The Legal Guide To Investment in Saudi Arabia

THE LEGAL GUIDE TO INVESTMENT IN SAUDI ARABIA
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Chapter 3 - Laws Related To Doing Business In Saudi Arabia

I. Commercial Matters and Contracts

Apart from the provisions of the Sharia, Saudi commercial law is based on three principal
bodies of legislation. The first is the comprehensive Commercial Court Law (Royal Decree No. 32
of 1350 H. [1931 G.]), primarily based on the Ottoman Commercial and Maritime law, inspired in
turn by the 1807 French Commercial Code. Most of this statute has now been abrogated and
replaced by new specialised laws. The second principal body is the Negotiable Instruments Law
(Decree No. 37 of 1383 H. [1964 G.]), which for the most part reproduces the provisions of the
Geneva Uniform Law of Bills of Exchange (1930) and the Geneva Uniform Law of Cheques
(1931), with the exception of provisions which, according to the interpretation at the time of
promulgation, were contrary to Sharia, in particular with regard to interest. Finally, in 1965, the
Commercial Companies Law (Royal Decree No. M/6 of 1385 H. [1965 G.]), as subsequently
amended, was introduced, partially reproducing French and other Western corporate structures as
deemed to appropriate to introduce in Saudi Arabia for Saudi commercial practice.

Thus, in many areas of commercial law, the rules and principles of the Sharia were
supplemented by modern legal structures provided that they did not conflict with the Sharia. In
most areas of law, unless otherwise agreed, all periods of time are calculated according to the
(shorter) Hijra year. The impact of Sharia on commercial contracts is analysed in more detail
below.

1. Introduction

Saudi law does not include a Civil Code or any comparable codification. Therefore, the
principles of the Sharia, as interpreted by the Hanbali School, apply to contract theory and
construction. The moral and ethical precepts instituted by the Sharia underpin the Islamic law of
obligations, with the principal object of rejecting unjustified enrichment and aleatory transactions
(i.e. those dependent on uncertainty), and ensuring that equal bargaining power exists between the
transacting parties. A result of this system is that parties are generally free to conclude contracts, on
any terms they wish, provided that such terms do not contravene provisions of the Sharia.

Because the Sharia places great importance on the sanctity of the negotiated terms of a
contract, and does not contain detailed provisions on many aspects of contract law, contract
drafting should be as explicit as possible, as is common in US legal practice. In order to avoid
unnecessary uncertainties and provide as much guidance as possible to the court in the event of a
dispute, parties should clearly set forth the terms of their relationship.

The following sections illustrate the relevant aspects of contract law under Sharia law
as applied in the Kingdom.

2. Contracts of Sale

Islamic law contains no general theory of contract per se. The contract of sale, bay, is the
model contract in the Islamic law of obligations. Other categories of contract are either extensions
of bay or defined as forms of bay, making bay the closest thing to a general law of contract.


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Contracts of sale form the basis of Islamic commercial law. In the context of sale
transactions, scholars of the various schools of Islamic jurisprudence set forth a series of basic rules
in order to maintain a balance between the reciprocal benefits of the contracting parties, to avoid
any element of hazard (gharar) that might be the occasion of illicit gain and to prohibit sales of
objects that the religion considers impure, such as alcohol.

The general requirements for a valid sale contract may be summarised as:

Both parties to the sale must be voluntary participants;
Both parties must have the full legal capacity to transact;
The object of the sale must be certain (i.e. existing);
The object of the sale must be owned by the vendor or the vendor must be authorised to sell
it;
The vendor must be able to deliver the object of the sale;
The vendor and the purchaser must have identified the object of the sale, either by
examination or by adequate description; and
The price must be determined precisely and known to both parties.

J urists have established four main conditions regarding the object of the contract,
namely that (1) it must exist at the time of conclusion of the contract, (2) it must be possible, (3)
it must be lawful and (4) its genus, species, quality and value must be clearly determined.

3. Assignment

The question of assignment of rights and debts under Islamic law is relatively complex
and often misunderstood. It is generally agreed that the Islamic concept of hawala or transfer of
rights is recognised by the Hanbali School. In order to be valid, the following conditions must
be fulfilled: (1) The right must not change its nature in the course of the transaction i.e. the same
kind of thing must be due before and after the transfer; (2) the right must be undisputed; (3) the
right must be liquidated; (4) the debtor must have agreed to the transfer; and (5) the right must
not be prohibited under Sharia law (e.g. a debt of interest). With regard to the transfer of
obligations to discharge debts (hawala), the Sharia distinguishes between the effects of
transfers undertaken with and without the approval of the creditor.

In the jurisprudence of the commercial circuits of the Board of Grievances hawala
constitutes a civil (i.e. non-commercial) transaction. The Board, which exercises conservatively
its power to define the limits of its own jurisdiction, usually leaves matters involving hawala to
the Sharia courts, even if the underlying debt is commercial in nature.

4. Conclusion of Contracts

The conclusion of a valid and binding contract under Islamic law requires compliance
with four general rules: a) consent of the contracting parties; b) legal capacity of the contracting
parties; c) a subject matter and d) a consideration.

The conclusion of a contract is a result of the connection of an offer (ijab) and an
acceptance (qabul) during a contractual session called majlis. Because there is no formal
contract structure, an offer and an acceptance and the contract itself need not be in any special


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form. Although oral contracts will be enforced depending upon proof of contract, written
contracts are preferred as they clearly indicate the terms of the agreement between the parties.

5. Sanctity of Contracts and Contractual Freedom

Although stronger, the Islamic counterpart of the Roman law principle of pacta sunt
servanda, is found in the beginning of the first verse of the fifth sura of the Quran which reads:
Oh ye who believe, fulfil your contractual obligations. This principle applies not only to
agreements concluded by private persons, but also to agreements entered into by a sovereign
state. Thus, under the Sharia, no-one, not even the sovereign or any official, is exempt as a
matter of privilege from compliance with duly concluded obligations.

6. Construction Contracts

The legal structure governing construction contracts under Sharia is the contract of
istisnaa. This contract is essentially a creation of the Hanafi School of Law. The acceptability
of these contracts under Saudi Arabian law was questioned until the Saudi model contract for
public works of 1408 H. [1998 G.] specifically declared its applicability.

Construction contracts are essentially an Islamic form of contract of manufacture. In
practice there are few differences between Islamic and the Western forms of construction
contracts.

7. Warranties

Islamic law, as applied in Saudi Arabia, requires warranties of title and of quality with
regard to contracts for the sales of goods. Saudi law has adopted the Maliki Islamic School of
Laws position with regard to such warranty requirements. The warranty period for quality is
one year following delivery of the sold object to the purchaser (which period may be increased,
decreased or waived by the express agreement of the parties). An exception to this rule is found
in cases in which a seller fraudulently misrepresents the object and thereby conceals a material
defect. Warranty claims are excluded if the defect was known to the purchaser at the time of the
conclusion of the contract. The purchaser is under an obligation to examine the object of the
purchase and to notify the seller of any defects within a 'reasonable' period.

Claims under a contractual guarantee are subject to a different set of rules and may give
rise to claims relating to the durability of the object sold.

The other form of warranty is of title, in which the seller warrants that the purchaser
shall exercise control over and benefit from the subject matter of the sale, free from any
physical or legal impediment, by the seller or any third party.

8. Retention of Title

Although not uncommon in Saudi business practice, contractual provisions for retention
of title are only enforceable to a limited extent before the courts, as they contravene the
provisions of the Sharia. Under the Sharia, sales contracts produce the entirety of their effects
including the transfer of title immediately upon conclusion of the agreement. The parties may
not derogate from this principle by way of agreement.


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9. Statute of Limitation

Although the Sharia traditionally rejects the idea of a statute of limitation (taqadum),
many schools of Islamic jurisprudence have, by way of interpretation taken the position that
rights are forfeited if they are not claimed during periods of 15, 20 or 30 years (depending upon
the circumstances of each individual case). This position has not been accepted by the Hanbali
School of Islamic Law. Yet in a number of areas specific statutes expressly providing for
limitation periods have been enacted by the Saudi government, for example in the fields of
labour disputes (1-year time bar), liability of company directors (3 years), cheques (1 year), bills
of exchange (6 months), or claims against the government and its agencies (5 years).
Furthermore, the Civil Procedure Law for proceedings before the Board of Grievances
(Ministerial Resolution No. 190 of 1989) fix a general time frame of 5 years, calculated from
the moment of coming into existence of a right to file an administrative claim before the Board.

10. Product Liability

The Combat of Commercial Fraud Law (Royal Decree No. M/11 of 29/5/1404 H. [2/3/
1984 G.]) protects consumers and impose certain quality obligations on suppliers. The Fraud Law
prohibit any deception or fraud in the sale of a commodity with respect to its identification,
origin, weight or measurement, or advertising and expiry.

The term fraudulent is defined by the law to apply to any commodity that fails to
conform to applicable standards or which is sold by deceptive or misleading means. Fines for
offences not involving food or items for humans or animals range from SR 5,000 to SR 100,000,
and a closure of the offending owners premises for periods ranging from seven to ninety days;
offences involving food also may subject the offender to a period of imprisonment ranging from
seven to ninety days.

Commodities infringing these requirements are subject to confiscation without
compensation or refund of the price of the commodities. While penalties for infringement are
severe, absence of wrongful intent constitutes a defence. The Commerce Ministry Official
Prosecutor is responsible for investigating infringements and seizing offending goods. He may also
prosecute offenders before a local committee, with power to issue final decisions in most cases.

11. Usury and Interest

Islam abhors the concept of riba (sometimes translated as usury) in its holy texts.
Consuming riba money is one of the most serious sins of Islam. Riba is forbidden because it
confers unequal bargaining power among the parties to a transaction, a concept at odds with the
Sharias vision of financial parity between parties, regardless of each partys wealth. There is still
dispute among Muslim scholars as to whether ordinary simple interest falls under the prohibition of
riba.

Most Arab and Islamic states have adopted solutions to deal with this question and in the
past many legislators have remained silent on the issue of interest in loans. Unlike the legal systems
of other Arab and Islamic countries, in which interest has been formally permitted at least in
commercial transactions, under Saudi law, with the Shari'a constituting the only primary source of
legislation, there is no provision allowing for the institution of interest, be it for commercial or
other transactions.


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Article 6 of the Negotiable Instruments Law provides that The stipulation of interest in a
bill of exchange is null and void. Article 2 of the Saudi Arabian Monetary Authority (SAMA)
Law clearly forbids interest, stipulating that SAMA may neither receive nor pay interest. Article
6 of the SAMA Law states that SAMA shall not, in its dealings, contravene the traditions of Islam
and may neither grant nor receive interest. The Banking Control Law of 5/3/1386 H. [24/6/1966
G.] does not address the issue of interest.

Despite this restriction, commercial business is still transacted in Saudi Arabia without
disruption and banks and financial institutions have instituted alternative procedures to replace
interest in common financial transactions. Banks in Saudi Arabia grant loans and charge their
customers a fee that is comparable to international bank rates on commercial loans. For account
holders, Saudi banks offer profit rates to depositors who maintain an account with them, i.e.
referring to Islamically permitted investment banking.

Another distinction in Saudi banking arises from the fact that the legal basis for a banks
claim against a borrower is not interest, but a recognition of a debt by the borrower who refrains
from objecting to the statement issued by the bank (which includes any account service charges).

Interest in any form in commercial transactions will not be enforced by Saudi courts.
Although in Saudi legal practice contracts often provide for interest, the enforceability of such
provisions before courts is, under normal circumstances, impossible. Instead, well-drafted legal
documents provide for alternatives to interest, especially in any penalty provisions which are the
most common clauses in contracts requiring interest payments.

12. Risk

Islam requires certainty in contracts, and thus forbids transactions comprising an element
of uncertainty relating to the object of the contract, its consideration or the time allowed for
performance of the parties respective obligations. This element of uncertainty is referred to as
gharar in the Islamic legal texts.

As with riba, the reasoning behind this prohibition is based on ethical considerations. The
Sharia determined that unjustified enrichment should be prohibited in the interests of fair and
ethical dealing in commutative contracts. The legal principle to which the Islamic objection to
gambling (and, by analogy, also gharar) is attributed, is that even if a wager does not constitute
fraud, the winner has not earned the winnings, and the loser has lost on mere chance. This implies a
disproportion between the situations of the two parties and an advantage of the strong over the
weak, which is incompatible with Islamic ethical principles of parity of bargaining power between
parties to a transaction.

In practice, the prohibition of uncertainty, or risk, affects many fields of modern
commercial transactions. For a start, insurance, as known in Western economies, is not permissible,
since, at the time of concluding the contract, an insurer knows neither whether he will be called
upon to make a payment to the insured, nor the extent of his exposure, Therefore, contracts of
conventional insurance contravene the prohibition of gharar.

Islamic law has found its own solution to gharar in insurance structures, creating a pool-
like structure called takaful. Takaful (i.e. cooperative insurance) consists of a charitable collective
pool of funds in which members pool their resources to assist each other in the event of casualty


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or loss. Under this scheme, members promise to make periodic contributions, which are invested by
the cooperative in an islamically conforming manner, and agree that if one of their number should
suffer a covered loss, each will make a proportionate gift from his account, to cover the loss.

Other systems of insurance that do not conform to these standards (i.e. commercial
insurance) are prohibited under the Sharia. All investment projects in the insurance sector (which
has been opened up to foreign investors by the recent Insurance law) must therefore be built on a
cooperative structure.

Another, rather obvious, aspect of the prohibition of gharar is the prohibition of financial
transactions involving excessive risk. Futures, derivatives, hedge funds and swaps are all contracts
which are tainted with gharar. Financial institutions and commercial organisations in Saudi Arabia
do not offer products of this nature.

In general, investors should bear in mind that the practical consequence of excessive
uncertainty or risk in contracts is that they might be considered invalid as a whole by a court
applying Sharia law.

13. Damages

The Islamic concept of damages much resembles that found in Western jurisdictions.
Damages are defined as the loss or detriment suffered to the property or rights of a person.
Islamic law excludes from the calculation of damages any property designated as unlawful
property under the Sharia. For example, pornography, pork and alcoholic beverages are
unlawful products which have no value in the calculation of damages.

While the Sharia does not currently provide for compensation for positive damages
(loss of profit), the owner of a damaged or destroyed object does have a right to compensation.
This right is limited to compensation for negative damages, which means that the person having
suffered loss to his property must be restored to the economic situation in which he was at the
time the damage occurred. If the object is severely damaged or destroyed, it may be replaced by
a similar one. If that is not possible, the debtor must pay to the owner the amount of its
pecuniary value. If the object suffered only minor damage, its owner may claim for the repair, if
possible, or financial compensation to be assessed by the judge. Any other actual loss that can
be measured as of the time of damage, may also be compensated, provided that such loss is not
speculative in nature.

II. Commercial Agency Law

The Saudi Arabian domestic market represents a significant potential market for foreign
exporters. The effective means of distributing products include the appointment of commercial
agents or distributors.

In essence, a commercial agent is an intermediary between customers and foreign
exporters, and therefore provides a beneficial and efficient means of marketing in low volume/ high
value products; such as machinery and equipment. Distributors, on the other hand, buy products
from foreign exporters for their own account and resell them in the local market, which becomes an
efficient means of selling high volume products to a large number of potential customers.


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It should be noted, that only Saudi and other GCC nationals, and entities wholly owned by
Saudi or other GCC nationals are permitted to engage in trading or commercial agency activities in
Saudi Arabia.

1. Sources and Background

Commercial Agency and Distributorship are regulated by the Commercial Agencies Law
(the "Agency Law", Royal Decree Number M/11 of 20/2/1382 H. [22/7/1962 G.], as amended by
Royal Decree No. M/32 of 1400 H. [1980 G.]), and the related Implementing Rules (the "Agency
Rules", Minister of Commerce Decision No. 1897 of 1401 H. [1981 G.]).

The Agency Law primarily concern the registration procedures and the penalties
resulting from non-compliance. They also contain some provisions concerning the relationship
between principal and agent, primarily intended to secure the interests of the customers.

The Agency Law are in many respects less stringent for the foreign party when
compared to the agency legislation of neighbouring countries. Furthermore, it is worth
emphasising that Saudi Arabia has one of the most liberal agency law of all of the GCC member
states.

2. Definition of Agency and Distribution

The laws governing commercial agency and distributorship do not define the terms agent
or distributor. However, the lack of definition is not a matter of concern, since the law does not
differentiate between the two, in terms of legal status.

The term "Commercial agency" is less clearly defined than might be expected for such a
critical term. As illustrated by the following statutory references, based on the full context of these
and other official documents as applied in practice, the term is commonly understood to mean the
import or local purchase of goods for resale, as well as the conclusion of sales in the Kingdom on
behalf of foreign principals.

A "Commercial Agent" is defined in the law as one who "enters into an agreement with a
foreign producer or his representative in the foreign producer's own country to perform commercial
activities, whether as an agent or a distributor in any manner, for a certain profit, commission or
other benefit of any other kind. Included within this provision are agencies for marine, air and land
transportation and any relationship which is determined to be an agency by the Ministry of
Commerce" (Agency Rules, Art. 1).

The meaning of "commercial agency" may be further clarified by studying the Commercial
Court Law (Royal Decree No. 32 of 1350 H. [1931 G.]), which define a "trader" as "a person who
carries on commercial activities as an occupation" (Art. 1), and "commercial activities" as including
the following:

Purchase of goods or produce, such as foodstuffs and similar products, for resale either directly
or after manufacture or processing;
Contracts or commitments to supply products or services related to commission, trade,
transport by land or sea, or commercial premises offices or sale rooms;
Any activity relating to financial instruments, money-changing and brokerage;


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Contracts and undertakings concluded by traders, retailers, commission agents, money-
changers and the various types of agents; and
Contracts to supply tools and materials for the construction of buildings.
(Agency Rules, Art. 2).

