1. Foreign exchange management

As the pillar industry of Saudi Arabia, the oil industry provides Saudi Arabia with the country's main foreign exchange income. Based on the "petrodollar" agreement reached between Saudi Arabia and the United States, Saudi Arabia's oil exports can only be traded in US dollars, which directly leads to the Saudi exchange rate being pegged to the US dollar and implementing a fixed exchange rate system.

As the foreign exchange regulatory authority, the Saudi Central Bank, in accordance with the Regulations of License Fees for Money Changing Business, requires financial institutions engaged in foreign exchange business to apply for licenses and pay corresponding fees. However, Saudi Arabia has not yet taken any foreign exchange control measures for the remittance and inflow of funds, profits and income of residents and non-residents abroad. Various currencies can be freely exchanged in Saudi Arabia, but transactions with Israel are prohibited.

2. Investment and Mergers and Acquisitions

First, according to the regulations of the Saudi Ministry of Investment (MISA), foreign acquisitions require the application of a foreign investment license. If the foreign investor has previously obtained a license, it only needs to make corresponding changes to the license. Typical M&A methods in Saudi Arabia are equity acquisition and asset acquisition. In equity acquisition, all shareholders need to sign a written resolution agreeing to transfer the company's equity to a third party, and after approval by MISA and notarization by the notary public, the acquisition behavior will be announced in the official gazette. The acquirer of asset acquisition can choose to acquire all or part of the assets. According to the provisions of the Saudi "Company Law", M&A activities involving listed companies must hire certified public accountants and legal advisors to participate, and must be supervised and reviewed by the competent authority, the Capital Market Authority ("CMA").

In addition, Saudi Arabia has taken regulatory measures against market dominance. Any M&A transactions that will lead to economic concentration (i.e., transactions that result in a market share of 40% or more) will be regulated by the Saudi "Competition Law". At the same time, according to the provisions of the Competition Law, if the total annual turnover in the previous fiscal year exceeds 100 million riyals, the entity transaction party involved in the economic concentration shall report to the General Authority for Competition (GAC) at least 90 days before the transaction.

III. Qualified Foreign Institutional Investor System

On May 4, 2015, the Saudi Arabian Capital Market Regulatory Authority (CMA) issued the "Rules for Qualified Foreign Financial Institutions Investment in Listed Securities" ("QFI Rules"), which clearly restricts the scope of qualified foreign investors in terms of type and scale:

In terms of type, qualified foreign investors should be licensed or registered in the jurisdiction of:

(1) Banks;

(2) Securities and brokerage firms;

(3) Insurance companies;

(4) Government and government-related entities;

(5) Investment funds;

(6) Other entities deemed qualified by the competent authority.

In terms of size, except for the government in (4), the assets under management or custody of qualified foreign investors should reach 1,875,000,000 riyals or more. At the same time, the law authorizes the competent authority to make temporary resolutions to reduce the asset size requirements based on special circumstances.

Regarding the shareholding ratio of qualified foreign investors, Article 14 of the QFI Rules stipulates that the maximum investment limit of qualified foreign investors in any listed company is 10% of its issued shares or convertible debt instruments; the shareholding ratio of all qualified foreign investor consortiums (including residents and non-residents) in any listed company shall not exceed 49%. The restrictive provisions of the above-mentioned QFI Rules actually prevent qualified foreign investors from obtaining a majority stake by limiting the shareholding ratio of foreign investors.

In recent years, as Saudi Arabia has taken a series of measures to increase its attractiveness to foreign investors, the government has also relaxed restrictions on foreign capital's participation in investment and mergers and acquisitions in Saudi Arabia. In 2019, the Saudi Capital Market Regulatory Authority (CMA) issued the "Instructions for the Foreign Strategic Investors Ownership in Listed Companies", which officially abolished the restrictive provisions that foreign strategic investors should not hold more than 49% of the shares in listed companies. At the same time, according to the "Draft Rules for Foreign Investment in Securities" issued by CMA, the qualification conditions and investment requirements for qualified foreign investors have been greatly relaxed. It can be foreseen that Saudi Arabia will gradually open its capital market to foreign investors in the future, and will also add new investment channels and provide investment convenience for foreign small and medium-sized investors.

Fourth, Land Use

First, Article 8 of the Foreign Investment Law stipulates that, subject to the provisions on non-Saudi acquisition of real estate, foreign companies that have obtained licenses may be approved to obtain necessary real estate based on the specific activities they operate and when providing necessary housing for their employees.

