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A Guide to Establishing a Presence in KSA’s Newly Recognized Special Economic Zones

Aside from launching the Special Integrated Logistics Zone (which is overseen by the General Authority for Civil Aviation) back on 31 October 2022, Saudi Arabia announced early 2023 the launch of four additional Special Economic Zones (“SEZs”) in Saudi Arabia’s continuing efforts to break the mold in accordance with Vision 2030. On the same day, the Economic Cities and Special Zones Authority (“ECZA”) published the draft Companies Law for SEZs (“Law”) on the Kingdom’s public consultation platform Istitlaa, which garnered public attention and feedback, thereby allowing ECZA to reconsider some of the provisions in the Law.

These five SEZs span across different provinces in the Kingdom, aiming to diversify the economy by moving it away from being oil-reliant, while encouraging innovation and growth and furthering foreign direct investment throughout the Kingdom. While the Law has yet to be promulgated, this Article aims to highlight: (1) the four SEZs and their targeted sectors (2) the key incentives of incorporating in one of the four SEZs, (3) the recognized legal forms under the Law, and (4) the impact of the Law.


I. Overview of the Four SEZs:

ECZA has strategically stratified the SEZs into the following four areas: (1) King Abdullah Economic City (“KAEC”), (2) Jazan, (3) Ras Al Khair, and (4) King Abdullah City for Science and Technology (“KACST”). The location of the SEZs were tailored around the Kingdom’s air, land, and waterway routes (with the exception of KACST, which is landlocked and created to build the Kingdom’s very own Silicon Valley).

The SEZs are located within the following areas:

  1. KAEC: located in the Red Sea, a popular and efficient port representing 13% of the global trade passing through the Red Sea. Its targeted sectors are: (a) automobile supply chain and assembly, (b) consumer goods, (c) electronic light manufacturing, (d) pharmaceuticals, (e) medtech, and (f) logistics.
  2. Ras Al Khair: catering to the maritime industry and focusing on advancing (a) the shipbuilding and Maintenance, Repair and Overhaul (“MRO”) and (b) rig platforms.
  3. Jazan SEZ: also strategically located in the Red Sea by focusing on fostering the growth of the industrial sector by targeting: (a) food processing, (b) metal conversion, (c) logistics, and (d) facilitating an efficient route for export of goods and import of manufacturing materials.
  4. KACST Cloud Computing SEZ: located in Riyadh and aiming to attract tech-savvy companies to foster the development of cloud computing services, allowing companies to establish data centers and cloud computing infrastructure in the Kingdom.


II. Perks of incorporating in SEZs:

The key incentives of incorporating in SEZs are:

  1. 5% corporate income tax (in contrast to the 20% corporate income tax levied on foreign companies in the mainland) for 20 years;
  2. 0% customs duties on capital equipment and inputs inside SEZ;
  3. 0% VAT for all intra-SEZ goods exchanged within and between SEZs;
  4. a permanent 0% withholding tax for repatriation of profits from SEZs into foreign countries;
  5. flexible Saudization requirements and facilitation of foreign talent during first 5 years; and
  6. expat levy ensuring fees exemption for employees and their families in the SEZs.

One of the factors that make foreign investors hesitant to incorporate in mainland KSA is the 20% income tax and the 15% on capital gains. The incentives which are mainly in respect to taxation offers foreign investors the ability to reap of the benefits locally and internationally.

However, it should be noted that foreign investors are restricted in incorporating based on the sectors that are available and recognized in the relevant SEZ. For instance, if a foreign investor wishes to set up a pharmaceutical company, it may only do so in KAEC, and cannot, for instance, set up a pharmaceutical company in Jazan SEZ, as the Jazan SEZ specifically caters to the industrial sector (as highlighted above).


III. Incorporation in SEZs

(1) Incorporation Process

The recognized legal forms available for investors are (a) Limited Liability Companies (LLCs), (b) branches (which can either be a branch of a foreign company, or a branch of a mainland KSA Entity), and (c) holding companies.

To incorporate a LLC, the investor(s) must demonstrate the following; (i) Stated capital, (ii) Trade name, (iii) Names of founders and their data, (iv) Names and nationality of management, (v) Draft bylaws, and (vi) Selected economic activities.

To incorporate a branch, the investor(s) must provide the following; (i) Resolution issued by whoever has authority to open a branch – and the name of the manager, and their national id/iqama/passport, (ii) Copy of the parent company’s Articles, (iii) Copy of CR of parent company, (iv) Desires companies the branch will engage in.

