I. Introduction
Foreign investors seeking to expand their activities and business into the Kingdom of Saudi Arabia (“KSA”) tend to focus on studying the market and the investment opportunities. However, the regulatory requirements are considered a major aspect when investing in the KSA and should be considered as well.
A company willing to enter the KSA market must start with the Ministry of Investment, which plays an important role in granting licenses to foreign companies or to those persons who hold a premium residency. However, there are activities that are limited to Saudi nationals or that require approvals from other authorities.
Foreign investments in the KSA need to meet a set of financial standards and regulatory requirements, introduced to maintain the performance of the general market and protect the market from violations that negatively affect it. However, some investors that do not meet them sometimes resort to using fictitious partnership, nominee or other arrangements with a Saudi partner or owner. These non-compliant practices may result in negative consequences towards the company and the partners because these contracts are considered a violation of the Saudi laws.
In this article we discuss nominee arrangements in Saudi Arabia and their negative consequences.
II. Comments
Investing in the Kingdom
There is no doubt that the KSA is considered a global investment destination, especially within the Middle East. The economic growth in the KSA and its large projects require the seriousness of foreign capital to enter the market, and therefore the Ministry of Investment is considered the main body to help investors meet the requirements to which they are obliged. It regularly deals with investors and companies and cooperates with them to facilitate their procedure to set up a company, in accordance with established regulatory principles, and seeks to attract and maintain solid investments that contribute positively to the growth of the economy and sustainable development in the KSA by transferring and localising technical knowledge, diversifying sources of income, increasing exports, as well as developing Saudi human resources and enhancing the economic competitiveness of products in local and global markets.
Therefore, investors must work in accordance with the regulations, which require distinguished local and international experience, the financial and organisational capabilities to invest in the KSA through the use of the latest international standards and specifications, a plan to employ and train Saudi employees, and a statement of how they can contribute positively to the transfer of technology, the localisation of quality jobs, and the promotion of Saudi products in the markets. In addition, we see several individual/corporate investors seeking to be present in the Kingdom to enhance their economic growth, by moving their regional headquarters to the Kingdom or starting to invest through commercial entities, either in partnership with Saudi citizens or by themselves.
The digitalisation and automation of Saudi Government electronic systems and procedures has facilitated and shortened several procedures that previously required a longer time to complete, including the issuance of licenses. The Ministry of Investment works in cooperation and coordination with various Government agencies. The Ministry of Investment also provides post-licensing services by facilitating procedures in investor relationship centres. Further, the supervision and review of regulatory requirements and obligations has been made easier.
Nominee arrangements
The inability of some companies/individuals to meet these regulatory standards makes them search for other ways to enter the Kingdom’s market, where one of methods that sometimes is used is nominee/fronting arrangements. Under these arrangements, the foreign person hides behind the name of a Saudi national or Saudi company, to carry out its activities in the KSA.
Nominee arrangements between individuals who have Saudi nationality and a foreign person who does not have Saudi nationality, whether a natural or a legal person, to enable such person carry out economic activities in the Kingdom of Saudi Arabia, violate the laws and regulations in the Kingdom. By practicing business within the KSA without obtaining the required licenses or enabling them to practice activities restricted to Saudis, this type of conduct violates the anti-concealment law and other laws. These actions may also be considered a crime, resulting in criminal penalties of up to SAR 5 million as well as imprisonment for up to 5 years. Penalties may double in case of repetition.
In the past, the Ministry of Commerce exercised its role alone in supervising and investigating this kind of practices. In recent times, the Ministry of Commerce has increased its activities and is currently working with several Government agencies and bodies to control crimes and violations related to commercial concealment, including the Ministry of Human Resources, Development, and Social Affairs; the Ministry of Municipal Affairs and Community Affairs; the Zakat, Tax, and Customs Authority; etc.
Other negative consequences of nominee arrangements
Nominee arrangements may also result in negative tax consequences.
Foreign companies which are tax resident in the KSA are generally subject to income tax at the rate of 20%. By contrast, local companies fully owned by Saudi nationals are only subject to 2.5% Zakat. The income tax legislation sets out the legal obligations on foreign persons such as to register for income tax, submit tax declarations and pay the tax to the Zakat, Tax and Customs Authority, etc. Note that the tax laws do not allow or disallow an activity – they impose taxes depending on certain facts and circumstances.
By entering a nominee arrangement, a company in the KSA that would normally be subject to 20% income tax, in practice it unlawfully declares itself to be subject to only 2.5% Zakat. The Zakat, Tax and Customs Authority are aware of these non-compliant practices and often consider them as tax evasion. They issue tax assessments and impose penalties from time to time. We have reviewed several judicial rulings that imposed the outstanding taxes and fines, and ordered the imprisonment and/or suspension of the activity. Further, deportation may be ordered after completing a sentence and paying all due fees and taxes.
Therefore, doing business through nominee arrangements in Saudi Arabia is not only unlawful, but it may result in severe negative consequences, including higher taxes, penalties, the mandatory dissolution of the entity, cancellation of all licenses associated with it, and it may also lead to the confiscation of funds.
To avoid the above issues, foreign investors must fulfil all their legal obligations and conduct business in accordance with the regulations in force in the KSA.
III. How can we help?
Our team of lawyers and consultants has experience on company licensing and incorporation matters, regulatory requirements according to the company’s activities, drafting a company’s tax plan and providing regulatory consultations to determine the appropriate entity for the new company. We assist clients in meeting and adhering to regulatory requirements. Please feel free to contact us if you need any assistance.