Setting Up a Branch or Subsidiary in Saudi Arabia: Guidance for UAE-Based Companies

Published On - April 30, 2024

Manar Al Dowikat KSA

Expanding your business from UAE to KSA

Introduction

Expanding a business to a new market is a significant decision that requires preparation and consideration. Understanding the business environment and legal process of the new target market is a crucial step for a successful expansion of the business.

Understanding the Business Environment in Saudi Arabia

Saudi Arabia is a country located in the Arabian Peninsula, and it’s the largest oil-producing country in the world. The legal system in Saudi Arabia is the Islamic (Shari’a) legal system, with some references and elements from the Egyptian, French and customary law. Saudi Arabia’s economy is going through a transformation, as the Kingdom revealed the ambitious 2030 vision, that aims to raise the non-profit sector’s contribution to GDP, raise the government’s ranking in several areas, improve business climate for small and medium enterprises and to increase non-oil revenue.

Legal and Regulatory Framework

Companies that are located in UAE are interested to expand their business to Saudi Arabia, this is because the legal framework in Saudi Arabia is similar to the legal framework used in UAE. The Saudi Council of Ministers approved the new KSA Companies Law 2022 (that replaces the previous 2015 Companies law) in Saudi Arabia. This new regulation aligns with the kingdom’s vision of 2030, for it aims to attract foreign investment, boosts flexibility and strengthens the private sector in the Kingdom.

As per Article 4 of the new Companies Law of 2022 in Saudi Arabia allows investors to choose any of the following Company Types:

  • General Partnership
  • Limited Partnership
  • Joint-stock company
  • Simplified Joint Stock Companies
  • Limited liability company

Settling disputes:

As per Article 153, except for criminal acts, the company my resolve any disputes arising between shareholders or between the company and its president, manager, or any board members by arbitration or other alternative methods of resolution.

Employment Law:

Employment law in Saudi Arabia are rapidly changing, and Saudization laws are working on re-shaping the labour market, which forces the companies to make changes within their hiring strategies to align with the new local regulation. Additionally, the employment contract must be compatible with the employment law in Saudi Arabia. The contract must be in issued in two (2) copies; So that there is a copy in the possession of each party to the contract.

Advantages of Expanding to Saudi Arabia

Companies that are located in UAE have several appealing reasons to expand their business to Saudi Arabia, such as:

  • Saudi Arabia has a growing economy that is not only driven by oil, instead it is diversifying into other sectors such as manufacturing, technology, and tourism. This includes 2030 Vision of the Kingdom that includes a long-term plan aimed at reducing the country’s dependence on oil, promoting private sector growth, and enhancing the business environment.
  • Saudi Arabia’s location is in the Middle East as well, which provides an access to key markets in the region including the Gulf Cooperation Council (GCC) countries, North Africa, and parts of Asia.
  • Infrastructure development is given incredible consideration in Saudi Arabia, including transportation, logistics, and telecommunications, which makes it easier for companies to operate efficiently and effectively within the country.
  • Saudi Arabia holds many available choices in industries such as construction, healthcare, renewable energy, and entertainment, which acts as a potential opportunity for UAE-based companies to improve its business and expand its operation.
  • And last but not least, Saudi Arabia is bordered with UAE and it is convenient for UAE companies to run the business in both countries simultaneously. 

Practical Considerations and Challenges

While expanding a Business from UAE to Saudi Arabia may appear similar in terms of Business Environment and Legal Framework, still, there are distinct challenges that company owners should be mindful of, such as:

  • Legal Requirements:

UAE companies can setup their presence in KSA only by way of establishing their branch or subsidiary company. To be eligible, the UAE company has to be existent for at least one year. The basic requirements to establish a branch or subsidiary in KSA, the UAE company has to prepare following documents:

  1. Trade License
  2. Memorandum of Association
  3. Financial Audit Report for last financial year
  4. Power of Attorney

Documents may slightly vary based on where the UAE company is registered (i.e. free zone or mainland). All above documents have to be attested by UAE Ministry of Foreign Affairs (MOFA) and Saudi Embassy in the UAE before sending to KSA for further process.

Moreover, UAE companies need to be aware that, unlike in UAE where registration is done in few government departments, the company registration process in KSA involves registration in many governmental departments and takes longer time.  

  • Language and Communication:

Arabic is the official language of Saudi Arabia, and while English is widely spoken in business settings, language barriers may still exist, particularly in more traditional sectors. Having bilingual staff or translators can facilitate communication.

  • Cultural Awareness

Saudi Arabia is a Muslim country that inherits the Islamic heritage and culture, and Islamic laws are being applied within the Kingdom. This means that the culture will differ significantly from Western countries, for the market may be very sensitive and strict in terms of branding and material content. Understanding local customs, traditions, and business etiquette can help the company to develop in the market and to conduct successful business operations.

  • Saudization

In 2011, the Ministry of Labour in Saudi Arabia introduced a policy called “Saudization”. Which focuses on reducing the dependency on foreign workers within the country and to make it obligatory for companies to hire Saudi nationals. The policy restricts companies to fulfill specific quotas of Saudi employees, in a percentage that varies based on the industry.

  • Regional Headquarters Program

Starting January 1st, 2024, the Ministry of Investments (MISA) announced the Regional Headquarters (RHQ) Programme which prevents all goverments entities to contract with companies that do not have their RHQ in Saudi Arabia, with only limited exception. This programme aims to attracts multinational companies to establish their regional headquarters in the KSA.

Conclusion

There are appealing reasons for UAE companies to expand their businesses to KSA by way of establishing their branch, representative office or subsidiary. Conducting a business in Saudi Arabia may be similar to UAE’s in terms of presenting unique opportunities and challenges for companies seeking expansion. However, process of setting up and timelines are quite different. It is crucial to work with legal experts who understand both UAE and Saudi legal requirements for setting up a business. With our assistance in CorpLex, and the guidance of our legal expertise, you will be able to overcome these obstacles to ensure a seamless expansion of your UAE business to the Kingdom of Saudi Arabia.