consists of two members and a director who will consider the dispute and try to work out a way to resolve the conflict in an amicable manner. If a settlement is not reached through this process then they will refer the case to arbitration.
- Negative List (Except Investment)
There are logical reasons for not allowing foreign investors to invest in some fields in Saudi Arabia. These reasons are divided into the following four sections:
- Political Reasons:
There are political reasons which relate to national security. Therefore foreign investors are not permitted to invest in the following fields:
- Manufacturing civilian explosives;
- Catering services for military sectors;
- Manufacturing machines ,instruments and military garments;
- Security and detection.
- Economical Reasons:
This relates to economical stability and security and to ensure peace of mind for the citizens of the country. Other reasons have links to politics, for example investing in oil fields is not permitted as well as everything connected to the oil like producing, exploring and mining for it. This is because it is the country's main natural resource and forms the country's most important economical pillar as Saudi Arabia relies and survives on the income of oil. Therefore if this field was open to investment by foreigners it would be taken over by foreign companies which would result in the Saudi government coming under great pressure as it could result in the Saudi economy becoming under the control of foreigners. This has occurred in some regions such as the South Asian Tiger countries when after having been infiltrated by foreign investors, overseas investors have destroyed the economies of the host countries. For reasons such as these, there has been a ban on foreign investment in Saudi oil. This ban excludes the other mining fields.
To protect local national investors, foreign investors are excluded from the following fields:
- Real estate agency;
- Some of the services which fall under publishing and printing.
- Audio and visual services;
- Business trade agents;
- Inland transport services ( buses) this excludes railway transportations;
- Searching for underwater resources;
- Recruitment and employment services (private house maids and drivers).
- Religious reasons:
- Real estate investing in the two holy cities of Mecca and Medina;
- Hajj and Umrah touring services.
- Medical reasons:
- Nursing and natural therapy services;
- Blood banks, toxic centres and quarantine medial places.
Generally speaking these areas are excluded for foreign investors. However there is room to amend them by either adding to the negative list or even erasing certain areas from this list although changes will only take effect after consideration by the Foreign Investment Authority Board.
- Company Laws
Company laws are considered to be the main body of legislation which govern companies. The Saudi Arabian company laws approve of eight different types of companies. The most popular forms are: limited liability companies (LLC), general companies, limited companies and joint stock companies.
Other types of companies which are not as popular are companies limited by shares and joint ventures. Shari'a Law also defines some other types of companies which however, cannot be used by foreign investors. Foreign investors usually establish companies that have limited responsibilities. Partnerships and joint stock companies are only established in exceptional cases.
Different types of companies.
It is possible for foreign investors to enter the Saudi labour market in the following legal ways:
- Limited liability companies (LLC);
- Share holding companies;
- Foreign company's branches;
- Technical and scientific offices for foreign companies;
- Private establishments.
- The Limited Liability Company
The Limited Liability Company is a company which consists of two or three partners who are responsible for the company's debts. The total number of partners in the company should not exceed fifty members; furthermore the capital of this company in the form of shares should not exceed five hundred thousand Saudi riyals.
- Share Holding Company
Companies with share holders make stakes in the company with capital. Otherwise, the license for this type of company is established by a royal decree.
- Branches of Foreign Companies
After the general investment authority has come to a decision to allow foreign companies to open branches, they must proceed in this venture according to the foreign investment capital system. Additionally, the foreign company should apply with the required necessary documents to the Companies General Management Office where all the documents and papers will be examined to see their validity.
- The Technical and Scientific Offices for Foreign Companies
This organisation deals with foreign companies who would like to open additional branches or offices throughout Saudi Arabia. The organisation offers its technical and scientific services to the company's representatives, agents, consumers and product distributors. These services are offered after a company is officially registered in the business registry and a registration certificate is handed to the company's manger.
- Private Establishment ( The Main Branch)
The regulations also explain the Commercial Agent System. The commercial agent is someone who signs a contract with a commercial brand giving him the right to market the brand and execute business deals. This can be either an agent or a distributor and in return the agent receives a profit, a commission or other benefits.
The rules and regulations allow companies to transform from one form of company to another form according to the decision taken by the company to amend its contract, system and its circumstances whilst at the same time fulfilling its establishment conditions and the chosen type of company it wants to transform to. Note: it is not permissible for a cooperative company to transform to any other type of company although other types of companies are allowed to transform to a cooperative one.
- Relevant Laws
Anti Money Laundering Law
This law consists of twenty-nine articles; these articles provide definitions and introductions. A total of eleven definitions present precise and conclusive meanings such as money laundering, property, process, instrumentalities, criminal activities and confiscation.
The International Money Laundering Law deals with all aspects of money laundering and several regulations which govern monetary establishments and companies. Furthermore, it publishes a decision to construct a financial intelligence unit and defines its jurisdiction and rule. These articles also point out the punishment which will be dealt to anybody who participates in money laundering and clears any misconceptions in settling any disputes.
Capital Market Law
This law which consists of sixty-seven articles commences with the explanation of various terminology and definitions. The contents give details of the jurisdictions of the Capital Market Law authority and the process of creating committee members who will be responsible for the Capital Market Law. These members consist of experts from all fields who will each be allocated a specific task. The articles also explain how to deal with negotiable securities and constructing a centre to deposit the negotiable security as well as creating a dispute settling committee together with setting boundaries for regulating intermediaries. It also explains investment funds and programs for group investments, as well as the law of information disclosure. The law covers criminal circulation fraud based on internal information as mentioned in article forty-nine. It also explains the requirements for granting agency and procurement restrictions as well as restricted offerings in shares. Towards the end of this chapter, thirteen articles commencing from Article 55 to Article 67 discuss the punishment laws, offences and penal provisions.
Gas Supplies and Pricing Law
This law consists of nineteen articles. The first article explains terminology and definitions which are related to 'gas'. It also details the different types of gas, its transportation and its retail. The second article concerns licensing the activity under the applicable law. The rest of the articles are regarding the ownership and operation of the facility and the right to use the network's capacity.
The law also refers to the rights of marketing, sale and technical services including: standardisation and quota allocation; licensing conditions and provisions; licensing fees and insurance; and disputes.
This law consists of sixty-two articles and commences with the explanation of various terminology and definitions. The law goes into great detail about the technical specifications of inventions. It also provides details of the exceptions that are not considered as inventions. As the Kingdom of Saudi Arabia follows the Islamic Shari'a Law, if there are any inventions which contradict the Shari'a, they will be considered null and will not be granted a patent certificate.
Trademarks Registration Laws
This law deals with business trade marks registered on the business license as well as the regulations regarding the transfer of ownership, the rules and regulations for private businesses and companies, the settlement of any disputes and the places to go to solve disputes. A point to note here is that this law was issued quite a while ago in the year (1984). During the reign of King Fahad bin Abdul-Aziz this law was amended and there was an addition made to it (Trademarks Registration Law) in the year 2000. Furthermore all these laws were issued before the Kingdom joined the WTO which means that the laws require further amendments and additions.
This was royal decree no: M/41 dated 30/8/2003 and consists of thirty-four articles. Firstly it lists various terminologies: different categories of writers who will be protected by the law; also the writers' rights; transferring the writers' copyright; the copyright law to protect the writer; its period; and the laws for innovation and punishment. The seventh chapter includes three articles giving details about general laws.
This is one of the major laws introduced in the Kingdom as it is a royal decree: no. M/51 dated 27/9/2005. It includes sixteen chapters which contain 245 articles. Its main features are the following:
- General Provisions
- Employment Units
- Employment of the Disabled
- Private Offices for Recruitment of Citizens and Private Offices for Recruitment from Abroad
- Training and Qualification of the Employer's Workers
- Qualification and Training Contract of Workers other than the Employer's
- Work contract
- Duties and Disciplinary Rules
- Termination of Work Contract
- End-of-Service Award
- Working Hours
- Rest Periods and Weekly Rest Days
- Protection Against Occupational Hazards
The Cooperative Insurance Companies Control Law
This law consists of twenty-five articles which discuss the law of insurance in Saudi Arabia as well as the tariffs and required prevention insurance together with dispute solving and the necessary conditions to provide insurance licensing.
Natural Gas Investment Taxation Law
This law consists of fourteen articles which in precise detail discuss the fields of investments in natural gas as well as the outcome of working and investment in natural gas. It also considers the tax bowl. Furthermore, it defines the price of tax, the tax year and explains how to calculate annual income.
Real Estate Law
Even though there are not many articles regarding this regulation as it only has eight articles it is considered to be one of the most profitable fields as it allows foreign investors to own property in Saudi Arabia. This will grant an opportunity to many people, especially foreigners who have lived in Saudi Arabia for a long time to own property.
The context of the second article is concerned with allowing people who live legally in Saudi Arabia to own property for accommodation purposes after obtaining permission from the Ministry of Interior. It also discusses the granting of permission based on (treatment in the same manner of) Saudi Arabia's own official consulates, embassies and accommodation for ambassadors and working staff. The same law applies to international and regional organisations based on what has been agreed upon, on the condition that they obtain a license from the Ministry of Exterior. However there is an exception to this rule: foreigners cannot own properties in the holy cities of Mecca and Medina.
It is permissible for companies and establishments to own real estate and to carry out their business activities. This includes accommodation for themselves and for their staff after obtaining the legal license. In order to obtain a license a company is required to buy real estate to build their project with a minimum total cost of at least 30 million Saudi riyals although this amount can be altered by the Minsters' Board.
- Settlement of investment disputes though litigation
- Litigation in KSA
- Settlement of investment disputes though arbitration
- International instrument on arbitration
- Arbitration under the Islamic Sharia
- Saudi Arabian attitude towards arbitration
On the whole, it is possible for investment disputes to be resolved through a myriad of methods which may comprise of one or more of the following: arbitration, conciliation, litigation (judicial settlement) and negotiation. The most favoured method of resolving disputes between groups is the negotiation method as it is a course of action which is voluntary hence both sides are pursuing the course of their own accord, therefore this results in less disagreements and a successful resolution. With regards to Islamic Shari'a, the preferred method utilised in order to resolve conflicts from when Islamic Shari'a Law was first established is conciliation. In the present age however, conciliation is not regarded as being able to offer the best resolution in investment disputes.
The importance of having independent and effective facilities in place in order to resolve investment disputes before foreign investors make any investment decisions in the host country cannot be underestimated. In the next section, I consider litigation (judicial settlement) together with arbitration of investment disputes, as part of this section I will also consider the Saudi Arabian stance on these methods.
