Transparency of the Regulatory System
Few aspects of the SAG’s regulatory system are transparent, although Saudi investment policy is less opaque than many other areas. Saudi tax and labor laws and policies favor technology transfer and the employment of Saudis rather than fostering competition. Saudi health and safety laws and policies are not used to distort or impede the efficient mobilization and allocation of investments. Bureaucratic procedures are cumbersome, but red tape can generally be overcome with persistence.
Stakeholder consultation is inconsistent: some Saudi organizations are scrupulous about consulting businesses affected by the regulatory process, while others tend to issue regulations with no consultation at all. Proposed laws and regulations are not always published in draft form for public comment. Some government agencies permit public comments through their websites. The processes and procedures for stakeholder consultation are not generally transparent or codified in law or regulations. There are no private-sector or government efforts to restrict foreign participation in the industry standards-setting consortia or organizations that are available. There are no informal regulatory processes managed by NGOs or private-sector associations.
International Regulatory Considerations
Saudi Arabia adheres to standards developed both domestically by, the Saudi Arabian Standards Organization (SASO), and by the Gulf Standards Organization (GSO), an umbrella group serving the six countries of the GCC. While the GSO continues to push for standards harmonization across the Gulf, SASO maintains significant agency in developing, elaborating on, and enforcing standards for Saudi Arabia specifically.
Over the course of 2016, Saudi Arabia continued to revise technical regulations for a variety of products based solely on standards developed by the International Organization for Standardization and International Electrotechnical Commission. Saudi Arabia has excluded other international standards, such as those developed by U.S.-domiciled organizations through open, transparent and consensus-based processes – and which may meet or exceed Saudi Arabia’s standards. Saudi Arabia’s exclusion of these other international standards, which are often used by U.S. manufacturers, creates significant market access restrictions for industrial and consumer products exported from the United States.
A member of the WTO, Saudi Arabia notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade.
Legal System and Judicial Independence
The Saudi legal system is derived from the legal rules of Islam, known as sharia law. Efforts to codify these laws, begun in 2010, remain incomplete. Saudi commercial law, meanwhile, is still in its developmental stage. In 1994 Saudi Arabia ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Saudi Arabia is also a member of the International Center for the Settlement of Investment Disputes (ICSID) Convention. In 2012, the SAG revised its arbitration law to update certain provisions. Currently, the MCI is leading a new effort to overhaul commercial laws, a project that entails drafting new laws while modernizing current ones. In 2016, Saudi Arabia took a significant step in improving its dispute settlement regime with the establishment of the Saudi Center for Commercial Arbitration (see “Dispute Settlement” below).
The Ministry of Justice oversees the sharia-based judicial system, but most ministries have committees to rule on matters under their jurisdictions. Many disputes that would be handled in a court of law in the United States are handled through intra-ministerial administrative bodies and processes in Saudi Arabia. Generally, the Saudi Board of Grievances has jurisdiction over commercial disputes between the government and private contractors. The Board also reviews all foreign arbitral awards and foreign court decisions to ensure that they comply with sharia law. This review process can take years, and outcomes are unpredictable.
The Kingdom’s record of enforcing judgments issued by courts of other GCC states under the GCC Common Economic Agreement, and of other Arab League states under the Arab League Treaty, is somewhat better. Monetary judgments are based on the terms of the contract—i.e., if the contract is calculated in U.S. dollars, a judgment may be obtained in U.S. dollars. If unspecified, the judgment is denominated in Saudi riyals. Non-material damages and interest are not included in monetary judgments, based on the sharia prohibitions against interest and against indirect, consequential and speculative damages.
As with any investment abroad, it is important that U.S. investors take steps to protect themselves by thoroughly researching the business record of the proposed Saudi partner, retaining legal counsel, complying scrupulously with all legal steps in the investment process, and securing a well-drafted agreement. Even after a decision is reached in a dispute, enforcement of a judgment can still take years. The Embassy recommends consulting with local counsel in advance of investing to review legal options and appropriate contractual provisions for dispute resolution.
