Al Madani & Co. Law Firm & Legal Consultants

Legislative Developments in the Saudi Investment System: Analyzing Their Impact on the Investment Environment

In recent years, Saudi Arabia has experienced significant economic and financial development, with a particular focus on enhancing the investment environment and attracting foreign investments. The new Saudi investment system is part of the Kingdom’s Vision 2030, an ambitious plan to diversify the Saudi economy and reduce its dependence on oil. The new system includes numerous updates designed to improve the investment environment in the Kingdom, making it more attractive to both local and foreign investors. This article will review the key updates in the new Saudi investment system.

The new system was issued on August 11, 2024, under Royal Decree No. (19/M), and is expected to come into effect in February 2025.

First: Investment Developments in Light of the Old Investment System

Before delving into the details of the new system, it is important to highlight the features of investment under the current system. The current system has several positive and negative aspects that have affected the attractiveness of investment in the Kingdom. Among the positives is the robust legal framework, which provides a clear legal structure that protects the rights of both local and foreign investors and ensures a stable investment environment.

Second: The Need for a New Investment System Aligned with the Kingdom's Goals

Since the launch of Vision 2030, Saudi Arabia has issued several regulations as part of a series of regulatory and legislative reforms aimed at improving its investment environment. These regulations work in tandem with the investment system and include civil transaction systems, privatization, companies, bankruptcy, and the initiative to establish special economic zones.

While the current foreign investment system has many advantages and has contributed significantly to achieving some of the Kingdom’s investment goals, the growing scale and ambition of these goals necessitated a better approach to attracting investment in line with the Kingdom’s future objectives.

Third: Key Features of the New Investment System

The new investment system establishes a unified framework for the rights and obligations of investors, reinforcing principles such as the rule of law, fair treatment, property rights, freedom to manage investments, intellectual property protection, and the ease of money transfer.

1. Name and Scope of the System

o Updated Investment System: The updated investment system unifies the rules applicable to both local and foreign investors under a single legal umbrella. This unification reflects the Kingdom’s approach towards equality in treatment and promotes a comprehensive investment environment characterized by transparency and clarity. Under this system, both local and foreign investors are allowed to operate in the Kingdom under the same conditions and regulations, enhancing the attractiveness of the Saudi market for investment.

o Foreign Investment System: The previous foreign investment system was limited to regulating the provisions applicable only to foreign investors, creating a form of duality in the treatment between local and foreign investors. The old system included specific conditions and procedures for foreign investment, which sometimes resulted in challenges and obstacles for foreign investors wishing to enter the Saudi market.

2. Investment Requirements

o Updated Investment System: As part of the Kingdom’s efforts to liberalize economic activities and encourage investments, the requirement to obtain a special license for investment has been abolished. This abolition contributes to simplifying procedures and reducing the bureaucratic burden on investors. Additionally, economic activities have been significantly liberalized, with exceptions limited to a specified list of activities set by the Permanent Ministerial Committee for Examining Foreign Investments, based on objective criteria.

o Foreign Investment System: Conversely, the old foreign investment system required foreign investors to obtain an investment license to conduct business. It also mandated the issuance of a list of types of activities excluded from foreign investment by the Council of Ministers, which could limit investors’ freedom in choosing their fields of investment.

3. Treatment of Local and Foreign Investors

o Updated Investment System: The new system guarantees equal treatment for both local and foreign investors. This equality in treatment is a significant development, as it enhances competitiveness and attracts more foreign investments, while also supporting local investors by providing equal opportunities for growth and expansion.

o Foreign Investment System: The old system did not include any provisions that guaranteed equal treatment between local and foreign investors, which could have created a form of discrimination and lack of clarity in dealing with investors.

4. Investment Incentives

o Updated Investment System: The governance of granting investment incentives has been strengthened in the new system, allowing for greater facilitation for investors according to clear and transparent criteria. This development aims to attract quality investments that contribute to achieving the Kingdom’s economic development goals.

o Foreign Investment System: The old system did not include any clear mechanisms or governance for granting investment incentives, which could have weakened the attractiveness of investment in the Kingdom and limited the system’s ability to attract quality investments.

5. Investor Rights

o Updated Investment System: Investor rights have been aligned in the new system with international investment principles and policies, enhancing the protection of investor rights and ensuring freedom in their investment activities and the free transfer of capital. The system also includes clear provisions for protecting intellectual property and trade secrets, as well as comprehensive treatment of both direct and indirect expropriation.

o Foreign Investment System: The old system specified certain rights for foreign investors, including the ability to transfer funds, but did not provide the same level of detail and comprehensiveness in protecting rights as the updated system does. It also only addressed direct expropriation provisions without referring to indirect expropriation.

6. Violations and Penalties

o Updated Investment System: Clear standards have been set for determining serious and non-serious violations in the executive regulations of the system, with consideration for the principle of gradual imposition of penalties, ensuring balance and fairness in applying sanctions. The system also considers the recurrence of violations, the size of the establishment, and the severity of the penalty, reflecting a trend towards enhancing justice and transparency in dealing with investors.

o Foreign Investment System: The old system did not include the same level of detail in determining violations and penalties, which could lead to disparities in the application of sanctions and a lack of clarity in procedures related to violations.

7. Dispute Resolution

o Updated Investment System: The new system provides both local and foreign investors the right to resort to the competent court in case of a dispute with the government entity unless the parties to the dispute agree otherwise. The system also allows for alternative dispute resolution methods, including arbitration, mediation, and conciliation, enhancing the system’s flexibility and providing multiple options for investors

o Foreign Investment System: The old system was limited to amicably resolving disputes between foreign investors and the government, which could limit the investors’ options in the event of a failure to reach an amicable settlement.

The new Saudi investment system represents a qualitative leap in the Kingdom’s journey towards achieving the goals of Vision 2030. By providing an attractive and stimulating investment environment, this system contributes to attracting direct foreign investments, diversifying the economy, and creating new job opportunities. The gradual removal of restrictions on foreign investment, the unification of treatment between local and foreign investors, and the enhancement of governance for granting investment incentives all contribute to boosting investor confidence. However, the success of this system requires concerted efforts from all stakeholders, including the government, private sector, and civil society. Certainly, achieving the ambitious goals set by Vision 2030 requires continued reforms and the development of legislation, as well as building a promising and sustainable economy.