In addition, one must not neglect to note that compromise in foreign investment disputes relies quite extensively on the differing attitudes of two parties towards the treatment of foreign investments: the host country (usually from capital exporting and developed countries) and the home country (which is usually developed and imports capital).
The home country together with its multinational corporations is of the viewpoint that having international dispute settlement systems which are dedicated to safeguard investment by foreign groups is in the interests of monetary growth.
In conclusion, the crucial characteristics of this viewpoint are: unrestricted movement is essential to overseas investments, furthermore it is important for foreign investment to have a dispute settlement system in place which is both impartial as well as effectual; the inviolability of foreign investment agreements, hence the permanence of contract is fundamental to investors; the international minimum standard; full recompense must be awarded for the procurement of foreign property; the worldwide rule on the security of investments should be generated by treaties; finally foreign investment conflicts should be resolved by means of overseas arbitration.
The view of the host state (developing countries) include the rules that there is no freedom of entry for foreign investment and that the developing country has the prerogative to screen any investment and exclude an investment which is harmful to the interests of the host state; the sovereignty of the state includes the restructuring of contracts (the doctrine of rebus sic stantibus) as opposed to the sanctity of contracts (pacta sunt servanda); the national standard of treatment; the localization of foreign investment contracts; that state contracts are different from ordinary commercial contracts.
The view highlighted above is one which is utilised by the Saudi Arabian government when resolving investment disputes. It will be considered further in the discussion of the Saudi Arabian viewpoint of employing arbitration as a method of reaching a resolution.
5.2 Settlement of Investment disputes through Litigation
The role of domestic courts in the resolution of disputes has increased in recent times. As a consequence of experience, the courts have developed the confidence to construe the conventions of international law and embody them in their own local legal structures. Furthermore, they have given consequence to them via domestic enforcement methods.
Aspects of law which have expanded as a result of domestic courts construing and embodying the conventions of international law are mainly in the areas of human rights, the environment and business transactions.
The function of a national court in resolving an investment dispute is focused on presenting a solution against foreign countries that have impeded foreign investor's rights. Furthermore, the court offers a solution to the nationals of the host country upon whom the actions of the foreign companies have had a negative impact.
Legal action by overseas investors in national courts: This is a provision which is offered in many countries and is considered as a method of encouraging the security of overseas investment by multinationals as a result of easy access to their own local courts in order to resolve investment conflicts which have occurred from agreements created in host countries. Nevertheless, the situation is still complex as the home state does not have automatic authority over agreements made by its citizens in a foreign country. However this is not the case if the host state has agreed to partake in a forum selection which gives the home country the right to have the jurisdiction in such conflicts. However, most countries are resolute in ensuring that they have the authority in cases such as these. However regarding America, the Foreign Sovereign Immunity Act allows courts in the USA to have authority over the business acts of sovereigns of foreign countries which could result in effects in the US. Nevertheless there are some who have immunity to this law as a result of the act of state doctrine and sovereign immunity.
Exemptions are imperative in instances where active international order founded upon the parity of countries would become unbalanced. For example if the local courts of one country implemented its authority over another country.
5.3 Litigation in Saudi
In Saudi Arabia investment disputes come under the jurisdiction of the Shari'a Courts. The Ministry of Justice governs the Shari'a Courts under the Judicial Code of 1975. The Shari'a Courts have three sections: Ordinary Courts; Summary Courts; and Courts of Appeal. A Judge in a Shari'a Court must be have Saudi Arabian nationality and be of good conduct; furthermore he must possess a degree in Islamic Shari'a from an Islamic Shari'a College. The role played by the Minister of Justice is a supervisory one concerned with the judiciaries' principles of independence and neutrality. The particular features of investment conflicts have resulted in the development of a judicial authority whose sole responsibility is to adjudicate such conflicts. The Ministry of Commerce governs the Special Committee for the Settlement of Commercial Disputes in order to deal with disputes in the commercial and investment sector.
In 1987 a competent judicial organisation was established in order to deal with investment disputes in Saudi Arabia. This board is known as The Board of Grievances (Diwan al-Madhalem). Although the Board was re-structured in 1955 with a focus on becoming more autonomous, the Board's president was under the immediate command of the King who had complete authority to endorse or disallow any of the Board's proposals or findings.
As foreign investment in Saudi Arabia continued to increase, in 1983 the Government re-structured the Board under a new code turning it into a judicial administrative tribunal granting it increased judicial authority in lawsuits which dealt with the Government and private foreign investors.
Nonetheless, because the Board continues to be linked to the Monarch's approval, it is criticised for not being totally autonomous. The authority of the Board of Grievances extends over conflicts as a result of government contracts, commercial agreements and administrative decisions. Furthermore, in accordance with Article 8, cases made by government civil servants against the government as well as appeals against administrative decisions on the basis of formal defects, violations of applicable codes and their implementation rules in addition to abuses of power which have been filed by interested parties are within the Board's jurisdiction. Furthermore, the Board's authority covers compensation claims made against the government; criminal cases; civil servant's disciplinary cases; conflicts regarding agreement between private parties and government agencies; as well as cases filed under the Anti-Bribery and Anti- Forgery Codes.
Besides the constraints the Board of Grievances faces in its ability to adjudicate and litigate in foreign investment conflicts, litigation itself is a process which has the possibility of being lengthy and drawn out. In addition, local courts are viewed by foreign investors as deficient in the knowledge required to adequately deal with foreign investment transactions. Furthermore, the publicity that comes with local court hearings is viewed by foreign investors as violating their private investment dealings. Most importantly however, foreign investors are not convinced of the neutrality of the domestic courts.
As a result, arbitration is the preferred means of resolving any investment transactions disputes which have arisen. Therefore, in the following section I consider the function of arbitration in the resolution of investment disputes in Saudi Arabia.
5.4 Settlement of Investment disputes through Arbitration
Arbitration has been utilised as a method to resolve disputes since time began and differing variations of it existed in different regions. In 1974 the earliest rules of arbitration were established in the Jay Treaty between Great Britain and the United States. This treaty allowed a dispute between the two countries to be finally resolved by means of neutral arbitration and showed the criterion arbitrators should be applying. In addition, the Jay Treaty resulted in the significant international arbitration rule that the tribunal has the authority make judgements in its own jurisdiction. Furthermore, it resulted in arbitration being viewed as a judicial process rather than a diplomatic process.
The First Hague Peace Conference in 1899 established the rules of international arbitration between states: 'international arbitration has as its object the settlement of disputes between states'. The advantages of arbitration were quickly appreciated as it was increasingly utilised as a way of making judicial settlements. These benefits incorporate: parties are able to decide on the forum, procedures, places an time periods; furthermore the idea that arbitrators are able to make judgements in disputes in a just and sensible way.
There are three types of arbitration: inter-state disputes; international commercial arbitration; international investment arbitration. The main focus in this study is on arbitration investment disputes where overseas investors have made agreements with the host country.
5.5 International instruments on arbitration
International legal arbitration rules have been laid out in numerous arbitration mechanisms. This section considers international and regional mechanisms which form the basis of international regulations.
(i)The 1962 Hague Rules
The International Bureau of the Permanent Court of Arbitration issued the 1962 Hague Rules. The Court made the rules available to attendees of the Hague Conventions as well as other investors wishing to utilise them.
(ii)Arbitration Tribunal of the International Chamber of Commerce
Based in Paris, The Arbitration Tribunal offers arbitration facilities for international investment disputes. It also allows any individual, company or country to include an 'ICC clause' in their contracts.
(iii)The 1966 Convention on the Settlement of Investment Disputes
The Centre for the Settlement of Investment Disputes (ICSID) was established in the 1966 Convention. (ICSID) and is a World Bank sponsored endeavour to safeguard overseas investments by means of a treaty mechanism with the view that making a mechanism available for settling investment disputes would encourage foreign investment to go into developing countries and hence assist the economic development of developing countries. The ICSID provides equilibrium to both foreign investors and their home countries, as well as the developing countries. The ICSID establishes a tribunal where the investor is given a platform and takes care of disputes involving foreign investors and home states that are party to the Convention and who comply with the ICSID's tribunal.
(iv) North American Free Trade Agreement (NAFTA)
NAFTA which is a regional mechanism covering the USA, Canada and Mexico generated a significant quantity of overseas investment agreements. In addition it administers and resolves foreign investment disputes between parties involved.
(v) Energy Charter Treaty
The Energy Charter is a regional mechanism which was adopted in fifty-one states in December 1991. This treaty also deals with arbitration in order to resolve conflicts between parties. The aim of the Energy Charter is to create open, proficient, safe and sustainable energy markets. Furthermore, it strives to advance a constructive climate which is beneficial to energy interdependence built on a foundation of trust between countries. The Energy Charter is a sectorial treaty and provides for the settlement of disputes which have occurred as a result of accusations of standards being violated therefore has substantive rules. Article 26 of the treaty deals with three forms of conflict settlement: courts or tribunals of the host state; procedures from the original treaty; procedure on the basis of ICSID arbitration.
The subsequent bilateral and multilateral agreements that also have arbitration clauses and to which the Saudi Arabian government has a part in may be listed as well.
(vi) 1976 Agreement on the Guarantee of Private Investment between the Government of the United States and the Saudi Government
OPIC is allowed to guarantee the investments of American nationals in Saudi Arabia against political perils under this Agreement. Furthermore, it also permits arbitration as a way of resolving conflicts between American investors who are guaranteed by OPIC and the Saudi Arabian government.
(vii) 1974 Agreement on the Establishment of the Inter-Arab Investment Guarantee Corporation (IAIGC)
This Agreement established in 1974, makes arbitration available as a method of resolving conflicts amongst countries who are its members as well as the Corporation as part of investment guaranteed as laid out in the Agreement. In this agreement however, any conflicts must follow the processes of negotiation and conciliation and then arbitration if the first two methods do not work. The terms of the Agreement dictate that each party assigns one arbitrator; thereafter they jointly appoint the chairman. If the appointments result in any conflict then the Secretary General of the Arab League should be requested to make the appointment. The terms of the Agreement, the IAIGCs By-Law as well as other relevant contractual provisions are the features which make up the applicable law.
(viii) The Unified Agreement for Investment of Arab Capital in Arab Countries
This Agreement makes three ways available to resolve investment disputes: arbitration, conciliation and the Arab Investment Court.
(ix) Agreement for Promotion, Protection and Guarantee of investments among member States of the Organisation of Islamic Conference.
Article 17 of this Agreement deals with resolving disputes through arbitration and conciliation. In the Agreement, detailed arbitration procedures are laid out.