An agency relationship generally is composed of the following elements:

The agent or distributor is permitted to enter into sub-agency or sub-distribution arrangements
(Agency Rules, Art. 1);
The agent or distributor is required to provide maintenance and spare parts, and to make certain
information available to the public at its business premises (Agency Rules, Art. 3.4);
The agent's agreement with the supplier must detail the agent's responsibilities to purchasers
regarding after-sale maintenance and supply of spare parts (Agency Rules, Art. 10.2); and
If a foreigner is found to have engaged in commercial agency, his local organisation may be
closed down (Agency Law, Art. 4; Agency Rules, Art. 20).

3. Requirements for Commercial Agents

Subject to certain exceptions, import regulations in Saudi Arabia do not require foreign
exporters to appoint an official agent or distributor. In other words, a foreign exporter may
export goods to any consignee against the usual shipping documents, without having an official
agent or distributor. However, a number of products require registration of the manufacturer and
agent, prior to importation. These exceptions primarily concern pharmaceutical products for
human and veterinary health care as well as animal foods. In these cases, the agency/distribution
agreement with the foreign producer is to be registered with the Ministry of Commerce before
the required registrations can be effected with the Ministry concerned with the products in
question (Ministry of Health, Ministry of Agriculture).

4. Registration of Commercial Agents

According to the Commercial Agency Law, agency and distribution agreements must be
registered in the Commercial Agency Register at the Ministry of Commerce. Failure to register
results in penalties being imposed upon the Saudi Agent ranging from SAR 5,000 to SAR 50,000.
However, the penalties are rarely imposed. There is no provision providing for penalties to be
imposed on the foreign party to an agency or distribution agreement which is not registered in
Saudi Arabia.

In Saudi Arabia, unregistered agreements are, however, considered to be valid, and any
disputes arising under them may be referred to arbitration or the courts, marking an important
difference between Saudi Arabias requirements and the legal situation in the other GCC countries.
In certain circumstances registration may be a commercial necessity -- for example, if a foreign
principal wishes to partake in government tenders the foreign principle may be required to
participate through a registered Saudi Arabian commercial agent. In these cases, the Commercial
Agency Law require a written contract, signed by the parties and duly authenticated. This means
that the signatures of the Saudi agent must be legalised by the competent Chamber of Commerce
and Industry in Saudi Arabia, and that the signatures of the foreign principal must be notarised in
his country, and legalised by the Saudi Arabian embassy or consulate, to enable the agent or a law
firm appointed by the principal to complete the registration of the agency or distribution agreement
within Saudi Arabia.


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5. Commercial Agency Contracts

The Saudi Arabian Ministry of Commerce has issued a Model Contract for Commercial
Agency or Distributorship, which is frequently used by Saudi Agents. However, the Model
Contract is not mandatory, and may merely serve as a guide. .

The minimum requirements for registration of contracts are that they must identify the
parties and clarify in detail their respective rights and obligations, as well as the obligations of both
parties to consumers with regard to the supply of spare parts and maintenance. The territory and the
products concerned by the agreement and the duration of the contract must also be mentioned.

Unregistered agreements are nonetheless valid agreements and the parties thereto may
have recourse to the courts or arbitration for settlements of disputes arising from such
agreements.

a. Exclusivity

Unlike the legislation of the United Arab Emirates, Saudi law leaves a principal free to
appoint several agents for the same product in the same territory. However, some products, such as
pharmaceutical products, require exclusivity. In the event that exclusivity is required, it may be
approached by defining the territory, which may vary from the entire geographical area of Saudi
Arabia to certain regions or cities, and by restricting the scope to certain products.

A commercial agent who has been appointed as a sole agent has a right to commission
on all contracts concluded in the contract territory, irrespective of whether or not he actually
brokered a transaction.

b. Commissions

As a general rule, the Commercial Agency Law, do not foresee restrictions as to the
amount of the agents commission, the method of its calculation or the mode and time of
payment. Among the most important exceptions are agencies relating to pharmaceuticals, where
the commission payable to the agent must not exceed 15% of the value of the goods, and
armament contracts, where agency is prohibited.

c. Termination

Commercial agency/distribution agreements may be concluded for indefinite or defined
terms. In the first case, the contract must set out an initial term after which the agreement may
be renewed indefinitely. The means of renewal must be inserted into the contract. In order to
limit the possibilities of dispute, agreements should list grounds for premature termination in
addition to a general termination provision.


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d. Compensation

Unlike the legislation of most other GCC countries, the Commercial Agency Law do not
provide for compensation on termination. Accordingly, whether or not compensation is due
depends on the contractual agreement and on the commercial circumstances. In practice,
compensation for loss of goodwill is frequently paid as part of an extra-judicial settlement, mainly
because an agent often has other means of exerting pressure on a principal who wants to terminate
the agreement.

A good number of contracts provide for compensation on termination. Such clauses are
quite common due to the corresponding suggestion in the Model Contract. In the absence of
such provisions there is no legal claim for compensation (as would be the case for example in
the United Arab Emirates).

e. Choice of Law, Jurisdiction and Arbitration Clauses

The Model Agency Contract issued by the Ministry of Commerce provides for Saudi law
as the applicable law of the Contract and for either local or foreign arbitration. Furthermore, Saudi
Arabian courts have recognised contracts with provisions for foreign arbitration. However, in most
cases relating to commercial agency in the Kingdom, Saudi courts will assume substantive
jurisdiction (and thereby apply Saudi law when rendering a decision), especially in cases involving
a foreign choice of law provisions in combination with a foreign arbitration clause.

6. Franchising

Although the Commercial Agency Law were issued in 1962, no law specifically covering
franchise relationships have yet been issued. In 1992, a circular was issued by the Ministry of
Commerce (Ministerial Decision No. 1012 of 1412 H. [1992 G.] subjecting franchise agreements to
the Commercial Agency Law for registration and all other purposes.

A Standard Franchise Agreement similar to the standard agency/distributorship form has
been developed and issued by the Ministry of Commerce. This Agreement serves as a minimum
standard but is by no means compulsory. In most cases the parties deviate from the model contract.

III. Establishing a Commercial Presence in Saudi Arabia

In a number of cases, the right to conduct business activities, such as commercial agencies
and distribution, is restricted to Saudi Arabian owned companies and individuals. Foreign
companies may, however, establish a presence in Saudi Arabia , in order to plan, co-ordinate,
support and supervise local operations, without directly controlling the Saudi partys commercial
activities. Saudi law recognises three categories of offices of foreign companies: technical and
scientific offices, liaison offices (both of which may be considered analogous to traditional
representative offices), and branches of foreign companies.

1. Liaison Offices and Technical and Scientific Offices

Under Saudi law, both liaison and technical and scientific offices (representative offices)


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are legal structures which enable foreign companies to maintain a local presence through offices
under their control, without any requirement for local partners.

The principal activity of technical and scientific offices is to provide support to the
commercial agent or distributor, especially in the field of pharmaceuticals. The office may neither
carry out any independent commercial activity, nor realise any profits. The permitted staff is
restricted to the employees listed in the offices business license.

Liaison offices, authorised by Minister of Commerce Order No. 1502 of 8/3/1400 H.
[26/1/1980 G.], are frequently established by foreign companies involved in Saudi government
contracts. In Saudi Arabia, project-related work has, for many years, usually been carried out
through a Temporary License and a Temporary Commercial Registration (TCR). Unless a foreign
company is permanently represented in Saudi Arabia (for example through a permanent branch or a
Joint-Venture company), its representation and the TCR expire at the end of the project. In such
cases, establishing a liaison office may constitute a alternative structure, especially if a follow-on
contract is expected or has already been signed, in order to coordinate between two or more
overlapping projects and TCRs.

The law defines the permitted activities of liaison offices for public works contracts as the
supervision and support for the activities of foreign companies undertaking government contracts in
Saudi Arabia. Unlike technical and scientific offices, liaison offices for public works may continue
to represent the interests of the foreign company, by providing maintenance services, after the
termination of a government contract and, in practice, they may even continue to exist
independently of any follow-on government contract.

As in the case of technical and scientific offices, liaison offices are prohibited from
conducting independent business activities. A license for a liaison office will not be granted, and an
existing license will be revoked if the authorities suspect that independent business activities are
being conducted by the licensee.

2. Branches

Before the new Foreign Investment Law entered into effect, the number of branches of
foreign companies established (as at the end of Gregorian year 2000) in Saudi Arabia was
insignificant and was essentially limited to certain companies in the oil, defence and civil
aviation sectors.

The position has changed substantially under the regime of the new Foreign Investment
Law, which favour both joint-ventures and wholly foreign-owned investment entities. As a
consequence, numerous foreign investors are now selecting the legal form of a permanent branch to
establish a business in Saudi Arabia. Unlike representative offices, the registration of branches falls
within the competence of SAGIA which facilitates the process for foreign investors, with SAGIA
increasingly acting as a one-stop-shop.

Branches are mentioned in Article 228 of the Companies Law. Art. 228 does not, however,
provide details of their legal nature. In essence a branch, whether temporary (i.e. project-related) or
permanent, is an extension of the legal personality of a foreign company, without itself constituting
a separate legal entity. If the foreign investor is a natural rather than a legal person (i.e. an
individual), the investment project is called an establishment (not a branch). In the case of an
establishment, the personal name of the investor must appear in the name of the project.


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A particular feature of permanent branches which are to be registered in Saudi Arabia is
that generally, the foreign parent company must make initial capital available to the branch upon
registration. The amounts are the same as in the case of joint-venture projects, i.e. normally SR 25
million for agricultural, SR 5 million for industrial and SR 2 million for other projects. It should be
noted that, in the case of branches, the paid-up capital does not confer limitation of liability, as in
the case of joint-venture companies. The capital simply serves as a security for the Saudi market.
With regard to tax and a number of other matters, permanent branches are otherwise treated in the
same manner as 100% foreign-owned limited liability companies.

3. Corporate Formation

General rules for the registration of the various investment structures are set out in the
Commercial Register Law (Decree No. M/1 of 21/2/1416 H. [19/7/1995 G.]) and the
corresponding Implementing Regulations.

a. Representative Offices (Liaison and Technical and Scientific Offices)

The following documents should accompany applications submitted to the Companies
Department, in the Ministry of Commerce, for the establishment of a technical and scientific
office:

Certificate of incorporation of the foreign company;
Resolutions of the companys board of directors approving the establishment of the Office,
appointing a Saudi agent for the purpose and approving the Agency Agreement;
Power of attorney, legalised by a Saudi consulate, authorising a nominated individual, as a
signatory, to represent the foreign company, to act on its behalf, to establish and to manage the
office;
A letter from the Saudi agent endorsing the opening of an office;
A copy of the certificate of commercial registration of the Agent as well as a copy of the
certificate of registration of the agency;
Agency agreement concluded between the company and the agent; and
If possible, a recommendation by a governmental or quasi-governmental agency endorsing
the establishment of the office to facilitate services and other technical assistance.

b. Branches

The following documents should accompany applications for the establishment of a
branch office:

A completed License Application form in English/Arabic (the authorised representative must
have initialled all pages);
A certified copy of a resolution of the board of directors of the foreign company approving the
formation of a branch in the Kingdom, appointing its resident general manager, undertaking to
provide facilities and technical support to the Saudi branch and to assume responsibility for all
obligations related to the activities of the branch in Saudi Arabia;


35
A legalised power of attorney authorising the person or persons designated to submit the
application and stating the limits of the authority;
An attested certificate of registration of the foreign company in its country of origin, issued by
the agency which authorised the company to carry out its business. The certificate must show
the date of registration;
A projected time-schedule for completion of all steps necessary to implement the project; and
The name, address, telephone and fax numbers of a contact person inside or outside Saudi
Arabia.

The first step in the registration process of branches is the preparation of an application
to be presented to SAGIA, which should provide details of the applicants and their local
partners (if any), the entity to be established, the capital to be invested, and declarations of the
investors that they have reviewed, and agree to be bound by, the Foreign Investment Law and
the applicable regulations.

On receipt of the application SAGIA will verify the conformity of the project with the
Kingdoms economic development priorities. A decision, approving or rejecting (with reasons)
the application must be issued within 30 working days from the presentation of the completed
application to SAGIA.

Once SAGIA has approved the application, the file is transmitted to the Ministry of
Commerce, for examination, in particular as to form.

Finally, the branch will need to be registered with the Commercial Registry Department
of the Ministry of Commerce (who will arrange to issue the Commercial Registration). The
registration form will set out detailed information concerning the branch, its managers, premises
and activities. The capital (if applicable) must be entirely paid into an account with a Saudi
bank. The procedures before the Ministry of Commerce can often take up to two months.

c. Limited Liability Companies (LLCs)

For the establishment of most forms of limited liability companies, a number of steps must
be taken following the grant of the license for foreign investment. Although the procedures should
theoretically take no longer than six to eight weeks, investors frequently report that they can take
many months.

The formation of a Saudi LLC with foreign participation requires the authorisation of
SAGIA.

The procedure to be followed after the grant of the SAGIA license may be summarised as
follows: A checklist and an application form for completion and filing should be obtained from the
Companies Department at the Ministry of Commerce. The companys Articles of Association must
then be submitted to the Companies Department for approval together with:

The SAGIA investment license;
A legalised certificate of registration of the foreign company in its country of origin, issued by
the agency that authorised the company to carry out its business activity. The certificate must
show the date of registration;


36
A certified copy of a resolution of the board of directors of the foreign company approving the
formation of a company in the Kingdom, and appointing the manager of the company;
A statement from a local bank evidencing the deposit of the companys capital in its name, and
certifying that no part of the capital may be withdrawn or disposed of until the completion of
all necessary steps in the registration process.

In a further step, the Articles of Association, as approved by the Companies
Department, must be executed, notarised, stamped by the Chamber of Commerce and published
in the Official Gazette.

Finally, the Certificate of Commercial Registration must be obtained from the
Commercial Registry at the Ministry of Commerce after submission of the following
documents:

Copies of the SAGIA license and of the approval of the Companies Department;
The bank certificate evidencing that any necessary capital has been deposited;
The copy of the attested power of attorney issued to the manager of the company setting forth
the limits of his authority;
A copy of the passport of the companys manager and his residence visa and work permit, if
available, or an undertaking to provide them as soon as they are issued;
The lease agreement for the companys office; and
The Certificate of the relevant Municipality that the companys office is located in an area
appropriately zoned for business.

d. Joint Stock Companies

The procedure for establishing J oint Stock Companies under Saudi law is similar to the
procedure for forming Limited Liability and J oint Stock Companies in Saudi Arabia. A
principal difference is that applications for J oint Stock Companies must show the method of
subscribing the capital, the number of shares reserved by the promoters for themselves and the
amount subscribed by each one of them. In practice, Joint Stock Companies exist primarily in
the field of banking.

e. Partnerships

The procedure for forming partnerships is similar. The documents to be provided with
the application for approval to the Companies Department are:

SAGIA license for foreign capital investment;
A draft of the Articles of Association of the partnership;
A legalised resolution of the board of directors of the foreign partner to invest and participate in
the establishment of the partnership in Saudi Arabia, stating the names and nationalities of the
partners and representatives, the objects of the partnership, the proposed capital and the
percentage of the foreign partners ownership of the partnerships capital;
A legalised power of attorney authorising the foreign partners representative to submit the
license application form and setting out the powers and authority of the representative;


37
If a Saudi company is a partner, a copy of its commercial registration and Articles of
Association or, if the partner is an individual, a copy of his identity card;

The managers of the partnership must, within 30 days of its formation, publish an
abstract of its Articles of Association in a daily newspaper distributed in the locality of its head
office. As in the cases of Limited Liability Companies and J oint Stock Companies, the
partnership must be registered in the commercial register.

f. Sponsorship and Temporary Commercial Registration

For private sector projects, instead of forming one of the above-mentioned entities,
foreign contractors may do business under the sponsorship of their Saudi customer. Foreign
contractors participating in Saudi government projects may obtain a Temporary Commercial
Registration (TCR) in lieu of a more permanent type of license.

Generally, with regards to sponsorship, two kinds of sponsorship are available to
foreign investors participating in private sector projects. Either the foreign participant obtains a
business visa for its employees who are then sponsored by the Saudi partner/customer, or the
foreign contractor seconds its employees to the Saudi partner who then employs and sponsors
such employees in Saudi Arabia.

A foreign contractor who does not maintain a registered presence and who is awarded a
project with the Saudi government may obtain a TCR (Minister of Commerce Resolution No.
680 of 09/11/1398 H. [10/10/1978 G.]) registration from the government. An application for a
TCR, with a copy of the contract, must be filed within 30 days following the conclusion of
negotiations and final signature of the relevant contract. No Saudi service agent is required so a
TCR can be awarded solely to a foreign contractor. TCRs are limited, in scope and duration, to
the substance and term of the government contract for which they are issued. If the original
government contract is extended or a new contract is awarded to the contractor the TCR may
likewise be extended by the government Foreign contractors executing two or more contracts,
have the option of establishing a liaison office or even setting up a permanent branch in Saudi
Arabia.

IV. Company Law

The Companies Law is the principal body of legislation governing companies. Saudi
company law recognises 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, Sharia 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.


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1. 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 partners contribution to the companys 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 governments 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:

1. Name and form of the company, and its objects and head office address;
2. Name, address, occupation and nationality of the partners;
3. Names of the manager(s), mentioning those who are also partners (optional);
4. Names of the members of the supervisory board, if applicable;
5. Share capital, amount of the contributions in cash and in kind, description of the
contributions and names of the contributors;
6. Method of profit distribution;
7. Duration of the company; and
8. 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 2,000,000 under the
Foreign Investment Law. The required amount is increased to SR 5,000,000 for industrial
projects and SR 25,000,000 for agricultural projects. The Board of Governors 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.


39

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
companys 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 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 companys object. The companys 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 authorised by the
partners to represent the company individually or collectively. The managers 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


40
calendar months. The partners are also free to choose the date of the start of the companys
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 boards main duty is to supervise the management of
the company, to advise on issues referred to it by the managers, and to authorise assignment of
assets belonging to the company, if foreseen in the companys statutes. The model statutes
contain provisions relating to supervisory boards.

g. Transfer of Shares

Shares are transferred by a formal notarised 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 companys capital. In practice, however, this principle is normally not recognised by the
courts because it is not supported by the corporate concepts of Sharia law.

