Discusses distribution network from how products enter to final destination, including reliability of distribution systems, distribution centers, ports, etc.
Using Agents or Distributors
Traditionally, only Gulf Cooperation Council (GCC) citizens and companies have been allowed to engage in trading and retail activities in Saudi Arabia, including real estate, without a local Saudi partner. In June 2016, the Saudi Arabian Government’s Council of Ministers formally approved full foreign ownership of retail and wholesale businesses, removing the 25 percent local ownership requirement. American exporters are not required to appoint a local Saudi agent or distributor to sell to Saudi companies. However, it is recommended that new-to-market companies consider finding a qualified local partner through one of our matchmaking services.
Agent/distributor relations are governed by the Commercial Agency Regulations of the Ministry of Commerce (https://mc.gov.sa/en). Even though it is no longer legally required, we recommend that U.S. companies seeking to do business with Saudi government agencies appoint a Saudi service agent. The sales commission paid to the Saudi service agent is negotiable between the U.S. party and the Saudi agent or distributor, but typically it ranges from 3 to 10 percent, depending on the product or service and the duties required of the service agent. U.S. companies should ensure the terms for sales commissions are clearly defined in the agency or distribution contract.
Terminating an agent/distributor agreement can be difficult even though Saudi policy has changed to permit registration of a new agreement over the objections of an existing distributor. While most prospective Saudi agents and/or distributors generally prefer exclusive agency contracts, they are not required. U.S. firms should be aware that because of the close-knit nature of business circles in Saudi Arabia, replacing an agent or distributor could damage a U.S. firm’s reputation if not handled with caution. A U.S. company should avoid being viewed as lacking adequate commitment to its Saudi business relationships. Saudi agents may request “parting compensation” in the event the foreign exporter decides to dissolve a business relationship. Since this is a common practice in this market, U.S. companies should address this prior to executing any contract.
U.S. firms interested in the Saudi market are cautioned against trying to use lists of importers for “cold calls” on prospective agents. Saudis prefer to conduct business with someone only after they have been properly introduced and have met face-to-face. To help dispel reluctance on the Saudi side, an introduction by a liaison will serve to vouch for the reliability of both parties. The U.S. Commercial Service in Saudi Arabia performs these introductions for U.S. companies as part of its “Gold Key” matchmaking service. Other appropriate third parties for such introductions include other Saudi firms and U.S. companies that have successfully done business in Saudi Arabia, banks, trade associations, and chambers of commerce.
The Saudi legal system, known as sharia, is based on the Quran and Hadith (sayings of the Prophet) and differs considerably from the U.S. judicial system. U.S. firms contemplating an agency or distribution agreement with a Saudi entity are strongly urged to consult with a local attorney and have a detailed, legally binding contract clearly stating the rights and obligations of all parties, how and when sales commissions are to be paid, and how and in what venue any disputes are to be settled. The U.S. Embassy in Riyadh maintains a list of local law firms, which can be accessed at https://sa.usembassy.gov/u-s-citizen-services/legal-assistance/.
The U.S. Commercial Service, through its domestic U.S. Export Assistance Centers and overseas offices in Embassies and Consulates, offers a variety of services to assist American firms in selecting a reputable and qualified representative. To learn more about U.S. Commercial Service assistance, visit https://www.trade.gov/export-solutions.
Establishing a Local Office
The procedures to establish an office in Saudi Arabia differ according to the type of business undertaken. For authoritative guidance, companies should visit the Ministry of Investment’s website. To open an office in Saudi Arabia, a foreign company should be prepared to submit a copy of its articles of association as incorporated in the country of origin; a copy of its commercial registration; a written approval by the board of directors of the company, its chief executive officer/president, or a similar entity related to their decision to open a subsidiary office; the name of the city where the office will be established; and the name of the subsidiary’s manager to the Ministry of Commerce. The aforementioned documents must be attested by the Saudi Arabian Embassy in Washington, D.C. The most common and direct method is simply to appoint an agent/distributor who can set up the office under its own commercial registry. The agent/distributor agreement should be registered with the Ministry of Commerce. The Commercial Agency regulations govern the conduct of the agent/distributor.
Types of Offices:
- Technical and Scientific Service Office: This type of office requires a license from the Ministry of Commerce. This approach preserves the independence and identity of the foreign company and provides more leeway in managing and marketing the company’s products and/or services. Technical and scientific service offices are not allowed to engage directly or indirectly in commercial activities, but they may provide technical and advisory support to Saudi distributors, as well as conduct market surveys and product research.
- Branch Office: Saudi Arabia’s Foreign Investment Law permits international companies to own 100 percent of projects and property required for the project itself, while enabling them to retain the same incentives given to national companies. A branch office involves a more direct presence than a commercial agent. Branch offices are largely restricted to an administrative role and may not engage in trading activities. Nevertheless, a branch office can be very useful as a liaison presence for a U.S. company. A branch office offers the benefits of a physical presence without the formal requirements of a joint-venture company. A U.S. company can open an independent branch office without a Saudi partner. Its parent company must accept full responsibility for all work undertaken by that branch office.