5.6 Arbitration under the Islamic Sharia
Arbitration is recognised as a method of settling disputes between parties in Islamic Shari'a. One can see examples of this in the two sources of Shari'a Law: the Holy Quran and the Sunna. Examples can also be found in the manuscripts of the jurists of Islamic Jurisprudence in earlier periods.
The Quran states:
If ye fear a breach between them twain, appoint (two) arbiters, one from his family, and the other from hers; if they seek to set things aright. Allah will cause their reconciliation: for Allah hath full knowledge, and is acquainted with all things.
Another verse, no. 65 reads:
But no by the Lord, they can have no (real) faith, until they make thee [the prophet] judge in all disputes between them, and find in their souls no resistance against the decisions, but accept them with the fullest conviction.
One can comprehend from these examples that arbitration was practised by the Prophet Mohammed quite regularly in order to settle conflicts between tribes as well as individuals. Furthermore he was also in the habit of appointing arbitrators and recognising the decisions they made.
5.7 Saudi Attitude towards arbitration
In Saudi Arabia, arbitration is recognised as an instrument in resolving disputes. An example of this is when the Saudi Arabian government utilised arbitration as a method of resolving the conflicts it experienced with overseas oil companies and their concession agreements.
Al Samaan states that the Saudi Arabian government's attitude transformed as a consequence of the result of the 1958 Aramco Arbitration Award. In addition, Al-Samaan views the award as demonstrating that the arbitrators had little understanding of Islamic Shari'a as well as the fundamental tenets of commercial transactions; the interests of the Western states were favoured by the award and resulted in the laws of the host state being prevented from being applied. As a consequence, the Saudi Arabian government approached arbitration with a negative view.
In the 1970s however, this attitude was revised as the government changed its view. This change of attitude was as a consequence of the economic boom together with the involvement of overseas companies in business and industrial ventures in Saudi Arabia. An Arbitration Code which would sanction arbitration under the approval of the Prime Minister was established.
Saudi Arabia agreed to the New York Convention (1958) on the Recognition and Enforcement of Foreign Arbitral Awards (NYC) in 1994. The most important reason why the Convention was agreed to was to help foreign arbitral awards enforced by Saudi Arabian courts possible. Consequently, the NYC is now considered to be a component of the Saudi legal system.
From the time of the economic boom in the 1970s, at a national level the government began to utilise arbitration more and more in resolving disputes with overseas investors. The Arbitration Code was implemented as a national framework for arbitration in 1983.
The Code offers arbitration as a feasible alternative to other methods of settling disputes which occur in civil and commercial deals in Saudi Arabia's territorial domain. According to the Code, arbitration is not allowed where conciliation is not permitted. In addition it is not allowed in criminal situations; personal status situations; as well as public order offences (including gambling and interest situations). Arbitration can only be carried out by a party with full legal capacity; in addition it is available to both Saudi nationals and foreign parties. Two forms of instruments are offered in the Code: arbitration clause and arbitration agreement. Furthermore, parties are able to have an existing conflict go through the arbitration process, or concur to go through arbitration to resolve any disputes which may occur in the future.
Article 1 of the Code states:
Arbitration may be agreed to in relation to a specific existing dispute and it may also be agreed beforehand to resort to arbitration in connection with any dispute that may arise as a result of the execution of a particular contract.
The Code clearly indicates that both national and foreign investors are eligible to make use of arbitration as part of the legal system.
6.1 Does Saudi law attract foreign investors and make them feel comfortable in making investments in Saudi Arabia?
- Are these laws enough or do they need to be improved?
- To what extent are foreign investors protected by Saudi laws?
- Are these laws functioning at present or do they need to be activated?
- The extent of foreign investor confidence towards laws in KSA
- Problem and Deficiencies
6.1 Does Saudi law attract foreign investors and make them feel comfortable in making investments in Saudi Arabia?
The Saudi Arabian investment situation is considered to be a very attractive environment for foreign investors as a result of transparent and unambiguous laws which protect the foreign investor. Saudi Arabia further entices foreign investors by offering incentives and features which they inevitably find themselves unable to resist. Some of these features are:
- The foreign investor may have more than one license in a variety of different fields.
- The foreign investor has the right to fully own his investment.
- The foreign investor has the same rights, privileges and guarantees that local investors have.
- Foreign investors are offered financial support in the form of simple loans as well as having import duties waived.
In the year 1979 a law was passed which allowed foreign investors to invest their capital in the agricultural and industrial sectors. Furthermore the law decreed that for a period of ten years they would be excluded from any taxation for any other projects they were involved in for five years. This period was then extended to twenty years in an effort to encourage foreign investors to establish more projects. However, it was under the condition that the locals should have a partnership percentage of 25% from the total capital in the project and would not decrease this percentage during the tax exclusion period.
These privileges, benefits laws which offered them all the guarantees required to invest in Saudi Arabia made foreign investors feel that they were in a safe environment and resulted in some major foreign investment projects in Saudi Arabia. I will discuss this subject in the third chapter.
6.2 Are these laws enough or do they need to be improved?
The first foreign investment law was introduced in 1956. The main focus at the time was on investment in the oil sector taking into consideration that oil is Saudi Arabia's main natural resource. Following this law there was another law passed in the year 1962 followed by another law in the year 1979 until an expanded law was issued in the year 2000, followed by the last law in 2005 after Saudi Arabia joined the WTO.
In brief there is a big difference between the law that was introduced in 1979 and the ones introduced in the years 2000 and 2005 in the following aspects: the investment percentage-wise foreign to local; the tax percentage; and the restrictions on the foreign investor. I will not go into detail, but what can be noted here is that Saudi Arabia established new rules whenever they were needed according to the international economic market. In this manner Saudi Arabia whilst catering for the foreign investor, is heading in the right direction for economical growth by setting useful laws for the Saudi economic market as well as attracting foreign investors.
6.3 To what extent are foreign investors protected by Saudi laws?
There are numerous positive and negative aspects of Saudi Arabian law in reference to the protection of overseas investment in Saudi Arabia. The proliferation of the Foreign Investment Law is one of the most notable accomplishments of the Saudi Arabian regulatory authority. An additional accomplishment is the founding of a regulatory organisation: SAGIA. Ramaday (2007) states that the SAGIA has played a fundamental role in cutting through Saudi Arabia's legendary bureaucracy. The SAGIA launched a functional and effective structure which was totally different to the way in which Saudi Arabian government departments usually operate. Furthermore the SAGIA has sixteen delegates from government agencies at its disposal in order to speed up approvals and decisions. It is not unusual for Saudi government approvals such as these to take up to thirty days on the condition that all necessary paperwork is completely organised, furthermore finding an excuse for approvals not taking place because of a previously unheard of reason is commonplace in Saudi Arabia.
As Dr Yahya states in his critical reviews, the SAGIA has had its fair share of problems in the last six years as it came across both internal and external impediments. On the internal side, the SAGIA faced deficiencies in strategic focus, employees' lack of integration and budget constraints in addition to shortages in human capital. As a consequence of the SAGIA having to deal with these concerns, its capability to enliven the investment climate was affected. Once the situation of the internal process had improved, the SAGIA tackled the external domestic difficulties which stemmed from its disjointed and indistinct legal jurisdiction (i.e.) legal authority which overlapped with other government departments. The Government also faced some type of opposition which had a negative effect on trade and negotiation agreements. Another challenging task faced by the SAGIA involved trying to positively develop Saudi Arabia's portrayal in the international business sphere.
Each aspect of the SAGIA in Saudi Arabia has been critically reviewed by Dr.Yahya. Although his viewpoint greatly differs from that of Dr. Ramaday, both criticise and commend the organisation. There is not a single example of a regulatory authority like the SAGIA in the past. Furthermore, for a country like Saudi Arabia where a regulatory system is still in the development process as well as in a contemporary commercial regime, the launching of an organisation like the SAGIA is an achievement. However, merely setting up an organisation is inadequate. To date the SAGIA has been considered simply as a license issuing authority for overseas investors. In the six years since the SAGIA has been in operation, it has not fulfilled any noteworthy tasks. Furthermore, it lacks any type of monitoring structure to observe any irregularities and the performance of overseas investment companies. Promoting and facilitating overseas investment in Saudi Arabia is another of the SAGIA's responsibilities, however at present the organisation has not fulfilled its tasks.
- Are these laws functioning at present or do they need to be activated?
There is no doubt that the investment laws in Saudi Arabia are activated and have been employed since they were established. Furthermore, a committee has been appointed by SAGIA to follow up these laws. There was also a royal decree issued in the year 2007 which instructed the establishment of the Special Commercial Court whose job focuses on receiving commercial complaints and cases both from local investors and foreign investors. The Special Commercial Court will examine these cases within the boundaries of the issued laws and then pass judgment. There are also other appeal courts that work in accordance to the law and in an effective method to implement, follow-up and rectify these regulations. Based on this, high ranking government personnel are assigned the responsibility of ensuring that these laws are appropriate.
- The extent of foreign investor confidence towards laws in KSA
There is no doubt that overseas investors are extremely interested in these laws which can be seen in the increasing amount of foreign investors wanting to invest in Saudi Arabia. Indeed, the SAGIA reports that more than 4500 new projects are being given permission to commence ventures with a cost exceeding 100 million US dollars at the onset only with 46% of funds being invested by foreign companies. Another report indicates that the flow of foreign geared investment is on the increase as in the last five years, the amount of foreign money increased from $183 million in the year 2001 to 18,3 billon US dollars in the year 2006. This means that the total foreign geared investment flow had reached 51 billion US dollars at the end of 2006 as was reported in the World Investment Journal. This figure represented 13% of the total gross domestic product for Saudi Arabia.
This is a clear indication that foreign investors have confidence in Saudi Arabia's investment laws.
6.6 Problem and Deficiencies in the Judicial System
Previous to the Foreign Investment Law being promulgated, overseas investors were restricted to investing in Saudi Arabia only as part of a joint venture. Although the Foreign Investment Law has resulted in several alterations in Saudi Arabia's overseas investment system, there still remain numerous flaws and problems which hinder the promotion of overseas investment. The fundamental problem is that Saudi Arabia's judicial system which although based on Islamic Sharia, is difficult to comprehend. As a result foreigners find the judicial system complicated. The difference between Saudi Arabian and western countries' judicial systems is an important aspect which potential overseas investors take into consideration when making an investment decision. As a consequence, a complete account of Saudi Arabia's judicial system is a strong requirement for overseas investors.
