Saudi Arabia introduced a new company law effective 19 January 2023 which replaced the earlier company law issued in 2015. The new law applies to all new companies incorporated on or after 19 January 2023. For existing entities, a compliance grace period of two years is provided for implementing required changes in their corporate documents or restructuring their operations as per the new law. However, the grace period does not apply to provisions for crimes, violations and penalties provided in the new law

The new Saudi Arabian law provides for four main business forms for foreign investors. These include:

• Limited liability company (LLC);
• Joint stock company (JSC);
• Simplified joint stock company (SJSC) (newly added); and
• Partnership company (General partnership and Limited partnership).

Compared to the previous law, joint venture companies are no longer allowed under the new law.

Limited Liability Company

The most common business form used by investors in Saudi Arabia is the Limited Liability Company (LLC). The formation of an LLC and its business scope must be approved by the Saudi Arabian General Investment Authority (SAGIA).

Key aspects of an LLC include:

• Formed by a minimum of 2 shareholders with no maximum limit (a maximum cap of 50 shareholders applied until 18 January 2023);
• Shareholders may be natural persons or legal entities;
• A single-shareholder LLC cannot own another single-shareholder LLC. This restriction is removed effective 19 January 2023;
• Shareholder's liability is limited to the extent of their shares;
• Minimum capital requirements:
  • SAR 25 million for agricultural projects;
  • SAR 1 million for industrial projects; and
  • No minimum set for other areas, but the authorities are empowered to set required capital amounts on a case-by-case basis;
• Effective 19 January 2023, restrictions on financing and permission to raise capital through the issuance of sukuks, debt instruments, or financing instruments are removed;
• 10% of the net profits of an LLC must be set aside in a reserve fund until the reserve equals 30% of the company's capital amount. Effective 19 January 2023, there is no minimum reserve requirement and companies can opt to create reserves as they may require.

Joint Stock Companies

Joint stock companies (‘JSCs’) are like public limited companies incorporated and are regulated under the regulations of the Ministry of Commerce and Industry. There are two types of JSC, closed JSCs and public JSCs . Only public JSCs can be listed on the Saudi stock exchange; they are hence subject to higher degrees of oversight, including by the Capital Market Authority

Key aspects of JSC include:

• JSCs can be established with only 1 shareholder (until 19 January 2023, at least two shareholders were required, except for closed JSCs with a capital of at least SAR 5 million or a JSC established by a government entity);
• Minimum capital requirement of SAR 500,000 (minimum capital of SAR 5 million applied for single shareholder JSCs unless established by a government entity, until 18 January 2023). 25% of the capital must be paid up at the time of incorporation and the balance within 5 years;
• Issue of a different class of shares such as ordinary, preference, and redeemable shares, with varying rights and obligations, is allowed;
• Shareholder's liability is limited to the extent of their shares;
• There is no lock-in period for the transfer of the founder’s shares (a 2-year lock-in period applied until 18 January 2023). The new law also allows an IPO at different stages, including the incorporation stage;
• A minimum of 3 directors are required with no maximum limit (a maximum cap of 11 directors applied until 18 January 2023); and
• 10% of the net profits of a JSC must be set aside in a reserve fund until the reserve equals 30% of the company's capital amount. Effective 19 January 2023, there is no minimum reserve requirement and companies can opt to create reserves as they may require.

Simplified Joint Stock Company

Effective 19 January 2023, a new form of company, the simple joint stock company (‘SJSC’) is introduced in the new company law, to meet the needs and requirements of a fast-growing start-up and venture capital market. The SJSC is a flexible corporate form that can be established by one or more persons, with no minimum capital requirements. SJSCs also allow for simpler management structures, including that a single shareholder can form and run an SJSC as a manager.

Partnership Company

There are two types of partnerships, i.e., general partnership and limited partnership. A limited partnership is comprised of at least one general partner and other limited partners. The general partners are fully liable for partnership debts, while the limited partners are liable only to the extent of their capital contributions. Partnerships are transparent for income tax purposes and their income is taxed in the hands of the partners with respect to their shares of the partnership’s taxable income.

Joint Venture Company (Removed Effective 19 January 2023)

A joint venture is a company with no separate legal entity, where two or more parties combine resources to attain a specific goal. Every contributor is liable for their undertaking in the venture unless the contract of the venture states otherwise. The contract must specify the rights and liabilities of partners and the manner of distribution of profits and losses. Effective 19 January 2023, no new joint venture company can be formed under the new company law.

Other Forms of Doing Business

Branch

Foreign companies are allowed to establish a branch in Saudi Arabia. The process is usually simpler than establishing an LLC. As with an LLC, the formation and business scope of a Branch must be approved by the SAGIA.

Key aspects of a branch include:

• Not considered a separate legal entity from its parent company
• The branch manager must be a Saudi national, or Saudi resident (resident permit holder)
• Same capital requirements as an LLC, but no reserve fund requirements; and
• May not be formed solely to perform promotional activities

Technical Scientific Services Office

A technical scientific services office (TSO) is a special business type used to perform liaison activities between a foreign company and its Saudi distributor and the local market. The form is typically limited to pharmaceutical companies, but in certain cases other company types may establish a TSO with approval.

Key aspects of a TSO include:

• Not considered a separate legal entity from its parent company
• Activities limited to liaising, conducting market research for its head office, and performing technical research in relation to its products
• TSOs have no capital requirements; and
• Restricted on the number of employees it may have, usually 5 to 10, subject to approval

Temporary Commercial Registration

A temporary commercial registration (TCR) is a limited-term business form that is used for fixed government contract work.

Key aspects of a TCR include:

• Can only be formed if a contract has been entered into
• Limited to activities directly related to the relevant contract for which it was formed
• Are forbidden from conducting any promotional or market research activities in Saudi Arabia; and
• TCRs have no capital requirements