Under the Companies law partners are jointly personally liable to pay all of the
companys debts if the companys 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 LLCs 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.


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2. Joint Stock Company

According to Article 52 of the Company Law, the establishment of joint stock
companies generally requires an authorisation from the Minister of Commerce after reviewing a
proposed companys feasibility study. The law requires the authorisation 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. 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

J oint stock companies must have a minimum capital of SR 2,000,000, 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. J oint 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.

J oint 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.


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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

J oint 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 companys 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

J oint 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 authorised 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 companys 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 companys 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


43
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 companys 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 companys 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.

3. 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
recognised in Saudi Arabia:

General Partnerships;
Limited Partnerships; and
Partnerships Limited by Shares.


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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 organisation 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.

V. Capital Markets

The establishment of the Saudi Arabian Stock Exchange (SSE) dates back to the 1970s,
when ownership of Saudi Arabias foreign-owned banks was transferred to Saudi nationals. As
a consequence, large corporations and joint ventures were established. These companies, in turn,
issued shares to public investors. However, the stock market remained informal, operating
without a regulatory framework for the trading and brokerage of shares, until the governments
development program was implemented in the 1980s.

In 1984, the responsibility for the regulation of the market was delegated to the Ministry
of Finance, the Ministry of Commerce and SAMA. Under this allocation of responsibilities, the
Ministry of Commerce regulated the primary market through which new company listings are
made. The Ministry of Finance determined the markets policy directives while SAMA operates
and manages the market.


45
Under this system, only commercial banks were authorised to act as brokers. Settling
and clearing facilities for all equity transactions, as well as central regulation facilities for joint
stock companies, were introduced with the establishment of the Saudi Share Registration
Company (SSRC).

In 1989 the Electronic Securities Information System (ESIS), a new automated clearing
and settlement system, was established. In 2001, ESIS was replaced by Tadawul, the new
service system for trading, clearing, and settlement of shares in Saudi Arabia. Tadawul enabled
real-time share trading, as well as same day settlement and clearing of transactions.

1. Evolution of the Stock Exchange

The share market has grown considerably since the regulation of share trading by
commercial banks, in 1985. During the period from 1985 to the end of 2002, the market
capitalisation of traded shares has risen by approximately 300% to USD 74 billion, representing
the highest capitalisation in the Arab world. Over 1.6 million individuals, more than 10 percent
of Saudi nationals, have invested in shares of Saudi joint-stock companies.

Experts estimate that the number of publicly listed companies on the Saudi market
should be in excess of 200. Despite this fact, the number of Saudi publicly listed companies
merely increased from 48 to 68 in the 17-year period from 1985 to 2002. In the past decade,
only 13 new companies were admitted to the market. A mere 20 of Saudi Arabias thousands of
industrial enterprises are currently listed on the market, and only 27 percent of stocks on the
market are free for trading. As a result of this low level of liquidity, due mainly to the fact that
the overwhelming majority of stocks is concentrated in the hands of the government and major
business families, the stock market has so far been dominated by a small number of dealers.

Some of the Kingdoms major economic powerhouses, such as Saudi Telecom, Saudi
Arabian Airlines and the National Commercial Bank, totalling assets in excess of USD 70
billion, have yet to be listed. However, in late 2002 the Saudi government began the largest sell-
off in two decades, launching the Initial Public Offering for the sale of 30 percent of Saudi
Telecom shares for four billion dollars. Other such sales of government-owned enterprises are
expected to follow shortly.

Until 1997, participation in the SSE was restricted to Saudi nationals and corporations;
GCC members were limited to participations of 25 percent per listed company. In 1997,
participation in the Saudi equity market was opened to foreigners, by permitting foreign
investment through the Saudi Arabian Investment Fund (SAIF) in London. A law of 1999
allows non-GCC foreigners to invest in Saudi equity markets through open-ended mutual funds
offered by Saudi banks, and granted GCC citizens the right to invest in the Saudi equity market
without restriction.

The market for government securities (bonds, treasury bills and floating rate notes) is
gradually expanding, and classes of corporate securities are being created. There are no
restrictions concerning foreign investment in government securities.

2. New Capital Market Law

The Capital Market Law (CML) of 30/11/1423 H. [2/2/2003 G.] foresees the
establishment of a formal stock market.


46

Article 67 of the law aims to increase transparency, facilitate foreign investment and
supervise the introduction of new investment tools. The enactment of the CML will facilitate the
licensing of financial intermediaries as well as the issue of an increased number and variety of
securities. The law, which is based on international standards, aims to achieve greater efficiency
and transparency and is a cornerstone of the governments privatisation programme, which
expects an increase in public participation in the capital market.

a. Securities and Exchange Commission

The Securities and Exchange Commission (SEC), reporting directly to the Prime
Minister, is the primary regulatory body of the Saudi capital market. It is responsible for
initiating statutory measures relevant to the capital market and for enforcing the CML.

The SECs main tasks are to regulate and develop the market, to monitor the issue and
trade of securities, and, in particular, to protect investors in securities from unfair practices, by
aiming to achieve efficiency and transparency of the market by regulating and monitoring
disclosure of information related to securities and issuers and the dealings of informed persons.

The law sets out a legal and regulatory framework for all capital-related activities, such
as securities trading. It provides for the creation of an independent stock market commission
and the establishment of a joint stock company to oversee the market, ensure transparency, and
protect investor interests. The SEC replaces the Ministries of Finance and Commerce and
SAMA, and will henceforth control all matters related to securities trading.

b. Saudi Arabian Securities Exchange

The CML provides for the establishment of the Saudi Arabian Securities Exchange
which will take the form of a private sector joint-stock company and will be the sole entity
authorised to carry out trading in securities in the Kingdom. The SEC has sole authority to settle
and register securities transactions. According to the CML, the Saudi Arabian Securities
Exchange will perform the following functions :

1. Ensure fairness and transparency of the markets operated by the Exchange;
2. Admit members (both brokers and clearing houses);
3. List and explain the requirements and conditions for the listing of securities;
4. Promote high ethical standards and standards of corporate governance;
5. Ensure timely and accurate dissemination of market information;
6. Establish and operate a nation-wide system for the trading of securities, settlement
clearing and deposit in order to protect investors; and
7. Provide modern communication and data processing facilities in order to foster
efficiency, enhance competition and increase the information available to market
participants.

c. Regulation of Brokers

Under the CML, brokerage activities are reserved to persons holding a valid license,


47
granted by the SEC. The law distinguishes between brokers, who essentially act as
intermediaries, in a commercial capacity, to acquire or place securities, and portfolio managers,
who manage securities or investment funds. The procedures for the registration of brokers and
portfolio managers are set forth in the by-laws issued by the SEC.

d. Disclosure, Market Manipulation and Insider Trading

In an effort to bring capital market dealings in line with international standards, the
CML contains detailed provisions on the disclosure of information, and prohibitions of market
manipulation and insider trading.

Prospectus liability, as set out in the CML, is one of the important requirements for a
safe environment for investment. The obligation to disclose information to the public on issuers
of securities, their business activities, the individuals in charge of management and the major
shareholders is information of prime importance for investors wishing to assess the risks
inherent in the purchase of securities. A prospectus must also describe the securities to be issued
as well as privileges, rights and preferences of the issuers other securities, if any, as well as the
issuers financial position. If any of the information contained in the prospectus proves to have
been incorrect, investors who acquired the security which was the subject of the prospectus,
may recover damages from the issuer or other persons responsible under the CML.

The prohibition of market manipulation and insider trading set out in the CML
essentially corresponds to international standards, thus contributing to the creation of a
transparent and fair environment for the trading of securities and the involvement of the general
public in the Saudi Arabian capital market.

VI. Protection of Intellectual Property

As in many other Arab states, the protection of intellectual property in Saudi Arabia is
high on the agenda for legal reform, in particularly as to the practical aspects of protecting
intellectual property. As mentioned earlier, Saudi Arabia is preparing for WTO membership,
and is therefore bringing its intellectual property laws into line with the TRIPS-Agreement
(Trade Related Aspects of Intellectual Property Rights). The Saudi government has a patent law
in place, and has enacted a new trademark law, of 10/10/1423 H. [14/12/2002 G.] as well as a
new copyright law. Saudi Arabia is also a member of the World Intellectual Property
Organization (WIPO) and has recently joined the Paris Convention on the Protection of
Industrial Property according to its last amendments of Stockholm 1967, and the Berne
Convention on the Protection of Literary and Artistic Works according to its last amendments of
1979, by Royal Decree No. 48 12/7/1424 H.

1. Patent Law

In the Kingdom, inventions are protected by the Saudi Patent Law (PL), enacted by
Royal Decree No. M/38 of 1409 H. [1989 G.]. But the government has now issued the "Patents,
Layout Designs of Integrated Circuits, plant Varieties and Industrial Models", enacted by Royal
Decree No. M/27 of 1425H (2004).
The King Abdulaziz City for Science and Technology (KACST) in Riyadh is the


48
government authority in charge of granting patents. The Patent Directorate of the KACST is in
charge of formal examination of applications.

a. International Treaties

Saudi Arabia has implemented the Gulf Cooperation Council Patent Law. It has also
joined Paris Convention, Berne Convention as mentioned in page 53.

b. Patentability

Saudi patent law provides that an invention is patentable if it is novel, involves an
inventive step and is industrially applicable as a means of offering a practical solution for a
defined technological problem. An invention is any new or improved product or manufacturing
method.

The patent law provides that an invention is novel if it is not anticipated by prior art
i.e. any element disclosed to the public anywhere, at any time, orally, in writing, by use or in
any other manner prior to the filing of the patent application or the priority date claimed in
respect thereof. Furthermore, an invention is considered as involving an inventive step if, in the
light of the relevant prior art, it is not obvious to a person with ordinary skill in the art. Finally,
an invention is considered as industrially applicable if it can be manufactured or used in any
kind of industry or agriculture including crafts, fishing or services.

c. Employee Inventions

A patent shall belong to an employer if the invention is made in the execution of a
contract or a commitment for exertion of inventive faculty or if the employer establishes that the
inventor would not have achieved such invention had he not used the facilities, means or
information made available through his employment. Therefore, a patent application made by
the employee-inventor within the two years following the termination of his services is deemed
to have been made during his employment.

Employees, as inventors, are entitled to have their names mentioned in patent applications.
Unlike patent law in most Western jurisdictions, under Saudi Arabian law, an employee may claim
reasonable remuneration, to be agreed upon amicably or to be assessed by the Patent Committee in
the light of the various circumstances of the employment contract and the economic significance of
the invention, even if such remuneration is not agreed upon in the employment contract. Any
agreement that deprives an employee of such rights is deemed void.

d. Duration of a Patent Grant

Patents are granted for a term of 20 Hijri years (approximately 19 years on the
Gregorian calendar). The design certificate protection period shall be 10 years from the date of
filing the application or 10 years from the date of start of its commercial exploitation anywhere
in the world. The plant patent protection period shall be 20 years from the date of filing the
application. The industrial model certificate protection period shall be 10 years from the date of


49
filing the application.

e. Exclusion

In compliance with the sources of Saudi law, the Patent Law prohibits the granting of a
patent if the invention itself or its use is contrary to the Sharia. According to the law, the
protection document shall also not be granted if its commercial exploitation is harmful to life, to
human, animal or plant or to environment.

f. Procedures for filing Patents

Protection request applications are submitted to the Patent Directorate. The Patent
Directorate will examine whether the application complies with the prescribed documentary and
procedural requirements, and, if so, will invite the applicant to pay the application fee.

The Directorate shall publish applications for patents on invention and plant varieties
within eighteen months from the date of filing the application, after paying the specified fee.

Should the Patent Directorate find that the prescribed conditions are not fulfilled, it will
invite the applicant to complete the application within a period not exceeding ninety days from the
date of notification. If the applicant fails to comply within the period, the application will be finally
rejected which implies that the applicant must file a new application and again pay the application
fee.

On completion of the examination of the form of the application, to the satisfaction of the
Patent Directorate, it will be referred for substantial examination. If it is found that the invention
fulfils the required conditions, the Patent Directorate will issue a decision granting the patent.
Decisions granting patents are published in the Gazette published by the Patent Directorate. Where
it is found that the applicant is not entitled to the grant of a patent, the Patent Directorate will
prepare a memorandum setting out the reasons for rejection and will send a copy to the applicant.

Any interested party may appeal to the Patent Commission against decisions granting
protection, claiming the total or partial revocation on grounds of its non-compliance with the
conditions of grant.

g. Effect of Holding a Patent

The grant of a patent entitles the owner to exploit the invention exclusively, by making,
importing, offering for sale, or using a product, as well as stocking the product for the purposes
of offering it for sale, or of selling or using it. Where a protection is granted in respect of a
process, the patentee is entitled to the same rights in respect of any products manufactured
directly by use of the process. Where a patentee has not commenced use of a patented invention
on a full industrial scale in the Kingdom within two years from date of grant, the Patent
Directorate may grant a compulsory license to a third party, on its application establishing its
capacity to fully exploit the patent.

Also, the directorate may grant a company license to a third party to exploit a plant variety


50
patented by a plant patent where a patentee has not commenced use his plant patent within three
years from the date of patent grant.

An applicant may claim the benefit of the priority of an earlier application in another
country by attaching a written declaration indicating the date and number of the earlier
application and the country in which he or his predecessor filed the application. The applicant
must produce a copy of the earlier application duly certified by the competent authority in the
country in which it was issued within ninety days from the date of filing the application. The
Patent Directorate assesses the claim of priority rights in the light of international treaties to
which the Kingdom is a party.

The patent law allows the government to expropriate inventions in part or in whole for
reasons of public welfare or national security. If the government does expropriate an invention,
it must reasonably compensate the patent holder. The decision to expropriate is in the
governments sole discretion and there is no appeal.

h. Patent Infringement

Patentees have the right to initiate proceedings before the Patent Committee against
persons exploiting their inventions within the Kingdom, without consent.

The Committee may issue injunctions and order appropriate compensation at the request
of patentees or of interested parties. The Committee may also impose penalties not exceeding
SR 100,000 on an infringer, at the request of the KACST. The maximum fine is doubled in the
case of repeated infringement.

i. GCC Patent Office

Since 1998, it has been possible to file patent applications with the GCC Patent Office
in Riyadh. Under this system, the GCC Patent Office issues a single patent, protecting an
invention throughout all six GCC States. No national patent may exist alongside a GCC patent
for the same invention. Any national patent granted in a GCC member country must be revoked
before the filing of the application for a GCC patent.

2. Trademark Law

Until recently, trademark matters in Saudi Arabia were governed by Decree No. M/5 of
1404 H. [1984 G.] and its executive rules, but the Saudi government has now issued a new revised
Trademark Law, effective as of 15/11/1423 H. [17/1/2003 G.]. The effects of the newly
incorporated amendments mainly concern the procedures for filing oppositions and appeals against
refusal decisions and, in some cases, the procedures for filing trademark applications. The new law
also modifies a number of substantive provisions to bring them into line with the TRIPS agreement,
such as the protection - under certain conditions - of well-known trademarks with regard to
dissimilar products.


51
a. Definition of Trademarks

Article 1 of the Trademark Law defines trademarks as names with distinct shapes,
signatures, words, letters, numbers, drawings, symbols, stamps and prominent inscriptions or
any other signs or combination thereof that are visible and suitable to distinguish industrial,
commercial, vocational, or agricultural products, or projects to exploit forests or natural wealth
or to indicate that the item on which the mark is to be placed belongs to the owner of the mark
on the grounds of manufacture, selection and invention thereof, or trading therewith, or to
indicate the rendering of a certain service. It is not possible to register invisible trademarks such
as sounds or scents.

The following cannot be registered:

marks without distinctive features;
marks which are contrary to religious practices or similar to religious symbols;
expressions, signs, or drawings contrary to public order or morality;
public emblems, flags, and other symbols, names, and designations belonging to the Kingdom
of Saudi Arabia, to states granting Saudi Arabia reciprocal treatment, or to international
organisations or governments, or imitations thereof;
official signs and seals of Saudi Arabia and those of governments and certain organisations,
relating to their control of products, services, or guarantees without authorisation from the
proper authority. This prohibition is valid only when the mark is intended to be used in relation
to products or services identical or similar to those of the governments or organisations
concerned;
geographical names where their use is likely to cause confusion as to the origin of the goods, or
might lead to an unwarranted monopoly thereof;
pictures and personal or trade names of others, without their authorisation;
statements regarding honorary degrees;
statements that might mislead the public, or that contain false information as to the origin of the
goods, services, or any other characteristics, as well as marks containing a fictitious, imitated,
or forged commercial name;
marks identical or similar to the marks which are well-known in Saudi Arabia, even though not
registered in Saudi Arabia, if they are intended for use in relation to identical or similar
products or services. Also, marks identical or similar to marks which are well-known in Saudi
Arabia and registered in Saudi Arabia, even if they are intended for use in relation to non-
identical or dissimilar products or services when this use causes damage to the owner of the
well-know mark;
marks owned by individuals, legal entities or countries with whom dealing is prohibited by
official order; and
signs identical or similar to marks registered or applied for by others for identical or similar
products, and signs the registration of which would prejudice the value of the products or
services of others.

b. Registration

Registered trademarks are entered in the Trademark Register kept by the Trademark
Bureau in the Ministry of Commerce. Registration grants trademark owners the exclusive right
to use their trademarks in Saudi Arabia for ten Hijra years (approximately nine Gregorian years


52
and eight months), renewable for similar periods. Trademark owners may file applications for
renewal of registration in the last year of the protection period, or within a grace period of six
months after the termination of the protection period, subject to payment of a penalty for the
delay.

The following documents are required for trademark registration:

An application form showing the applicants name, nationality, and address, signed by the
applicant or its Saudi agent;
A description of the trademark;
A duly legalised copy of the home registration certificate of the trademark, if any;
A duly legalised power of attorney or authorisation of agent;
A list of goods and services to be covered and their classes;
Ten prints of the mark for each class; and
A confirmation of payment of the application fees (SR 1,000 per class).