Saudi Arabian litigants have direct understanding of Saudi Arabian law, culture and the somewhat unstructured dispute resolution system hence they have the upper hand over overseas parties in nearly all investment conflicts. Overseas associates in conflicts view it prudent to acquire local legal representatives with knowledge of the Saudi Arabian legal process. Similarly numerous law practices employ non-Saudi (particularly American) attorneys to assist in disputes with foreign investors.
A shortage of local qualified lawyers results in investors facing difficulty in settling complicated, commercial conflicts. To combat this problem, Saudi Arabian law firms engage foreign lawyers from around the world. However, for domestic issues, lawyers from Arab countries are usually employed and lawyers from western countries are employed for commercial issues. An additional problem faced by foreign investors is the judiciary's competence as their proficiency does not extend beyond Islamic Sharia concerns. Another aspect which makes some foreign companies reluctant to invest in Saudi Arabia are concerns regarding the Saudi Arabian judiciary's independence as they believe that the judiciary is heavily influenced by the Government.
The Foreign Investment Act is very unclear in terms of conflict settlement. In fact, Article 13 simply states that any conflict which occurs between either the government and an investor or between an investor and his Saudi Arabian associate should be settled amicably. However, Article 26 of Executive Rules only mentions conflicts between the government and investors, although it lays out a procedure for when a dispute cannot be resolved amicably between a Saudi partner and an overseas investor. The Investment Dispute Settlement Committee will be established by the board to resolve any conflicts concerning the investment license. If the Committee is unable to settle the conflict in a manner which is agreeable to both parties, then the conflict will be resolved by means of arbitration under the terms of the Arbitration Act and its Executive Rules. However, the Executive Rules of Investment Act does not present a process between an overseas investor and the Saudi Arabian government via arbitration. This is because Article 3 of Arbitration Code 1983 and Royal Decree No. 58 proscribe government departments from resolving their private disputes via arbitration without acquiring permission from the President of Council of Ministers.
There have been numerous occurrences where this has resulted in major difficulties being faced by overseas investors. For instance, Saudi partners are able to block foreign investor's obtaining exit visas, compelling them to stay in Saudi Arabia even against their wishes. Furthermore, in cases where fraud is alleged, foreign partners may be imprisoned in order to prevent them from exiting the country until a police investigation is carried out or the case is resolved.
The Court also has the authority to take control of private property pending the adjudication of a commercial conflict in accordance with Royal Decree No. M/4 of October 2, 1989. Consequently it is imperative for overseas investors to ensure that they protect themselves by carrying out comprehensive research of the prospective Saudi Arabian associate's company records and employing legal advice. Furthermore, in the investment procedure overseas investors should act in accordance with all legal processes and ensure that they have a well-drafted and secure agreement.
A major hindrance in the promotion of overseas investment is highlighted in a list produced by the SAGIA in February 2001 which considers areas that are out of bounds to overseas investment. These areas comprise of three industrialized categories and fifteen service industries including: Real estate investment in Mecca and Madina; several sub sectors in printing and publishing; various sub sectors of telecommunications, audiovisual and media services; distribution services in wholesale and retail trade; land and air transportation services except railroads on a BOT basis; fisheries and toxic centers; blood banks; and quarantines.
Although these areas are unavailable to 100 percent overseas investment, some areas may allow foreign Saudi Arabian associates foreign minority possession in shared business enterprises.
According to Dr. Ramaday, the Saudi government can encourage foreign investment further by offering a steady, predictable, unbiased and clear system of investment and regulations. He also suggests that the Saudi Arabian government should have a pivotal function in encouraging increased implementation of sustainable practice, impartial competition and business criterion in addition to increasing consumer/shareholder awareness of good FDI practice. He further states that the government can promote superior investment strategies with enticements as well as making certification more possible or more reasonably priced for smaller business.
- Summary of findings
7.1 Summary of findings:
Saudi Arabia is at the beginning stages of its Foreign Investment regulatory regime. Despite much criticism, the government's attempt to boost the economy by looking for foreign investors to invest in Saudi Arabia has not gone unappreciated. The most important elements which have boosted the economy are the introduction of the Foreign Investment Act and the Capital Market Law. These laws are lead by the regulatory authority SAGIA which takes care of all overseas investment activity in Saudi Arabia. For a country like Saudi Arabia where the majority of government departments are controlled by the monarchy and where the roots of the judicial process are being increasingly strengthened, the addition to the law of clauses like Article 11 is important to mention as it is a vital step towards developing investor's confidence. To increase the confidence of foreign investors to invest in Saudi Arabia, the government should pay particular attention to the protection of property. Indeed, Islamic Sharia law also reviles the removal of any property via illegal methods or the seizing of property without any fair and legal reason.
A significant aspect of FIA 2000 is that it permits the repatriation of shares of overseas investors. In accordance with Article 7 of the Act, the capital can be transferred, utilised or disposed of in any way, hence giving overseas investors security in case the investment venture does not attain desirable profits or a company becomes bankrupt and faces liquidation. This even applies when an investor simply decides to cease his venture; he would retain the ability to securely withdraw his capital in any legitimate manner and transfer funds to his own country. Furthermore, the Article also considers both the Islamic and western notion that 'liquid or illiquid assets can be disposed of by any legitimate manner by its owner.' The overseas investor would be able to transfer any funds needed to clear any contractual debts associated with the project.
A very important aspect regarding conflict settlement that needs to be mentioned here is that as part of the Foreign Investment Act, the Board of Grievances has the authority to consider appeal in only two cases: cases concerning license applications and in the case of the infringement of any terms of the Foreign Investment Act. The Board of Grievances does not have the authority to allow any appeal relating to the administrative decisions of the SAGIA's Board of Directors as decisions can also be arbitrary and biased. The Foreign Investment Law 2000 which was preceded by the Foreign Capital Investment Code 1979 also had the same stipulations.
Saudi Labour Law stipulates that a minimum of 75% of staff should have Saudi nationality and receive 50% of the total pay check from different ventures including those that are only funded by foreign investors. A further stipulation under this law is that Saudi citizens should be occupying job positions such as: human resources staff, recruiting officers, receptionists, cashiers and security staff. However, when there is a shortage of staff, the Labour department is able to lower this proportion. In order to work in Saudi Arabia, foreign nationals are required to obtain a work permit and a guarantee. In addition, a letter of release is required from a former employer if a foreign national changes jobs.
In practice however, foreign companies are obliged to employ 25% to 30% of Saudi nationals in their workforce. Not adhering to these regulations results in foreign companies being denied working visas for their foreign staff.
The founding of the Saudi International Arbitration Commission (SIAC) in December 2005 is a significant stride in Saudi Arabia's arbitration history. The chairman of ICC-Saudi Arabia has stated that the Commission will initiate the ICC's internationally recognised system of arbitration to the Saudi legal and business communities. Moreover, it intends to set up arbitration centres in the Saudi Arabia's major cities. To date, the Commission has made little or no progress. In addition Saudi Arabia's Arbitration Laws have seen no changes. If these changes do take place however, foreign investors will be offered more protection which would give them the confidence to invest in Saudi Arabia.
- Saudi Arabia's Judiciary and judicial system is combined with its Ministries and bureaucracy. In foreign investment cases, the judiciary is frequently influenced by this triangle in order for judgements to be made in the foreign investor's favour. The government and the executives should be detached from the judiciary who should be autonomous to ensure that unbiased decisions are made.
- As a result of overseas investors having difficulty in comprehending Saudi Arabia's legal process, the SAGIA is responsible for assisting them in becoming familiar with local laws as well as the local Islamic laws that are already in place.
- The SAGIA has had a focus, a strategy and a mission in place since its establishment, however it has lacked productivity. Its main focus now should be an effort to advance foreign investment in Saudi Arabia.
- External domestic problems which have arisen from the SAGIA's ambiguous and disjointed legal authority (regulatory authority) which overlap with the jurisdiction of other government departments need to be addressed.
- Apart from minimising the negative lists, the SAGIA has not made any progress since the implementation of FIA. A strong recommendation is that the SAGIA should ask all foreign companies to take part in a survey from which their views on investment projects in Saudi Arabia and the related obstacles and problems they have encountered or are encountering can be obtained.
- The SAGIA can utilise the results of the survey to make amendments to the FIA and therefore reduce the obstacles and problems that are faced by overseas investors thereby awarding foreign investment more confidence.
- The conflict settlement process between overseas investors, their Saudi partners and the Saudi government is not sufficiently comprehensive and ambiguous hence should be amended.
- Information and regulations concerning Merger and Acquisitions (M&A) are not provided by the SAGIA. In developed countries M&A is the main source of foreign investment, hence a strong recommendation is for the SAGIA to provide increased incentives and promote M&A because this would be more prolific than establishing new ventures.
- The Saudi Arabian government has faced the problem of skilled Saudi workers unable to find work for quite a long time as foreign investors prefer to employ manpower from abroad. As a consequence, companies have to arrange visa documents for their employees which is costly as well as time consuming. A strong recommendation is for the Saudi government to make technical education at a higher level available to more Saudis to eradicate this problem. As a consequence, the increasing rate of unemployment in the Saudi population will decline.
- Saudi Arabia's development is being hindered by low level bureaucracy. A consequence of this is that many valuable and worthwhile policies are unable to function at an ideal level. Therefore the Saudi government should work towards reducing its bureaucracy which would enable the successful implementation of all of its policies.
- A consequence of unpredictable Saudisation policy is that foreign investors are always under pressure. As the Saudisation policy is perceived as a threat by foreign investors, the government should improve the confidence of investors by making necessary changes.
Finally, it is recommended that judicial powers be taken from the Ministries, instead these judicial authorities together with all authority which is connected to judicial tasks be awarded to judicial organisations including the Board of Grievances.
This dissertation commences with general background information about the Kingdom of Saudi Arabia followed by details about its relationship with the World Trade Organization. The increased willingness of foreign investors to invest in Saudi Arabia is also discussed.
In Chapter two, this study considers the laws currently in place in Saudi Arabia. It makes comparisons with Islamic law and International Business law and examines how consistent Islamic law is with International Business Law. Furthermore, the judicial structure in Saudi Arabia is examined together with the effectiveness of the Saudi Arabian judiciary and application of laws.
In Chapter three I have researched FDI by defining investment and the role of FDI as an instrument that functions in any project involving a foreign investor. I have also examined FDI in Saudi Arabia explaining its legislative history and summarising the advantages of FDI including the development of the economy and technology in Saudi Arabia.
