As announced by Crown Prince Mohammad Bin Salman on 13 April 2023, four special economic zones (SEZs) will be established in Saudi Arabia.
With each SEZ having a distinct area of focus, investors setting up entities in these SEZs will be taxed at 5% corporate tax for the first 20 years, 0% VAT on goods procured by the entity from others in the SEZ or from other sources inside or outside the Kingdom, 0% withholding for repatriating profits, customs duties deferral for goods inside SEZ or 0% Custom duties on capital equipment and inputs inside SEZ, and exemption from expat levy for employees and their families.
With a plan to regulate the economic activities of companies in the SEZs, the Economic Cities and Special Zones Authority (ECSZA) has issued drafts of three Regulations: Companies Regulations, Labor Regulations, and Tax & Customs Regulations which will be applicable for entities set up in the SEZs.
The draft Regulations are open to feedback and suggestions until 21 May 2023. It is anticipated that the Regulations will be promulgated shortly thereafter.
Click here to download the Special Economic Zone Proposed Law (Arabic) PDF.
Provisions Under Companies Regulations
The Companies Regulations draft contains several features that are quite different to the Companies Law in the Kingdom.
The Companies Regulations stipulate that companies set up in the SEZs shall be treated as limited liability companies (LLCs), yet, unlike the Saudi Companies Law, the capital will be represented through different classes of shares. These shares must all be paid up, and the value of the shares must not be lower than the nominal value fixed for the shares, a mechanism that is available only to joint stock & simplified joint stock companies under the Companies Law.
Companies will be required to issue a share certificate in either a paper or electronic form evidencing the ownership of shares. As is the norm in most of the free zones throughout the world, the Regulations prohibit issuance of any bearer share. Transferability of shares in accordance with the provisions in the Articles of Association (AoA) and the provision of drag along and tag along rights simplify the mechanism of M&A activity. Extending the concept of one stop solution, upon receipt of application from investors, the competent authority set up by the ECSZA will issue a trading license & company registration as well as deposit and publish the AoA of the company.
Another unique feature of the Companies Regulations is the ability of companies in the SEZs to suspend carrying out their activities for a period no more than 12 months. This will enable companies set up under SEZs to opt for suspension for any reason instead of full closure.
Like the Saudi Arabian Companies Law, the Companies Regulations provide for the setting up of a single person LLC, as well as allows companies inside any of the four SEZs, or existing anywhere in Saudi Arabia to set up branch offices inside any of the SEZs.
While the Companies Regulations require for a fair valuation of in-kind shares for fixing of share price and issuance of a detailed decision by the manager or board covering the valuation, it does not place a condition that the valuation be done by an accredited evaluator nor provides for any ceiling for such shares.
Companies shall be required to maintain registers covering the details of shareholders, managers, mortgages, debt instruments & Financing Sukuk and minutes of meetings. Besides allowing shareholders and holders of debt instruments to inspect the registers, any person may request the competent department to inspect the registers against a fee.
Like the Saudi Companies Law, the Companies Regulations leave the management of the company to be determined by the AoA of the company and empowers the managers or the board to take all decisions except on matters, which are reserved, by the AoA or the Companies Regulations to be determined by the assemblies of shareholders.
Besides prescribing certain minimum conditions for a person to be appointed as a manager or a board member, the Companies Regulations require the managers to be diligent, sincere, and loyal towards the company, and to avoid conflicts and disclose all direct or indirect interests. However, unlike the Saudi Companies Law, there is no specific provision enabling the managers to undertake works of the company with the approval of the shareholders.
With a few exceptions, the Companies Regulations require a simple majority of the shareholders present at the general assembly for adopting any resolution and a 75% vote of shareholders present at the special assembly of shareholders of certain class of shares for adopting resolutions affecting the rights of those shareholders. However, it allows companies to prescribe higher percentages in the AoA for adopting such resolutions.
Increase or decrease of capital shall be subject to approval by a majority vote of shareholders representing no less than 75% capital, provided that the AoA of the company does not restrict such changes. Besides, as is the norm, decrease of capital shall require certain procedures including publication of decision in a required format, issuance of decision by the manager or the board that the company is not bankrupt. and obtaining of approval of all creditors for a decrease.
The Companies Regulations allow a company to buy back its shares either for reducing the capital or reserving the shares as ‘treasury shares’ provided that the buy-back shall not result in all shares of the company becoming ‘treasury shares’.
Like companies formed outside the SEZs, the companies set up in the SEZs will be able to issue debt instruments and negotiable Financing Sukuk in accordance with the provisions under the Saudi Capital Market Law.
