On April 13, 2023, Crown Prince Mohammad Bin Salman announced the creation of four new special economic zones (SEZs) in Saudi Arabia.

Each SEZ will concentrate on a specific industry, offering investors who establish businesses within these zones a 5% corporate tax rate for the first 20 years. Additionally, there will be a 0% VAT on goods purchased by these entities from within the SEZ or from other domestic and international sources. Investors will also benefit from a 0% withholding tax on repatriated profits, deferred customs duties for goods within the SEZ, or a 0% customs duty on capital equipment and inputs within the SEZ, and an exemption from the expat levy for employees and their families.

To manage and regulate the economic operations within these SEZs, the Economic Cities and Special Zones Authority (ECSZA) has released drafts of three regulatory frameworks: Companies Regulations, Labor Regulations, and Tax & Customs Regulations. These regulations will apply to all entities established within the SEZs.

The draft regulations are open for public feedback and suggestions until May 21, 2023, and the final regulations are expected to be enacted shortly after that.

Provisions Under Companies Regulations

The draft Companies Regulations contain numerous features that differ significantly from the Kingdom’s Companies Law.

The Companies Regulations mandate that firms established in the SEZs will be treated as limited liability companies (LLCs). However, unlike the Saudi Companies Law, the capital will be represented by various classes of shares. These shares must be fully paid up, and their value cannot be less than the nominal value set for the shares, a mechanism currently available only to joint stock and simplified joint stock companies under the Companies Law.

Companies will need to issue share certificates in either paper or electronic format as proof of share ownership. As is common in many free zones worldwide, the Regulations prohibit the issuance of any bearer shares. The transferability of shares, in accordance with the provisions in the Articles of Association (AoA), and the inclusion of drag-along and tag-along rights simplify the process of mergers and acquisitions. Extending the concept of a one-stop solution, upon receiving an application from investors, the competent authority established by the ECSZA will issue a trading license and company registration, as well as deposit and publish the AoA of the company.

A unique feature of the Companies Regulations is the ability for companies in the SEZs to suspend their operations for up to 12 months. This provision allows companies to temporarily halt activities for any reason rather than opting for full closure.

Similar to the Saudi Arabian Companies Law, the Companies Regulations allow for the establishment of single-person LLCs and permit companies within any of the four SEZs, or those already existing elsewhere in Saudi Arabia, to set up branch offices within the SEZs.

While the Companies Regulations require a fair valuation of in-kind shares for determining share price and mandate a detailed decision by the manager or board regarding the valuation, they do not require the valuation to be conducted by an accredited evaluator nor set a ceiling for such shares.

Companies must maintain registers detailing shareholders, managers, mortgages, debt instruments, and Financing Sukuk, as well as minutes of meetings. Besides allowing shareholders and holders of debt instruments to inspect the registers, any person may request the competent department to inspect the registers for a fee.

As with the Saudi Companies Law, the Companies Regulations delegate the management of the company to be defined by the AoA, empowering managers or the board to make all decisions except those reserved by the AoA or Companies Regulations for the shareholders’ assemblies.

In addition to prescribing minimum qualifications for a person to be appointed as a manager or board member, the Companies Regulations require managers to be diligent, sincere, and loyal to the company, avoiding conflicts and disclosing all direct or indirect interests. Unlike the Saudi Companies Law, however, there is no specific provision allowing managers to undertake company business with shareholder approval.

With a few exceptions, the Companies Regulations require a simple majority of shareholders present at the general assembly to pass resolutions and a 75% vote of shareholders present at a special assembly of a particular class of shares to pass resolutions affecting those shareholders’ rights. Companies may set higher percentages in the AoA for adopting such resolutions.

Changes to capital, whether an increase or decrease, must be approved by a majority vote of shareholders representing no less than 75% of the capital, provided the AoA does not restrict such changes. Capital decreases require specific procedures, including publishing the decision in the required format, issuing a decision by the manager or board that the company is not bankrupt, and obtaining creditor approval.

The Companies Regulations permit a company to buy back its shares to either reduce the capital or hold the shares as ‘treasury shares,’ provided the buy-back does not result in all shares becoming ‘treasury shares.’

Like companies formed outside the SEZs, those set up within the SEZs can issue debt instruments and negotiable Financing Sukuk in accordance with the Saudi Capital Market Law.

Companies must appoint a statutory auditor and include the accounts of the controlling company and a report from the manager or board in the financial accounts of the SEZ-based company. The competent authority may modify certain conditions and grant exemptions from these requirements. Specifically, auditors are prohibited from providing any consultation or management services to companies whose accounts they audit.

Provisions related to company closure processes, the role and powers of liquidators, are similar to those in the Saudi Companies Law.