In chapter four, I discuss the main subject of this dissertation: the new foreign investment laws in Saudi Arabia. I consider the foreign investment laws and attempt to analyse the articles of law and give suggestions as to how the law can be developed. I also study and make observations of the law to find any loop holes in it and try to solve any issues which face the law, for example the exaggeration in taxation, which is quite a complicated issue, again I make suggestions which might resolve these concerns. Thereafter I examine the executive rules in the same sequence as the one utilised in my discussion of foreign investment law. Subsequently, I examine the negative list and explain how it is a challenge to FDI in Saudi Arabia.
In Chapter five, I consider the resolution of foreign investment disputes in Saudi Arabia. Firstly, I examine the process of litigation as a mechanism to resolve conflicts internationally and more specifically in Saudi Arabia. Thereafter I consider arbitration and again set out the legal rules for international arbitration of investment conflicts. Arbitration is also examined as a process under Islamic Shari'a Law, together with the Saudi Arabian attitude towards arbitration when resolving conflicts with foreign investors.
Chapter six looks in detail at whether Saudi Arabian law does enough to attract overseas investment and whether foreign investors feel comfortable in making investments in Saudi Arabia. Whether the laws are currently functioning and to what extent foreign investors feel that they are protected by these laws and therefore have confidence in Saudi Arabian Foreign Direct Investment Laws is also considered. The problems associated with the laws and any deficiencies are highlighted.
In the last chapter of the dissertation, I make recommendations which I have deduced from my findings as well as from other methods such as interviews and meetings with experts. Furthermore, I utilised information gleaned from interviews I have had with foreign investors to get a clear idea of their opinions on investment in Saudi Arabia.
In conclusion, this dissertation has met its aim - to examine the arrangement for the treatment and protection of foreign investment in Saudi Arabia. The dissertation has also highlighted a very important aspect for the economic development of Saudi Arabia - the shift in the government's position on the manner of dealing with foreign investment in the country. There is no uncertainty in that by means of overseas direct investment, Saudi Arabia has the potential to attain the highest level of economic expansion which is essential for the country's development. Furthermore, as predicted by overseas investors, Saudi Arabia has a huge amount of potential for foreign investment. Indeed, the strong and expanding economy of the country with many incentive packages for overseas investors has already persuaded many foreign companies to invest in Saudi Arabia.
Finally I hope I have achieved my aim of examining the new rules of foreign investment in Saudi Arabia. Furthermore, I hope that the Saudi Arabian authorities work hard to improve and develop the legal environment in Saudi Arabia to rival those of the international markets in order to attract more Foreign Direct Investment in the Kingdom of Saudi Arabia.
The Foreign Investment Act
ARTICLE 1: The following expressions and terms shall have the meaning ascribed beside each, unless the context deems otherwise: A. THE COUNCIL: The Supreme Economic Council. B. BOARD OF DIRECTORS: The Board of Directors of the General Investment Authority. C. THE AUTHORITY: The General Investment Authority. D. THE GOVERNOR: The Governor of the General Investment Authority and Chairman of the Board of Directors. E. FOREIGN INVESTOR: The natural person of non-Saudi nationality or otherwise the body corporate, where all partners are non-Saudi nationals. F. FOREIGN INVESTMENT: Investment of Foreign Capital in a licensed activity under this Act. G. FOREIGN CAPITAL: The Foreign Capital in this Act shall mean, for example but not limited to, the following funds and rights as long as they are possessed by a Foreign Investor: 1. Money, instruments, securities and commercial instruments. 2. Foreign Investment profits if they are invested to increase the capital, expansion of existing projects or establishment of new projects. 3. Machinery, equipment, supplies, spare-parts, means of transportation and production requirements relevant to the investment. 4. Legal fights i.e., licenses, intellectual properties, technical know-how, administrative skills and production techniques. H. PRODUCTION FACILITIES: Projects for the production of industrial and agricultural products (plant and animal). I. SERVICE FACILITIES: Service and construction projects. J. ACT: The Foreign Investment Act. K. THE RULES: The Rules of Implementation of this Act.
ARTICLE 2: Without prejudice to the requirements of regulations and agreements the Authority shall issue a license for a Foreign Capital Investment in any investment activity in the Kingdom, whether permanent or temporary. The Authority shall make a decision about the investment application within thirty days after the completion of documents provided for in the Rules. In the event that the specified period elapsed without the Authority rendering a decision about the application it shall be obligated to issue the required license for the investor. If the Authority shall deny the said application within the specified period, then the pertinent decision of denial shall be justified, and the party against whom the decision of denial had been issued shall have the right to contest such decision according to regulations. ARTICLE 3: The Council shall have the authority to issue a list of activities excluded from Foreign Investment. ARTICLE 4: Subject to Article 2, the Foreign Investor may obtain more than one license in different activities, and the Rules shall specify the necessary measures. ARTICLE 5: Foreign Investments licensed under the provisions of this Act, may be in either of the following forms: 1. Facilities owned by a national and a foreign Investor. 2. Facilities wholly owned by a Foreign Investor. The legal form of the Facility shall be determined according to regulations and directives.
ARTICLE 6: A project licensed under this Act shall enjoy all the benefits, incentives and guarantees enjoyed by a national project according to regulations and directives. ARTICLE 7: The Foreign Investor shall have the right to reallocate his share as derived from the selling of his equity, or from the liquidation surplus or profits generated by the facility, out of the Kingdom or to use by any other legal means, and he shall also be entitled to transfer the required amounts to settle any contractual obligations pertaining to the project. ARTICLE 8: The foreign facility licensed under this Act shall be entitled to possess the required real estates as might be reasonable for practicing the licensed activity or for the housing of all or some of the staff as per the provisions for non-Saudi nationals' real estate acquisition. ARTICLE 9: The Foreign Investor and his non-Saudi staff shall be sponsored by the licensed facility. ARTICLE 10: The Authority shall provide all those interested in investment with all necessary information, clarifications and statistics, together with all services and procedures to facilitate and accomplish all matters pertaining to the investments. ARTICLE 11: Investments related to the foreign investor shall not be confiscated wholly or partially without a court order, moreover, it may not be subject to expropriation wholly or partially except for public interest against an equitable compensation according to Regulations and Directives. ARTICLE 12: 1. The Authority shall inform the Foreign Investor in writing when violating the provisions of this Act and its Rules in order that such violation be rectified within a period of time determined appropriate by the Authority for rectifying such violation. 2. Without prejudice to any greater penalty, the Foreign Investor under the existence of the violation shall be subject to any of the following penalties: A. Withhold all or part of the incentives and benefits allocated for the Foreign Investor. B. Imposition of a financial fine not exceeding SR. 500,000 (Five hundred thousand Saudi Riyals). C. Cancellation of the Foreign Investment license. 3. The imposition of the penalties referred to in paragraph (2) herein above is rendered by a resolution by the Board of Directors. 4. A petition against the penalizing resolution may be brought before the Board of Grievances according to its regulations. ARTICLE 13: Without prejudice to the Agreements in which the Kingdom of Saudi Arabia shall be a party of: Disputes arising between the Government and the Foreign Investor relating to his licensed investments under this Act shall as far as possible be settled amicably, and if this shall prove to be impossible, then the dispute shall be settled according to regulations. The disputes arising between the Foreign Investor and his Saudi partners relating to his licensed investments under this Act shall as far as possible be settled amicably, and if this shall prove to be impossible, then the dispute shall be settled according to regulations. ARTICLE 14: All Foreign Investments licensed under this Act shall be treated in accordance with the Tax codes valid in Saudi Arabia and its amendments. ARTICLE 15: The Foreign Investor undertakes to abide by all regulations, rules and directives valid in Saudi Arabia together with international agreements in which it is a part thereof. ARTICLE 16: The implementation of this Act shall not prejudice the vested interests of Foreign Investments that legally existed before this Act shall come into force, however, these projects in conducting their activity or increasing their capital shall be subject to its provisions. ARTICLE 17: The Authority shall issue the Rules, which shall be published in the Official Journal, and shall be effective as of the date of its publishing. ARTICLE 18: This Act shall be published in the Official Journal, and shall be effective thirty days after its publishing, and shall invalidate the Foreign Capital Investment Act issued by the Royal Decree no. (M/4), dated 2/2/1399 (H), together with any contradicting provisions.
The Executive rules of the Foreign Investment Act
Article 1: For the purpose of implementing these Executive Rules the following terms and expressions shall have the meanings indicated opposite thereto, unless the context requires otherwise: The Council: The Supreme Economic Council The Board of Directors :The Board of Directors of the Saudi Arabian General Investment Authority The Chairman of the Board of Directors :The Chairman of the Board of Directors of the Saudi Arabian General Investment Authority The Governor: The Governor of the Saudi Arabian General Investment Authority The Authority: The Saudi Arabian General Investment Authority Foreign Investor: A natural person who is not a Saudi national, or a corporate entity, partners thereof are not Saudi nationals Foreign Investment: Investment of Foreign Capital in an activity licensed under the Act and the rules Foreign Capital :For purposes of the Act and the Rules, Foreign Capital shall mean, but is not limited to, the following assets and rights so long as they are held by a Foreign Investor:
- Cash, securities and commercial papers.
- Foreign Investment profits if reinvested to increase capital expand existing investment entities or establish new ones.
- Machinery, equipment, fixtures, spare-parts, means of transportation and production requirements related to the investment.
- Intangible rights such as licenses, intellectual property rights, technical know-how, administrative skills and production techniques.
The Act: The Foreign Investment Act Products Facilities: Projects for the production of industrial and agricultural products (crops and livestock) Service Facilities: Service and contracting projects The Rules: The executive Rules of Foreign Investment Act The Centre: Investors Service Centre Stipulated in Article (9) of the Saudi Arabian General Investment Authority's Act
Second: The Fields of Investment
Article 2: The Authority is authorized to issue a license for foreign capital investment in the Kingdom for any investment activity whether permanent or temporary with the exception of the activities excluded under the third article of the Act. Article 3: The Board of Directors shall periodically review the list of activities excluded from foreign investment in order to shorten it and submit it to the Council to consider its approval. Article 4: Foreign Investments licensed under the provisions of The Act and The Rules may be in either of the following forms: 1- Entities jointly owned by a national and a foreign investor. 2- Entities wholly owned by a foreign investor.
Third: Benefits, Incentives and Guarantees
Article 5: Foreign Investment projects shall enjoy all the benefits, incentives and guarantees extended to national projects, including the following:
- The incentives stipulated in the Protection and Promotion of National Industries Act issued by Royal Decree No. 50 dated 23.12.1381 H.
- Ownership of real estate required to carry out the investor's licensed activity or for his residence and his staff housing according to the provisions of the Regulation of Ownership and Investment in Real Estate by Non–Saudis issued by Royal Decree No. M/15 dated 17.04.1421 H.