Companies will be required to appoint a statutory auditor and include accounts of the controlling company and report of the manager or the board in the financial accounts of the company set up in SEZs. The competent authority may alter certain conditions and grant exemptions to companies from complying with these requirements. Specifically, auditors are restricted from providing any consultation or management services to companies whose accounts they audit.
Provisions related to process of closure of companies, role and powers of liquidators are similar to the provisions under the Saudi Companies Law.
The penalties for violation by any company of the Companies Regulations range from a simple warning to imposition of fines up to SR. One Million and cancellation of the registration.
Provisions Under the Labor Regulations
Provisions in the drafted Labor Regulations are not much different from the provisions under the Saudi Labor Law. However, there are certain provisions extending exceptions and exemptions to companies set up in the SEZs.
Non-Saudi nationals must be employed after obtaining work permits as per the rules set in the Labor Regulations; a company may transfer or assign an employee to another company through the Ajeer platform.
While the Labor Regulations provide employment of regular employees for the company to carry out the activities specified in the commercial register, companies may employ workers for certain durations wherein they work for half of the usual work hours or work for certain days of the week.
Companies may also hire employees on a temporary basis wherein they will render services for undertaking specific work during certain periods provided that the period does not exceed 90 days. Accordingly, it provides for payment of wages based on the completion of the assigned work.
The Labor Regulations require the competent authority within the ECSZA to determine the percentage of non-Saudi employees and Saudization ratios. The competent authority is required to coordinate with the Ministry of Human Resources in setting up certain conditions wherein the non-Saudi employees may work outside the SEZs.
Provisions related to the term of the contract, probation, maximum number of work hours during a day or a week, rest period, obligations of employers and employees, leave entitlements, end of services benefits (EoSB) computation of EoSB, salary payment frequency, and restrictions on working with a competitor are mostly identical to provisions in the Saudi Labor Law.
Similarly, provisions for termination of employment contract are similar, with the exception that the Labor Regulations do not restrict termination by parties for a valid reason only to indefinite period employment contracts.
As required under the Saudi Labor Law, the Labor Regulations require companies to draw and circulate among the employees Work Rules Regulations in the format provided under these Regulations, similar to what is issued by the Ministry of Human Resources. There is a specific form of employment contract covering all obligatory and optional provisions, which will have to be complied with by all companies in the SEZs.
Provisions Under Tax and Customs Regulations
The Tax and Customs Regulations draft mainly covers issues related to the treatment of goods delivered to entities in SEZs. These regulations provide that the goods supplied from any part of the Kingdom or outside of Saudi Arabia to entities within the SEZ or exchanged between the entities in the same SEZ or in different SEZ shall be exempted from VAT provided that the subject goods fall under the ‘customs exemption’ category and the goods are associated with the entity’s licensed activities.
Although the official language in which the entities may communicate with the competent department shall be Arabic, the department shall accept use of English language along with Arabic language, as well as accept documents in English language. In the event of requirement by the department, the companies may be asked to provide Arabic translation of the same.
The Regulations provide for the issuance of a detailed guide by the competent authority on procedures for regulating entry and exit of goods, transportation and ownership of goods, restricted and prohibited goods, manufacturing processes, and waste recycling and goods consumption. It will also issue detailed guidelines in respect of the applicability of tax and customs regime for companies in the SEZs.
Exemptions and incentives shall not be applicable to investors in case of suspension of business in the SEZ by the investor or any related person. In the case of transfer of business from the main economic areas to a SEZ, the investor will have to disclose the transfer, which will be treated as a transaction between associated persons.
The competent authority has the right to abolish exemptions and incentives in the case where an investor knowingly and intentionally provided false or misleading information or statements to the competent authority; deliberately misapplied this law or misused exemptions and incentives to obtain or assist others in obtaining exemptions and incentives for ineligible activities; or facilitated payments to non-residents on behalf of persons not entitled for exemptions and incentives.
In the event of abrogation of exemptions and incentives, the competent authority shall impose tax and apply fines according to relevant regulations in respect of tax years in which the above-mentioned violations occurred.
The promulgation of these Regulations after the consultative phase will pave the way for licensing and setting up of entities in the SEZs.
The Regulations provide a detailed regulatory framework for setting up and operating companies within the SEZs. While the Regulations are not much different from the basic regulatory regime for conducting commercial activities in the Kingdom, there are certain unique features covering tax related exemptions and exceptions, which are poised to simplify setting up of entities in the SEZ as well as attract investment and human capital.
If you have any inquiries or concerns regarding how these Regulations may affect you or your business, please do not hesitate to contact us. Our team of legal experts will be happy to assist you and provide the necessary guidance.
AlGhazzawi & Partners