Navigating Trade Company Establishment in Saudi Arabia: Opportunities and Challenges for Chinese Businesses

Establishing a trade company in Saudi Arabia has become a topic of significant interest for many Chinese enterprises.

With the continuous development of the Saudi economy and the advancement of its foreign investment policies, numerous business opportunities are emerging in this Middle Eastern powerhouse. The recent publication of investment guidelines by the Saudi Ministry of Investment (MISA) has shed light on the capital requirements for foreign investors seeking to establish a trade company in the country. The minimum registered capital required is 30 million Saudi Riyals, approximately 57 million Chinese Yuan.

This measure has garnered widespread attention and interest due to the high financial barrier it presents for Chinese companies. In light of this, finding reliable Saudi partners for cooperation may offer a more viable option. This article is the 16th installment in the series “Saudi Business Guide” by the Sino-Arab Industrial Research Institute, delving into the industrial policies, laws and regulations, industry trends, market demand, competitive landscape, and potential business opportunities in investment, trade, and engineering construction fields between China and Saudi Arabia.

1. Minimum Capital Requirements

Saudi Arabian company law does not explicitly stipulate a minimum capital requirement. Instead, the government determines the amount of subscribed capital based on the business activities and equity structure of the company. According to the regulations of the Saudi Ministry of Investment (formerly Saudi Arabian General Investment Authority – SAGIA), the minimum registered capital requirements for companies under specific business categories are as follows:

a. Commercial (Joint venture): Minimum 25% ownership by Saudi shareholders, and foreign shareholders should contribute no less than 20 million Saudi Riyals.

b. Commercial (100% foreign-owned): Minimum initial registered capital of 30 million Saudi Riyals, with a commitment to invest at least 200 million Saudi Riyals within the first five years of the company’s establishment.

c. Service/Property Investment Projects: 30 million Saudi Riyals.

d. Service/Real Estate Financing Projects: 200 million Saudi Riyals, with Saudi shareholders holding a 40% stake.

e. Service/Transport: 500,000 Saudi Riyals.

f. Contracting: 500,000 Saudi Riyals (subject to income/assets requirements).

Based on the above, establishing a trade company in Saudi Arabia requires a minimum registered capital of 30 million Saudi Riyals, equivalent to approximately 57 million Chinese Yuan, which poses a significant financial challenge for most Chinese companies. It is important to note that this capital requirement only applies to companies established by foreign investors and not to Saudi nationals setting up their businesses.

2. Using Saudi Nominee Shareholders

Many foreign nationals, including Chinese, conducting business in Saudi Arabia opt to establish companies with Saudi nominees as shareholders, allowing them to benefit from certain advantages:

Firstly, Saudi Arabia restricts foreign natural persons from owning shares in Saudi companies. Foreign individuals wishing to become shareholders in Saudi companies need to obtain “premium residency” in Saudi Arabia, which is a long-term residency permit. However, this requirement is often challenging for most Chinese nationals to fulfill, as it entails meeting specific criteria related to investment, employment, professional background, and more.

Secondly, Saudi Arabia imposes strict capital requirements for foreign-owned investment companies. For instance, for a foreign company 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.

Using Saudi nominees to hold shares allows foreign investors to enjoy better financial returns and evade these challenges. However, it is crucial to note that this practice, commonly known as nominee shareholding, is illegal and even considered a criminal offense in Saudi Arabia.

3. Anti-Concealment Law

To combat commercial concealment, the Saudi government introduced the Anti-Concealment Law in 2004 and has since been cracking down on nominee shareholding. On August 19, 2020, a new Anti-Concealment Law was enacted and took effect 180 days after its announcement. On March 12, 2021, the implementation regulations of the new law were also enforced, further strengthening the crackdown on foreign nationals engaging in hidden business activities in Saudi Arabia.

Commercial concealment involves non-Saudi individuals obtaining licenses or permits that are exclusively reserved for Saudi nationals to conduct specific economic activities. This can include arrangements or agreements between Saudis and non-Saudis for unauthorized activities.

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

Chinese companies seeking business opportunities in Saudi Arabia can consider appointing Saudi agents to act on their behalf as authorized distributors. The Commercial Agency Law, enacted on July 22, 1962 (1382 Hijri), exclusively reserves the profession of commercial agents (distributors) for Saudi Arabian nationals. Consequently, foreign nationals can legally appoint Saudi agents to handle the distribution of their products.

Conclusion

In conclusion, understanding the conditions and limitations for establishing a trade company in Saudi Arabia is crucial for Chinese enterprises. While the high capital requirements and restrictions present challenges, collaborating with reliable Saudi partners can offer potential solutions. Engaging Saudi agents as distributors can be a more accessible option, complying with the provisions of the Commercial Agency Law. Furthermore, the Saudi government’s strict measures against commercial concealment underscore the importance of adhering to the country’s laws and regulations. By understanding and complying with Saudi Arabia’s business regulations, Chinese companies can seize business opportunities in this Middle Eastern giant, fostering growth and success for their internationalization strategies.