Saudi Arabia's updated Investment Law: an overview and comparative analysis

The Kingdom of Saudi Arabia (the “KSA”) has issued the updated Investment Law on 11 August 2024, pursuant to Royal Decree No. M/19, as published by Umm Al-Qura News, the official gazette of the Kingdom of Saudi Arabia (the “Law” or the “Updated Investment Law”). The Law will take effect 180 days following its publication, following which it shall repeal the Foreign Investment Law of 2000, issued pursuant to Royal Decree No. M/1 dated 5/1/1421H (the “Foreign Investment Law”) and its executive regulations issued by the Resolution No. (2/74) dated 12/5/1435H of the Board of Directors of the General Authority for Investment. The implementing regulations to the Law (the “Regulations”) shall be issued by the KSA Ministry of Investment (the “Ministry”) at the same time as the Law comes into force.

The Law seeks to develop and enhance the competitiveness of the investment environment in the KSA, contribute to economic development and create job opportunities by providing an attractive investment climate.  In this context, the primary objectives of the Law are as follows:

1. facilitating the establishment of investments, ownership of assets therein and the exit therefrom or liquidation thereof;
2. guaranteeing and promoting the rights of investors;
3. guaranteeing equal treatment for local and foreign investors;
4. ensuring transparent, efficient and fair procedures for investors and their investments; and
5. promoting the principle of competitive neutrality and fairness and ensuring equal opportunities in investments.

Comparison between the Law and the Foreign Investment Law.

We set out below the key differences between the Law and the Foreign Investment Law:

Summary of Key Points:

Investment and Capital:

The Law offers greater clarity on the treatment of capital and investment by defining the terms ‘capital’ and ‘investment’ specifically:

• Capital has been defined to mean any asset which has a material value, whether cash, in-kind, or intangible, as specified in the Regulations, including the following in particular: (i) company shares and interests; (ii) contractual rights; (iii) fixed or movable assets; (iv) intellectual property rights; and (v) rights granted under any law, such as licenses, permits, or the like.  However, capital shall not include loans, bonds, financing sukuk, and public and private debt instruments.
• Investment has been defined to mean the use of capital to establish, expand, develop, finance, manage, or partially or fully own an investment project in the KSA for the purpose of economic gain.

This is a promising development, facilitating investors in structuring transactions and providing more flexibility in deal-making.

Fair treatment and protection against expropriation:

Article 4 of the Law provides that all investors shall be treated fairly and local investors (i.e. a natural or legal person of Saudi nationality who engages in investment) and foreign investors (i.e. a natural or legal person who engages in investment and who is not deemed a local investor in accordance with the provisions of the Law ) shall be treated equally, under similar circumstances.

The Law also stipulates that an investors' investment may not be fully or partially confiscated except pursuant to a final judicial ruling, nor may such investment be directly or indirectly expropriated except for public interest, in accordance with legal procedures, and in return for a fair compensation.  By ensuring investors’ comfort with their investments and capital protection, this provision will substantially aid in accelerating foreign investments.

Repatriation of Funds:

Article 4 of the Law provides that the investor shall have the right to transfer his funds within or outside the KSA without delay. This shall include but shall not be limited to: (i) transferring the proceeds of his investment and the profits gained therefrom; and (ii) the proceeds of the sale or liquidation thereof, through legal channels using any recognised currency (i.e. any currency recognised by the Saudi Central Bank) and disposing of such funds through any other lawful means.

Further, the investor shall: (i) have the right to manage his investment; (ii) dispose of such investment in accordance with the law; (iii) own any property necessary for the conduct of his business; and (iv) have protection of their intellectual property and trade secrets.  The competent authority shall facilitate and provide the necessary support to achieve the above objectives.

Investment Incentives:

Article 6 of the Law permits any ministry or public agency with an independent legal personality to grant investment incentives to investors in accordance with objective and fair eligibility criteria, with the Regulations to specify provisions necessary to implement this.

This means any KSA ministry or public agency will be able to formulate incentives or grant exemptions to attract investment, and supports the KSA Vision 2030 by giving greater flexibility to various KSA ministries and public bodies in different administrative regions as well as industry sectors to achieve their growth objectives.

The Regulations will provide guidance and clarity as to how this is intended to be achieved.

Registration:

Article 7 of the Law empowers the Ministry to establish a national register for investors that will contain information and data related to their investments. The Ministry shall manage/update the register and maintain its confidentiality. It further requires foreign investors to register with the Ministry prior to engaging in any investments except for investments in securities that are subject to the KSA Capital Market Law. It also indicates that all information and data related to the investments for both local and foreign investors will be held in the register which shall be maintained by the Ministry and will be updated with the support of other KSA competent authorities as required by the Regulations.

This is an interesting development because for the first time it appears that the investments of local KSA investors will be enrolled on an investment register maintained by the Ministry, which has historically acted as the KSA authority responsible only for foreign investment, as well as the issuance of foreign investment licenses to foreign investors wishing to do business in KSA. We understand that local investors will not be required to register with the Ministry, however the Ministry may coordinate with other competent authorities to obtain information related to local investors in order to populate the national register for investors.