A translation into Arabic of one or more of the above-mentioned documents may be
required.

Applications for registration are reviewed by the Trademark Bureau which will reach its
decision within sixty days. In cases of rejection, applicants have the right to file objections with
the Minister of Commerce within sixty days after notification of the decision. If the Minister
rejects an objection, the concerned party may appeal to the Board of Grievances within thirty
days of receiving such objection.

Following approval, a trademark is published in the Official Gazette of the Kingdom
(Umm Al-Qura), on payment of a publication fee of approximately SR 1,200.

Interested persons may object to trademark registrations within ninety days after
publication. Objections rejected by the Minister of Commerce are subject to appeal to the Board of
Grievances.

A registration may lapse if a trademark is used improperly. Marks not used for five
consecutive Hijri years may be challenged for lack of use. Marks used for two consecutive years
after the date of registration may, however, only be challenged with leave of a court.
Applications for leave can be a lengthy and difficult process given that registration has been
issued and use will have taken place.

Marks which are unlawfully registered, because based on fraud or false statements,
against the public order and morality, or not effectively used for five consecutive years without
acceptable justification, may be cancelled on petition of the Registrar of the Trademark Bureau
or any interested party. Non-renewal of marks is construed as abandonment and results in
cancellation.

Third party applications to register cancelled marks for identical or similar products or
services are not acceptable until three Hijri years after the cancellation, unless the cancellation
order provides for a shorter period.


53
c. Classification

The International Classification (eighth edition), was adopted in Saudi Arabia. The only
classifications not allowed are those dealing with prohibited products.

d. Fees

Trademark registration in Saudi Arabia is subject to payment of agents or lawyers fees,
legalisation charges, an application fee (SR 1,000), publication fees (SR 1,200) and registration or
renewal fees (SR 3,000).
e. Transfer and Licensing

Transfers of ownership of trademarks must be in writing. The original transfer
instruments or notarised and legalised copies of such instruments must be submitted to the
Trademark Bureau with the required fees.

Registered trademarks may be licensed to individuals or legal persons, on an exclusive or
non-exclusive basis, for all or part of the products or services for which the mark is registered. A
license period may not exceed the term of the protection of the mark. Licensees only have the right
to assign the license or to sublicense the mark, if so agreed. The license must be in writing and
notarised, and is filed with the Trademark Bureau.

f. Protection of Trademarks

Infringement of trademarks is subject to penal proceedings. Punishment may include
imprisonment for a maximum period of one year, or a fine between fifty thousand and one
million SR, or both. The new Trademark Law has extended the limitation period for prosecution
of trademark infringement/counterfeiting from 3 years to 5 years. The expiry of this limitation
period does not, however, affect claims with regard to personal rights.

If a trademark is infringed, the owner may claim damages according to the general
Shari'a principles, i.e. only for negative damages. Actions for damages are brought before the
Board of Grievances. The time limit for filing claims is 3 years.
In accordance with the new Trademark Law, the Minister of Commerce will appoint
officers to report on and take action in respect of infringements of trademark rights. The powers of
these officers include the power to search premises, to seize counterfeit goods, to investigate the
infringer and to execute orders of the Board of Grievances.

g. International Treaties

Saudi Arabia has not signed any international treaty or convention on trademarks.


54
3. Copyright

Until 1982, there was no enforceable legal protection against the unauthorised
duplication of reproducible works in Saudi Arabia.

However, with the first Saudi Copyright Law, enacted by Royal Decree No. M/11 of
1410 H. [1989 G.], Saudi Arabia significantly increased the legal protection of intellectual
property rights. A new law was issued by Royal decree No. M/41 of 1424 [2003 G]. Although
the Sharia and Saudi rules and regulations previously recognised the pecuniary value of
intangibles and thus provided a certain degree of protection, they did not completely satisfy the
substantial requirements of a modern international multi-media society. This Law contains 28
articles setting out the general principles of copyright protection.

Article 18 of the new Copyright law will extend protection to the works of Saudi Arabian
or foreign authors whose work is first published in Saudi Arabia, as well to works which are
protected under international treaties and agreements to which Saudi Arabia is a signatory. Saudi
Arabia is a signatory to the Universal Copyright Convention (UCC), which (see below) partly
mitigates this anomaly and Saudi Arabias membership of the WTO is under discussion.

a. Copyright Protection

The protection of copyright is available to authors of classified creative works in
science, literature, and arts without regard to the type of classified work, its mode of expression,
its significance or the purpose of composition. In particular, computer programs are subject to
copyright protections and translations, adaptations, and compilations are also similarly
protected.

Not protected are laws, judicial decisions and orders, resolutions of administrative
committees, international agreements, and all other official documents, as well as daily news items
or events characterised as news developments published by newspapers, magazines, and
periodicals.

b. Ownership

Sole authorship and co-authorship works are protected. The filing or deposit of a work
is, however, not a condition for protection. Co-authorship exists where several persons
cooperate in the creation of a work, and it is not possible to separate the individual contributions
from each other (Article 6 of the new Copyright Law). In addition, there is a special regulation
for cases of several parties participating in creating a work under the responsibility of an
individual or legal entity. A work is defined as a collective work if the single contributions are
designed to serve a purpose determined by the person with the final responsibility for the work,
and if the individual contributions are linked so as to render it impossible to separate them from
each other. In those cases, the authorship of the collective work belongs to the person (whether
an individual or a legal entity), who was responsible for managing the work (Article 6(3) of the
new Copyright Law). If these requirements are fulfilled, there is no need for a contract to assign
to an employer the rights to use a work created by its employee(s).

However, assignments of rights insofar as permissible under Sharia should be carefully


55
considered in drafting service contracts.

Article 6 of the Copyright Law will not apply if an employees contributions are
distinguishable from those of other employees. Assignments of rights should be carefully tailored
to establish clear title to a copyrightable work, in the above circumstances, and in cases of
intra-company collaboration.

c. Duration of Protection

Copyright protection for the author of a classified work is for his lifetime and a period of
fifty years thereafter. According to Article 19 of the Copyright Law, the period of protection for
works published anonymously or under a pseudonym, and for computer programs, photographs,
moving pictures and related works and for performance rights is also 50 years, starting from the
date of publication. The period of protection for broadcasting organisations is 20 years, from the
date of first broadcast.

d. Transfer and Licensing

The Saudi Copyright Law allows for transfer and licensing. Agreements must specify the
scope of the transferred or licensed rights and be in writing. Registration or recording of the
agreements is not required. However, an authors assignment of rights to all future works is null
and void.

e. Infringement

Penalties for copyright infringement may include imprisonment and/or fines, seizure of the
unauthorised publications, and closure of infringing shops. If a copyright is infringed, the damaged
party is entitled to claim damages according to the general principles of tort under Shari'a.

f. International Treaties

Saudi Arabia has signed the Universal Copyright Convention, as amended. Thus, works
protected in another signatory State to the UCC are entitled to all of the protections provided by the
Saudi Copyright Law.

VII. Acquisition of Real Estate by Foreigners

Until recently, foreigners were not allowed to own land in Saudi Arabia. Accordingly,
most business activities by foreigners were carried out on leased property.

The position was modified by Royal Decree No. M/15 of 1421 H. [2000 G.], which
enacted the "Ownership and investment of Real Estates by Non Saudi's law". This law permits
a non-Saudi investor of natural or legal character licensed to exercise any professional,
vocational, or economic activity to possess real estate required for the performance of that


56
activity, which includes the investors private residence as well as the housing of his
employees. Furthermore, legal residents of Saudi Arabia have the right to acquire real estate
for their own residence after obtaining authorisation of the Minister of Interior. Ownership or
property by non-Saudis in the holy cities of Mecca and Medina is not permitted.

The Foreign Investment Law allows foreigners to acquire land for investment purposes,
provided the investment amounts to at least SR 30 Million and the development of the land is
accomplished within five years.

There are four options for acquiring land in Saudi Arabia:

in industrial cities managed by the Ministry of Industry and Commerce;
in municipal areas;
in the Royal Commission industrial cities of J ubail and Yanbu; and
privately owned land.

The steps to be taken by foreign investors in order to acquire land differ depending on
the location of the land. Administrative procedures for the acquisition of land by foreigners
remain to be drafted.

VIII. Labour Law

The essential provisions of Saudi labour legislation are contained in Royal Decree No.
M/21 of 1389 H. [1969 G.], the Labour and Workmen Law (LWL). According to the
principle of territoriality, the labour laws apply, as a matter of public policy, to all employment
contracts for work performed in Saudi Arabia.

1. Labour Contracts

Labour contracts must be in writing, in Arabic, and in two official copies. A contract
will, however, be considered, for legal purposes, as existing even if not in writing (Art. 77).
There are no sanctions provided for labour contracts that are only drafted in a foreign language.
If the contract is in Arabic and a foreign language, the Arabic version prevails. The employer
and the employee each receive one copy of the contract. If an expatriate employee signs an
employment contract providing benefits more favourable than those provided for in Saudi
Arabias labour law, then those more favourable benefits apply. However, if the Saudi labour
law is more favourable to the employee, a judge in the Primary Committee or Higher
Committee system may rule that Saudi law be applied instead of the contract.

The provisions of the LWR apply to all employees. Unless otherwise agreed in the
contract, all periods and time-limits provided for in the labour law are computed by reference to
the Hijra calendar.

Labour contracts may provide for a maximum probation period of three months. This
period must be clearly stated in the contract. Labour contracts may be concluded for a fixed
term or for an indefinite term.


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2. Policy of Saudisation

Finding beneficial employment for an increasing number of young Saudis is a critical
component of the governments labour policy. Reducing dependence on foreign labour, and
increasing the number of Saudis in all types of employment became a primary objective of the
Saudi Arabian government in 1996 when the Saudisation policy was instituted. This policy only
allows foreigners to be employed only if no Saudi with the required qualifications can be found.

Companies with more than 20 employees must increase their Saudi workforce by 5 %
each year, until the number of Saudis reaches 75% of the total. In practice, however, authorities
do not apply the percentages under the policy strictly, but examine the real intention of the
companies concerned on a case-by-case basis. Despite this lenient approach of the authorities,
there are severe penalties for failure to observe requirements and in case of non-compliance a
company may be excluded from government contracts and loans and may be refused visas and
work permits for foreign staff. With increasing unemployment among young Saudis, the
authorities are becoming more strict in applying these penalties, and non-Saudis cannot be hired
for certain categories of employment, determined by the Ministry of Labour.

Companies may request a relaxation of the requirements if no Saudi nationals have the
necessary skills and experience, but exemptions are rarely granted. The company must present a
plan for future increases in the numbers of Saudi nationals in the companys workforce. In
drafting an acceptable action plan, investors are encouraged to communicate directly with a
Ministry of Labour officer at SAGIA.

3. Working Hours, Holiday and Sick Leave

Basically, employees should not work more than 8 hours a day, excluding time for
prayer, rest and food, 6 days a week, with the exception of the month of Ramadan, when the
daily working hours are reduced to 6 hours per day. The minimum working age is 13 years.
Persons aged between 13 and 15 years are allowed to work in accordance with certain
requirements, such as the approval of a custodian, notification of the relevant labour office and
the supply of a health certificate.

Employees are entitled to a minimum of fifteen calendar days holiday per annum for
their first ten years of employment. After ten years of service with the same employer, the legal
minimum increases to twenty-one days per year.

Employers with more than 20 employees must grant employees 30 days sick leave with
full pay, and an additional 60 days sick leave with 75% of pay. (The same policy is applied in
practice for companies having less than 20 employees). Overtime and holiday work is
compensated by increasing the hourly rate by 50%.

Female employment, which is relatively limited in Saudi Arabia both for nationals or
expatriates, is subject to specific conditions. Women are not permitted to exercise a profession
which puts them in direct physical contact with men. For this reason, separate workspaces are
required for men and women. Exceptions to this rule are professions in the medical and media
sectors. Businesses are increasingly exploring the use of telecommuting programs to increase
their female work force.
Other restrictions on female employment include a number of provisions granting
women special protection prohibiting their being required, for example, to work night shifts and


58
to perform dangerous and excessively hard tasks.

Women who do work have a generous maternity benefit program. In the first three years
of employment with an employer, women are granted maternity leave for the four-week period
preceding the expected date of delivery and for a six-week period thereafter, at 50% of their
salary. If the pregnancy occurs after the first three years of service, a woman will be allowed to
take her maternity leave, whilst continuing to receive 100 % of her salary. Medical expenses
related to pregnancy and delivery are payable by the employer.

4. Medical and Social Insurance

Social insurance is governed by the Social Security Law issued by Decree No. M/33 of
27/8/1421 H [24/11/2000 G.].

In the first year of employment, the employer is obliged to insure employees against
work-related accidents. This contribution amounts to 2% of the employees salary and applies to
Saudi and non-Saudi employees alike. In addition, employers must pay contributions, for their
Saudi employees, to the pension fund of the General Organisation for Social Insurance (GOSI)
the department responsible for social security in Saudi Arabia. Saudi employees set aside 9% of
their gross salary, which must be retained by the employer, and the employer makes a matching
contribution of 9%.

5. Wages

The Law does not provide for any legal minimum wage. However the average monthly
salary in Saudi Arabia is approximately SR 3,700 in the public sector and SR 2,700 in the
private sector.

The wages paid to Saudi nationals in an investors workforce may not be less than 51%
of the total of the salaries paid to nationals and non-nationals within the workforce. These
conditions may be temporarily relaxed under certain circumstances, including cases in which
Saudi nationals do not possess the necessary technical skills or educational qualifications.

6. Labour Inspection

Inspectors from the Ministry of Labour and Social Affairs undertake ad hoc inspections,
regular control inspections and inspections following complaints in regard to the following:

Work conditions;
Salaries;
Control and protection of working children;
Health regulations; and
Security at work.

7. Termination

In accordance with the general provisions of the LWR, labour contracts concluded for a
fixed term are automatically terminated upon expiry of the term fixed in the contract. If the
parties continue the employment relationship after the expiry of a fixed term contract, it is


59
automatically transformed into a contract for an indefinite term.

Contracts for an indefinite term may be terminated by either party for justified cause, by
observance of a 30-day notice period for employees receiving a monthly salary and a 15-day
notice period for other employees.

In certain exceptional cases, listed in Article 83 LWR, employment contracts may be
terminated without observing a notice period or paying compensation to the employee, provided
that the employee has been given the right to express himself on the matter. These cases
include:

If the employee has assaulted his employer or supervisor;
If the employee has failed to perform his principal contractual obligations, to comply with
orders, or to obey posted safety rules, after repeated written warnings;
If the employer establishes that the employee has exhibited poor conduct or has been
dishonest or dishonourable;
If the employee has wilfully caused material loss to the employer;
If the employee misrepresented himself or presented forged documents to obtain
employment;
If the employee was hired on probation and is found to be unsatisfactory during his
probationary period;
If the employee absents himself - without justification - for more than twenty days in a
year or for ten consecutive days, provided that a written notice shall be delivered to him
after ten days in the first case and after five days in the second case;
If the employer establishes that the employee left a hospital or other place provided for
his treatment, without permission from the person supervising the treatment; and
If the employee has divulged trade secrets concerning his work to third parties.

Similar rights are granted to the employee who maintains the right to compensation
from the employer, under certain conditions listed in Article 84 LWR:

If the employer fails to perform his obligations towards the worker;
If the employer asks the worker to carry out work which is essentially different from the
nature of the work for which he is engaged under the contract, or if the employer, without
lawful cause necessitated by the nature of the work, transfers the worker from his original
place of residence so as to cause considerable harm to the employee;
If the employer, or anyone acting for him, commits an assault or act prejudicial to the
morals and good standing of the worker or any of his family members;
If there is a grievous danger threatening the workers safety or health, provided that the
employer was aware of, but failed to remove, the danger; and
If the employer or his representative has, by his conduct, particularly by treating the
employee with cruelty or violating the contract terms, compelled the worker to appear as
the party who terminated the contract.

Articles 87 and 88 LWR are of particular importance in practice. These provisions set
out the method for calculating the employee's so-called end of service award. In cases in
which the employer terminates the contract, the employee is entitled to receive compensation
amounting to the equivalent of 15 days of gross salary (including most allowances, benefits and
bonuses) for each of the first five years of service, and the equivalent of one months salary for


60
each additional year of service. Employees terminating a contract for an indefinite period are
entitled to receive 1/3 of the above compensation they have been in the employment for 2- to 5
years, or 2/3 of the compensation if they have been in the employment for 5- to10 years.
Employees who have remained in the same employment for more than 10 years are entitled to
receive the full amount of the above compensation whether the contract be terminated on the
employer's or their own initiative.

Article 87 Sect. 2 LWR provides that variable elements of the salary, such as incentives,
bonus payments etc. may be excluded from the compensation calculation, if expressly provided
in the labour contract. Otherwise, the any type of compensation that the employee receives is
included in the calculation.

Finally, all claims under the labour legislation are time-barred 12 months after the date
of the cause, but at the latest 12 months after the expiry of the contract or its termination.

8. Dispute Settlement

Parties may settle labour disputes in the local labour office. The labour dispute
resolution mechanisms seek to create a cooperative and friendly environment between
employees and employers.

Any employee who believes he has been dismissed without reasonable justification may
file an appeal at the nearest labour office within fifteen days of his dismissal, if he wants to stay
the execution of his dismissal. But if he claims compensation, he should file the claim within
one year. The labour office will attempt to resolve the dispute amicably. If the labour office is
unsuccessful, the case may proceed to the Primary Committees for Dispute Resolution.

The Primary Committee for Dispute Resolution has jurisdiction to settle finally (1)
disputes not exceeding SR 10,000, (2) claims for a reversal of employee discharge, and (3) the
imposition of, or exemption from, fines. The Committee has first instance jurisdiction over
disputes (1) that involve amounts exceeding SR 10,000, (2) concerning employee termination,
and (3) concerning labour injuries, regardless of the amount in dispute.

The second instance, the Higher Committee for Dispute Settlement, located in Riyadh,
hears appeals from judgments of the Primary Committees for Dispute Settlement. It has full
power to render final judgment in all disputes. Members of the Higher Committee include a
representative from each of the Ministry of Commerce and the Ministry of Petroleum, and three
from the Ministry of Labour.