- The benefits ensuing from agreements of avoiding double taxation and agreements of promotion and protection of Investment which are signed by the Kingdom.
- Prohibition of any full or partial confiscation of investment without a court order or subjecting them to expropriation wholly or partly except for the public interest and against fair compensation.
- Foreign investors are entitled to repatriate their share that is derived from the sale of his equity, from surplus of liquidation or the profits generated by the entity and to dispose of it by any legal obligations. He is also entitled to transfer required amounts to fulfil any contractual obligations in respect of the project.
- Shares can be freely exchanged amongst partners and others.
- The licensed entity is entitled to sponsor the foreign investor and his non–Saudi staff.
- The licensed entity is entitled to obtain industrial loans in accordance with the regulations of The Saudi Industrial Development Fund.
- The losses incurred by the entity may me carried forward to the following years and will not be calculated at tax settlement of the years during which the entity reaps profits.
Fourth: Licensing Conditions and Criteria
Article 6: The conditions for granting a Foreign Investment license by The Authority shall include the following:
- The investment activity to be licensed should not be in the List of Excluded activities from Foreign Investment.
- The intended Product should comply with the Kingdom's rules and regulations, or the laws of the European Union or the United States of America in the absence of those laws, in terms of standards and specifications, raw materials and production processes.
- The license applicant should be a natural or nominal person who has come to the Kingdom for investment.
- The Foreign Investor should not have been convicted in the past for substantial violations of the provisions of The Act.
- The Foreign Investor should not have been convicted in the past of financial or commercial violations whether in the Kingdom or in other countries.
- The grant of a license shall not result in the breach of any international or regional agreement to which the Kingdom is a party.
Article 7: The Foreign Investor may obtain more than one license to practice the same activity or a different activity(s) subject to the following conditions:
- The conditions set forth under Article (6) of The Rules must be satisfied.
- Licensing applications to practice the same activity submitted by natural or moral persons shall be considered as expansion of established projects applications.
- The Board of Directors will reconsider these conditions periodically or when deemed necessary.
Article 8: The Foreign Investor may purchase local or foreign investment entities or shares thereof subject to the conditions set forth in Article (5) and Article (6) of The rules.
Fifth: Licensing Procedures
Article 9: The Authority shall prepare an investment guide containing a description of the procedures for obtaining both permanent and temporary licenses and their modifications, as well as the forms, required documents to obtain the licenses and any information needed by the investor. The guide shall also list the incentives, benefits and guarantees to be enjoyed by The Foreign Investor. In addition, the guide must contain substantial information about the following:
- Foreign Investment Act, its rules and supplementary decisions.
- The Statute of the General Investment Authority and the Executive Rules of the General Investment Authority
- The Regulation of Ownership and Investment in Real Estate by Non-Saudis
- Protection and Promotion of National Industries Act.
- Labour and Workmen Act and Social Insurance Act.
- Zakat, Tax and Customs Regulations.
- Legal Shari'a Procedures Act.
- Penal Procedures Act.
- Legal Profession Act.
- Companies Regulations (Commercial Register, Trade Fraud, Banks Monitoring).
- Intellectual Property Protection Regulations (Trade Marks Act, Copyrights Protection Act, Patents Act).
- Residence Act.
The guide shall also contain special sections on the customs and traditions observed in the Kingdom and shall be updated regularly. Article 10: Applications to obtain a foreign investment license shall be submitted to the Applications Reception Unit of The Centre, using the designated form. The application must contain all the necessary information; satisfy all documentation requirements cited therein and be signed by the applicant or his duly authorized representative. The Centre shall notify the license applicant by a written or electronic receipt note including the number of the application record and its date. Article 11: The Authority may accept complete licensing applications and the required attached documents that are delivered by post, e-mail or fax. The licensing decision may be issued accordingly; provided that it will be delivered to the applicant only after The Authority receives the original documents when deemed necessary. Article 12: Decisions on submitted applications are subject to the provisions of The Act, The Rules and the resolutions of The Board of Directors. The Governor, or his assigned delegate, shall sign the licensing decisions within thirty days. National holidays shall be excluded from the mentioned period. Article 13: The Centre shall notify the investor, by hand delivery, registered mail, e-mail or any other means, of the final decision issued with respect to his application. Article 14: If The Authority rejects the application for a new license or the modification of an existing license, its rejection shall be justified. The foreign Investor may object to the rejection decision before The Board of Directors within thirty days effective from the date on which he is notified of the rejection decision. Article 15: The Board of Directors shall consider the objection and reach a decision on it within thirty days from the date of its submittal. If the objection was rejected, the license applicant shall have the right to challenge the rejection decision before the Board of Grievances.
Sixth: Obligations of the Foreign Investor
Article 16: The licensed investor shall start the practical steps required for setting up the entity in accordance with the time schedule submitted by him to The Authority. The Authority shall, if The Foreign Investor shows adequate reasons for delays in the implementation procedures, extend the period specified in the schedule, provided that the extensions shall not exceed one year in total. The extension shall not exceed one year unless a decision to that effect is made by The Board of Directors. Article 17: When The Authority does not approve the extension requests specified by the time table, and if The Foreign Investor is found not to be diligent after the extension, The Board of Directors may then revoke the license. A Foreign Investor whose license is revoked under this Article shall bear the consequences of revocation. Article 18: Licensed entities must abide by the conditions and primary objectives upon which the licenses are issued. No modifications shall be made unless approved by The Authority. Article 19: Owners of licensed entities shall adopt an accredited accounting system and a budget for their entities approved by an authorized accounting office. Upon request, owners of licensed entities shall provide The Authority with statistics or information in respect of their entities.
Article 20: Authority officials, empowered by a written mandate by The Governor or his designated representative, shall have the right to monitor the implementation of the provisions of The Act and The Rules. For this purpose, they have the right to examine records and all documents relating to the investment activity and shall pinpoint violations and submit necessary reports to The Governor or his designated representative. The assigned officials shall maintain the confidentiality of the information and documents they examine. Article 21: The Board of Director shall issue a list of violations and penalties pertaining to the violation of the provisions of The Act, The Rules, the licensing conditions and the rules of their implementation and the implementation of the penalties therein. Article 22: The Authority shall notify the Foreign Investor in writing regarding any violation of the provisions of The Act, The Rules and the licensing conditions; and shall allow a suitable period of time, as specified by the list of violations and penalties, to correct them. If the Foreign Investor fails to implement the necessary corrections, he shall be subject to any of the penalties provided for in the list of violations and penalties. Article 23: The Board of Directors shall form a committee consisting of at least three members, one of whom shall be a legal counsellor and shall develop rules and procedures for its functioning. The responsibilities of the committee shall be to review violations of the provisions of The Act provisions and The Rules and the licensing conditions. The committee shall hear the parties accused thereof, to consider their defences and to suggest what it sees according to what specified by The Act and the list of violations and penalties. The Board of Directors shall render the penalty decision. Article 24: The Foreign Investor with to whom the penalty decision is issued according to Article 23 of The Rules may object to the rejection decision before the Board of Directors within thirty days effective from the date on which he is notified of the rejection decision. Article 25: The Board of Directors shall consider the objection and make a decision on it within thirty days from the date of its submittal. If The Board of Directors confirms the penalty the license applicant shall have the right to challenge the rejection decision before the Board of Grievances within 60 days effective from the date on which he was notified of the decision.
Eighth: Disputes Settlement Committee
Article 26: The Board of Directors shall form, subject to Article 13, paragraph 2 of The Act, a committee composed of at least a chairman and two members to be named The Investment Disputes Settlement Committee. This committee shall consider the disputes arising between the Foreign Investor and his Saudi partners in respect of a licensed investment under The Act. The committee shall work to settle the dispute amicably. In case an amicable settlement could not be reached, the dispute shall be settled through arbitration according to the Arbitration Act and its executive rules issued by Royal Decree No. (46) Dated 12.7.1403 H. This committee is the competent body to consider the dispute as stipulated in the Arbitration Act.
I. Industrial Sector:
- Oil exploration, drilling and production. Except the services related to mining sector listed at (CPC 5115+883) in International Industrial classification codes.
- Manufacturing of military equipment, devices and uniforms.
- Manufacturing of civilian explosives.
II. Service Sector
- Catering to military sectors.
- Security and detective services.
- Real estate investment in Mecca and Medina.
- Tourist orientation and guidance services related to Hajj and Umrah.
- Recruitment and employment services including local recruitment offices.
- Real estate brokerage.
- Printing and publishing. Except the following activities:
- Pre-printing services internationally classified at ( CPC 88442)
- Printing Presses internationally classified at ( CPC 88442)
- Drawing and calligraphy internationally classified at ( CPC 87501)
- Photography internationally classified at ( CPC 875)
- Radio and Television Broadcasting Studios internationally classified at ( CPC 96114)
- Foreign Media Offices and Correspondents internationally classified at ( CPC 962)
- Promotion and Advertising internationally classified at ( CPC 871)
- Public Relations internationally classified at ( CPC 86506)
- Publication internationally classified at ( CPC 88442)
- Press Services internationally classified at ( CPC 88442)
- Production, selling and renting of computer software internationally classified at (CPC 88)
- Media consultancies and studies internationally classified at ( CPC 853)
- Typing and copying internationally classified at (CPC 87505 + 87904).
- Motion picture and video tape distribution services internationally classified at (CPC 96113).
- Commission agents internationally classified at (CPC 621).
- Audiovisual and media services.
- Land transportation services, excluding the inter-city passenger transport by trains.
- Services provided by midwives, nurses, physical therapy services and quasi-doctoral services internationally classified at (CPC 93191).
- Blood banks, poison centres and quarantines.
