Saudi Arabia's series of law changes eases entry for investment and companies

Arab world's largest economy introduced a raft of regulations in the last two years to spur growth

Saudi women walk past a mural depicting Saudi King Salman bin Abdulaziz and Crown Prince Mohammed bin Salman at a park in the capital Riyadh. Saudi Arabia continues to introduce new laws to support the economy. AFPShow less

Saudi Arabia has released a series of new regulations in the past two years aimed at providing more clarity in attracting foreign investment into the kingdom and reassuring investors that the country is open for business and committed to the growth agenda.

The kingdom's new laws include companies law, civil transactions law, amendments to labour law as well as newly updated investment law that was approved by the Council of Ministers this month. This is providing less barriers to entry for foreign and even local companies.

“A key element of the Vision 2030 is to attract increased inbound investment into Saudi Arabia, to fund various of the kingdom’s giga and mega projects and support the transition of the kingdom’s economy away from oil and gas,” said Alan Wood, corporate partner at Clyde & Co.

“With this in mind, a common theme of many of the new laws and regulations introduced over the past year has been to provide foreign investors with greater certainty around key legislative provisions and to adopt terminology that will be more familiar to many of them.”

Two important laws that came out in the past week include an update to the new investment law which puts Saudi and non-Saudi investors on an equal footing and the amendments to the labour law that are expected to benefit employees and employers and enhance their relationship.

As part of the law, there will no longer be a system of getting a foreign investment licence, instead, there will be an investment register that's operated by the Ministry of Investment.

Other reforms introduced as part of the law also include greater protection of investor rights including protection against expropriation, the protection of intellectual property and easing of the settlement of disputes whether the investor is local or foreign.

“The investment law will be important for encouraging foreign direct investment into Saudi with the removal of the complicated licence process for a more simple registration,” said James Swanston, senior economist for Mena at Capital Economics.

Saudi Arabia launched its Vision 2030 programme in 2016 to diversify its economy away from oil, support private-sector growth, improve female workforce participation and reduce unemployment among citizens.

As part of the strategy, the kingdom is building new projects including the futuristic mega-city Neom with an investment worth $500 billion.

It also set a target to attract $100 billion annually in FDI by 2030 to boost non-oil gross domestic product and has set a goal of increasing FDI to 5.7 per cent of GDP by the end of the decade.

Labour law changes

Amendments to the labour law have also been announced by the kingdom to bring them in line with international standards, and make the Gulf country more attractive to global talent.

Among the key changes introduced in the labour law include provisions related to the probationary period, overtime work, leaves, dispute resolution procedures and others.

Entitlement to maternity leave will be increased from 10 to 12 weeks on full pay as part of the new amendments. There are also three days of paternity leave and bereavement leave in the case of the death of a sibling.

Changes are also brought to the probation period. Previously, the probation period could be 90 days for example and another 90 days of extension if the employee had agreed. As per the latest rules, the probationary period could be 180 days straight off, which is expected to reduce the administrative burden on employers and provide certainty to both parties.

The new labour law has also enhanced the dispute resolution procedures and clarified how to address grievances and reach an amicable solution between the employee and employer which were not there in the old law.

Saudi Arabia aims to create more job opportunities for women. AFP

“The amendments to Saudi labour law which have recently been approved by the Council of Ministers contain a number of changes which are likely to be appreciated by employers and employees alike, and serve to enhance employment relationships in the kingdom,” said Rebecca Ford, partner at Morgan Lewis.

Through companies law unveiled last year, Saudi Arabia is also simplifying processes for opening different types of companies in the kingdom and providing more clarity on how companies operate including the election of board members, guidelines on the distribution of dividends, accounting records and financial statements.

Some of the guidelines on corporate structure were available before but the new law made rules and regulations clearer and more transparent for companies to operate in the kingdom, according to analysts.

“The companies law, a new and modernised law marrying international standards with sharia principles, demonstrates the kingdom’s continual commitment to creating a flexible regulatory framework that is attentive to the needs of the business community at large,” said Anwar Ouazzani, partner at Norton Rose Fulbright based in Saudi Arabia.

Civil transactions

Another important law that came into effect last year was the civil transactions law that covers all aspects of commercial transactions in the kingdom from termination of contracts to contractual obligations and dispute resolution.

Earlier there were different laws to govern transactions from the contractual perspective based on sharia law and other Saudi laws. The new law provides more clarity and removes uncertainty as investors look to invest in Saudi Arabia.

It did not remove sharia from the law but put into writing or codified principles incorporating both sharia law and international best practices.

The new law has made it clear how contracts work in different sectors including infrastructure, construction, energy and other sectors.

Saudi Arabia introduced civil transactions law as well as other laws to attract more investment into the country. AFP

The new civil transactions law “will have a considerable impact on the business community, bringing greater clarity and predictability to both international and local companies and entrepreneurs alike”, said Andrew Mackenzie, partner and regional head of litigation, arbitration and regulatory at DLA Piper Middle East.

“It will provide a much clearer legal framework for economic activity and the interactions between contracting parties.”

Saudi Arabia's new regulations mark a substantial positive development for the Saudi economy, according to Jing Teow, director of consulting economics and sustainability at PwC Middle East.

“It will likely reassure foreign investors that Saudi Arabia is open for business, and underscores the government's commitment to the kingdom's growth agenda,” she said.

The new laws introduced by the kingdom is having a positive impact in attracting companies to the kingdom.

“A number of international companies with strict internal controls moving their regional headquarters to Saudi Arabia to get business there is a testament to the improving business and investment laws in the kingdom,” said Junaid Ansari, head of investment strategy and research at Kamco Invest.

Saudi Arabia recorded a 0.6 per cent year-on-year increase in FDI inflow to 17 billion Saudi riyals ($4.5 billion) in the first quarter of 2024, according to data from the kingdom's General Authority for Statistics.

More than 120 foreign firms also relocated their regional bases to Riyadh in the first quarter of this year 2024, marking a 477 per cent increase compared to the same period last year, Savills said last month.

Earlier this year, Saudi Arabia introduced a regulation for foreign companies to set up regional headquarters in the kingdom or risk losing out on government contracts.

However, companies with foreign operations not exceeding one million Saudi riyals can operate in the kingdom without local headquarters.

Laws introduced in the kingdom in the last three years include:

1. Mining investment law to simplify procedures for granting a mining licence

2. New privatisation and agriculture laws

3. Personal status law

4. Special economic zones law