Cases may be brought before the Primary Committees and the Higher Committee within
specified time limits, and adequate substantiation of all facts submitted is required. Claims
involving breaches of the Labour law are time-barred twelve (12) months after the date of the
breach. Claims relating to any right created by the Labour Law are time-barred after the lapse of
twelve (12) months from the date of termination of the employment.

The labour dispute resolution committee system has absolute independence from the
Ministry of Labour and full jurisdiction to settle all labour disputes brought before it. All
judicial proceedings are free of charge; and the procedures are generally considered simple,
efficient, and expeditious.


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9. Work Permits

Work permits for expatriate employees are, for obvious reasons, an issue of crucial
importance for foreign investors. Due to the efforts of SAGIA, obtaining work permits in Saudi
Arabia has been considerably facilitated in recent years, both with regard to sponsorship
requirements and administrative procedures.

a. Applications for Work Permits through SAGIA

Potential investors wishing to conduct business in Saudi Arabia must obtain a license
from SAGIA. As part of this procedure, investors are required to submit, to the Ministry of
Labour and Social Affairs representative at SAGIA a list of the total numbers of employees and
of expatriate employees required, which numbers may be adjusted, based on experience and
industrial expertise, and in accordance with the Saudisation policy.

Following approval of the Ministry of Labour and Social Affairs, investors are notified
of the approval, and of the required fees. Each work permit costs SR 2,000. Investors have three
months to pay the total work permit fee into the account of the Recruitment Affairs Department,
at a designated bank which issues receipts. This fees are refunded if the work permits are not
used within two years.

The next step for investors is to submit the receipt for the work permit fee to the
representative of the Ministry of Foreign Affairs in SAGIA. After verification, the work permits
are issued via diplomatic pouch to the relevant Saudi embassies.

At this point, the investor may recruit according to its visa quota for a particular country
and, subject to the investors enterprise having been duly established and registered, the
prospective expatriate employees may apply for work visa to the Saudi embassy in their home
countries. The application process includes submission of a valid passport, passport photograph,
completed application form, and a letter of employment and sponsorship from the employer.
Applicants must also submit their resums, to enable verification of their professional
qualifications against the position requirements described on the work visa. A medical
examination is also required. Finally, applicants are required to pay a work permit-processing
fee, prior to the issue of a work visa.

b. Residence Permit

Within three months after arrival in Saudi Arabia, expatriates with work permits must
also apply, through their employer, to the Ministry of the Interiors Passport Office, for a
residence permit (an Iqama). In addition to a completed application form, which should be
obtained from the Saudi Embassy in the applicants country of origin, the following is required:

Original passport with a valid entry visa for work;
2 passport photographs;
The valid original work permit as well as a copy of this permit;
A medical report issued by an authorised hospital or clinic establishing that the applicant
is free from all contagious diseases; and


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A receipt for the processing fee of SR 500.

The Passport Office issues the employees Iqama directly to the employer. The
regulations require the employee to surrender his passport to his employer, once the Iqama is
issued, and the employer should remit the Iqama to the employee, to enable him to move within
the country but will retain the passport for the duration of the employees stay. The employee
should carry his Iqama, at all times, as his identification.

Employers must ensure that residence Iqama are renewed within three days of their
expiry date. Companies are forbidden from employing foreign individuals who do not hold a
valid Iqama issued under their sponsorship. Each employees Iqama may include a residence
permit for the wife (or wives) and children, if the employer so sponsors the employee.
Residence permits for wives and children are not automatically granted.

c. Exit Re-Entry Visas

When an expatriate employee wishes to leave the country temporarily, the employer
should apply, on the employees behalf, to the Ministry of Interior for an exit and re-entry visa.
Exit and re-entry visas are valid for a maximum of 6 months. Application for the visa requires
the submission of a letter signed by the employer and validated by any Chamber of Commerce
approving the employees departure and return to Saudi Arabia. The employer must pay a fee of
SR 200 for single visas and SR 500 for a multiple visa.

For travel outside of the country, the employee must retrieve the passport from the
employer and surrender the Iqama. On his return, he must surrender his passport to his
employer in exchange for the Iqama.

d. Transfer of Work Visa/Sponsorship

Expatriate workers must complete specific procedures when accepting a new post with a
company other than the company that sponsored their original work permit. The employee must
obtain formal approval from his original employer to seek new employment and formal
sponsorship from the new employer. The following documents should be submitted to the
Ministry of Labour and Social Affairs, to complete the process:

A completed application form, stamped by the original employer and the new employer;
A release letter from the original employer legalised by the Chamber of Commerce;
A copy of the new companys valid Commercial Registration Certificate;
A valid passport; and
An explanation of the employees profession, and proof of payment of the transfer fee.

IX. Banking and Insurance

Banking in Saudi Arabia is regulated by the Banking Control Law of 5/3/1386 H.
[24/6/1966 G.] (BCL), while Insurance services are primarily regulated by Royal Decree M5
17/4/1405 H. [9/1/1985 G.].


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1. Structure of the Banking Sector

The country's central bank is the Saudi Arabian Monetary Agency (SAMA), established
in 1952. Among other things, SAMA issues and controls currency, regulates the money supply,
regulates and monitors commercial banks (including deposits, loans and investments) and
manages the national foreign assets. The BCL provides for state owned and private banks.
Recent liberalisation, particularly as regards the activity of foreign banks in the Kingdom, has
come in advance of the recently enacted Capital Markets Law in Saudi Arabia, which will open
the Kingdom's financial markets to international banks and other financial services companies.

a. Public Funds

Under the BCL there are nine public funds. The distribution of government subsidies
and grants of loans to public and private sector projects are channelled through specialised
public funds or banks.

For example, the Saudi Industrial Development Fund (SIDF), which is linked to the Ministry of
Finance, aims at encouraging Saudi nationals to establish small and medium size industrial
projects in the private sector. The SIDF provides loans and advice on marketing, technical and
financial matters. The Saudi Arabian Agricultural Fund, which is affiliated to the Ministry of
Agriculture, grants subsidies and makes loans to farmers for the purchase of machinery, feed
and livestock. It also finances joint ventures in agricultural projects with foreign participation.
The Real Estate Development Fund offers loans to Saudi individuals and entities for private and
commercial housing projects. The Public Investment Fund, controlled by the Ministry of
Finance, is used as a medium to long-term financing vehicle for the petrochemical industry, and
it acquires equity in companies and banks for resale to low-income groups.

b. Private Banks

There are currently 10 fully operative non-government commercial banks operating in
Saudi Arabia. These are Banque Saudi Fransi, Saudi Hollandi Bank, Al-Rajhi Banking and
Investment Corporation, Arab National Bank, Bank Al-J azira, National Commercial Bank,
Riyad Bank, Saudi American Bank, Saudi British Bank and Saudi Investment Bank.

In 2002, three GCC banks, Emirates Bank International (EBI); National Bank of Kuwait
(NBK); and National Bank of Bahrain (NBB) were granted approvals to open branch operations
in Saudi Arabia. EBI's licence to operate in Saudi Arabia is only the second new banking
licence issued since the 1980s. NBK and NBB received their respective approvals in late
September 2002, but will need to obtain commercial registration certificates before formally
opening offices in Saudi Arabia.

c. Foreign Participation

Of the banks currently operating in Saudi Arabia, only three are wholly Saudi-owned;
the remainder have a minimum 60 percent Saudi participation.


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d. Foreign Banks

SAMA granted its first banking license for full operations to a non-Saudi bank in 1999.
Other foreign banks work closely with Saudi banks as affiliates or joint ventures. Cooperation
between foreign and Saudi banks may result in foreign banks providing international officers,
systems, training and access to international networks. Under certain conditions, a foreign bank
may issue bonds and guarantees certified by a Saudi bank. Increasingly, foreign banks are
offering Islamically conformed financing structures in the Kingdom.

e. Islamic Banks

The prohibition of interest in Saudi Arabia has led to alternative and creative
approaches to financial operations An Islamic banking sector is growing rapidly, fuelled not so
much by government and legal concerns, but more by individual investors who wish to invest
their funds in conformity with their religious beliefs.

Further, the Islamic Development Bank in J eddah, an international financial institution
established pursuant to a Declaration of Intent issued by the Conference of Finance Ministers of
Muslim Countries, fosters the economic development and social progress of member countries
and Muslim communities. It participates in equity capital and grants loans for productive
projects and enterprises, besides providing financial assistance to member countries in other
forms for economic and social development.

The Bank is authorised to accept deposits and to mobilise financial resources through
Shari'a compatible modes. It is also charged with the responsibility of assisting in the promotion
of foreign trade, especially in capital goods, among member countries, and of providing
technical assistance to member countries.

2. Keeping an Account at a Saudi Bank

Accounts in Saudi Arabia may be kept in Saudi Riyals or any foreign currency (e.g.
US$ or ). Nationals of GCC states other than Saudi Arabia may only open accounts in Saudi
Riyals. The retransfer of the deposits to a foreign country also in a foreign currency is not
restricted by law.

a. Opening Private Accounts

In order to open a private account, a foreigner must provide proof of his identity, by
presenting a valid residence permit, an authorisation letter issued by his sponsor and details of
his other banking relationships.

Banks must, according to SAMA guidelines, maintain records of these documents and
in particular of their expiry dates. Banks must freeze all accounts within 90 days of the expiry of
the authorisation, if the investor does not present the bank with either a copy of the new
authorisation or evidence that it is being renewed. After 180 days the account is blocked.

All accounts held by expatriates are closed when they leave the Kingdom on an exit
visa.


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b. Opening a Business Account

In order to open a business account, the following documents are usually required: the
Companys Articles of Association or other incorporation statutes, a shareholders or partners
resolution to open the account designating the manager(s) authorised to operate it and specimen
signature(s) of those delegated to operate the account. Details of other banking relationships
must also be given.

If a foreign investor is a juristic entity, it must provide copies of its authorisation to
practice its activity in the Kingdom, e.g. the investment license or commercial registration, as
well as copies of the residence permit (or ID cards in the case of Saudi nationals) of its directors
and agents.

Due to the governments current measures to combat terrorism, several changes may soon be
made to the procedures for opening bank accounts.
c. Money Laundering

Saudi Arabia tightened its laws and regulations regarding money laundering when it
recently established a permanent committee of representatives of various government agencies
to manage all legal and other issues related to money laundering. The Kingdom also issued new
law to prevent money laundering. Under this law, Saudi banks are no longer permitted to open
bank accounts for non-resident individuals without specific approval from SAMA. In
accordance with other guidelines issued by SAMA, banks must maintain records of suspicious
transactions and report them to the law enforcement officials and SAMA.

The new Saudi money laundering law which has recently been approved by the Council
of Ministers stipulates terms of imprisonment of up to 15 years and a fine of SR 7 million for
money laundering through charities or organised gangs. It further requires financial institutions
to keep records of transactions for a minimum of 10 years and to adopt precautionary measures
to uncover and foil money-laundering operations. It also requires banks and financial
institutions to create financial intelligence units to prepare reports on suspicious transactions to
help minimise and detect illegal operations.

Furthermore, the new law allows exchange of information on and judicial action against
money laundering operations with countries with which the Kingdom maintains official
agreements.

Finally, SAMA exchanges information on money laundering and activities related to
terrorist financing with other international banking supervisory authorities and with foreign law
enforcement agencies.


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3. Granting of Loans

Saudi banks may grant loans to subsidiaries, representative offices and branches of
foreign companies present in Saudi Arabia. The following documents must usually be attached
to applications for loans:

The annual statements for three successive years, as recent as possible;
The relevant formative documents of the company including, in particular those documents
with the necessary representation clauses which allow the company to be bound by entering
into the relevant loan documentation;
A cash flow forecast, whereby the borrower must explain the sources, from which the loan will
be repaid;
A feasibility study for the project to be financed;
A commercial register extract and tax assessments; and
An explanation of the purpose of the loan.

Saudi Arabian banks usually accept the following securities:

Borrowers note;
Banker's acceptance;
Transfer of liens of the borrower;
Transfer of tradable securities such as bonds, shares, debentures, etc.; and
Bank guarantees and guarantees from the parent company.

In the case of foreign companies wishing to establish subsidiaries in Saudi Arabia and
to finance the establishment through a local bank, banks usually require guarantees from the
parent company or bank guarantees, since the new company will not yet have any financial
statements on which to assess the credit risk of the borrower.

4. Means of Payment and Guarantees

As a result of the liberalisation of Saudi trade, virtually all customary means of payment
known in international business have become permissible. Letters of credit are the most
commonly used means of guarantee in ordinary course of business practice.

a. Payment by Credit Transfer and Cheque

Payment by credit transfer or cheque is less common in Saudi business. One reason is
that such payments mostly require prior delivery of the goods against an unpaid invoice.
Payment in advance and down payments are uncommon in many sectors. Delivery against
cheques (or post-dated cheques) should only be carried out when there is an absolute trust in the
solvency of the business partner, since cheques do not represent any guarantee of final or
punctual payment, and recovery through the courts is often lengthy and costly.


67
b. Letters of Credit

In Saudi Arabia irrevocable letters of credit are the safest method of obtaining and
effecting settlements. It is helpful for exporters to reach an agreement with the importers on the
detailed conditions of letters of credit, during the contract negotiations. For this purpose,
exporters may apply for support from their local banks. In any event, exporters should ensure
that payment under the letter of credit can be obtained, without further assistance from the
importer. Exporters should also obtain another usual security, in the form of a confirmation of
the letter of credit, by banks in their home country.

Letters of credit may, by express agreement between the business partners, be governed
by theStandardised Guidelines and Customs of Documentary Credits (ERA) of the
International Chamber of Commerce in Paris (ICC). In this case internationally common and
binding standards apply, which usually simplifies potential disputes in connection with
payment.

The disadvantage of this means of payment is the relatively high opening cost. This is
due to the fact that the bank opening the letter of credit issues a promise to pay to the
beneficiary a specific sum of money in defined circumstances. Fees, so-called irrevocable fees,
must be paid for the assumption of this liability. Saudi banks usually charge the borrower a fee
corresponding to a percentage p.a. of the nominal value varying from approximately 0.75 % to 3
%.

c. Payment against Documents

The delivery of goods on the basis of payment against documents is usually restricted to
goods of minor value. Difficulties have been experienced with this method of payment in
trading with Saudi Arabia. By way of example, an importer's refusal to accept the documents
will give rise to considerable cost to the exporter.

5. Foreign Exchange

Saudi Arabia does not have specific legislation on the regulation and the control of
foreign exchange. However, SAMA is entrusted with the task of protecting the national
currency and, in doing so, taking appropriate measures to control the volume and circulation of
money. In assuming this task SAMA issues circulars to the licensed banks in Saudi Arabia, e.g.
prohibiting Saudi banks from engaging in international financial transactions in Saudi riyals
without the prior consent of SAMA.

For private business though, there are no restrictions concerning the transfer of capital
and profits. SAMA must, however, be notified, of transactions in excess of SR 100,000.

Like the currencies of all GCC member states, the Saudi Riyal is freely convertible and
linked to the US dollar (current exchange rate: 1 US$ =3.75 SR). Transfers of capital to a
foreign country are possible without any restriction. However, a Saudi employer or partner of a
foreign entity not established in Saudi Arabia is legally bound to withhold a certain amount on
behalf of the Saudi tax authorities if the profits of the foreign company are considered subject to
Saudi income tax.


68

As part of inter-GCC cooperation, the GCC projects establishing a unified currency.
The prospective date for the unified currency launch is currently set at 2010. Policy decisions
regarding exchange rate, form, use and application, and bearing standard still have to be fixed.

6. Regulation of Insurance Services

Insurance in Saudi Arabia is exclusively conducted through registered insurance
companies, operating according to the Cooperative Insurance Guidelines as set out in the rules
contained in the incorporating Statutes of the National Company for Cooperative Insurance,
issued by virtue of Royal Decree M5 17/4/1405 H. [9/1/1985 G.]. In 2003, the new insurance
law was passed by royal decree M32 2/6/1424 H [31/7/2003] which sets the rules for the
establishment of an insurance company.

The Saudi Arabian Monetary Agency (SAMA) is the competent body for the
supervision and technical control of insurance works as well as for the determination of
procedures.

Insurance and reinsurance companies in Saudi Arabia may only be established pursuant
to a licence granted by Royal Decree, based on a decision of the Council of Ministers and
following a proposal of Minister of Commerce and Industry.

The requirements for establishing an insurance or reinsurance company are:

The company must be incorporated as a Public Joint Stock Company;
The main purpose of the company must be insurance or reinsurance, and the company must not
conduct any other forms of activity, unless they are accessory to the business of insurance.
Further, the applying company must not directly own any insurance brokerage; and
The capital of the company must be at least SR 100 million for insurance companies, and SR
200 million for reinsurance companies.

Once a company has been authorised to carry out insurance activities, it may only
suspend its activities with the approval of SAMA.

Approval from SAMA is also required for the appointment of the board of directors of
insurance and reinsurance companies, as well as for the establishment of branches or other
offices, mergers or banking activities.

SAMA has the right to inspect books and account of any insurance or reinsurance
company.

SAMA also regulates licensing procedures for professions related to insurance
activities, such as insurance brokerage. Licences for these activities are granted by the Ministry
of Commerce and Industry.

