SAUDI ARABIA COMMERCIAL REGULATIONS

REGULATIONS FOR COMPANIES

The 1965 Regulations for Companies, and its 1982, 1985, and 1992 amendments, contains the rules for the formation and operation of business entities in Saudi Arabia. Businesses can take the following forms:

• General partnership
• Limited partnership
• Joint venture
• Joint stock company
• Partnership limited by shares
• Limited liability partnership
• Company with variable capital
• Co-operative company
• Registered branch of a foreign company

COMMERCIAL REGISTRATION

• Foreign Companies’ Commercial Agencies Registration: To register an agency, the
  agent must be a Saudi company or establishment. The partners and the management of the company must all be Saudis. The time limit for the submission of the registration application in the register of commercial agencies is three months from the date on which the agency came into effect.

• Companies’ Service Agencies: The act stipulates that a foreign contractor who has no Saudi partner shall appoint a Saudi service agent. The Saudi agent must have a commercial registration. If the contract under consideration is a consultancy, the Saudi agent shall be licensed to carry out consulting services of the same nature as the contractor. The Saudi agent is not allowed to represent more than 10 foreign contracting companies. A foreign company with a contract with the government shall have a temporary license that expires with the project.

• Foreign Companies Branches: A foreign company carrying out industrial or contracting works or any other works essential to the goals of economic development in the Kingdom may apply to the Foreign Capital Investment Committee for a license to establish a branch in the Kingdom. On receiving the license, the company may complete its registration with the Ministry of Commerce according to the Commercial Register and the Companies Act.

• Scientific and Technical Offices: A foreign company that distributes its products in the Kingdom through a registered Saudi agent may apply to the Ministry of Commerce to open a Scientific and Technical Office for providing Scientific and Technical Services to agents, distributors and consumers if the use of its products requires specialized knowledge or precautions.

COMMERCIAL AGENCY REGULATIONS

Under the 1962 Commercial Agency Regulations, non-Saudis are not permitted to act as commercial agents in Saudi Arabia. In addition, no one can act as a commercial agent unless his name has been entered into the Register maintained by the Ministry of Commerce. In 1981, the Ministry of Commerce adopted Implementation Rules, the major provisions of which are that:

• Saudi distributors are responsible for registering each foreign contractor they represent. Copies of the agency agreement must be filed with the registration application in order to avoid fines and to provide the Saudi distributor with protections built into the regulations (in practice, fines are rarely, if ever, assessed for failure to register). Failure to register a distributorship agreement will not render such agreement unenforceable or otherwise adversely affect the foreign supplier.

• For the term of the agency agreement and for the earlier of one year after a contract’s termination or until appointment of a new agent, the agent must provide consumers with necessary spare parts and maintenance at reasonable prices, available within 30 days of request.

• Commercial agency contracts must include certain basic terms (parties, subject matter, term, termination procedure, etc.) and any other matters not inconsistent with the regulations in force in Saudi Arabia. A model contract (originally issued in 1981 but revised in 1983) was recommended by the Ministry of Commerce for this purpose.

• Severe penalties are imposed for violation of certain of the 1962 Regulations or the Implementation Rules, including liquidation of the company, deportation of foreign personnel, and prohibition against future commercial activities in the Kingdom.

The Model Contract

In 1983, the Ministry of Commerce issued a Revised Model Contract for Agents and Distributors (the "Model Contract") as a guideline to help the parties involved meet the minimum standard requirements. Use of the Ministry of Commerce form is not required. However, if the agency contract differs substantially from the provisions in the Ministry of Commerce form, the Ministry may not register the contract.

The major provisions of the 1983 Model Contract include:

• Saudi agents/distributors need not accept goods that do not meet Saudi Government specifications.

• The foreign supplier must supply spare parts and maintenance for one year after the contract terminates or until appointment of a new agent.

• The Model Contract’s section on disputes serves only as a guide to dispute resolution. Disputes under distributorship agreements should be settled amicably if at all possible. If the parties are unable to settle amicably, the dispute will be submitted to the Saudi Board of Grievances for resolution, unless arbitration within or outside the Kingdom is specified in the distributorship agreement. In November of 1993, Saudi Arabia acceded to the New York Convention on International Arbitration. It is therefore likely that if a New York Convention recognized venue is specified in the agreement, the settlements made will be recognized in the Kingdom.

Text Model of  Saudi Arabian Agency Contract

Original Saudi Arabian 1962 Commercial Regulations
Royal Decree No. 11 dated 20/02/1382H
Amended by Royal Decree No. M/8 dated 20/03/1393H
Amended by Royal Decree No. M/32 dated 10/08/1400H

Article (1) No natural or corporate entity, other than Saudis, shall be permitted to operate as a commercial agent in the Kingdom of Saudi Arabia. The capital of the Saudi companies operating as commercial agents must be fully Saudi, and the members of their boards of directors and the persons authorized to sign on their behalf shall be Saudis.

Article (2) Commercial agents who were still operating on the date of the issuance of this regulation and who are not covered by the provisions of Article 1 above, shall be given a period to liquidate their businesses and to transfer the same to Saudi commercial agencies within two years from the date on which this regulation becomes effective. The Minister of Commerce shall specify such period with regard to each agent separately, taking into consideration speedy implementation, the nature of the agent's business, and the period referred to above.