The Companies Law is the principal body of legislation governing companies. Saudi company law recognizes eight forms of companies. The most common forms are limited liability companies (LLC), joint stock companies, general partnerships and limited partnerships. This Guide focuses on these four forms. The less common company forms are partnerships limited by shares and joint ventures. Apart from the above, Shari'a law specifies a number of other types of companies, which cannot, however, be used by foreign investors. In practice, foreigners usually establish LLCs. Partnerships and joint stock companies are only established in exceptional cases. Limited Liability Company LLCs are a popular corporate vehicle among foreign investors in Saudi Arabia, because they are simple to establish and administer and the personal liability or each of the partners is limited to the individual partner's contribution to the company's share capital. Explained below are some of the important characteristics of LLCs under the Companies Law and the relevant Ministry of Commerce and Industry guidelines. a. Memorandum of Association To increase the likelihood of the government's timely approval, acceptance and registration of an LLC, the memorandum of association, and the governing documents of the LLC should follow the model memorandum of association issued by the Ministry of Commerce and Industry. The memorandum of association must contain the following:
- Name and form of the company, and its objects and head office address;
- Name, address, occupation and nationality of the partners;
- Names of the manager(s), mentioning those who are also partners (optional);
- Names of the members of the supervisory board, if applicable;
- Share capital, amount of the contributions in cash and in kind, description of the contributions and names of the contributors;
- Method of profit distribution;
- Duration of the company; and
- The form of notices that may be issued by the company to its shareholders.
b. Minimum Capital The minimum capital of an LLC with foreign participation is SR 500,000 under the Foreign Investment Law. The required amount is increased to SR 1,000,000 for industrial projects and SR 25,000,000 for agricultural projects. The Board of Directors of SAGIA may reduce the minimum invested capital in projects established in areas specified by it or in export projects or those which require considerable technical experience. The share capital must be fully paid when the company is established. Cash contributions must be paid into an account with a local Saudi bank and are frozen, until the bank is presented with documents showing that the establishment formalities have been completed. The partners of the LLC are personally jointly liable to third parties for any inaccuracies in evaluation of contributions in kind to the share capital of the LLC. c. Partners, Name An LLC must have at least two but not more than fifty partners who may be legal entities or individuals. A company will be automatically dissolved if the number of its partners falls below two. Foreign companies that intend to establish a Saudi LLC as a 100% subsidiary usually arrange for a minority stake to be held by a dependent company or by an individual of their choice. Others prefer to establish a permanent branch. The share capital of LLCs is divided into shares of a uniform nominal value. Transfers of shares to any third party are permitted, subject to pre-emption rights in favour of the other partners and the approval of SAGIA and the Ministry of Commerce and Industry. The company's SAGIA licence, Commercial Registration and Articles of Association must be amended following any share transfer. Certain other important obligations of the partners, which are not contained in the model statutes of association, such as agreements relating to the transfer of shares (e.g. pre-emptive rights, put or call options), side letters, funding and the exercise of voting rights are usually contained in a shareholders' or joint venture agreement. Such agreements, which are not registered with the Ministry of Commerce and Industry but are nevertheless enforceable before the courts, are common practice, as they provide an opportunity for partners to agree to details regarding the administration of the company, which details may not be included in the model statutes. In many cases, a shareholders' agreement is the only protection for foreign partner(s) in an LLC. Shareholders' agreements existing outside of the LLC statutes, are permitted, enforceable, and encouraged as long as parties to such agreements remember the caveat that, like all other contracts in Saudi Arabia, the terms of the shareholders' agreements must not contravene the Shari'a and the mandatory provisions of the Companies Law. If, however, the shareholders' agreements contravene the registered Articles of Association then the most recent stipulation will prevail as between the shareholders, but not vis-� -vis third parties. Unlike the legislation of other GCC states Saudi law does not limit the level of foreign participation allowed in Saudi LLCs. Companies which are owned by foreigners may also be registered in the Commercial Register. Moreover, the new Foreign Investment Law that entered into force in 1421 H. [2000 G.] appears to encourage the establishment of 100% foreign-owned investment projects, be it in the form of companies, branches or individual establishments. Miscellaneous issues to bear in mind are that the company's name may consist of partners' names or may reflect the company's object. The company's stationary should contain its Commercial Registration number, as well as the amount of the paid-up capital and the fact that the company is an LLC. d. Management An LLC may have one or more managers. There is no requirement that any manager be a Saudi national. If there is more than one manager all managers may be authorized by the partners to represent the company individually or collectively. The manager's representative authority generally encompasses all transactions and business relating to the company's normal corporate and business activities. According to the model statutes, specific transactions may, however, be subject to the prior approval of the partners. Usually, the restrictions are determined by the first partners meeting and are registered in the Commercial Register. A general manager is frequently designated for the supervision of the day to day business of the company. It is not a requirement that the general manger be a partner. e. Fiscal Year It should be noted that it is advisable to provide expressly that the fiscal year of the company is according to the Gregorian calendar, otherwise the fiscal year is by law twelve hijri calendar months. The partners are also free to choose the date of the start of the company's fiscal year. f. Supervisory Board If an LLC has more than 20 shareholders it must have a supervisory board consisting of at least three members. The supervisory board's main duty is to supervise the management of the company, to advise on issues referred to it by the managers, and to authorize assignment of assets belonging to the company, if foreseen in the company's statutes. The model statutes contain provisions relating to supervisory boards. g. Transfer of Shares Shares are transferred by a formal notarized agreement, unless the company's statutes provide otherwise. Transfers take place before a notary public after having obtained the approval of SAGIA and the Ministry of Commerce and Industry. Shares must be offered first to the other partners (in the proportion of their participation in the capital of the company) before they may be sold to third parties. A partners' resolution approving the sale and stating that the shares were offered to all of the other partners will be required. The statutes may contain further provisions and may modify the rights of the partners to some extent. h. Liability of Partners The liability of LLC partners towards third parties is limited by law. They are liable only to the extent of their investment in the capital of the company. Partners may be jointly liable towards third parties for the estimated value of contributions in kind for a period of three years. If the company becomes insolvent, the partners are theoretically only liable for their share of the company's capital. In practice, however,
this principle is normally not recognized by the courts because it is not supported by the corporate concepts of Shari'a law.
Under the Companies law partners are jointly personally liable to pay all of the company's debts if the company's losses exceed 75% of its stated capital and no resolution of the partners providing for the continuation of the company (and payment of certain of its debts) is adopted within thirty days. Such resolution should either provide that the company shall continue, with the commitment of the partners to pay its debt, or that the company be dissolved. i. Liability of Management Under Article 168 of the Companies Law, the managers of an LLC are jointly liable for damages suffered by the partners, the company, or third parties due to any failure on their part to observe the provisions of the Companies Law or the LLC's governing documents. Except in cases of fraud, for which the Companies Law provides no statute of limitations this liability lapses three years after the discovery of the wrongful act. Partnerships While for foreign tax reasons it may, in some cases, be advantageous for foreign parties to operate in Saudi Arabia through partnerships foreigners may not currently establish or participate in partnerships under Saudi Arabian law. The following types of partnerships are recognized in Saudi Arabia:
- General Partnerships;
- Limited Partnerships; and
- Partnerships Limited by Shares.
a. General Partnerships A general partnership is an association of two or more persons who are jointly and personally liable for partnership debts. The partnership is a separate legal entity and may transact business in its own name. Partners may not transfer partnership interests to other parties without the unanimous consent of the other partners. No minimum capital is required under the Companies Law for the establishment of a partnership; there are, however, minimum capital requirements under the Foreign Investment Law. Contribution terms are set out in the partnership agreement, which must be registered with the Ministry of Commerce and Industry. General partnerships are a common form of business organization used by Saudi nationals. b. Limited Partnerships Limited partnerships include two kinds of partners: general partners and limited partners. General partners are personally liable for partnership debts to the full extent of their personal assets. Limited partners are liable for partnership debts to the extent of their investment in the partnership. A limited partnership is registered in the same manner as a general partnership. c. Partnerships Limited by Shares A partnership limited by shares is a partnership consisting of at least one general partner who is personally liable for partnership debts to the extent of his personal assets, and at least four shareholders who are responsible for partnership debts only to the extent of their shares in the capital. The minimum capital of a partnership limited by shares is SR 1,000,000 under the Companies law. The partnership is managed by one or more general partners. A supervisory board elected by the partners' assembly supervises the acts of the general (managing) partner(s). The provisions for registering joint stock companies apply to the incorporation of a partnership limited by shares. Joint Stock Companies According to Article 52 of the Company Law, the establishment of joint stock companies generally requires an authorization from the Minister of Commerce after reviewing a proposed company's “feasibility” study. The law requires the authorization through a Royal Decree based on the approval of the Council of Ministers for the formation of any joint stock companies with concessions, undertaking public sector projects, receiving assistance from the State, in which the State or other public institutions participate or for joint stock companies engaging in a banking business. In general, the provisions applicable to the administration of joint stock companies are more detailed than those applicable to limited liability companies. However, the requirements are not as strict as those found in certain Civil Law jurisdictions and, as a result, the costs of administration of a joint stock company are not significantly higher than those relating to the administration of a limited liability company. a. Articles of Association In order to avoid undue delay in formation of the joint stock company, the proposed articles of association of joint stock companies should follow a model issued by the Ministry of Commerce and Industry. The model is generally used, without any major changes, in order to avoid delay in the registration of the company, and because the relevant laws only permit the articles of association of a joint stock company to deviate from the model “for reasons deemed acceptable by the Minister”. Shareholders of joint stock companies frequently enter into shareholders' agreements in addition to the articles of association. b. Minimum Capital and Shareholders Joint stock companies must have a minimum capital of SR 2,000,000 (except where the Foreign Investment Law sets a higher requirement), divided into negotiable shares of equal value of at least SR 50. If the shares are to be publicly traded, joint stock companies must have a minimum capital of SR 10,000,000. Joint stock companies must have at least five shareholders, whose liability is limited to the amount payable on their shares. The shares may be either registered or “bearer” shares. Each shareholder is under an obligation to pay at least 25 % of the amount of the cash contribution at the time of the company's establishment. The total paid in capital at the time of incorporation must amount to at least 50 % of the authorized/issued capital. Cash contributions must be paid into an account with one of the banks designated by the Minister of Commerce. The funds are frozen until the bank is presented with documents confirming that the formation formalities have been completed. Joint stock companies may hold their own shares, but only under certain restrictive conditions. Examples are cases in which the company wishes to reduce its capital, or if the shares in question form part of the assets and liabilities of an estate to be acquired by the company. c. Shares In principle, all shares grant their owners equal rights. A joint stock company may have nominative or bearer shares and preferred shares. Nominative shares are issued in the name of the shareholder concerned. Bearer shares must be fully paid up on issue. Preferred shares conferring preferred rights in respect of profit distribution and on liquidation may be issued, but may not exceed 50% of the capital. d. Saudi Participation, Name Joint stock companies may be wholly owned by foreigners. The participation of a Saudi investor is no longer compulsory. The name of a joint stock company may not contain the name of a natural person, unless the company's object is the use of a patent or an invention registered in the name of that person or unless the company acquires a commercial firm and adopts the name of the latter as its own name. All official papers of the company, such as letterheads, contracts, invoices and other documents given to third parties must state the name, the type of company, the domicile, as well as the issued and the paid in capital of the company. Non-compliance with this obligation may, under certain circumstances, lead to unlimited liability of the person acting in the name of the company. e. Management Joint stock companies are managed by a board of directors, which must be composed of at least 3 directors. The board of directors must elect a chairman and a managing director among its members. A single director may hold both the office of chairman and managing director. There is no supervisory board in addition to the board of directors under Saudi law. The day-to-day business of a joint stock company is usually carried out by the managing director or by an employee vested by the board of directors with the power to represent the company (“general manager”) in its daily activities. The latter is not a member of the board of directors, but may apply to attend the meetings. Members of the board of directors may not appoint other members to act on their behalf by proxy in the board meetings, unless this is specifically authorized in the articles of association. Resolutions of the board of directors are valid if at least half of its members are present and if the number of those present is not less than three, unless the company's bylaws require the attendance of a greater percentage or number of members of the board of directors. The minutes of the board meetings must be entered regularly after each meeting in a special, officially stamped register and must be signed by the chairman and the secretary. Members of the board of directors must own shares in the company's stock, of a nominal value of not less than SR 10,000. These shares should, within thirty days of the date of appointment of a director, be deposited in one of the banks designated by the Minister of Commerce, and are set aside as a guarantee against the individual directors' liability. f. Shareholders' Meetings Saudi law distinguishes between ordinary and extraordinary shareholders' meetings. An ordinary shareholders' meeting must be held at least once a year, and at the latest within six months after the end of the company's fiscal year. Shareholders may exercise their voting rights in person or by proxy. A proxy may, however, only be issued to another shareholder who is not a director of the company. An ordinary shareholders' meeting shall only be valid if attended by shareholders representing at least 50% of the company's share capital, unless the articles of association of the company require a higher level of shareholder representation. Resolutions of ordinary shareholders' meetings are usually adopted by simple majority of votes present unless the statutes of the company provide for a higher proportion. Extraordinary shareholders' meetings are convened in order to amend the articles of association of the company, with exception of the following amendments:
- Depriving shareholders of any of their basic rights as shareholders in the company;
- Amendments increasing the financial liability of any of the shareholders;
- Amendments to the object of the company;
- Transferring the registered office of the company from the Kingdom to a foreign country; and
- Changing the nationality of the company.