Laws and Regulations on Foreign Direct Investment
SAGIA, in cooperation with its parent organization (the MCI), remains responsible for formulating government policies regarding investment activities, proposing plans and regulations to enhance the investment climate in the country, and evaluating and licensing investment proposals.
SAGIA periodically reviews the list of activities excluded from foreign investment (see Policies Toward Foreign Direct Investment) and submits its reviews to higher authorities for approval. Although these sectors are off limits to 100 percent foreign investment, foreign minority ownership in joint ventures with Saudi partners may be allowed in some sectors. Foreign investors are no longer required to take local partners in many sectors and may own real estate for company activities. They are allowed to transfer money from their enterprises outside of the country and can sponsor foreign employees, provided that “Saudization” quotas are met (see Labor Section below). Minimum capital requirements to establish business entities range from zero to SR 30 million ($8 million) depending on the sector and the type of investment.
Investors are not required to purchase from local sources or export a certain percentage of output, and their access to foreign exchange is unlimited. In order to benefit from waivers from Saudi customs duties, however, foreign manufacturers must prove that no local materials are available. Further, in line with the SAG’s bid to diversify its economy and provide more private sector jobs for Saudi nationals, the government has increasingly signaled its interest in introducing local content requirements for foreign firms. Aramco’s “In-Kingdom Total Value Added” program, for example, strongly encourages the purchase of goods and services from a local supplier base and aims to double Aramco’s percentage of locally-manufactured energy-related goods and services to 70 percent by 2021.
SAGIA’s Investor Service Center (ISC) offers detailed information on the investment process, provides licenses and support services to foreign investors, and coordinates with government ministries to facilitate investment. According to SAGIA, the ISC must grant or refuse a license within five days of receiving an application and supporting documentation from the prospective investor. SAGIA established and posted licensing guidelines in 2012 and 2015, but many companies looking to invest in Saudi Arabia continue to work with local representation to navigate the slow and often bureaucratic licensing process. However, foreign investors report increased efficiency over the last year in obtaining a license, with an approval time averaging one week compared to over a month in the past.
SAGIA has traditionally issued foreign investment licenses for seven broadly-defined activities: industrial, trading, agricultural, contracting, real estate, specialized and non- specialized services, and consulting. In 2015, SAGIA reduced the license categories to three sectors, each with its own regulations and requirements: services, which comprise a wide range of activities including real estate, trading, consulting, IT, healthcare, and tourism; industry; and contracting. Foreign firms must describe their planned commercial activities in some detail and will receive a license in one of these sectors at SAGIA’s discretion. Depending on the type of license issued, foreign firms may also require the approval of relevant competent authorities, such as the Ministry of Health or the Saudi Commission for Tourism and Antiquities.
An important SAGIA objective is to ensure that investors do not just acquire and hold licenses without investing, and SAGIA has been cancelling licenses of foreign investors that it deems do not contribute sufficiently to the local economy. SAGIA’s periodic license reviews, with the possibility of cancellation, add uncertainty for investors and can provide a disincentive to longer-term investment commitments.
SAGIA has agreements with various SAG agencies and ministries to facilitate and streamline foreign investment. These agreements permit SAGIA to facilitate the granting of visas, establish SAGIA branch offices at Saudi embassies in different countries, prolong tariff exemptions on imported raw materials to three years and on production and manufacturing equipment to two years, and establish commercial courts. To make it easier for businesspeople to visit the Kingdom, SAGIA can sponsor visa requests without involving a local company. Saudi Arabia has implemented a decree providing that sponsorship is no longer required for certain business visas. While SAGIA has set up the infrastructure to support foreign investment, many companies report that the process remains cumbersome and time-consuming.