- Liaison Office: Establishment of a liaison office is normally granted for companies that have multiple contracts with the government and require a local office to oversee contract implementation. Representative offices are not allowed to engage in direct or indirect commercial activities in Saudi Arabia.
- Joint Venture: A company can establish a joint venture with a legally registered Saudi firm. Usually, the Saudi business community refers to limited liability partnerships as joint ventures. These partnerships must also be registered with the Ministry of Commerce, and the partners’ liabilities are limited to the extent of their investment in the partnership.
Foreign companies can also obtain a license from the Saudi Ministry of Investment to set up an industrial or a non-industrial project. The Ministry will license projects under the new Foreign Investment Act, which allows for 100 percent foreign ownership. In addition, foreign investors can open a sales/administration/marketing office to complement their industrial or non-industrial project. The Ministry has a broad mandate on all matters relating to foreign investments in industry, services, agriculture, and contracting.
The Saudi Companies Law, which came into effect in 2016, is the principal body of legislation governing the conduct of companies in Saudi Arabia. The law recognizes eight forms of companies. The most common forms are limited-liability companies (LLC), joint stock companies, general partnerships, and limited partnerships. The less common company forms are partnerships limited by shares and joint ventures. Apart from the above, sharia specifies several other types of companies, but these cannot be used by foreign investors. Foreign companies usually establish LLCs, which are a popular corporate vehicle because they are simple to establish and administer and the personal liability of each of the partners is limited to the individual partner’s contribution to the company’s share capital.
In April 2022, the Saudi Ministry of Investment announced a new draft Investment Law that will provide for the equal treatment of local and foreign investors with respect to direct investments in Saudi Arabia. The law aims to support the principle of competitive neutrality and fairness, and to ensure equal opportunities in the treatment of direct investments made by public and private investors. Under the draft law, foreign investors will enjoy neutral treatment without any discrimination; have the freedom to manage, sell and dispose of their economic projects; and to own properties that are necessary to ensure smooth operation of the economic project. Foreign investors will further be permitted to conclude commercial contracts and to acquire, liquidate or sell any company. There are provisions in the law to transfer funds from inside and outside of Saudi Arabia, including the transfer of proceeds and profits from an economic project. Local and foreign investors will be subject to the same sectoral approval requirements for licenses and registration, as well as for approvals or permits for certain economic activities or special economic zones.
On October 8, 2019, the Saudi Council of Ministers approved a franchise law which became effective on May 12, 2020. The law is supplemented by implementing regulations that set out specific obligations and requirements that apply to franchisors and franchisees and regulate other aspects of franchise arrangements. The new law specifically allows for alternate dispute resolution methods, such as arbitration, mediation and conciliation, and parties are able to select their means of dispute resolution. Currently, the Board of Grievances in Saudi Arabia has jurisdiction over franchising disputes for those disputes not referred to international or local arbitration.
The Saudi Arabian Government liberalized the wholesale, retail, and franchise sectors in 2016 allowing full foreign ownership of retail and wholesale businesses by removing the former 25 percent local ownership requirement. All industrial enterprises are open to non-Saudis, and investors can also trade in the products they manufacture. We recommend that U.S. franchisors consult with an attorney familiar with Saudi law before establishing, changing, or terminating a franchise agreement.
The Franchise Law requires franchisors to provide the franchisee with a disclosure document at least 14 days prior to the execution of the franchise agreement or before the franchisee pays any funds relating to the franchise (i.e., a deposit). The disclosure document must include the content prescribed in the implementing regulations of the Law, broadly covering the main rights, obligations and material risks related to the proposed franchise. The disclosure document and franchise agreement must be translated into Arabic.
Aside from the key provisions that are normally incorporated into franchising agreements, companies should pay particular attention to Islamic dietary laws (halal meat/cosmetic products, prohibition of pork and alcohol content, etc.) as well as local dress and customs.
Direct marketing is not widely practiced in Saudi Arabia as personal relations between vendors and customers play an important role. Furthermore, many forms of direct marketing practiced in the United States are unacceptable due to Islamic precepts and traditions such as privacy at home. However, marketing trends in Saudi Arabia are evolving due to a growing domestic workforce, an influx of digital marketing strategies, and the implementation of the value-added tax (VAT). Moreover, Saudi Arabia is a nation of relatively young, tech-savvy consumers. Companies, specifically those in hospitality and consumer goods sectors, are marketing their products online by placing advertisements on social media platforms like Snapchat, Instagram, Twitter, and YouTube. Large retail stores have started to use direct marketing to strengthen their connection with their consumers using mobile messaging, promotional emails, interactive websites, and online advertising to increase consumer awareness and retention.