X. Tax Law
1. Overview


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Saudi Arabian Tax Law is based on Royal Decree No. (M/1) dated 15/1/1425 AH
(corresponding to 6 March 2004) which introduce the Saudi Arabian Income Tax Law (the
Income Tax Law) and by Ministerial Resolution 1535 of the Ministry of Finance and National
Economy (dated 11/6/1425 (corresponding to 28 J uly 2004)) which officially released By-Laws
to the Income Tax Law (the By Laws) which were also effective upon 14/6/1425 AH
(corresponding to 30 J uly 2004). The DZIT, the Preliminary Tax Appeal Committee (PTAC)
and the Appellate Committee for Zakat and Tax Appeals (ACZTA) provide rulings and
interpretations on questions raised by taxpayers.
a. Tax Authority

The DZIT, which is the taxation authority in Saudi Arabia, is a department of the Ministry of
Finance and National Economy (MOFNE), with its headquarters in Riyadh. Foreign
companies and individuals coordinate their tax affairs through the DZIT Head Office in Riyadh.
Wholly owned Saudi companies make their returns to the appropriate branch office of the DZIT
in one of the major cities.

b. Previous Deemed Profit Tax

Previously in Saudi Arabia (prior to 1425 AH (corresponding to 2004) ff the taxable income of
a taxpayer could not be determined precisely, due to the lack of annual tax returns, and/or
audited accounts, the net income was subject to tax on a deemed profit basis. The new Income
Tax Law has removed the need for a Deemed Profit and all taxes are to be accounted for, on a
going forward basis, on a gross income minus permitted deductions basis.
c. Withholding Taxes

Pursuant to the Income Tax Law and the By Laws, withholding is nor required on all payments
made from Saudi Arabian residents to non-Saudi Arabian residents if such payments are
remitted in accordance with certain categories of income. Payments of withholding taxes are
now required to be made on a monthly basis and penalties are now imposed on Saudi Arabian
residents who fail to file on time and/or make late payments of withholding taxes. Pursuant to
Articles 68 of the Income Tax Law and Article 63 of the By Laws the following withholding is
required on the gross remittance amounts:

Management Fees 20%
Royalty (including software licenses), payments against services made to the Head
Office or to a related party
15%
Rent, technical or consultancy services, air tickets or air freight or shipping,
international telecommunication services, dividends, loans interest, insurance or
reinsurance premium
5%
Any other payments 15%

d. Indirect Taxes


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All taxes in Saudi Arabia are direct taxes payable to the DZIT. There are no indirect taxes, such
as value-added or sales taxes or estate duty. Additionally, taxes are only paid to the national
government. Other levels of government do not levy taxes.

e. Tax Treaties

Saudi Arabia has concluded only one Double Taxation Agreement, which is with France. This
Agreement initially applied only to the taxation of individuals, but its application was extended
to corporations as of J uly 1, 1995.

Saudi Arabia has, however, concluded several treaties to avoid double taxation in specific fields
of business, e.g. agreements on the taxation of airlines. With the exception of France, Saudi
Arabia does not allow a tax credit for any (corporate or personal) income taxes paid by a Saudi
individual or entity in another country, and income taxes paid elsewhere will not qualify as an
allowable expense for Saudi Arabian tax purposes. Some countries, including J apan, the United
Kingdom, Germany and the United States, allow tax credits for income taxes paid in Saudi
Arabia.

Saudi Arabia is currently negotiating Double Taxation Agreements with ten (10) other
countries and anticipates that they may be approved in the near future.

f. Accounting

Tax returns must be based on annual financial statements prepared according to accounting
standards provided for in the Regulations for Companies, the Income Tax Laws, the By Laws,
and by the Saudi Organisation for Certified Public Accounting (SOCPA). The accounting
records must be in Arabic and physically kept in Saudi Arabia.

While the fundamental concepts of accounting and auditing in Saudi Arabia do not differ
significantly from international standards, there are some peculiarities, such as:

the restriction on revaluing real estate;
the prohibition of limited liability organisations from lending to their shareholders; and
the deduction of shareholders portions of income tax on corporate profits from the dividends --
recording them as corporate expenses.

2. Forms of Taxation

Taxes payable in Saudi Arabia vary substantially according to whether or not the taxpayer is a
GCC national. The three categories of tax to be applied to all individuals and entities working
and operating in Saudi Arabia are Zakat, Income Tax and Corporate Income Tax.

Zakat is a religious tax, originating from the Sharia, which is payable only by individuals who
are GCC nationals, and by legal entities, on the proportions of their net profits accruing in
respect of the participations of GCC nationals.

Non-GCC nationals are subject to Income Tax on their income (except on their salaries and
wages and on their income from legal entities subject to Corporate Income Tax). The question


71
of income tax is addressed in more detail below.

Legal entities are subject to Corporate Income Tax on the proportions of their net profits
accruing for the benefit of non-GCC nationals owners.

a. Corporate Income Tax

Corporate Income Tax is payable on the shares of income of corporations and limited liability
companies pro rata to the participations of non-GCC nationals. Partnerships are treated as pass-
through entities, and their participants who are not GCC nationals are therefore subject to
Income Tax on their shares of the partnership income, and GCC nationals are liable for Zakat on
their shares of the same income.

(i) Tax Rates

According to Article 7 of the Income Tax Law the tax rates for corporate income of foreign
companies are as follows:

20% of the Saudi Tax Base for all taxpayers (other than as follows);
30% for a taxpayer engaged in the natural gas investment field;
85% for a taxpayer engaged in the production of oil or hydrocarbons; and
Any withholding that may be applicable to such taxpayers (as discussed above).

(ii) Gross Income

Saudi Arabian Tax Law does not distinguish between different categories of income. Gross
income consists of all gains, profits or other net income arising from business transactions
carried out within Saudi Arabia. If transactions are carried out in part or in whole inside Saudi
Arabia all income derived from the transactions will be considered part of the Saudi Tax Base
and potentially taxable in Saudi Arabia.

Capital gains are treated as ordinary income. The same principle applies to gains derived from
the sale of shares in partnerships or companies registered in Saudi Arabia. Usually, profits from
sales are calculated by subtracting the re-evaluated book value (or the market price, if it is
lower) of the shares from the sale price. In the case of recently established corporations
sometimes only the historical book value is subtracted from the sale price. The law does not,
however, prescribe any particular method.

Interest earned on capital in Saudi Arabia is considered part of gross income. The same applies
to rents, licence fees or royalties for the use of patents, copyrights, secret processes, formulae,
goodwill, and trademarks, etc., registered in Saudi Arabia. Dividends on shares in corporations
registered in Saudi Arabia are added to gross income, unless corporate tax or Zakat has already
been charged. Income derived by Saudi-resident companies from operations outside Saudi
Arabia is also assessed as gross income.


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(iii) Calculation of taxable income

Taxable income is calculated by reference to the audited financial statements of an enterprise.

If a foreign legal entity does not file a tax return, and/or does not submit audited financial
statements any payments made to it from Saudi Arabian residents will be subject to
withholding.

(v) Deductions

Net taxable income is calculated by deducting allowable expenses from gross income. In
principle, necessary business expenses are deductible from gross income. In practice it is,
however, often difficult to determine whether or not certain expenses are deductible. Numerous
decisions of the DZIT and rulings of the PTAC and the ACZTA have been issued on the
subject.

Salaries and wages are considered ordinary business expenses and are thus deductible from
gross income. The DZIT requires companies to provide detailed payroll information with their
tax returns. Social security contributions are deductible only to the extent of the employers
share, as are contributions to certain pension funds operated in Saudi Arabia are deductible.
Agency fees paid by a foreign company are also deductible, subject to certain conditions and
restrictions.

As a general rule, provisions and termination benefits are not deductible, except for employment
termination benefits required by the labour law. Administrative costs incurred by the head office
of a company outside Saudi Arabia are not deductible, with the exception of technical costs
directly related to business activities in Saudi Arabia.

(vi) Depreciation

Assets of a company may be written off within the limits of depreciation rates established by the
DZIT, which accept accelerated depreciation of certain equipment, such as computers subject to
the depreciation allowances and schedules set forth in the Income Tax Laww.

(vii) Losses

Losses previously could not be carried forward until the entry into effect of Council of
Ministers Resolution No. 3 of 1422 H. [2001 G.], which allows losses to be carried forward
indefinitely. In return, the former exemption periods (tax holidays) for joint-venture
investment projects (5 or 10 years depending on the nature of the project) have been terminated.
However, companies which enjoyed exemptions under the previous investment law continue to
enjoy them under the current law until their expiry.

(viii) Tax exemptions

Under the tax system, tax guarantees or incentives are rare. Certain foreign entities may be
exempted from the Corporate Income Tax by Royal Decree.

There are no tax-free zones in Saudi Arabia.


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b. Personal Income Tax

(i) Tax liability and taxable income

Personal income tax is payable by foreign individuals on income accruing in Saudi Arabia,
whether or not they are resident in the country. The same rules of territoriality apply to personal
income tax as to corporate income tax.

While non-GCC nationals are not taxed on their wages or salaries, non-GCC professionals are
subject to income tax on professional income arising in the Kingdom. The calculation of
professional taxable income follows similar rules to those applicable to corporations. Not
included in the definition of professional income is income arising from sales of real or personal
assets.

(ii) Rates

The following tax rates apply to non-GCC professionals professional income:

The first 6,000 SR p.a. Exempted
The next 10,000 SR p.a. 5%
Above 66,000 SR p.a. 30%

c. Zakat

GCC nationals, whether individuals or corporations, are subject to Zakat rather than, to the
Income Tax or Corporate Income Tax (as the case may be). The net income of corporations
partly owned by GCC nationals, is subject to Zakat, on the share attributable to the
participations of Saudi and/or other GCC nationals, and to Corporate Income Tax on the
remainder.

Zakat is a religious tax payable by all Muslims. The tax was traditionally levied on the savings
value of every Muslims cash, property, trade merchandise and herds of animals. The
calculation of the tax base for corporate and individual Zakat is complex. Generally speaking,
for businesses, the Zakat tax base may be outlined as capital not invested in fixed assets or long-
term investments as well as deferred pre-incorporation expenses, as adjusted by the yearly net
loss or profit. Therefore, the corporate Zakat tax base is considerably higher than the Corporate
Income Tax base, but the rate of Zakat is significantly lower (2.5%).

3. Tax Administration

All entities that are active in Saudi Arabia must submit annual tax or Zakat returns to the DZIT
and obtain a clearance certificate. An outline of the steps required to satisfy the requirements of
the DZIT will be given below. The substantially different rules for the administration of Zakat
will not be discussed here.


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a. Certificate of Commencement

A taxpayer should register with the DZIT, before commencing business in Saudi Arabia. After
registration, for which a number of documents are required, a Certificate of Commencement
will be issued. With such a Certificate, the taxpayer is permitted to undertake business activities
in Saudi Arabia, such as participating in public tenders.

b. Tax Returns

All foreign individuals or entities carrying on business in Saudi Arabia must file annual tax
returns with the DZIT. The tax return should include the relevant income as appearing in the
audited financial statements. Although income may be calculated on a deemed profit basis (as
outlined above), the DZIT may insist on the filing of comprehensive tax returns.

The Income Tax Law defines a foreign individual or entity as carrying on business in Saudi
Arabia (thus requiring such individual or entity to file returns) if the foreign individual or entity
has a permanent establishment in Saudi Arabia. Individuals must file a tax return (and are
considered residents) if they have a place of abode and reside in Kingdom for more than 30 days
in the aggregate in any taxable year or if no abode is present in Saudi Arabia, they spend more
than 183 days in any taxable year in Saudi Arabia.

The time for filing tax returns expires two and a half months after the end of the fiscal year,
which may be determined by the taxpayer (including the starting date as well as the applicable
calendar).

c. Review Procedure

Upon receipt of the final tax return, the DZIT reviews the documents submitted and may request
additional information from the taxpayer, demand any amount due, or conduct a field audit of
the taxpayers books and records. Field audits may be conducted if, in the opinion of the DZIT,
a tax return contains irregularities.

The DZIT issues the tax assessment, based on the outcome of the review procedure. If a final
tax return has been submitted, the assessment is final and, in the case of a provisional tax return,
a provisional assessment will be issued.

Appeals against final assessments may be filed with the PTAC, within 60 days after issue. The
taxpayer must still make a payment of the disputed amounts (or obtain permission to pay such
amount in instalments) in order for any appeal or objection to be considered valid. PTAC
decisions are subject to further appeal to ACZTA. The Income Tax Law provides that appeals
may be made from the ACZTA to the Board of Grievances within 60 days of receiving a
decision from the ACZTA. Appeals against assessments are often protracted.

d. Tax Clearance Certificate

A tax clearance certificate is required to renew the taxpayers annual commercial registration
and is required in order to allow the taxpayer to carry out business activities in Saudi Arabia.


75
The taxpayer will receive such a certificate, when a final assessment has been issued, and all
taxes have been paid. If a taxpayer appealed the final assessment, DZIT may issue a provisional
tax clearance certificate upon receipt of a bank guarantee for the amount in dispute. In the case
of a provisional tax return and a provisional assessment, a taxpayer may request a temporary tax
clearance certificate.

e. Penalties

Penalties, ranging from 10% to 25% of the amount of the tax due, are imposed on payments
received by DZIT more than five days after the due date. Other penalty payments are imposed
in cases of differences of more than 10% between the tax assessed on the basis of a provisional
tax return and the amount ultimately assessed. Tax evasion is penalised at a flat rate of 25% of
the unpaid tax. Failure to file withholding tax are imposed on the party whos obligation it is
to withhold at 1% per month.

f. Limitation Period

The DZIT may make or amend a tax assessment within five years from the end of the deadline
specified for filing the tax declaration for the taxable year, or at any time, upon a written
consent of the taxpayer. The DZIT may also make or amend an assessment within ten years of
the deadline specified for filing the tax declaration for the taxable year if a taxpayer does not file
its tax declaration, or it is found that the declaration is incomplete or incorrect with the intent of
tax evasion.

A taxpayer may request a refund of overpaid amounts at any time within five years from the end
of the overpaid taxable year.

XI. Imports and Customs

As is the case in many jurisdictions, the rules and regulations on the import and export
of goods, and the customs system in Saudi Arabia, are complicated by bureaucratic red tape
which is frequently the cause of delay

1. Laws and Regulations

Saudi customs operations and import and export procedures are governed by the Saudi
Customs Law, enacted by Royal Decree No. 425 of 5/3/1372 H. [23/11/1952 G.], as amended.
Details and special provisions are contained in the Implementing Regulations to the Customs
Law.

2. Imports
a. Authorities

The central governing body for customs administration in Saudi Arabia is the
Directorate General for Customs Affairs which operates under the Ministry of Finance. The


76
Directorate General is based in Riyadh. There are three Customs Secretariats in Dammam,
J izan, and J eddah. Each Secretariat is responsible for a number of Customs posts. In total, Saudi
Arabia has 33 ports including airports, seaports and land (dry) ports. The same procedures for
clearing Customs apply in each port.

b. Importers Licence

Only Saudi nationals or companies wholly owned by Saudi nationals have the right to
import goods into Saudi Arabia for resale in the Saudi market or re-export. In case of a
company, all members of the board as well as the persons vested with power to sign must be
Saudi nationals. The importer must be a Saudi national listed in the Commercial Register held
by the Ministry of Commerce, and be in possession of a licence allowing the importer to engage
in external trade related activities.

c. Import Procedures

(i) Reporting and Unloading Cargo

On arrival in Saudi Arabia, carriers are required to report their shipments by
transmitting to the Customs authorities the original cargo manifest (with two Arabic copies).
The manifest must show the quantities, marks, types, numbers and destination of the goods, the
type of transportation facility, and the total number of packages in words and numbers; the
manifest must agree with the contents of the cargo. Goods imported by land must have the
manifest prepared at the point of origin or at the last Customs point prior to crossing the Saudi
border.

The original manifest (in duplicate) must be accompanied by a request for unloading in
Arabic, and be authorised by the agent of the shipping company. These documents must be
submitted within 36 hours of the vessels arrival. Carriers may proceed to unload after
permission is received. In the case of air shipments, Saudi Arabian Airlines (Saudia) is
responsible for unloading the goods and storing them in a Customs warehouse, while each port
authority is responsible for unloading goods that are imported by sea. Receipt of the goods by
Customs takes place only when the cargo arrives at the Customs warehouse or other designated
storage area, and is externally inspected. Shipping companies are responsible for shortages until
the goods are delivered into the Customs warehouse. On delivery and inspection, the shipping
company is provided with an official receipt.

When goods arrive at any port in the Kingdom, and have been unloaded into a Customs
warehouse, the importer or agent is allowed 10 days in the case of goods imported by air and 13
days in the case of goods imported by sea to clear Saudi Customs. If goods are not removed
from Customs at the end of this period, they are subject to demurrage charges.

(ii) Documentation

The Customs file prepared by the Customs Broker or the importer should contain the
following, and additional documents may be required depending on the goods being shipped:

Delivery Order;


77
Customs Import Declaration Form;
Commercial Invoice;
Certificate of Origin;
Airway Bill or Bill of Lading;
Steamship or Airline Certificate;
Insurance Certificate; and
Packing List.

(iii) Customs Control Procedures

On receipt of the Customs file, Customs Control determines how the goods should be
inspected. All shipments are inspected, either fully, partially, or visually. The Customs Inspector
may decide on specific procedures, such as sending the shipment for health inspection in the
case of food products, by referring it for health, quality control, agricultural inspection or to the
Saudi Arabian Standards Organisation (SASO) for conformity with Saudi standards. If none of
these are required, the Customs Declaration Form is signed by the Inspector, and the broker
pays the import charges.

(iv) Standards

Certain goods entering Saudi Arabia are subject to compliance with Saudi standards.
SASO operates the Kingdoms International Conformity Certification Program (ICCP). A
Certificate of Conformity is required for every product covered by the ICCP. Shipments
arriving at a Saudi port without the Certificate of Conformity are not allowed to be imported.

A Certificate of Conformity is obtained through Country Offices appointed by SASO in
various countries to perform a conformity verification procedure on each shipment prior to
export. If the products are not registered, they will be sampled and tested in accordance with
SASO requirements. If they meet the requirements, a Certificate of Conformity is issued. This
Certificate must accompany the shipment with the shipping documentation.

In the case of electrical appliances, equipment and accessories, SASO Certificates of
Conformity, obtainable from the Saudi Consulate in the country of origin, must be issued by the
manufacturer on his official letterhead, notarised by a notary public, certified by a local
Chamber of Commerce, and submitted to SASO for verification at least two months prior to the
date of shipment. On approval, the certificate is returned to the manufacturer who must attach a
stamped copy with each shipment of the commodity in question to the Kingdom.