Secondly, according to the Law of Real Estate Ownership and Investment by Non-Saudis, the use of real estate acquired by foreign investors is limited to the business or residence of the investors and their employees, and real estate investment activities such as sale or arbitrary sublease are not allowed within five years. Article 5 of the law stipulates that non-Saudi nationals are not allowed to invest in land and real estate located in the cities of Mecca and Medina (including leasing or purchasing to obtain ownership). However, non-Saudi Muslims can rent real estate within the borders of Mecca and Medina, and the lease period should not exceed two years in principle.

V. Labor Law

One of the key points of Saudi Arabia's "Vision 2030" national plan is to focus on "Saudiization" reforms, especially in the private sector, to strive to achieve the goal of replacing foreign workers with Saudi nationals, and to emphasize the training and improvement of Saudi labor. This is both a business challenge and an important opportunity for foreign investors to formulate labor and personnel systems in accordance with the law and operate in compliance with regulations after entering the Saudi market.

Article 26 of the Saudi Labor Law stipulates that, except for special circumstances where there is a lack or impossibility of having qualified Saudi employees, the proportion of Saudi employees employed shall not be less than 75% of the total number of employees. At the same time, Article 43 requires employers to provide special vocational training to no less than 12% of Saudi employees each year to ensure that Saudi employees can smoothly adapt and complete high-level jobs in the future.

As for the employment of foreign employees, the Saudi Labor Law stipulates that foreign employees must obtain a work permit issued by the Saudi Ministry of Labor to be qualified as Saudi workers. The competent authority responsible for the recruitment and management of overseas labor in Saudi Arabia is the Private Offices for Recruitment from Abroad. Workers provided by the Private Offices for Recruitment from Abroad can directly sign labor contracts with employers. At the same time, the Labor Law requires that the labor contracts between enterprises and foreign employees must be written and fixed-term.

VI. Introduction to Hot Fields of Foreign Investment

(I) Cooperation between Social Capital and Government Agencies

In order to implement Saudi Arabia's 2020 "privatization plan" and to implement Saudi Arabia's "Vision 2030" master plan, Saudi Arabia has made important legal and regulatory revisions to the legal and regulatory environment for private institutions to participate in government-led projects. The Private Sector Participation Law (PSPL) officially came into effect and was implemented on July 24, 2021. The supporting "Implementing Regulation of PSPL" and "Governing Rules of PSPL" were also announced and implemented. The PSPL clearly stipulates that foreign investors who carry out PSP projects (including PPP projects and government asset divestiture projects) in Saudi Arabia enjoy national treatment, which further demonstrates Saudi Arabia's efforts to create an environment that is inclusive and welcoming to international investment and achieve economic diversification.

PPP (Public-Private Partnership) projects are the main project model adopted by Saudi Arabia in the infrastructure construction industry. It is also one of the regulated objects under PSPL. According to its provisions, PPP projects in Saudi Arabia should meet the following elements:

(1) The contract period should be 5 years or more;

(2) The private institution should undertake at least two of the following tasks in accordance with the contract arrangement: design, construction, management, operation, maintenance or financing (regardless of whether the assets involved are owned by the government or the private institution or both);

(3) There is a qualitative and quantitative risk allocation between the government and the private institution;

(4) All payments to be made or received by the private institution should be based on the performance of contractual obligations.

According to Article 54 of the PSPL "Implementation Regulations", the model for PPP projects in Saudi Arabia should be BOT, BOO, BOOT, BTO and other models approved by the competent authorities.

According to Article 17 of the PSPL, no government agency may enter into a PSP contract with a private organization without the approval of a specific review agency. At the same time, Article 11 stipulates that when the licenses or authorizations required for a project cannot be approved in a timely manner, the Council for Economic and Development Affairs (CEDA) may issue supervision instructions to the relevant approval entities based on the progress report submitted by the contracting government agency (Contracting Authority).

In addition, the PSPL allows the National Center for Privatization (NCP) to exempt specific PSP projects from the mandatory provisions of "employee localization" under certain conditions.

It is worth noting that according to official news released in February 2021 [1], the Saudi Arabian government will completely terminate the signing of PSP contracts with companies and institutions whose regional headquarters are located outside Saudi Arabia from 2024, and therefore requires foreign companies that have signed such contracts with the government to move their regional headquarters to Saudi Arabia before 2024. But it also emphasized that the new regulations will not affect foreign companies and foreign investors entering the Saudi market or cooperating with Saudi private institutions.

