According to the Saudi Gazette, “Riyadh is named the 14th most ambitious city in the world, with a population of over 7.3 million and an ambition index score of 328 out of 500.” That’s quite amazing and entrepreneurs should capitalize on the opportunities offered by establishing and operating a business in Riyadh. Expatica, for example, stated that Saudi Arabia “SR13 billion in foreign direct investment in 2018. It also ranks 41st on the Global Foreign Direct Investment Country Attractiveness Index.” Unsurprisingly, then, Saudi Arabia makes sense for many entrepreneurs and Riyadh is a great option.
The most common argument by the Saudi government is that the country is open for business. However, for foreign investors, this isn’t quite that simple. As an entrepreneur, you’ll find yourself in a party that contributes to about a fifth of the country’s GDP and efforts are being made to increase it to 35% by 2030. In 2019, according to the Global Entrepreneur Monitor report based on 49 countries, about 75% of the entrepreneurs surveyed viewed Saudi Arabia as having good opportunities for their entrepreneurship.
Business Types
Today, efforts have been made to make set-up procedures for entrepreneurs in Riyadh more streamlined. Entrepreneurs can also get tons of advice from a wide range of topics, from funding to marketing to export, from the Small and Medium Enterprises Authority, Meras, and Saudi Arabian General Investment Authority’s (SAGIA) Investment Services Centre. The last source is particularly beneficial for foreign investors because they can help with meeting the required formalities. There are three options for establishing entrepreneurship in Riyadh:
- Limited liability company. To establish this structure, the entrepreneur must have at least 2 shareholders, but neither have to be a citizen and have at least SR500,000 in start-up capital. The maximum number of shareholders allowed is 50. Management must represent the company and there is no formal Board of Directors. This structure also has to undergo an annual audit. This structure is more challenging due to the requirement for approval for Articles of Association, which can establish requirements for management. If there are over 20 partners, the company must have a Board of Controllers. This is the most common type of company for foreign businesses in Saudi Arabia. Liability is limited to the interest held in the company by the shareholders. This method is popular for joint ventures with Saudi partners.
- Branch office. This structure allows foreign companies to engage in commercial activity. The parent company has full liability associated with the branch. The minimum start-up capital required is SR500,000. Notably, since no Articles of Association must be approved, this structure is easier to establish than the limited liability company. To do this, you have to expand your business and have the required license. This establishes the scope of the commercial activities that can be undertaken. Even though this business type is not incorporated locally, it must deposit an amount equal to that required for limited liability companies. This deposit is “blocked” or held until the company gets the certificate of registration, issued by the Ministry of Commerce and Industry.
- Representative office. This structure can represent a technical and scientific office, which allows a manufacturer to use a distributor to provide technical support locally. Typically, these are only allowed by foreign pharmaceutical companies. This structure is not allowed to engage in commercial activity, nor is it allowed to earn revenue. Essentially, the technical and scientific office is only allowed when there are complex products. Another option is a short-term business to fulfil a government contract (temporary company registration). Both forms are limited to the specific reasons it was initiated and cannot involve general promotion or solicitation of services.
Taxes in Saudi Arabia
Residents don’t have personal income taxes. However, taxes are paid for investing in a business. In this case, the tax is based on the share owned by the individual, unless the company is publicly traded. In those cases, an Islamic tax, known as zakat, is applied. Disposing of shares leads to a 20% tax on capital gains. Corporation taxes are based on income at 20%. Importantly, there are no capital or stamp duties, nor are there real property or inheritance taxes in Saudi Arabia.
Factors to Consider
The most important thing to consider are business factors. For example, you’ll want to consider the type of business and industry of interest. Other considerations are existing trade agreements/relationships, and headquarter nationality. If you’re not a Saudi national, you’ll want to hire someone that is to act on your behalf. This is because this individual will know how to best meet the expectations of the local community and how to adhere to cultural requirements. Note though, that about 80% of the labor force in the private sector are non-Saudi. Prior to investing, ask yourself:
- What opportunities exist?
- Are there expected changes to regulations and, if so, what are they?
- What protections exist for my business?
- Are there any incentives for foreign investment?
- Can the capital I put into my business be repatriated from Saudi Arabia?
- What impact is held by the geopolitical environment on the market?
- How politically and financially stable is Saudi Arabia?
- Is Saudi Arabia’s banking and financial system sufficiently developed?
As can be seen, there are many different opportunities for beginning a business in Saudi Arabia. The country’s capital — Riyadh — is a great option for those that have a valuable product/service to offer. However, as can be seen, there are many different things to consider from a legal standpoint, a financial standpoint, and a cultural standpoint. Without effectively researching different opportunities, it will be harder to establish a successful entrepreneurship within Riyadh.
Most importantly, you’ll want to assess your motivations for wanting to establish an entrepreneurship in Saudi Arabia and how it will help you meet your goals.These types of decisions are important because this type of investment is time-consuming and can be very difficult to undertake.
Considering starting an office in Riyadh or have you already made the decision? Contact us to see how we can help.