Labelling of imported food products is also regulated by SASO. Exporters of food
products to the Kingdom must conform to mandatory standards for both samples and for
commercial quantities, and must provide the following:

Food Manufacturers Ingredients Certificate;
Consumer Protection Certificate; and
Price List.

No medicines or pharmaceuticals are allowed to be imported into Saudi Arabia unless
they are registered in advance with the Food and Pharmaceuticals Authority, under the Ministry
of Health. The Ministry examines applications, which must be supported by the required
certificates authenticated by the Saudi Consulate in the country of origin, and analyses the


78
samples to ensure that they conform to the required specifications, before granting an import
license. All shipments are checked by the Ministry of Health at the point of entry to the
Kingdom

Imports of medicines and pharmaceuticals also require a certificate from the responsible
authority in the country of origin stating that these products are, in fact, used under the same
brand name and formula in that country. This certificate must also be authenticated by the Saudi
Consulate in the country of origin.

Special provisions apply to agricultural products such as nursery plants, plants, and all
kinds of fruits, vegetables, and seeds. In addition to the general shipping documents, an exporter
of such items to Saudi Arabia must submit the following to the Department of Agriculture
before they are allowed into the country:

Certificate of Inspection issued by a company specialising in seed inspection;
Phytosanitary Certificate verifying that the seeds or grains are free from agricultural
diseases;
Seed Analysis Certificate to prove the degree of purity of the seeds; and
Certificate of Weight.

All shipments of plants are inspected on arrival in the Kingdom.

(v) Temporary Imports

Temporary clearance of goods is not permitted regardless of status as commercial goods or
government-imported goods. Customs formalities on the goods must be completed, inspection
carried out, and duty paid at the point of entry to the Kingdom prior to the goods being allowed into
the country.

(vi) Duty Drawback

Duty Drawback is a refund available in Saudi Arabia to the importer/exporter of
record for raw material imports that are processed in the Kingdom and re-exported as more
finished goods. The Duty Drawback Scheme is usually used when duty exemptions are not
available on the goods in question.

To trigger Duty Drawback status, importers or their agents must inform Customs at the
point of entry that the imported goods are raw materials that will be further processed and re-
exported. The importer will pay the duty assessed on importation, but the amount is kept in
bond and refunded on re-export of the goods. Prior to re-export, the exporter must submit all
export documentation together with a copy of the Customs Import Declaration, a receipt for
payment of duty on the raw materials, the Certificate of Origin, and a copy of the invoice to the
buyer certified by the Chamber of Commerce. Customs use a standard formula to determine
how much of the imported raw material is used in the final exported product. The same formula
is applied to every product.

3. Duties

Since 1991, Saudi Arabia has implemented the Brussels Harmonised Commodity
Description and Coding System to determine the relevant customs tariff. Duties are assessed on


79
the CIF value of the goods in accordance with the Customs Tariff of Saudi Arabia. The general
rate of duty is 5%. Some local industries are protected by tariff rates of either 12% or 20% on
imported competing goods.

Duties, charges and all dues may be paid in cash, by check, by certified check or by
bank draft directly to the banks located in the Customs area, or they may be charged to a
companys account with Customs. Following payment, the importer is provided with a Release
Form authorising the release of the goods from the Customs warehouse.

The GCC Customs Union came into effect on J anuary 1, 2003 and transformed the 6
GCC member states into a single customs zone. The Customs Union implemented a common
customs tariff of 5% on all foreign goods imported into the GCC. The principle of single point
entry has been adopted for the Customs Union. Furthermore, the free movement of goods
among the GCC States and the treatment of the goods produced in any of the GCC States as
national products by the other members of the GCC states are among the main principles of the
GCC Customs Union. The relevant authorities in Saudi Arabia are currently drafting schedules
and procedures under which Saudi Arabia will implement the requirements of the GCC
Customs Union.

4. Privileges and Custom Exemptions

Certain goods may be imported duty-free into Saudi Arabia, such as some agricultural
machines, insecticides, precious metals or scientific books. Raw materials may be imported duty
free under the ten-year exemption program for new manufacturers, or under the Duty Drawback
Scheme.

5. Export Procedures

Exporting goods from the Kingdom is relatively simple. An Export Certificate and a
Customs Declaration must be completed for all goods to be exported from the Kingdom.
Following submission of these documents to the Director of Customs, who authorises the
export, they are sent to the Valuation Division which stamps them, registers them, provides a
serial number and endorses the shipment for inspection. The goods are not allowed to enter the
Customs area until the out-of-Kingdom means of transportation is already in the port, and a
shipment inspection and valuation is completed by a representative of the Customs
Department.

XII. Public Tender Law

Public Procurement is one of the most important fields of law for foreign exporters and
investors in Saudi Arabia. Although the relative importance of the public sector vis--vis the
private sector has decreased slowly in recent years, most major projects still involve
government participation. Large projects, especially in infrastructure, are to be executed in the
forthcoming years and public procurement will therefore continue to play an important role.

The Saudi Tenders Law (Procurement of Government Purchases and Execution of Its
Projects and Works Law) was promulgated by Royal Decree No. 14 of 1397 H. [1977 G.],


80
together with its implementing rules. It replaced the former Tenders and Auctions Law, Royal
Decree No. 6 of 1386 H. [1966 G.].

The Law governs the procurement of construction works, machinery and equipment,
office equipment and articles, operation and maintenance works, supply of food, drilling of wells,
supply of spare parts, procurement of medicines and of arms and defence equipment, major
projects and consulting services.

1. General Principles

The Tenders Law and its implementing rules govern the advertisement of tenders, the
manner in which they are submitted, bid evaluation process, time for acceptance of contract award,
and other issues. In theory, the Regulations do not lay down any rights or obligations for the
bidders but are directed towards the procuring body. Usually contracts with public entities make
reference to the Law, the Implementing Rules and the General Conditions for Tender and all such
regulations terms of the contract and generally binding between the contractual parties.

Article 1 of the Tenders Law specifies the general principles of procurement in Saudi
Arabia:

All individuals and establishments wishing to deal with the government and having the
qualifications to do so are to be given equal opportunity and treated equally;
Competing bidders are to be given adequate and standard information about the work
required and are to be able to obtain the information at the same time and a specific date is to
be set for the submission of bids by all of the bidders;
In order to secure its purchases and execute its projects and works, the government is to deal
with the individuals and establishments licensed to exercise the type of work required, in
accordance with the established rules and procedures;
Saudi individuals and companies licensed to operate in accordance with the existing laws
and regulations have priority in dealing with the government followed by joint venture
establishments in which Saudis hold a majority participation;
Manufactured goods and products of Saudi origin are to be preferred over similar foreign
goods and products if they serve the purpose for which the tender was announced, even
though they are of lower quality than foreign goods and products (in preparing the
specification, Government Agencies must give priority to products of national industries);
Manufactured goods and products are not to be considered of Saudi origin unless they are
produced by a Saudi industrial establishment licensed to operate in the Kingdom and said
establishment has submitted a certificate from the Ministry of Commerce and Industry
testifying that local raw materials and local manpower have contributed a reasonable
percentage to the production of the goods and products;
Purchase or execution of works are be carried out at fair prices that do not exceed prevailing
rates and competition among those working in the area is, according to the law, to be
considered the practical method of assessment; and
Offers are to be accepted, and contracts are to be concluded according to the offers only in
accordance with the prescribed conditions and specifications.

2. Scope of Application

The Tenders Law has remained in large parts in its original version. Its scope of application


81
still needs to be adapted to modern forms of procurement.

a. Entities

There is no central tender board in Saudi Arabia, and each government agency is
empowered to enter into its own contracts. The Tenders Law applies to the following bodies:

ministries;
government departments;
government agencies with private budgets;
local governmental units; and
public authorities.

The Tenders Law is not applicable to public business sector companies or to companies
whose shares are held by public entities, such as Saudi ARAMCO and SABIC. In practice,
many of the companies not subject to the Tenders Law apply the rules of this Law. In many
cases the internal regulations of these companies and their system for purchasing and selling are
based on the Tenders Law.

b. Fields

Article 3 of the Tenders Law classifies fields of procurement and the applicable procedure
for each field. It should be noted that numerous resolutions issued by the Council of Ministers
provide that tenders should be open to all qualified individuals and companies, which means that
the ways mentioned in the law are no longer active or applicable:

(i) General Rule

Unless otherwise stated, the general rule in procurement is that the government agency
must invite at least three competitors to submit bids for government tenders, and that the
government agency is to select the best offer based upon an evaluation both of the pricing and
the technical quality of the bids.

(ii) Construction Works

The government must issue invitations to present bids to at least five contractors officially
classified within the group qualified to carry out the required work and licensed to operate in the
Kingdom. The government is to invite the contractors to present their offers within a period not less
than one month from the date of issue of the invitation which should specify the day and hour on
which the bids will be opened.

The well known Council of Ministers Resolution No. 124 of 1403 H. [1983 G.] requires at
least 30 percent of the volume of a "public works contract" for the performance of works, such as
construction contracts generally, as well as maintenance and operations contracts, won by a foreign
contractor or any Saudi-foreign joint venture main contractor (with less than 51% Saudi


82
participation), to be subcontracted to 100% Saudi-owned businesses. The Saudi subcontractor may
not, in turn, subcontract any part of its work. The DZIT may refuse to issue final clearance
certificates on the basis that the minimum 30% requirement is not met, which may delay release of
the final 10% instalment of the contract price.

In practice, however, the restrictive effect of Resolution No. 124 of 1403 on foreign or
minority Saudi-owned foreign contractors is limited. A large number of works and related services,
ranging from simple transport to complex civil and other works, are usually handled by Saudi
subcontractors which today dominate the Saudi market. Furthermore, all products and services
produced in Saudi Arabia as well as products purchased from Saudi importers are taken into
account in calculating the 30% requirement.

(iii) Machinery and Equipment

The government may invite licensed Saudi agents to submit supplier bids for equipment
and machinery required for public works. The government must specify the products for which
bidding will take place, and provide a response period of between 3 and 20 days from the date
the invitation is issued to potential suppliers. The government may purchase products directly
from offshore manufacturing companies, if there is no official agent for the required products in
the Kingdom.

(iv) Office equipment

The government may purchase office equipment directly from manufacturers if the
value of the transaction is less than 1,000,000 SR. Office equipment includes, for example,
cameras, typewriters, calculating machines, filling cabinets and cupboards, arm-chairs, drapes,
floor carpeting, cutting, tying and stapling machines, printed matter and other stationery and
interior decoration. If the value of the order exceeds 1,000,000 SR, the government must solicit
open bids from at least three traders dealing in the products.

(v) Operation and Maintenance Works

Operation and maintenance works, including electrical or mechanical equipment or
buildings, are procured through the issue of an invitation to at least three specialised contractors
licensed to engage in the activities. The invitees are to present their offers as sealed bids within
a period to be determined by the soliciting government agency.

(vi) Supply of Food

Food supply contracts concern contracts for cooked meals, food stuffs, provision of
meals, food delivery and other similar catering related requirements. The government is
required to invite at least three specialised Saudi caterers to submit bids in sealed envelopes
within a time specified by the soliciting government agency.

(vii) Drilling of Wells


83

The government must invite at least three specialised contractors to submit sealed bids
within a period specified by the soliciting agency. The specialised contractors must hold all
licenses required for the performance of drilling work and related oilfield services (if
applicable).

(viii) Spare Parts

Spare parts are to be purchased by direct purchase from the official agent regardless of
cost.

All kinds of purchases and work are to be carried out by direct purchase if the value of
the requirement does not exceed SR 1,000,000. The Minister or Head of the Independent
Department is to exercise this prerogative and may only delegate that authority within a limit of
SR 500,000.

(ix) Consulting Operations

If the government requires any type of study, special technical advice, or project
supervision, the procuring agency may contract directly and retain a consultant if the value of
the project is less than 1,000,000 SR. If the project value exceeds the minimum, the procuring
agency must invite at least three consulting businesses to submit bids within a specified period.
Contracts for studies and designs must be procured for a lump sum amount (rather than an
hourly rate). Contracts for supervision or implementation related consultancy projects may be
for either a lump sum amount or for a recurring amount based upon completion of certain
percentages of the value of the project.

(x) Procurement of Pharmaceuticals

The government must invite at least three Saudi agents of international pharmaceutical
companies to submit bids for contracts to supply the government with pharmaceuticals. A
technical committee appointed by the Minister of Health selects the international
pharmaceutical firms eligible to receive invitations to bid. The list of companies from which the
technical committee may select qualified bidders is endorsed annually by the Minister of
Health. The technical committee is empowered to assistance from international bodies to obtain
practical and technical information on international pharmaceutical suppliers.

(xi) Arms

The government may procure armament supplies by direct agreement with
manufacturers. The Prime Minister decides the eligibility of the manufacturers.

Council of Ministers Decision No. 1275 of 1395 H. [1975 G.] (Decision 1275)
provides that:


84
A company that enters into an armaments contract (including related equipment and
installations) with the Saudi Government may not pay any commission to any intermediary,
sales agent, representative or broker. Any prior commission agreement between any such
company and any party involving the Saudi Government shall be void and unenforceable.

Decision 1275 provides that armament contracts must be performed in accordance with
requirements of national security and the requirements of the defence plan and that no
intermediaries or other parties benefit from armaments contracts. The Decision affirms in its
preamble the policy of the government that intermediaries and commissions of any type may
not be used in armaments contracts.

(xii) Major Projects

The government must invite at least 3 specialised companies to bid on major projects
which include important civil engineering projects, projects involving significant mechanical
and/or electrical operations requiring highly specialised construction/operations processes or
projects involving the use of specialised patents or scientific methods. The bidding process for
major projects consists of two stages, the first stage being a beauty contest in which the
credentials of the bidders are evaluated and the second stage in which bidders often submit
highly detailed responses to request for proposals. Certain private and corporatised Saudi
Arabian entities (such as Saudi ARAMCO, SABIC and the Saudi Telecommunications
Company) call for tenders for infrastructure projects in two rounds.

3. Tender Procedures

The Tenders Law and its Implementing Rules use the terms Soliciting Agency,
Purchasing Department and Contracting Authority. The Soliciting Agency is the procuring
entity, and the Purchasing Department is the department concerned with procurement matters
within the Soliciting Agency. The Contracting Authority is the minister, any person vested with
ministers powers, the governor, or the chairman of the Soliciting Agency. The Contracting
Authority may only delegate its powers under the Tenders Law to the level of administration
directly beneath it.

a. Preparation of Tenders

The Contracting Authority is to prepare the tender conditions and specifications and
decide on the appropriate points system to be applied in evaluating bids. Finally, the
Contracting Authority determines the estimated value of the tender and accordingly the value of
the bid bond.

b. Notification

According to the principle of publicity, all public tenders must be duly advertised.
Public tenders not limited to Saudi entities or individuals, must be advertised internationally. All
announcements and publications must be in the Official Gazette, a leading newspaper, and other
mass media inside Saudi Arabia, or in Saudi Arabia and abroad, in the case of international
tenders.


85

While procurement below SR 1 million may be made from a sole source, larger projects
require public invitation. Government agencies are required to consider as many qualified
bidders as possible. Tender documents must be issued before bids are requested, on forms
issued by the Soliciting Agency. The Council of Ministers has issued standard contracts for
public works procurement.

All public tenders must clearly specify the place for submission, the information to be
given and specifications to be met by bidders and are to disclose the proportion of local content
of the project or qualification required for participation in the public tender.

c. Classification

Ministerial Circular No. 1065 of 1403 H. [1983 G.] requires contractors to apply to the
Contractor Classification Department at the Ministry of Municipality and Rural Areas for
classification for numerous types of supply, service and construction activities.
New requirements and procedures for contractor classification were issued in 1992.

d. Pre-qualification

In addition to classification, a prospective contractor must pre-qualify with certain
government agencies with which it seeks to do business, often for each tender. Pre-qualification
assures notice of forthcoming tenders, and sometimes leads to direct procurement.

e. Submission of Bids

The invited contractors must submit their bids within the time and on the date
determined by the tender documents. No bids may be submitted thereafter. In practice, bids are
normally submitted on the last day of the bidding period. However, bids may be amended if the
amendment is favourable to the procuring body, and is presented by the bidder with lowest bid
and in compliance with the tender specifications and conditions.

Each bid must contain a detailed description, the specifications of the project and the
price proposed. The price proposed should be in Saudi currency, unless the specifications allow
it to be in other currencies.

Bids are to be delivered to the Soliciting Agency by registered mail or by hand against
receipt. The bid is to be presented on the forms included in the tender documents or issued by
the Soliciting Agency. Although not required by law, it is the practice of the private sector that
bids are submitted in two sealed envelopes. One envelope will usually contain the technical
offer, including all technical specifications -- without prices, while the other envelope generally
contains the financial offer, with prices and other financial conditions.


86
f. Bid Bond

Each bid must be accompanied by a bidders guarantee either in cash, by certified
cheque or bid bond. The Ministry of Finance has established the terms, conditions and
procedures for letters of credit issued for government projects. A bid bond of two per cent of the
contract value is required. The bid bond should be unconditional and issued or endorsed by a
Saudi bank or by a specialised insurance company accredited by SAMA. According to
Ministerial Decision No. 17/1486 of 1398 H. [1977 G.], the amount of the bid bond is
determined by the Contracting Authority and may not exceed 2% of the estimated contract
value. This value is to be equal for all bidders and is specified in the tender announcement.

Bid bonds are to be returned to bidders within seven days after expiry of the validity of
their respective bids, irrespective of any request of the bidder in that respect. Bids not
accompanied by bid bonds are to be excluded from the procurement procedure.

g. Decision

Bids are evaluated by one or more three-member committees formed within each
ministry or department. The committees may seek the assistance of specialised technicians who
submit their reports to the committee. The committee issues its recommendations regarding the
most suitable bidder but the Contracting Authority is not bound by the recommendations.

The Minister or the Head of the Autonomous Department (a government agency other
than a ministry) appoints two committees for opening and examination of bids. Both
committees must be composed of technical, financial and legal experts and are to take into
account the nature of the contract subject to the public tender. One committee is to be
responsible for opening the envelopes (the "Opening Committee") and the other is to be in
charge of selecting the best bid (the "Decision Committee").