Lastly, to incorporate a holding company, the holding company must take the form of a LLC, and must ensure that its subsidiary does not directly own shares in the holding company. In the event the subsidiary does own a stake in the holding company, the subsidiary must not (i) hold voting rights in the shareholders meeting or board of directors meetings in the holding company, and (ii) the subsidiary shall dispose of its shares in the holding company within twelve months from the date of its affiliation with the holding company, and the subsidiary cannot owning additional shares except in the case of distributing dividends.


(2) Shares and Capital of the Company

Companies incorporated in SEZs do not need to have a minimum capital, and can contribute the capital that is fit to meet their objectives. The shareholders can contribute to the capital by way of cash contribution or in-kind contribution, can issue different classes of shares, can place share transfer restrictions, and can also put in place drag along and tag along rights. Further, there is statutory protection for minority shareholders representing 15% of the capital in the company entitling them to file a claim should their shares be negatively impacted by a decision of the majority shareholders.

Further, the company may purchase its own shares, so long as it does not drain the entire treasury shares, provided that the company does not have any voting rights to the shares and cannot attend general meetings.


(3) Management

The company can be managed by a single manager or by a board, and appointed managers/directors must meet the following criteria; (i) at least 18 years of age, (ii) is a natural person (with the exception of a legal person holding a position subject to approval of ECZA), (iii) Has not been convicted for any crimes related t0o fraud, corruption or dishonesty in the past 10 years, (iv) Has not been convicted of committing insider trading, (v) Has not been removed as a director pursuant to a judicial order, (vi) Satisfies any criteria set forth under management section of the bylaws; and (vii) Must not be bankrupt or insolvent.


(4) Shareholders’ Meetings

Shareholders Assembly can be convened by the auditor, its directors or shareholders representing at least 5% of the shares of the company, provided that notice is given at least 14 days before the date of the meeting. Quorum is valid provided that 50% of the shareholders representing the capital are present. Ordinary decisions must be passed by 50% of the shareholders representing the capital, while extraordinary decisions must be passed by 75% of the shareholders representing the capital of the company.  Shareholders may vary profits and losses but cannot deny a shareholder from profits or exempt them from losses.


(5) Interplay of the Law with the Mainland KSA Laws and Regulations

Companies incorporated in SEZs are not subject to the laws and regulations of mainland KSA, with the exception of Capital Market Authority (“CMA”) rules and regulations, which companies incorporated in SEZs are subjected to.


IV. Impact of the Law

While incorporating in SEZs offers attractive incentives for foreign investors, specifically in respect to the tax consequences, the Law in reality is restrictive, as it only allows the incorporation of LLCs and branches and holding companies, in contrast to incorporation in mainland KSA, which allows investors to incorporate Simplified Joint Stock Companies (“SJSC”), Joint Stock Companies (public or closed) (“JSC”), and partnerships. Several public commentators have proposed introducing other legal forms to provide investors with more options to align with the legal forms recognized under the KSA Companies Law. While the legal form as described under the Law is a LLC, it introduces concepts and corporate formalities foreign to LLCs, such as the issuance of different classes of shares, which is recognized under SJSCs and JSCs. Further, the Law does not address or resolve – even after receiving feedback from the public – how companies incorporated in SEZs are subjected to the CMA laws and regulations, especially if JSCs are not recognized under the Law.


Further, the Law sets forth the permissible fines and penalties that may be enforced by ECZA upon SEZ entities, but as pointed out in the public discourse, fails to identify what actions amount to a violation under the Law. ECZA confirmed that it will be adding a schedule addressing the types of violations under the Law but have yet to circulate it for public feedback. It can be assumed that certain violations could be related to the SEZ entity’s relationship with mainland KSA’s market and entities, and whether SEZ entities will be unable to provide their products and services to the mainland KSA market.


Lastly, it is unclear whether SEZs will be able to open a bank account in mainland KSA, or, whether banks will be established in SEZs to cater to SEZ entities. When free zones were established in UAE, many companies incorporated in free zones faced difficulties in setting up bank accounts, however, as SEZs in KSA have taken lessons from free zones established in the region, it is most likely that this issue will be resolved upon the promulgation of the Law.


V. Conclusion

While the introduction of several SEZs and the Law is a welcomed incentive encouraging the growth of foreign direct investment across KSA, there is still room for improvement in respect to corporate law formalities in SEZs. Since the Law has gained public attention, one should be on the lookout for the publication of the Law and whether the public opinion has swayed the regulators in broadening the list of recognized legal forms and providing further clarity as to the relationship between companies incorporated in SEZs and the CMA regulations, especially if LLCs are the only recognized legal form in  the SEZs. As the introduction of SEZs in the Kingdom is a relatively new concept, we predict further rules, directives, and circulars to be introduced to better shape SEZs in the coming years.