What is the commercial reality to setting up a 100% foreign owned Branch entity as opposed tpo 100%foreign owned LLC in KSA?
Establishment of a company in KSA is either by way of a limited liability company or, less frequently, a joint-stock company. This choice is generally driven by factors such as proposed shareholder numbers, management structure and the proposed activities of the company. Another potential factor is the possible need to include Saudi equity participation for activities such as for the importing, exporting, marketing, promotion and sale of products.
In addition to a company structure, a ‘Permanent Branch’ may be the optimum investment vehicle and a preferred option for a foreign investor that is keen to invest in KSA without being involved in the more complicated process and requirements necessary to form a limited liability company. However, to establish a branch office in Saudi Arabia, you must have an existing GCC company in another country. The branch office is 100% owned by foreign investment and the branch must appoint a legal representative in Saudi Arabia.
The following is a brief overview of the advantages and disadvantages of the two investment vehicles:
- Limited liability company
- Permanent entity (a ‘Permanent Branch’)
In all cases, the selected establishment will require a foreign investment license from MISA and possibly other specific regulatory approvals.
A Permanent Branch is a conventional branch which would be considered as an extension of the parent office. The minimum start-up capital to satisfy MISA ‘s initial requirements would commonly be approximately SAR 500,000.
The main advantages of a Permanent Branch are:
- Depending on the circumstances, it may be the quickest to establish
- The formation process is generally similar to that of a limited liability company
- No new articles of association are needed
- It can have the full range of activities
- It can engage in projects in both the public and private sector (in accordance with approved objects)
- It may promote and solicit approved business throughout KSA
The main disadvantages of a Permanent Branch are:
- Requires a minimum share capital of SAR 500,000 which may increase depending on the business activities.
- Saudi-owned entities, or entities involving substantial Saudi participation, are likely to be preferred for government contracts
- Its activities are limited to the licensed objects approved by MISA
- There is a general expectation that substantive income producing activities will be undertaken
- It is not able to conduct promotion, marketing and trading activities (as a minimum 25% Saudi equity participation is required for these activities together with significantly greater capitalization)
- It cannot be formed solely to engage in representation or promotional activities
- The parent company cannot quarantine liability in KSA and may be exposed in its place of incorporation
- No other shareholders share the financial burden of capital requirements and setting up costs.