Extraordinary shareholders' meetings are convened by the board of directors upon request of shareholders representing at least 10% of the capital. Resolutions of extraordinary shareholders' meetings are adopted by a majority of two thirds of the shares represented at the meeting. If the resolution concerns an amendment to the statutes, such as an increase or decrease in capital, an extension of the company's term or a merger or dissolution, a majority of three quarters of the votes present is required. g. Transfer of Shares Shares in joint stock companies are freely transferable, with the exception of founders' shares, which may not be negotiated until after publication of the balance sheets for two complete financial years. Unlike shareholders of LLCs, the shareholders of joint stock companies have a right of pre-emption only if provided for in the company's Articles of Association or in any Shareholders' Agreements.
Anti Money Laundering Law
Available at: http://www.sagia.gov.sa/english/uploads/AML_en_2.3.5.pdf
Capital Market Law
Available at: http://www.sagia.gov.sa/english/uploads/Media/Capital%20Market%20Law_en_2.3.5.pdf
Available at: http://www.sagia.gov.sa/english/uploads/Reports%20/Copyright%20Law_2.3.5.pdf
Gas Supplies Law
Available at: http://www.sagia.gov.sa/english/uploads/laws/Gas%20Supplies%20Law%20English_2.3.5.pdf
Available at: http://www.sagia.gov.sa/english/uploads/laws/Insurance%20Law%20English_2.3.5.pdf
Available at: http://www.sagia.gov.sa/english/uploads/laws/labor_law_en.pdf
Natural Gas Investment Taxation Policy
Available at: http://www.sagia.gov.sa/english/uploads/laws/Natural%20Gas%20Inv.%20Taxation%20Policy%20English_2.3.5.pdf
Available at: http://www.sagia.gov.sa/english/uploads/laws/Patents%20Law_en_2.3.5.pdf
Real Estate Law
Available at: http://www.sagia.gov.sa/english/uploads/laws/Real_Estate_En_2.3.5.pdf
Available at: http://www.dzit.gov.sa/en/index.shtml
Available at: http://www.sagia.gov.sa/english/uploads/laws/Trademarks%20Registration%20Law_2.3.5.pdf
- Abdul Hamid, Arbitration with the Arab Countries (Denver/Boston, Kluwer Law and Taxation Publishers, (1990)
- Abu-Talib H, The Judicial System in the Kingdom of Saudi Arabia (Cairo, Dar AI-Fiker, Al-Arabi 1404 (1983)
- El-Ahdab, Abdul Hamid, Al-Tahkim Fi al-Bilad al-Arabyya. (Arbitration in the Arab Countries), 1989. (In Arabic).
- Alkahtani F, The Legal Security of Foreign Direct Investment in Saudi Arabia (2003)
- Al-Samaan, Yahya, The Legal Security of Foreign Investment in Kingdom of Saudi Arabia PhD, University of Dundee (1997)
- Al-Samaan, Yahya, The Evolution of Contractual Relationship between the Government of Saudi Arabia and Aramco. L.L.M. thesis, the University of Dundee (1990)
- Al-Sarakhsi. Sharh al-Siyar al-Kabir, 1335 H. (In Arabic).
- Al-Shareef. Enforcement of Foreign Arbitral Awards in Saudi Arabia: (2000).
- Alotaibi N, Legal Protection and Regulation Development of Foreign Investment Laws in Kingdom of Saudi Arabia (2007)
- Al-Zarqa, Mustafa, Nizam al-Taamin: Haqiqatuh Wa al-Ray al-Sharye Fih. 1984 (In Arabic)
- AI-Zohaly M, The Judicial Regulations in Islamic Jurisprudence and its Practice in Saudi Arabia Damascus, Dar Al-Fiker, 1402H (1982)
- Anderson N, Law Reform in the Muslim World (University of London, The Athlone Press, 1976)
- Delupis. Finance and Protection of Investments in Developing Countries. (1973)
- Dennis Campbell, ‘Legal aspects of doing business in the Middle East'(1989) 4(4) JIBL
- El-Malik, M. Walid, Minerals Investment under the Shari'a Law. London /Dordrecht /Boston: Graham and Trotman, 1993.
- Ewe Ghee Lim, ‘Determination of, and Relation Between, Foreign Direct Investment and Growth: A Summary of the Recent Literature' IMF Working Paper WP/01/175
- Gray and Kingsbury, Developments in Dispute Settlement: Interstate Arbitration Since 1945', 1992 BYIL, 63
- Khalid Al-Yahya (Nov., 2006), First Arab Regional Forum on Innovations in Governance
- Nicholas Apergis, ‘The Relationship Between Foreign Direct Investment and Economic Growth: Evidence from Transitional Countries' University of Macedonia (2003)
- Ramaday, M, Saee, J, Foreign Direct Investment: A Strategic Move Toward Sustainable Free Enterprise And Economic Development In Saudi Arabia, (2007)
- Yothin Jinjarak, ‘Foreign Direct Investment and Macroeconomic Risk' Nanyang Technological University (2004)
- Al-Fanjry, Mohammad, "Al-Aefa al-Dariby Bemogib Nizam Istythmar Ras al-Mal al-Agnabi Fi al-Mamlaka" (the Exemption from Taxatiomn under the Foreign Capital Investment Code in the Kingdom), 28 Tyjarat Al-Riyadh. no.318, (February 1989). (In Arabic).
- Asante, Samuel, "International Law and Foreign Investment: A Reappraisal", 37 International and Comperative Law Quarterly 588 (1988).
- Asherman, Jeanne, "Doing Business in Saudi Arabia", 16 the International Lawyer 321 (1982).
- Kemichal, Fathi, "Proceedings of the First Euro-Arab Arbitration", 5 ICSID Review, Foreign Investment Law Journal 195 (1990).
Reports and Papers:
- Shihata, Ibrahim, "Al-Moassasa al-Arabia Li Daman al-Istithmarat Wa Dawroha Fi Tawjih Haraqt al-Istithmarat al-Arabia", (Inter-Arab Investment Guarantee Corporation and its Rule in the Movement of Arab Capital), a paper prepared for Kuwaiti Fund for Arab Economic Development, 1974. (In Arabic).
- "Saudi Arabia Accedes to International Arbitration", Middle East Executive Report (November 1979).
- "A Practitioner's Introduction to Saudi Arabian Law", 16 Vanderbilt Journal of International Law (1983).
- Guide to Industrial Investment, Kingdom of Saudi Arabia, Saudi Consulting House, Riyadh, 1986.
- Inter-Arab Investment Guarantee Corporation Annual Report, 1986.
- "Saudi Arabia into ICSID-With Reservation", Middle East Executive Report (June 1988).
- "Investment in Saudi Arabia", 13 Middle East Executive Report (August 1990).
- "Doing Business in Saudi Arabia", Price Waterhouse, 1991.
Documents and Decrees:
- The Fifth Development Plan, 1410-1415 H. (1990-1995), Ministry of Planning.
- Council of Ministers Resolution No.58, dated 17/1/1383 H. (June 25, 1963).
- ICSID, Doc. 13, List of Contracting States and Signatories of the Convention as of September 18, 1992.
- A1-Qura Gazette, issue No.140 21/2/1346H and NO. 3489, dated 10.08.1414H.
- Royal Decree dated 18/2/1346 H (14/8/1927)
- Royal Decree No. 8762 dated 28.7.1358 H (1940)
- Royal Decree No. 64/M dated 14/7/1395 H (21/7/1975).
- Royal Decree No. 50 dated 23.12.1381 H
- Royal Decree No.M/46, dated 12/7/1403 H. (25 April 1983)
- Royal Decree No.M/11 dated 16.7.1414 H (1994)
- Royal Decree No. M/15 dated 17.04.1421 H.
- Royal Decree No: M/41
Rules and Acts:
- Judiciary Act 1395H (1975)
- Getty Oil Concession Agreement (1949).
- Aramco Concession Agreement (1933)
- Foreign Investment Act (2001)
- The Executive rules of Foreign Investment Act (2001)
- Negative List (2001)
- Company Laws (2001)
- Relevant Laws (2001-2005)
- Aramco v Saudi Arabia, (1963) 27 ILR 117.
- Petroleum Development Ltd v Sheikh of Abu Dhabi, (1951) 18 ILR 144.
- Qatar v International Marine Oil Company Ltd, (1953) 20 ILR 534.