Saudi Anti-Concealment Law: Ensuring Compliance for Chinese Businesses

In recent years, foreign investors, including Chinese nationals, have often used Saudi nominees to conduct business activities in Saudi Arabia, seeking convenience and cost advantages.

However, this practice is strictly prohibited by the Saudi government. Since the implementation of the Anti-Concealment Law in 2004, the Saudi government has been cracking down on nominee shareholding.

On August 19, 2020, a new Anti-Concealment Law was introduced and came into effect 180 days later. Subsequently, on March 12, 2021, the implementation regulations of the law were also enforced, further intensifying the crackdown on hidden commercial activities involving foreign nationals in Saudi Arabia.

1. Background

On June 13, 2022, Saudi Arabia’s Ministry of Commerce announced the conclusion of a five-month special campaign against anti-concealment. The campaign aimed to uncover instances where foreign nationals conducted business activities using Saudi nominees. Many foreign nationals, including Chinese, conducting business in Saudi Arabia, choose to establish companies with Saudi nominees as shareholders and delegate the ownership to them. This practice offers several benefits for foreign investors.

Firstly, Saudi Arabia places restrictions on foreign natural persons owning shares in Saudi companies. Foreign individuals looking to become shareholders in Saudi companies need to obtain “premium residency” in Saudi Arabia, a long-term residency permit. Meeting the specific criteria for this residency, such as investment amounts, employment positions, and professional backgrounds, is often challenging for most Chinese nationals.

Secondly, Saudi Arabia imposes strict capital requirements for foreign-owned investment companies. For example, for foreign companies to establish a trading company in Saudi Arabia, a minimum paid-up capital of 30 million Saudi Riyals is required. In contrast, Saudi nationals or companies do not face such stringent requirements.

Lastly, foreign-owned companies in Saudi Arabia are subject to higher corporate income taxes compared to local Saudi companies. While Saudi companies pay a modest 2.5% religious tax (zakat) annually, foreign-owned companies registered in Saudi Arabia are subject to a 20% corporate income tax. This has led to the prevalent use of nominee shareholding by foreign investors to enjoy better financial returns, resulting in strict government controls.

In the June 2022 crackdown, the Ministry of Commerce conducted 58,000 inspections and investigated enterprises suspected of engaging in commercial concealment. The targeted industries included engineering contracting and construction, wholesale and retail trade of textiles and clothing, transportation, logistics, automotive repair workshops, and spare parts sales.

2. What is Commercial Concealment?

As per the definition of the Anti-Concealment Law, commercial concealment refers to non-Saudi individuals engaging in unauthorized economic activities using permits or licenses obtained through agreements or arrangements, under the pretext of being Saudi nationals.

The elements constituting commercial concealment include: Non-Saudi nationals engaging in economic activities exclusively restricted to Saudi nationals, using licenses or permits obtained by Saudis, to conduct those activities on behalf of non-Saudis, through agreements or arrangements made with Saudis.

The law sets out circumstances where commercial concealment constitutes a criminal offense and attracts criminal liability:

a. Non-Saudis engaging in economic activities in Saudi Arabia for personal profit without obtaining the necessary permits. They use the name of a Saudi national, or use permits issued to Saudis, or register companies or trade names in the name of Saudis.

b. Non-Saudis using a Saudi national’s bank account in Saudi Arabia to conduct business activities without obtaining the necessary permits.

c. Aiding, abetting, or advising in the commission of commercial concealment crimes.

Commercial concealment that does not meet the criteria for criminal offense falls under general violations and incurs fines, including:

a. Companies providing non-Saudis with unauthorized means to maintain absolute control over the company.

b. Non-Saudis owning or using unauthorized means to have absolute control over a company.

c. Companies using accounts other than their own for transactions related to their economic activities.

3. Dealing with the Anti-Concealment Law

The most common form of commercial concealment is nominee shareholding, where foreign investors appoint Saudi nominees as shareholders. Is it possible for foreign investors to appoint Saudi agents as representatives to sell goods in Saudi Arabia without violating the Anti-Concealment Law?

On July 22, 1962 (1382 Hijri), Saudi Arabia enacted the Commercial Agency Law, reserving the profession of commercial agents (distributors) exclusively for Saudi nationals. Consequently, foreign nationals can legally appoint Saudi agents as distributors of their products.

The Anti-Concealment Law imposes severe penalties for commercial concealment, including up to five years of imprisonment and fines of up to 5 million Saudi Riyals (approximately 1.3 million USD). Additionally, non-Saudi nationals found guilty of concealment will be deported from Saudi Arabia.

For foreign investors already suspected of commercial concealment, the Saudi Ministry of Commerce has issued “Regulations for Correcting Illegal Acts of Concealment.” It requires them to correct their actions within a certain period using one of the following methods:

a. Establishing a partnership between a Saudi and non-Saudi company, with the foreign company officially becoming a shareholder in the Saudi company.

b. Registering a company in the name of a non-Saudi national.

c. Saudi companies continuing their economic activities by adding new partners (Saudi nationals or licensed foreign investors).

d. Saudi nationals selling or transferring the enterprise involved in commercial concealment to the foreign company through regular procedures or dissolving the company.

e. Non-Saudi nationals obtaining Saudi premium residency under the Residence Law and participating in business using that status.

f. Non-Saudi nationals permanently leaving Saudi Arabia.

4. Conclusion

For Chinese investors, conducting business in Saudi Arabia using Saudi nominees may offer certain conveniences and cost advantages. However, we must recognize that this practice violates Saudi government laws and regulations, and the government is actively cracking down on commercial concealment.

As foreign investors, especially Chinese investors, we must abide by Saudi Arabia’s laws and regulations to ensure that our business activities are legal, transparent, and sustainable. While pursuing commercial interests, adherence to international laws and ethical principles should be our guiding principle. Only by complying with relevant regulations can we build trustworthy, stable, and sustainable business relationships, achieving long-term development goals.

Therefore, Chinese investors must act cautiously when doing business in Saudi Arabia, adhere to local laws, respect the decisions of the Saudi government, and build trustworthy and transparent partnerships with their collaborators to ensure successful and sustainable investment and development.