Penalties for violating the Companies Regulations range from simple warnings to fines of up to SR. One Million and cancellation of registration.

Provisions Under the Labor Regulations

The provisions in the draft Labor Regulations are largely similar to those found in the Saudi Labor Law, but there are specific exceptions and exemptions for companies established within the SEZs.

Non-Saudi nationals must obtain work permits as outlined in the Labor Regulations before being employed. Companies can transfer or assign employees to other companies using the Ajeer platform.

While the Labor Regulations allow for the employment of regular staff to carry out activities listed in the commercial register, they also permit hiring workers for specific durations, either for half the usual working hours or on certain days of the week.

Companies can also employ temporary workers for specific tasks during set periods, provided the duration does not exceed 90 days. Wages are then paid based on the completion of the assigned work.

The Labor Regulations task the competent authority within the ECSZA with determining the percentage of non-Saudi employees and Saudization ratios. The competent authority must coordinate with the Ministry of Human Resources to set conditions under which non-Saudi employees can work outside the SEZs.

Provisions regarding contract terms, probation, maximum working hours per day or week, rest periods, employer and employee obligations, leave entitlements, end of service benefits (EoSB) calculations, salary payment frequency, and restrictions on working with competitors are mostly consistent with the Saudi Labor Law.

Similarly, termination provisions align with those in the Saudi Labor Law, except that the Labor Regulations do not limit terminations for valid reasons to indefinite period contracts only.

As required by the Saudi Labor Law, companies must draft and circulate Work Rules Regulations among employees, in the format specified by the Regulations, similar to those issued by the Ministry of Human Resources. A specific employment contract form covering all mandatory and optional provisions must be used by all companies within the SEZs.

read more: How to Setup Joint Venture Company in Saudi Arabia

Provisions Under Tax and Customs Regulations

The draft Tax and Customs Regulations primarily address the treatment of goods delivered to entities in the SEZs. These regulations state that goods supplied from any part of the Kingdom or from outside Saudi Arabia to entities within the SEZ, or exchanged between entities within the same or different SEZs, will be exempt from VAT, provided the goods fall under the ‘customs exemption’ category and are related to the entity’s licensed activities.

Although Arabic will be the official language for communication with the competent department, the use of English will also be accepted alo

ngside Arabic, including documents in English. If required, companies may need to provide Arabic translations of documents.

The Regulations mandate the issuance of a detailed guide by the competent authority on procedures for regulating the entry and exit of goods, transportation and ownership of goods, restricted and prohibited goods, manufacturing processes, and waste recycling and consumption of goods. Detailed guidelines regarding the applicability of the tax and customs regime for SEZ companies will also be provided.

The implementation of these Regulations following the consultative phase will facilitate the licensing and establishment of entities in the SEZs.

These Regulations offer a comprehensive regulatory framework for the creation and operation of companies within the SEZs. Although they are largely similar to the existing regulatory regime for commercial activities in the Kingdom, they include distinctive features related to tax exemptions and exceptions. These features are designed to streamline the process of setting up entities in the SEZs and to attract investment and human capital.

If you have any questions or concerns about how these Regulations may impact you or your business, please feel free to contact us. Our team of legal experts is ready to assist you and provide the necessary guidance.

Ease of Establishment of Entities

The ECZA has expressed its commitment to supporting investors throughout the entire investment process, offering a streamlined application and approval process along with an integrated One-Stop-Shop (OSS) service. This OSS will serve as the sole resource investors need to access all SEZ services and support. The OSS service encompasses property development, real estate services, company licensing and registration, employment services, tax and customs services, legal and compliance services, and residential services.

To ensure a swift and straightforward application and approval process, international best practices have been adopted. ECZA’s goal is to provide a smooth experience for establishing a business in KSA, significantly reducing the time frame and regulatory requirements. The simplified licensing process through the SEZ OSS minimizes interactions with multiple entities. A high-level summary of the procedure is outlined below (with further rules and details expected, which may vary for each SEZ):

• Complete and sign a letter of assignment for a representative
• Obtain attestations of documents from the relevant government authorities
• Choose up to five commercial names (in order of preference)
• Complete the application, pay the fees, and submit licensing and registration forms
• Confirm land assignment
• Complete the articles of association/constitutional document
• Receive licenses and registration certificates for the entity.

Key Benefits Offered by SEZs

SEZs provide a variety of advantages for participants, based on current guidelines. These include:

• Corporate Income Tax: A reduced corporate income tax rate of 5% for up to 20 years.
• Withholding Tax: A permanent 0% withholding tax for the repatriation of profits from a SEZ to foreign countries.
• Customs Duties: A 0% customs duties deferral for goods within the SEZ.
• Expat Levy: Exemptions from the expat levy, ensuring fee exemptions for employees and their families in the zone.
• Value-Added Tax (VAT): A 0% VAT rate for all goods exchanged within the SEZ and between different zones.
• Foreign Nationals: Flexible and supportive regulations for foreign talent during the first five years.