There is no need for tenders in cases of public procurement involving amounts below
SR 1,000,000 where contracting authorities may purchase the goods directly from the available
sources. For public tenders involving amounts in excess of SR 1,000,000, the respective
Minister or Head of the Autonomous Department is required to appoint an Opening Committee
and a Decision Committee.

The Decision Committee may also decide that subcommittees be constituted to analyse
the technical and financial conditions of each bid and to ensure their compliance with the
minimum tender requirements. The subcommittees consider the reputation of the bidders and
their ability to effectively comply with, and perform, the contract under the required technical
and financial conditions. The Decision Committee may request that other experts be recruited in
addition to the various subcommittees to assist the Decision Committee with its reports.

Bids are first analysed by reviewing the relevant technical aspects. The financial aspects
of the bid may only be taken into consideration after a conclusion has been reached by the
Decision Committee that the bid complies with all technical requirements of the public tender
and is deemed to be satisfactory for the performance of the contract. The contract is to be
awarded to the bidder offering the best conditions in general, the shortest term and the lowest
price. A comparison of prices occurs only after a comparison of the technical and financial


87
conditions of all bids. Any decision to exclude a bid from the public tender is to be duly
substantiated.

Changes in price are not normally permitted after opening the bids. If the lowest bid is
considered to exceed the market price, the bidder must be asked to reduce his price. If a
satisfactory price is not submitted, the next lowest or all of the other bidders may be asked to
submit revised prices. Post-bid negotiation is also required when tenders are non-conforming. If
the lowest bidder fails to withdraw his conditions or reservations, the Soliciting Agency may
seek a suitable bid from one of the other bidders. If no acceptable bid is submitted, the tender
may be cancelled. Contracts in excess of 3,000,000 SR must be awarded by the head of the
Soliciting Agency but awards for lesser amounts may be delegated.

The authority to decide on purchases and the execution of works of a value in excess of
3,000,000 SR rests with the Minister or Head of the Autonomous Department. For contracts for
lesser amounts, the authority may be exercised by the Deputy Minister or whoever acts in his
place. Delegation of authority to other officials for lesser amounts may take place, provided it is
compatible with the authority of the delegated person. Contracts in excess of 100,000,000 SR
must be awarded after having the approval of the Prime minister.

(i) Cancellation

The Implementing Rules of the Tenders Law provide that a public tender may be
cancelled in one of the following cases:

only one bid has been submitted or if only one bid remains valid after all others have been
excluded as a consequence, for example, of non-compliance with technical requirements;
there is no further need for the tender;
all bids, or most of them, were made under reservations; or
the lowest bid exceeds the estimated contract value even after limited negotiations.

The tender may be cancelled on the recommendation of the Decision Committee and
with the approval of the Contracting Authority. The Contracting Authority may, on
recommendation of the Decision Committee, approve a contract if there is only one bidder
remaining, under the following conditions:

if there is an urgent need that does not permit re-tendering or if re-tendering is not expected
to achieve a different result;
the bid was made for the market price; and
all tender specifications and conditions are complied with.

(ii) Challenging Decisions

The Board of Grievances in Riyadh is the adjudication forum delegated the authority to
review complaints by bidders against government procurement decisions.

h. Agent

Previously, foreign contractors wishing to do business with the Saudi government were
required to have registered agents in Saudi Arabia. The Saudi Council of Ministers repealed the


88
Law Governing Relationships between Foreign Contractors and their Saudi Service Agents
issued pursuant to Royal Decree No. M/2 of 1398 H. [1977 G.] by Royal Decree No. M/22 of
1422 H (2001). Foreign contractors may now submit bids directly to the government without
being obliged to appoint a Saudi agent (although in some instances, where Saudi Arabian
knowledge or expertise is required, the relevant government agency may require the foreign
party to associate with a Saudi Arabian company or establishment).

4. Special Methods of Procurement

While public tenders are the procurement procedure generally applicable to government
contracts for the acquisition of movables and the provision of services and civil construction
works, the following special methods of procurement may also be used:

a. Limited Tenders

Limited tenders apply to projects that can be awarded only to certain entities or individuals
either in Saudi Arabia or abroad because they have very specific or unique technical and/or
financial qualifications. Participation in limited tenders is only permitted to those entities and
individuals which fulfil all technical and financial requirements deemed necessary for the
successful performance of the subject matter of the contract. Moreover, all entities and individuals
participating in limited tender procedures must have a good business reputation in Saudi Arabia.

All procedure rules applicable to public tenders as laid down in the Tenders Law also
apply to limited tenders, insofar as they are suitable for the type of procurement concerned.

Although permissible by law, recent resolutions have considerably limited the
governments ability to use the Limited Tenders procurement procedure.

b. Limited Negotiations

Limited negotiations are negotiations in which, due to their nature, a bid may be
awarded only to certain entities or individuals either in Saudi Arabia or abroad, which have
specific technical and financial qualifications, e.g. if:

the bids submitted are higher than the quoted prices or if a bid was issued subject to
reservations;
due to its nature, the subject matter of the contract may be performed only by a limited
number of entities or individuals;
any related product due to natural reasons may be purchased only in the relevant production
site;
the agreement relates to technical services that may be rendered solely by a limited number
of experts; or
national security reasons so require.


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c. Direct Procurement

Direct (single source) procurement constitutes an easier way of contracting services or
purchasing goods, but it may only be used in a limited number of cases - most notably if there is
significant urgency in connection with the procurement at issue. In direct procurement tenders,
the Soliciting Agency negotiates directly with a single bidder.

If local goods and products will satisfy the needs of a direct procurement tender, (i) they
may be purchased directly if they are produced by a single factory or source or (ii) they must be
purchased by an abbreviated tender situation if there are multiple factories of sources of the
goods in Saudi Arabia provided that the Ministry is authorised to determine the appropriate
purchase price in either case.

d. Auctions

Materials that exceed the requirements of the government department may be sold to
other government departments. The price of such materials is to be determined by a committee
consisting of at least three officials who are required to first check the market prices, under the
condition that the sale price is not less than the estimate made by the said committee.

If the value of the materials exceeds SR 100,000, the sale may only take place by public
auction in accordance with the procedures provided for in the Implementing Rules of the
Tenders Law. Government employees may not purchase items sold by the Government unless
the sale takes place by public auction, and the purchased items are for the purchasers personal
use.

5. Contracts with Public Entities

In most of the above-mentioned procurement methods the Soliciting Agency will enter
into a contract with the successful bidder in line with the following rules:

tender conditions and specifications;
offer of the accepted bidder;
Tender Law and its Implementing Rules; and
general principles of applicable Saudi laws and regulations.

a. Model Contracts

Model Contracts for public works, supply and other types of administrative contract
have been issued by a Resolution of the Council of Ministers on the recommendation of the
Ministry of Finance in accordance with Article 10 of the Tenders Law.

Today, each Soliciting Agency has standard conditions for contracts for the
procurement of goods, works or services. In many cases the terms and conditions of contracts as
well as their form are imposed by the Soliciting Agency. In general, other than technical
modifications, amendments to these model contracts are rarely accepted.


90
b. Advance Payments

In its Article 8, the Tenders Law permits advance payments to be made to the successful
contractor. The value of the advance payment may not exceed 20% of the total contract value,
provided that an unconditional and irrevocable advance payment guarantee is given.

The balance is paid by progress payments related to contract periods or milestones such
as the shipment of supplies or monthly submission of engineers' or architects' certificates. A
proportionate share of the advance payment is deducted from progress payments, together with
a final retention of five to ten per cent, which is retained until provisional or formal acceptance
and submission of a certificate from DZIT indicating that the contractor's tax dues have been
settled. In no event may progress payments exceed the value of work completed. If the entry
into effect of a contract is subject to the fulfilment of certain conditions, and one of them is the
making of the advance payment, then such payment shall be made only after all other conditions
are fulfilled, which may in some cases delay a project considerably.

c. Bonds

The Tenders Law and its Implementing Rules provide for four different types of
guarantees: bid bond, advance payments guarantees, performance guarantees, and retention
money guarantees. In certain cases the Soliciting Agencies include specimen guarantees to be
used by bidders, in the tender conditions. Most of the Soliciting Agencies do not accept the
standard specimen of the International Chamber of Commerce for letters of guarantee on
demand.

(i) Performance Guarantees

Successful bidders are required to provide performance bonds equivalent to 5% of the
contract value. Within 10 days of the final decision to award a contract the government agency
will release the bid bond on receipt of the performance bond. The time for providing the
performance bond may be extended by an additional 10 days with the approval of the
Contracting Authority.

Performance guarantees are not required for contracts for consultancy work, direct
purchases, or purchases of spare parts. The value of performance guarantees may be gradually
reduced in operation and maintenance contracts pro rata to the performance of work, provided
that the remaining value is not less than the value of the work still to be completed under the
contract.

(ii) Failure to Deposit

If a successful bidder fails to provide the required performance bond within the
prescribed term, the Soliciting Agency may terminate the agreement registered letter addressed
to the bidder. The Soliciting Agency then may conclude the contract with the bidder next in line
and draw down the bid bond provided by the withdrawing bidder.

The Soliciting Agency may deduct from the value of the bid bond any losses which it
may have incurred as a result of the withdrawal of the successful bidder. Withdrawing bidders
remain liable for any losses of the Soliciting Agency beyond the amount of the bond, and the


91
amount of the excess may be deducted from payments due to the withdrawing bidder by any
other government agency or authority in Saudi Arabia.

(iii) Insurance Policies

While insurance company guarantees and surety bonds are permitted, they are rarely
used since they must equal twenty-five per cent of the contract value. A retention money
guarantee, normally five per cent, may also be required, or withheld from progress payments.
An advance payment guarantee in the amount of the advance payment must also be issued prior
to payment of the advance. Procuring Authorities recover advances by deduction from progress
payments, and the advance payment guarantee may be reduced proportionally to the reductions.

d. Penalties

Saudi Arabian Government contracts generally contain liquidated damages or penalty
clauses, inserted as a means of recovering damages for delay, usually accumulated at a daily
rate specified in the contract.

According to the Tenders Law, a government contractor is subject to a penalty fine of
up to 4% of the value of supply contracts and of up to 10% of the value of public works
operations and maintenance, or consultancy contracts in accordance with the details specified by
the contracts and the Rules for Implementation, unless the delay is the result of force majeure,
emergency or an action beyond the contractors control.

The minister or head of the department may extend the contract period if the delay was
the result of the following:

Assigning new works to the contractor if he was ordered to do them within a period that does
not allow performance in the remaining period agreed in the original contract;
A previous order from the department concerned for reasons not related to the contractor; or
If the delay was caused by factors other than those mentioned in the previous paragraph,
exemption from the delay fine granted only with the approval of the Ministry of Finance.
e. Language of the Contract

Contracts with government entities must be in Arabic. In exceptional circumstances, the
Procuring Authority may sign a contract in a foreign language.

f. Retention

The means and timing of payments due to contractors are specified in their contracts.

Payment of the final 10% of the value of a contract is postponed until the contractor
presents the government with a certificate from the DZIT establishing that the contractor has
paid all taxes due.


92
g. Decennial Liability

Contractors must provide a guarantee for a period of ten Hijri years, against collapse,
whether total or partial, that may occur as a result of defective execution of the building or
structures erected by them, unless the parties agreed in the contract that use of the building or
structures is intended for a lesser period. This rule, which originates from the 1807 French
Commercial Code, can be found in the legislations of a number of other Middle Eastern
jurisdictions such as Egypt and the Emirate of Abu Dhabi.
h. Arbitration and Dispute Resolution

Article 3 of the Saudi Arbitration Law prohibits government entities from entering into
contracts which provide for arbitration, unless the government entity receives the express
approval of the Head of the Council of Ministers.

i. Anti-Bribery Law

The Law against Bribery (the Anti-Bribery Law), Royal Decree No. M/36 of
29/12/1412 H. [1/7/1992 G.], penalises both public officials who accept bribes and those
offering them, as follows.

Every public official who, alone or on behalf of another, requests, accepts or receives a
promise or gift to use actual or claimed influence to obtain or to attempt to obtain from any
government agency employment, orders, decisions, commitments, licenses, supply agreements,
employment, favours or privileges of whatever kind shall be deemed to have participated in a
bribe. The briber, and any intermediary or accomplice are liable for the prescribed penalty.
Whoever agrees to instigate, instigates or knowingly assists in the commission of the completed
offence, is deemed an accomplice.

In applying this law, the following persons are considered public servants: [] (e)
employees of joint stock companies or companies performing obligations in public utilities
(Art. 8 of the Anti-Bribery Laws).

Intermediaries who seek to influence government procurement officials to direct
government contracts to their foreign clients may incur liability under the Anti-Bribery Laws,
both for themselves and for their principals.

Offences under the Anti-Bribery Law are punishable by imprisonment of up to 10 years
or a fine of up to 1,000,000 SR or both.

XIII. Environmental Law

The Saudi government has made protecting the environment for both present and future,
one of its major objectives. As the sheer scale of Saudi Arabias oil industry exposes the country
and its natural resources, such as air, water and land, to considerable dangers, creating standards
to prevent pollution plays an important role. To date, Saudi Arabia has protected its


93
environment in an exemplary fashion, but the growing complexity of Saudi Arabias industrial
activities requires modern, specific approaches.

1. Laws and Regulations

The new environmental Law came into force by Royal Decree No. M/34 of 28/7/1422
H. [16/10/2002 G.] which replaced the numerous Decrees and regulations, which previously
provided a somewhat patchwork basis for environmental protection.

2. Meteorology and Environmental Protection Administration

The Meteorology and Environmental Protection Administration ("MEPA") is the main
body responsible for protecting the environment and controlling pollution.

MEPA is responsible for a large number of tasks, which include:

conducting environmental studies and publishing the results;
preparing, issuing and reviewing relevant environmental standards and ensuring
compliance;
working in conjunction with other government agencies, establishing plans to deal with
environmental catastrophes;
promoting general awareness for protecting the environment; and
working in conjunction with other government agencies and dealing with violations of
applicable environmental standards.

Businesses must agree to comply with environmental Laws in order to receive industrial
and commercial licenses from the Ministry of Commerce and the Ministry of Industry and
Electricity. MEPA maintains close relations with other sectors of government, and is authorised to
inform the competent authorities of breaches of environmental Laws and to assist them with
enforcement.

3. International Conventions for the Protection of the Environment

Saudi Arabia is party to the following international conventions concerning the
protection of the environment:

The 1992 Regional Convention for the Conservation of the Red Sea and Gulf of Aden
(commonly referred to as the J eddah Convention);
The United Nations Convention on the Law of the Sea;
The 1985 Vienna Convention for the Protection of the Ozone layer;
The Montreal Protocol, calling for phasing out chlorofluorocarbon (CFC) gases (harmful
to the ozone layer) by 2010;
The 1989 Basel Convention on the Control of Transboundary Movements of Hazardous
Wastes and their Disposal;
The 1967 Outer Space Treaty;
The Kuwait Regional Convention for the Protection of the Marine Environment from
Pollution.


94
4. Penal Provisions

Acts of pollution of the sea, air and land of Saudi Arabia with 'toxic, nuclear or other
similar dangerous materials' are punishable by:

imprisonment for a period of up to five years; or a fine of up to SR 500,000, or both;
cessation or suspension of business activities for a period of up to 90 days;
seizure and confiscation of machinery, which is the cause of pollution, including but not
limited to, ships for a period of up to 90 days;
the payment of compensation commensurate with the damage caused by the pollution;
and/or
restoring the environment (if possible), rectifying any damage (including ceasing the
offending activity), and cleaning up.
Repeated offenders are liable for the following:

imprisonment for a period of up to 10 years;
a fine of up to SR 1,000,000;
cessation or suspension of business activities, either temporarily or indefinitely;
seizure and confiscation of machinery, which is the cause of pollution, including, but not
limited to, either temporary or indefinite ship seizure;
payment of compensation commensurate with the damage caused by the pollution; and/or
rectification of any damage and cleaning up.
Other, less serious, forms of pollution may be punished by:

a fine of up to SR 10,000; and/or
rectification of any damage and cleaning up.
For repeated offenders, the range of punishments are the same as in the cases of
pollution by toxic, nuclear or other similar materials, except that the fine may not exceed SR
20,000, and business activities may be suspended for a period not greater than 90 days.

MEPA, together with other competent government agencies, in their sole discretion,
may further impose penalties for infringement of any applicable environmental standards, even
in cases where no penalties have yet been fixed.

5. Unified GCC Environmental Law

The recent enactment of GCC environmental law underlines the member states common
awareness of the importance of preserving their environment. The General Environmental Law
of the Gulf Cooperation Council of 4/2/1421 H. [9/5/2000 G.] set out the basic rules for
protecting the environment in member states. The law set out the obligations of the Public
Authorities and individuals, and lay the principles of preservation, rationalisation and planning
related to the environment. The implementation of the regulations is monitored by a special
GCC body, responsible for the affairs and management of the environment. This body is
empowered to penalise infringements of the law and may prepare and apply additional standards
for protecting the environment.


95
The Competition Law:

This law was enacted by Royal Decree No. M/25 dated 4/5/1425 h [2003 G]. It is intended to
encourage competition among private business entities and competitors in the Saudi market and
to combat collusionary activities. The law, by its terms, does not apply to public corporations
and government owned companies.

The law establishes the Competition Protection Board (the CPB) which is charged with
ensuring that the Competition Law is implemented and enforced. The CPB, to be
formed by Royal Decree and presided over by the Minister of Commerce and Industry
has eight members including representatives from the Ministry of Finance, SAGIA and
four expert members who are to be nominated by the Minister of Commerce and
Industry.

The CPB will be responsible for approving any mergers, acquisitions or joint
management agreements that may occur between business entities in the event that any
such actions lead to significant control of the relevant market.

Subsequent to formation, the CPB will issue Implementing Regulations to the
Competition Law which will define the parameters of unacceptable collusionary
activities as well as the framework by which such activities will be regulated.

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