As Crown Prince Mohammad Bin Salman announced on April 13, 2023, Saudi Arabia will establish four special economic zones (SEZs).

Each SEZ will have a unique focus area. Investors who set up businesses in these SEZs will benefit from a 5% corporate tax rate for the first 20 years,  and they will also enjoy 0% VAT on goods purchased from within the SEZ or from other sources, both domestic and international.

Profits sent abroad will not be subject to withholding tax, and there will be no customs duties on capital equipment and inputs or a deferral for goods within the SEZ Additionally, employees and their families will be exempt from the expat levy.

To oversee and regulate the activities within the SEZs, the Economic Cities and Special Zones Authority (ECSZA) has drafted three sets of regulations: Companies Regulations, Labor Regulations, and Tax & Customs Regulations and these draft regulations are open for feedback and suggestions until May 21, 2023, and are expected to be finalised shortly after.

Provisions Under Companies Regulations

The Companies Regulations draft introduces several new features that differ from the existing Companies Law in Saudi Arabia.

These regulations state that companies in the SEZs will be treated as limited liability companies (LLCs). However, unlike the standard Saudi Companies Law, the capital will be represented through different classes of shares.

All shares must be fully paid up, and their value must not be less than the nominal value set for them this is typically a feature only available to joint stock and simplified joint stock companies under the Companies Law.

Companies must issue share certificates, which can be in either paper or electronic form, to prove ownership and as in most global free zones, the issuance of bearer shares is prohibited. The share transfer is allowed according to the Articles of Association (AoA), and provisions for drag-along and tag-along rights simplify mergers and acquisitions (M&A) activities. 

To streamline the process, once investors submit their applications, the ECSZA’s competent authority will issue trading licenses, and company registrations, and publish the company’s AoA.

A unique feature of the Companies Regulations is allowing companies in the SEZs to suspend their activities for up to 12 months instead of closing down completely.

Similar to the Saudi Companies Law, these regulations permit the establishment of single-person LLCs. Companies within the SEZs or anywhere in Saudi Arabia can also set up branch offices in any of the SEZs.

For in-kind shares, a fair valuation is required to set the share price, and a detailed decision from the manager or board is needed. However, the valuation does not need to be done by an accredited evaluator, and there is no limit on the value of such shares.

Companies must keep registers detailing shareholders, managers, mortgages, debt instruments, financing Sukuk, and meeting minutes. Shareholders and debt instrument holders can inspect these registers, and others can request access for a fee.

Management of the company is determined by the AoA, and the managers or board are empowered to make all decisions, except those reserved for shareholder assemblies by the AoA or the Companies Regulations.

The regulations require managers to be diligent, sincere, loyal, avoid conflicts of interest, and disclose any direct or indirect interests. Unlike the Saudi Companies Law, there is no specific provision allowing managers to undertake company work with shareholder approval.

A simple majority of shareholders present at the general assembly is needed to adopt most resolutions. However, a 75% vote of shareholders present at a special assembly is required for resolutions affecting specific classes of shares. Companies can set higher percentages in their AoA for adopting such resolutions.

Increasing or decreasing capital requires approval by a majority vote of shareholders representing at least 75% of the capital, provided the AoA doesn’t restrict such changes. Decreasing capital involves procedures like publishing the decision, issuing a declaration of solvency by the manager or board, and obtaining creditor approval.

Companies can buy back their shares to reduce capital or hold them as ‘treasury shares,’ as long as not all shares become ‘treasury shares.’

Companies in the SEZs can issue debt instruments and negotiable Financing Sukuk in line with the Saudi Capital Market Law.

A statutory auditor must be appointed, and the financial accounts must include the controlling company’s accounts and the manager’s or board’s report. Auditors cannot provide consultation or management services to the companies they audit.

The process for closing companies and the role of liquidators is similar to the provisions in the Saudi Companies Law.

Penalties for violating the Companies Regulations range from warnings to fines up to SR 1 million and cancellation of registration.

Read More: Top 10 Most Successful Businesses to Start in 2024 in KSA

Provisions Under the Labor Regulations

The drafted Labor Regulations have many similarities with the Saudi Labor Law, but they offer some exceptions and exemptions for companies in the SEZs.

Non-Saudi nationals need work permits as per the Labor Regulations. Companies can transfer or assign employees to another company through the Ajeer platform.

While the regulations allow regular employment for activities listed in the commercial register, companies can also hire workers for shorter durations, where they work half the usual hours or only on certain days of the week.

Companies can hire temporary employees for specific tasks, provided the period doesn’t exceed 90 days, with wages paid based on task completion.

The ECSZA’s competent authority will determine the percentage of non-Saudi employees and Saudization ratios. They will coordinate with the Ministry of Human Resources to set conditions under which non-Saudi employees can work outside the SEZs.

Key provisions such as contract terms, probation, maximum work hours, rest periods, employer and employee obligations, leave entitlements, end of service benefits (EoSB), salary payment frequency, and restrictions on working with competitors are mostly the same as those in the Saudi Labor Law.

The regulations for terminating employment contracts are similar to the Saudi Labor Law, except that termination for valid reasons applies to both definite and indefinite period employment contracts.

As with the Saudi Labor Law, companies must create and share Work Rules Regulations with employees, following a format provided in the regulations, similar to those issued by the Ministry of Human Resources. There is also a specific employment contract form covering all required and optional provisions that companies in the SEZs must follow.

Read More: Advantages of Operating a Free Zone Company in Saudi Arabia

Provisions Under Tax and Customs Regulations

The draft Tax and Customs Regulations focus on how goods delivered to entities in SEZs are treated. Goods supplied from anywhere in Saudi Arabia or from outside the country to entities within an SEZ, or exchanged between entities within the same or different SEZs, will be exempt from VAT, provided they qualify for customs exemption and are related to the entity’s licensed activities.

While Arabic is the official language for communication with the competent department, English will also be accepted alongside Arabic. Documents in English are allowed, but companies may need to provide Arabic translations if requested.

The regulations require the competent authority to issue a detailed guide on procedures for regulating the entry and exit of goods, transportation and ownership of goods, restricted and prohibited goods, manufacturing processes, waste recycling, and goods consumption. They will also provide guidelines on the tax and customs regime for companies in the SEZs.

Exemptions and incentives will not apply if an investor or related person suspends business in the SEZ. If a business is transferred from the main economic areas to an SEZ, the transfer must be disclosed and will be treated as a transaction between related parties.

The competent authority can revoke exemptions and incentives if an investor knowingly provides false information, misuses the law, or helps others obtain exemptions and incentives for ineligible activities. They can also revoke exemptions if an investor makes payments to non-residents on behalf of those not entitled to exemptions.

If exemptions and incentives are revoked, the competent authority will impose taxes and fines for the tax years when the violations occurred.

After the consultation process, these regulations will be promulgated, opening the door for licencing and entity establishment in the Special Economic Zones.

A comprehensive regulatory framework for establishing and running businesses within SEZs is provided by the Regulations. 

Although the regulations are essentially the same as the basic framework for conducting business in the Kingdom, they contain some special provisions about tax-related exemptions and exceptions that have the potential to streamline the establishment of entities in the Special Economic Zone (SEZ) and draw in investment and human resources.

Please do not hesitate to contact us if you have any questions or concerns about how these regulations may affect you or your company. Our group of knowledgeable solicitors will be pleased to help you.