Comprehensive Service Center:

Article 7(4) gives the Ministry the right to create a comprehensive service center for investors to apply for “legal approvals necessary for engaging in an investment activity, including licenses or permits” – essentially providing a single window clearance mechanism which will significantly streamline the investment process and promote ease of doing business. Again, another interesting development as historically, any investor wishing to engage in some specific economic activities in KSA would be required to separately apply to different KSA public authorities for approval to practice that economic activity (e.g. after the foreign investor would have obtained a foreign investment license from the Ministry, as well as other registrations), typically referred to as ‘post-approvals’, however under this Article it appears the Ministry will receive applications from the investor and thereafter coordinate directly with the competent authorities in charge of issuing such post-approvals to ensure that the investor satisfies the necessary legal requirements.

List of Excluded Activities:

Article 8 of the Law requires “the competent authority” to issue and update the list of excluded activities, which the Ministry will publish. While the definition of “Competent Authority” in the Law is broad as it includes “any ministry or public agency with an independent legal personality”,  we note that Resolution No. (40) dated 10/01/1446 AH issued by the Counsil of Ministers, which was issued alongside the Law, has for the purposes of Article 8, narrowed this to a committee established for the purpose of issuing and updating the list of excluded activities, as well as assessing and considering any applications to practice those excluded activities formed under Resolution No. (83) dated 30/01/1443 AH issued by the Council of Ministers (the “Resolution 83”), (the “Permanent Ministerial Committee”). This is an interesting development as there is potential for confusion as to which body is responsible for assessing applications to practice excluded activities.

Under Article 3 of the Foreign Investment Law, the list of excluded activities was treated as an absolute restriction against foreign investors undertaking particular economic activities which were considered sensitive (e.g., concerning the public interest or national security), and were restricted only to local investors.

However, under the Law, Article 4 of which enshrines the equal treatment of local and foreign investors, there appears to be a degree of flexibility as foreign investors may apply to the Ministry for approval to practice excluded activities, which the Ministry may refer to the competent authority (i.e. the Permanent Ministerial Committee).  The foreign investor is also required to apply to the Ministry for approval, prior to making any change in the ownership of his investment in any of the restricted activities included in the list of excluded activities, and the Ministry shall refer the application to the competent authority.

Protection of National Security:

Article 9 allows the Ministry to suspend any foreign investment for the purpose of protecting national security, provided that the suspension decision is based on objective grounds, is consistent with the KSA’s obligations under international agreements to which it is a party, and is in accordance with the procedures specified in the Regulations.

Use of Alternative Dispute Resolution Methods:

For the first time, investors may resolve disputes, including with competent authorities, through means other than court resolution. Article 10 permits investors the right to agree on the settlement of their disputes through alternative dispute resolution methods, including arbitration, mediation and conciliation. This differs significantly from current dispute resolution procedures involving public bodies, which require any disputes between private persons and public bodies to mandatorily be heard before and resolved by the KSA Administrative Courts (the Board of Grievances). The article affirms the right of the investor, when he is a party to any dispute, including disputes that arise with the competent authority, to resort to the competent court, unless the parties to the dispute agree otherwise, which is an embodiment of the principle of the freedom of the contractors to determine the means they deem appropriate to adjudicate their disputes.

It remains to be seen how this may work in practice, because standardised contractual templates that have been developed by the KSA Ministry of Finance require KSA public bodies that enter into contractual arrangements with private persons to follow specific dispute resolution procedures based on the value of the disputes, and that require permission to be sought from the KSA Ministry of Finance to resolve disputes other than through KSA courts in case that value is exceeded.

Penalties:

Article 11 provides that an investor who commits a “non-serious” violation of any of the provisions of Articles 7 or 8 of the Law shall be notified by the Ministry using any means determined thereby in order to rectify said violation within a period to be specified in the Regulations. The Regulations will specify the details of the “serious” violations and the procedures for detecting and recording such violations. 

Without prejudice to any harsher penalty provided for in any other law, an investor who fails to rectify the non-serious violation after the expiration of the period specified for rectification or who commits a serious violation of any of the provisions of Articles 7 or 8 of the Law, shall be subject to one or more of the following penalties: (i) a warning; (ii) a fine not exceeding SAR 300,000 (noting that the fine may be doubled in case of a repeat violation); and/or (iii) cancellation of registration.

The Ministry shall establish a committee (or more) comprising no less than three members, one of whom at least shall be a legal specialist, which shall consider the violations and impose the penalties based on the gravity and frequency of the violation and the size of the establishment.

Article 12 provides that any person against whom a decision is issued by the Ministry may appeal said decision before the competent court within 30 days from the date of notification thereof.

International Agreements:

The provisions of the  Law shall not prejudice any of the KSA's obligations under any applicable international agreement to which the KSA is a party.  The guidance provided by the Ministry also clarifies that, in the event of a conflict, the provisions of the international agreement shall prevail over the provisions of the Law.

Special Economic Zones:

The Law aims to regulate all investments in the KSA owned by: (i) local and foreign investors, whether natural or legal persons; and (ii) investments owned by government companies, with the exception of investments in special economic activities and zones regulated by special laws and regulations, such as special economic zones, which will be subject to the provisions of its law, provided that the investor shall generally enjoy, as a minimum, the rights stipulated in the Law.

We note that most of the finer details regarding the various provisions of the Law and its implementation will be outlined in the Regulations. The Law is a welcome development as it adopts investment principles consistent with international best practices and will enhance the flow of foreign investment into the KSA.  This will positively influence financial, economic, functional, and social dimensions, substantially improving the KSA economy’s competitiveness and advancing the objectives of Vision 2030.