Saudi Arabia engineering investment 101: type of business entity

By Wang Jihong and Tang Hongwei, Zhong Lun Law Firm
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Saudi Arabia has for many years been China’s number one trading partner in Western Asia and Africa, as well as one of China’s most important contract engineering markets in the Arab world. But before investing in engineering projects in the country, it is important to understand which type of business entity to set up to carry out operations. Under Saudi Arabian law, this could be either a permanent or temporary entity, or, in terms of organisational form, either a subsidiary or a branch office. Recently, Saudi Arabia also began to require foreign investors to set up a regional headquarters in the country.

PERMANENT OR TEMPORARY

Wang Jihong, Zhong Lun Law Firm
Wang Jihong
Partner
Zhong Lun Law Firm

When undertaking engineering projects under Saudi Arabia’s Government Tender and Procurement Law (GTPL), foreign investors are required to establish a domestic business entity, which can be either permanent or a temporary one catering to the government project after a successful tender. The procedures for setting up a permanent or temporary entity are largely identical.

The major difference between the two is that the licence term of a temporary entity is consistent with the term of the tendered project. Upon project completion, the foreign investor must dissolve the temporary entity or convert it to a permanent one. As the process of dissolving a temporary entity is identical to that of a permanent one, most foreign investors favour the permanent option.

SUBSIDIARY OR BRANCH?

Under Chinese laws and regulations, establishment of an overseas subsidiary or branch office is subject to overseas investment reviews, including procedures for reporting, filing and foreign exchange registration of overseas investment by the National Development and Reform Commission, the Ministry of Commerce, the State Administration of Foreign Exchange and other competent authorities.

Tang Hongwei Zhong Lun Law Firm
Tang Hongwei
Senior Associate
Zhong Lun Law Firm

Saudi Arabian laws generally leave foreign investors free to choose between setting up a subsidiary or a branch office. For some operating activities, a domestic entity must own a certain shareholding in order for foreign investors to take part. To engage in restricted activities such as engineering, procurement and construction (EPC) projects, a branch office alone cannot satisfy Saudi legal requirements, and foreign investors should set up a joint venture with a local entity.

Under Saudi Arabia’s Professional Companies Law of 2020 and its Ministry of Investment requirements, companies set up by foreign investors to obtain business permits to engage in “management of construction projects, detailed engineering design and EPC contracts” should make sure that Saudi Arabian shareholders own at least 25% of the company.

There are, however, exceptions. According to the Council of Ministers Resolution No. 681, issued on 7 August 2017, if the foreign investor has operated for more than 10 years since its incorporation in its homeland, and the investor or its associated entity has carried out engineering construction projects in at least four countries and/or regions, it may engage in engineering services and related consultancy services, and obtain an engineering licence by setting up a wholly owned subsidiary or branch office in Saudi Arabia without having to collaborate with a domestic shareholder.

The “engineering services and related engineering consultancy services” under resolution No. 681, according to Saudi Arabian laws and legal practice, includes architectural and engineering consultancy activities and management of construction projects.

If a foreign investor wishes to engage in EPC activities in Saudi Arabia via a branch office, it may, with the approval of the project owner, split the EPC project between onshore and offshore elements. The onshore portion, including construction and procurement of construction materials and equipment, goes to the Saudi Arabian branch office, while the offshore portion, including design and offshore procurement of project equipment, goes to the foreign investor or its associated entity, thus achieving the commercial objective of having a branch office undertake an EPC project in Saudi Arabia.

REGIONAL HEADQUARTERS

A regional headquarters, or RHQ, refers to a unit of a multinational company established under the laws of Saudi Arabia for the purpose of supporting, managing and providing strategic direction to its branches, subsidiaries and affiliates operating in the Middle East and North Africa region.

According to the latest notice, from 1 January 2024 the Saudi government will restrict foreign investors from bidding in domestic projects unless they have set up an RHQ in the country. Furthermore, the RHQ cannot carry out any activities that generate business income. In other words, if a foreign investor wishes to bid for projects in Saudi Arabia after 2024, it will need to set up a subsidiary or branch office in the country as an RHQ.

During his 2019 meeting with Mohammed bin Salman Al Saud, Saudi Arabia’s crown prince, President Xi Jinping called for reinforced synergy of development strategies, cementing of mutual interests, and speeding up efforts to connect the Belt and Road Initiative to the Saudi Vision 2030.

It would seem that the prospects for investment and co-operation between the two nations are only getting stronger, especially in the areas of engineering, infrastructure and energy. Still, investors are advised to thoroughly research the Saudi legal environment before committing to engineering projects there.

Wang Jihong is a partner and Tang Hongwei is a senior associate at Zhong Lun Law Firm

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