I. Introduction
Expanding business operations into the Kingdom of Saudi Arabia (KSA) presents numerous opportunities for foreign investors. While market analysis and investment prospects often take precedence, understanding and adhering to regulatory requirements is equally critical.
To establish a presence in the Saudi market, companies must first engage with the Ministry of Investment, which is responsible for granting licenses to foreign entities and individuals holding premium residency. However, certain business activities are restricted to Saudi nationals or require approval from other regulatory bodies.
Foreign investors in KSA must comply with specific financial and legal standards designed to ensure market stability and prevent violations. Some investors who fail to meet these requirements attempt to bypass regulations through nominee agreements or fictitious partnerships with Saudi nationals. Such practices violate Saudi law and can lead to severe consequences for both the foreign investor and the local partner.
This article examines nominee arrangements in Saudi Arabia and their associated risks.
II. Considerations for Investing in Saudi Arabia
Saudi Arabia has emerged as a leading investment hub in the Middle East, attracting global investors due to its economic growth and large-scale projects. The Ministry of Investment plays a key role in facilitating foreign investment by assisting companies in meeting regulatory obligations. It aims to attract sustainable investments that drive economic development by localizing technology, diversifying income sources, boosting exports, and enhancing the competitiveness of Saudi products in both local and global markets.
Investors are required to operate in compliance with the applicable regulations, demonstrating international expertise, financial stability, and strong organizational capabilities. They must also outline plans for employing and training Saudi nationals and contributing to technology transfer and job localization.
Many corporate and individual investors are eager to enter the Saudi market, either by establishing regional headquarters in the Kingdom or forming commercial partnerships with Saudi entities. The government’s digital transformation has streamlined many bureaucratic processes, reducing the time required to obtain licenses and regulatory approvals. The Ministry of Investment works closely with other government agencies to provide post-licensing services and ensure ongoing compliance.
III. Risks of Nominee Arrangements
Some foreign investors unable to meet the regulatory standards resort to nominee or fronting agreements. In such arrangements, a foreign entity or individual operates a business in Saudi Arabia under the name of a Saudi national or company.
These agreements violate Saudi laws and regulations, as they allow foreign entities to conduct business without the required licenses or engage in activities reserved for Saudi nationals. Under the Anti-Concealment Law, such practices are considered a criminal offense, with penalties including fines of up to SAR 5 million and imprisonment of up to five years. Repeat offenses may lead to harsher penalties.
Historically, the Ministry of Commerce was solely responsible for monitoring and addressing such violations. However, enforcement efforts have since expanded, with multiple government agencies, including the Ministry of Human Resources and Social Development, the Ministry of Municipal and Rural Affairs, and the Zakat, Tax, and Customs Authority, collaborating to detect and prevent commercial concealment.
IV. Tax Implications of Nominee Arrangements
Nominee arrangements can also result in significant tax liabilities. Foreign-owned businesses in Saudi Arabia are subject to a 20% income tax, while entities fully owned by Saudi nationals are generally subject to a 2.5% Zakat obligation. The tax laws require foreign entities to register for income tax, file tax declarations, and fulfill their payment obligations to the Zakat, Tax, and Customs Authority.
Through nominee arrangements, some foreign businesses attempt to unlawfully classify themselves as Saudi-owned, thereby reducing their tax obligations. However, tax authorities actively monitor such practices, treating them as tax evasion. In response, the Zakat, Tax, and Customs Authority imposes assessments, penalties, and, in some cases, criminal sanctions. Judicial rulings have resulted in fines, business closures, imprisonment, and even deportation upon completion of sentences and payment of outstanding dues.
Engaging in nominee arrangements not only violates the law but also exposes businesses to severe financial and legal repercussions, including excessive taxation, regulatory penalties, revocation of licenses, and potential confiscation of assets.
To mitigate these risks, foreign investors must ensure full compliance with Saudi regulations and operate transparently within the legal framework.
V. How We Can Help
Our team of legal and business consultants specializes in company formation, licensing, and regulatory compliance in Saudi Arabia. We provide expert guidance on structuring investments, meeting tax obligations, and ensuring full adherence to the Kingdom’s legal framework. For professional assistance tailored to your business needs, please feel free to reach out to us.