Further guidance and regulations for the various SEZs are expected to be announced in the coming months.

Investors looking to establish entities in KSA should assess whether their business objectives align with setting up a legal entity within an SEZ or if they require a separate legal entity onshore in KSA (i.e., outside of an SEZ), as the licenses and benefits may be restricted to activities conducted within an SEZ.

Our corporate team in Riyadh has extensive experience assisting international and local clients with the establishment of entities in KSA and advising on structuring and regulatory matters. We facilitated the establishment of one of the first companies in the ILBZ, working closely with regulatory authorities on the various procedural and practical aspects of setting up an entity in an SEZ.

FAQs

1. What are the main benefits of setting up an entity in an SEZ in Saudi Arabia?

Answer: SEZs in Saudi Arabia offer numerous advantages, including a reduced corporate income tax rate of 5% for up to 20 years, a permanent 0% withholding tax on the repatriation of profits, deferred or 0% customs duties for goods within the SEZ, exemptions from the expat levy for employees and their families, a 0% VAT rate for all goods exchanged within and between SEZs, and flexible regulations for foreign talent during the first five years.

2. How do the SEZ regulations differ from the regular Saudi regulations for businesses?

Answer: While the SEZ regulations share many similarities with the general Saudi business regulations, they include unique features such as specific tax exemptions, simplified procedures for setting up and operating businesses, and additional incentives aimed at attracting investment and skilled labor. These differences are designed to streamline operations and enhance the attractiveness of SEZs.

3. What is the role of the Economic Cities and Special Zones Authority (ECSZA) in the SEZs?

Answer: The ECSZA is responsible for regulating and overseeing economic activities within the SEZs. This includes issuing licenses, setting up regulatory frameworks, coordinating with other government bodies, and providing support and guidance to businesses. The ECSZA also ensures that SEZs operate efficiently and in compliance with Saudi laws.

4. Can foreign nationals work in SEZs, and what are the regulations governing their employment?

Answer: Yes, foreign nationals can work in SEZs. The regulations offer flexible and supportive conditions for employing foreign talent, especially during the first five years. Companies must obtain work permits for non-Saudi nationals, and the ECSZA will coordinate with the Ministry of Human Resources to establish conditions under which non-Saudi employees can work outside the SEZs.

5. What steps are involved in establishing a company within an SEZ?

Answer: Establishing a company within an SEZ involves several steps, including:

1. Completing and signing a letter of assignment for a representative.
2. Obtaining document attestations from relevant government entities.
3. Selecting up to five commercial names (in order of preference).
4. Completing the application, paying fees, and submitting licensing and registration forms.
5. Confirming land assignment.
6. Completing the articles of association/constitutional document.
7. Receiving licenses and registration certificates for the entity.

6. Are there any specific tax advantages for companies operating within SEZs?

Answer: Yes, companies in SEZs benefit from significant tax advantages, including a reduced corporate income tax rate of 5% for up to 20 years, a 0% withholding tax on profit repatriation, deferred customs duties for goods within the SEZ, and a 0% VAT rate on intra-SEZ and inter-SEZ goods.

7. What happens if a business in the SEZs suspends its operations?

Answer: If a business in an SEZ suspends its operations, the exemptions and incentives granted to it will no longer apply. This includes tax benefits and other regulatory advantages. Businesses must disclose such suspensions, and the competent authority may revoke benefits if the suspension is not managed appropriately.

8. How does the ECSZA ensure compliance with the SEZ regulations?

Answer: The ECSZA monitors and ensures compliance through various mechanisms, including regular audits, inspections, and reviews of company operations within the SEZs. It also provides detailed guidelines and support to help companies understand and adhere to the regulations. Non-compliance can result in penalties, fines, and the revocation of incentives.

9. What are the penalties for violating the SEZ regulations?

Answer: Penalties for violating SEZ regulations range from warnings to fines of up to SR 1 million and cancellation of the company’s registration. The exact penalty depends on the severity and nature of the violation, including providing false or misleading information, misapplying the law, or misusing exemptions and incentives.

10. How will the new SEZ regulations affect existing businesses in Saudi Arabia?

Answer: Existing businesses in Saudi Arabia can choose to establish new entities within SEZs to take advantage of the benefits offered. However, they must evaluate whether their business objectives align with operating in an SEZ. The regulations primarily impact new entities set up within SEZs, but existing businesses can benefit by setting up branches or new operations in these zones.

read more: 5 Regulatory Shifts Shaping Saudi Arabia