Competition and Anti-Trust Laws
SAGIA and the Ministry of Commerce and Investment review transactions for competition-related concerns. Concerns have arisen that allegations of price fixing for certain products, including infant nutrition products, may have been used on occasion as a pretext to control prices. The Ministry of Commerce and Investment has looked to the GCC’s reference pricing approach on subsidized products to assist the SAG in determining market-price suggested norms.
Expropriation and Compensation
The Embassy is not aware of the SAG ever having expropriated property from foreign investors without adequate compensation. There have been no expropriating actions in the recent past or policy shifts that would suggest that the SAG will initiate such actions in the near future. Some small to medium-sized foreign investors, however, have complained that their investment licenses have been cancelled without justification, causing them to forfeit their investments.
ICSID Convention and New York Convention
The Kingdom of Saudi Arabia ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1994. Saudi Arabia is also a member state of the ICSID Convention, though under the terms of its accession it cannot be compelled to refer investment disputes to this system absent specific consent, provided on a case-by-case basis. Saudi Arabia has yet to consent to the referral of any investment dispute to the ICSID for resolution.
Investor-State Dispute Settlement
The use of any international or domestic dispute settlement mechanism within Saudi Arabia continues to be time-consuming and uncertain, as all outcomes are subject to a final review in the Saudi judicial system and carry the risk that principles of sharia law may potentially trump a judgment or legal precedent. The Embassy recommends consulting with local counsel in advance of investing to review legal options and contractual provisions for dispute resolution.
International Commercial Arbitration and Foreign Courts
Traditionally, dispute settlement and enforcement of foreign arbitral awards in Saudi Arabia have proven time-consuming and uncertain, carrying the risk that sharia principles can potentially trump any foreign judgments or legal precedents, as the New York Convention allows. Even after a decision is reached in a dispute, effective enforcement of the judgment can still take years. In several cases, disputes have caused serious problems for foreign investors. For instance, Saudi partners and creditors have blocked foreigners’ access to or right to use exit visas, forcing them to remain in Saudi Arabia against their will. In cases of alleged fraud or debt, foreign partners may also be jailed to prevent their departure from the country while awaiting police investigation or court adjudication of the case. Courts can in theory impose precautionary restraint on personal property pending the adjudication of a commercial dispute, though this remedy has been applied sparingly.
In recent years, however, the SAG has demonstrated interest in improving the quality of commercial legal proceedings and access to alternative dispute resolution mechanisms. Local attorneys indicate that the quality of final judgments in the court system has improved, but that cases still take far too long to litigate. In 2012, the SAG updated certain provisions in Saudi Arabia’s domestic arbitration law, paving the way for the establishment of the Saudi Center for Commercial Arbitration (SCCA) in 2016. Developed in accordance with international arbitration rules and standards, including those set by the American Arbitration Association’s International Centre for Dispute Resolution and the International Chamber of Commerce’s International Court of Arbitration, the SCCA offers comprehensive arbitration services to firms both domestic and international. Less than a year old, the SCCA has already accepted three arbitration cases filed by Saudi firms against other Saudi firms. The SCCA reports that both domestic and foreign law firms have begun to include referrals to the SCCA in the arbitration clauses of their contracts. Awards rendered by the SCCA can be enforced in local courts, though judges remain empowered to reject enforcement of provisions they deem non-compliant with sharia law.
A 1996 royal decree put Saudi Arabia’s current bankruptcy law, the Regulation on Bankruptcy Protective Settlement, into effect. Articles contained in the law allow debtors to conclude financial settlements with their creditors through committees in each municipal or regional Chamber of Commerce and Industry or through the Board of Grievances. Ordinary creditors may utilize the law’s provisions, except in the case of privileged debts and debts which arise pursuant to the settlement procedures. The Ministry of Commerce and Investment is revising the bankruptcy law to update key provisions and address several deficiencies in the Saudi bankruptcy regime. Potential investors should note that the “resolving insolvency” indicator most negatively affects Saudi Arabia’s World Bank “Doing Business” ranking; its rank for this indicator is 169th out of 190 countries measured.