Article (3) No one shall be allowed to operate as a commercial agent unless his name is registered in the Commercial Agents Register maintained by the Ministry of Commerce. The Minister of Commerce shall issue a decision for the establishment of this register. The register shall contain the name of the merchant or the company, the kind of goods for which he acts as agent, the name of the appointing company or the establishment, and the date of appointment and its duration if the agency was fixed for a certain period.

Registration applications shall be presented together with supporting documents to the Deputy Minister. No registration shall be rejected except for non-Saudis or those Saudis who are barred from or are incapable of engaging in commerce and trading.

Article (4) Anyone who acts as commercial agent and violates this regulation shall be fined a sum not exceeding 50,000 Riyals and not less than 5,000 Riyals with publication of such penalty on the account of the violator without prejudice to the right of anyone who suffers damages to claim compensation. If the violation is committed by a foreigner or by a Saudi company with one or more foreign partners, the penalty shall be, in addition to the fine quoted above, the administrative liquidation of the commercial agency business and the possibility of preventing the violator from practicing commerce either permanently or for a specific period. The Minister of Interior may, based upon a recommendation by the Minister of Commerce, order the deportation of the foreigner.

Article (5) Registration fees are fixed at 500 Riyals whether the agent is an individual or company. The fee shall be paid once.

Article (6) Without prejudice to the provisions of other laws, the Commercial Agency Regulations, promulgated by Royal Decree No. 11 dated 20/02/1382H and its amendments, shall apply to everyone who enters into a contractual agreement with the producer or his representative in his country, be it an agent or a distributor.

Article (7) Without prejudice to the laws and resolutions pertaining to the securing of maintenance and spare parts, the agent and distributor shall:

a.) Secure permanently spare parts that are demanded continuously by the consumers, and secure other spare parts within a reasonable period as stipulated by the Implementing Regulations.

b) Secure necessary maintenance for the products and guarantee manufacturing quality and other conditions made available by the producers, on a continuous basis and for the duration of the agency and for an additional year after the termination of the agency or the appointment of a new agent, whichever comes first, and in accordance with the Implementing Regulations.

c) The provisions of this article shall also apply to importers who are not agents or distributors and to anyone involved directly or indirectly in the sales operation for profit purposes; anyone who violates the provisions of this article shall be fined in accordance with the penalties that apply to agents and distributors.

Article (8) The Minister of Commerce shall issue the Implementing Regulations for the Commercial Agencies Regulations, and they will be published in the Official Gazette.

Article (9) The Ministry of Commerce shall prepare sample Contract Agreement (see Model Contract earlier in this section) forms as a guide to agents and distributors. These forms will include all necessary data for the Contract Agreement, such as the parties thereto, place, period and location, renewal and termination conditions, and obligations of the parties vis-a-vis one another and towards the consumer, especially regarding the securing of maintenance and spare parts.

Foreign Contractors' Agency Regulations
Royal Decree No. 2 dated 21/01/1398H

Article (1) These regulations govern the Saudi agent and the foreign contractor, both individuals and companies performing works or acting as consultants for the Saudi Arabian government.

Article (2) These regulations apply on all contracts concluded between the foreign contractor and the Saudi Arabian government.

Article (3) In case a Saudi partner is not available, a foreign contractor must appoint a Saudi service agent; non-Saudis cannot act as agents for foreign contractors. In case the foreign contractor is a consultant, a Saudi consulting office shall act as the foreign contractor's agent.

Article (4) No agency agreement will be allowed in armaments contracts and associated services, nor in government-to-government dealings.

Article (5) The appointed agent should be a Saudi national residing in the Kingdom of Saudi Arabia with a commercial registration allowing him to act as an agent.

Article (6) A foreign contractor with diversified activities may appoint more than one Saudi agent; and a Saudi agent may act on behalf of no more than 10 foreign contractors.

Article (7) An agency contractual agreement, specifying the parties' obligations, shall regulate the relationship between the Saudi agent and the foreign contractor.

Article (8) The Saudi agent shall receive from the foreign contractor an agreed upon amount not to exceed 5 per cent of the contract value to be implemented by the foreign contractor.

Article (9) A Saudi agent cannot act as a consulting and executing agent for the same project; however, a Saudi service agent may be an agent for a foreign contractor assigned to perform consulting works for the project, and also be an agent for a foreign contractor assigned to execute the works on another project.

Article (10) The purpose of the agency shall not be to exploit influence or connections.

Article (11) Without prejudice to the provisions of other laws and regulations, the Commercial Disputes Arbitration Committee shall be empowered to look into any dispute arising between the foreign contractor and his Saudi agent.

Article (12) The foreign contractor who violates the provisions of these regulations shall be prohibited from practicing his activities in the Kingdom of Saudi Arabia; and the Saudi agent who violates the provisions of these regulations shall be prohibited from becoming an agent and his commercial registration shall be withdrawn.

Article (13) These regulations shall be implemented from the publishing date in the Official Gazette.

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