The limitations of the Saudi postal system are a constraint vis-à-vis online fulfilment; however, this too is changing. Currently, there is a delivery system called Wasel that delivers mail and parcels to residences. In addition, delivery services boomed amid the 2020 COVID-19 lockdown and a number of delivery apps were developed.
Federal Express, United Parcel Service (UPS), Deutsche Post’s DHL, and Aramex all serve the major communities in Saudi Arabia.
Non-document shipments require the receiver’s ID number. The term ID will not necessarily be recognized In Saudi Arabia, the terms used are:
- Commercial Record number (CR) - (Businesses)
- Iqama, National ID number, or Resident ID - ( Individuals)
Failure to comply with the above requirement may result in delayed customs clearance and delivery, confiscation of the shipment by Saudi Arabia Customs or for the shipment to be returned at the shipper’s expense.
Since January 2020 as part of the Saudi Arabia e-commerce law, all online marketplaces and e-commerce platforms selling to customers in Saudi Arabia are required to announce duties, VAT, and other destination charges. These include:
- The cost of transportation from the origin country as per the agreed rate between the shipping provider (e.g. Transglobal Express) and the e-commerce platform
- High value shipments subject to Saudi Customs Duty and VAT
- High value shipments subject to Saudi government Smart System Fees (FASAH)
- All dutiable shipments subject to Saudi declaration form fees
- Low value shipments subject to VAT
- All shipments subject to disbursement fees at destination
- COD collection of Value of Goods
Under the current Foreign Investment Law, a foreign investor may either set up its own project or do so in association with a local investor (at present, only registered entities, and not individual investors, are being approved). If the registered entity option is chosen, foreign investors most commonly structure their enterprise as a limited liability company. The minimum capital of an LLC with foreign participation is SAR 100,000 ($26,667) for most projects, SAR 1,000,000 ($266,667) for industrial projects, and SAR 25,000,000 ($6,666,667) for agricultural projects. The Ministry of Investment may require higher or lower capital levels depending on its assessment of project requirements. The current law allows single member LLCs. After issuance of a Ministry of Investment license, the LLC must be registered with the Ministry of Commerce’s Commercial Registry.
The one-member LLC may become the investment vehicle of choice in the future, given the relative simplicity and ease of registration and administration. LLCs can be owned 100 percent by foreign investors or have a mixed Saudi/foreign ownership. Joint-stock companies require authorization from both the Ministry of Investment and the Ministry of Commerce. In general, the provisions applicable to the administration of joint-stock companies are more detailed than those applicable to limited liability companies. The law requires the authorization of the Council of Ministers for the formation of any joint-stock companies for undertaking public sector projects that receive assistance from the state or include public sector institutions. Joint-stock banking companies also require authorization from the Council of Ministers.
The Investors Service Center (ISC) at the Ministry of Investment oversees all matters related to foreign investor licensing and registration. The ISC was intended as a one-stop shop to assist foreign investors and minimize lengthy procedures, though its record in achieving this goal has been mixed. Foreign companies’ profits are taxed at 20 percent of profits, and losses may generally be carried forward.
The Saudi Standards, Metrology and Quality Organization (SASO) establishes product standards and conformity requirements for most imports and locally manufactured goods. The Communications and Information Technology Commission (CITC) has authority over imported telecommunications and IT products and services and has taken an increasingly proactive regulatory role. The Saudi Industrial Development Fund (SIDF) may be engaged to provide up to 50 percent financing for approved industrial projects with payback periods up to 15 years. Market intelligence is available to prospective investors through the SIDF.
Other Saudi Arabian Government entities that might be involved in the process of establishing a business presence in Saudi Arabia include: the Ministry of Foreign Affairs (visas); the Ministry of Interior (residence permits and industrial safety and security approvals); the Ministry of Labor (Saudi labor regulations and hiring quotas); the Royal Commission for Jubail and Yanbu (if the project is in those industrial cities); the General Organization for Social Insurance (social insurance and disability payments for Saudi employees); and the Technical and Vocational Training Corporation (training programs for Saudis).
Before signing any commercial agreements or commencing business activities in Saudi Arabia, we encourage U.S. companies to conduct in-depth research and due diligence. The U.S. Commercial Service in Saudi Arabia offers a fee-based International Company Profile (ICP) report, which provides detailed information on a specific company and comments based on interviews with the local company representatives, site visits, confirmation of commercial registration with the Saudi licensing authority, and open-source information. In addition, U.S. companies should consult a local law firm to create contracts in Saudi Arabia. The U.S. Embassy in Riyadh maintains a list of local law firms, which can be accessed at https://sa.usembassy.gov/u-s-citizen-services/legal-assistance/.