(II) Digital Economy

As the main industry in the "Vision 2030" plan, the development of the digital economy is essentially the top priority of Saudi Arabia's reform and development process. Therefore, Saudi Arabia is investing heavily in advanced technology fields such as communications, digital economy, cloud computing, artificial intelligence, and aerospace, and actively cooperating with international excellent teams to learn more practical experience.

In August 2019, Saudi Arabia established the Saudi Data and Artificial Intelligence Authority ("SDAIA"), which is specifically responsible for national big data and artificial intelligence management. At the same time, the National Center for Artificial Intelligence and the National Data Management Office are set up.

To ensure the stable development of the digital economy, in October 2019, the Saudi government promulgated the E-Commerce Law, and subsequently its implementing regulations were promulgated and implemented. The Ministry of Commerce (Ministry of Commerce) is the statutory competent authority responsible for regulating the development of the e-commerce industry, strengthening supervision of personal data protection, consumer rights and disclosure obligations, developing digital payments and improving transparency.

In order to keep pace with the international trend of data security and data compliance, SDAIA released the Public Consultation Version of Personal Data Protection Law (PDPL) on November 20, 2022, the first general Saudi Personal Data Protection Law. The law aims to protect the privacy of personal information and legally regulate the collection, processing, disclosure or retention of personal information. The law covers a wide range of areas, including telecommunications, cloud computing,E-commerce, Internet of Things, finance and government departments, etc. While PDPL draws on the experience of the European General Data Protection Regulation (GDPR) system, it also sets specific regulations for Saudi Arabia. PDPL applies to public or private institutions that process all personal data and personal sensitive data in Saudi Arabia in any way. PDPL also regulates the personal data of the deceased, provided that the data will lead to the identification of the deceased or his family members. Therefore, when a foreign institution processes data related to individuals residing in Saudi Arabia, the foreign institution will also be subject to the jurisdiction of PDPL. It is worth noting that Article 3 of PDPL states that the law will not affect any provisions in any other laws promulgated by Saudi Arabia or international conventions signed by Saudi Arabia that grant data subjects more complete rights or better protection.

PDPL will officially come into effect on March 17, 2023. Foreign companies or institutions under the jurisdiction of this law should actively respond and meet the Saudi data compliance standards required by PDPL as soon as possible.

(III) New Energy Economy

Saudi Arabia supports and encourages the development of the new energy industry, and sets specific goals in "Vision 2030": by 2030, the proportion of non-oil trade exports will increase to 50%; non-oil government fiscal revenue will increase to 266.7 billion US dollars.

In order to attract foreign investors to invest in the new energy field, the Saudi government has introduced a series of preferential policies, such as foreign investment in the new energy industry can enjoy sole ownership; employment of Saudi employees can enjoy salary subsidies from the Saudi National Human Resources Development Fund; raw materials and permanent equipment used in projects can apply for import tariff exemptions; project land rent subsidies, etc.

In addition to the special laws and incentive policies in the fields of new energy, digital economy and engineering contracting mentioned above, Saudi Arabia has also promulgated special industry laws and regulations for professional skills companies, mining, private medical industry, telecommunications industry, audio-visual media industry, etc., which should attract enough attention from foreign investors involved in related industries.

VII. Conclusion

With the signing and entry into force of the "Comprehensive Strategic Partnership Agreement between the People's Republic of China and the Kingdom of Saudi Arabia", the future economic cooperation and international relations between China and Saudi Arabia will inevitably be upgraded to a higher level and a stronger level of partnership, which will also bring a more secure direction and environment for Chinese investors to invest in Saudi Arabia in the future, especially in the hot areas of China-Saudi cooperation such as new energy, digital economy and engineering contracting. This article interprets and sorts out the key regulations on investment and mergers and acquisitions, land use, overseas engineering contracting and labor employment that foreign investors are concerned about, and integrates and introduces the laws and regulations and encouraging policies in hot investment areas such as new energy, digital economy and engineering contracting, aiming to help and guide Chinese companies to smoothly achieve high-quality, legal and compliant foreign investment in Saudi Arabia.

Notes:

[1] <Saudi Arabia won't work with foreign firms without regional HQ from 2024 | Reuters>。

Statement: Reprinted from: Go Global Service Port. The views expressed in this article do not represent the views of the editor and publisher. This article is only the author's general interpretation of relevant laws, regulations and policies and cannot be used as a formal legal opinion or suggestion.