Local Saudi Sponsorship

Local Saudi Sponsorship

Similar to that of other GCC countries, commercial law in Saudi Arabia states that a foreign investor cannot establish a mainland business entity without first appointing a local sponsor. The role of this local sponsor varies depending on the business model, and as an inevitable challenge for foreign investors, it is vital to understand the functions of a local sponsor and the impact this has on establishing a business in Saudi Arabia.

The type of sponsorship available depends on the type of business to be conducted by the company and therefore the legal business structure selected.

There are two sponsorship options for a foreign investor who wish to set up a business in Saudi Arabia: individual sponsorship and corporate sponsorship.

Individual Sponsorship

Individual sponsorship: As the name suggests, individual sponsorship is simply when an individual Saudi national or nationals, sponsor your business, and by doing so, hold a 51% share of your company. He or she must be a Saudi citizen over the age of 21, and whilst it is not required that they have any experience within your chosen industry, they will usually be business professionals or government employees. Whilst this might all sound a bit daunting, there are two important points to note at this stage. Firstly, profits do not have to be shared to reflect the percentage shareholding, and in most instances, the local sponsor is paid a set annual fee in exchange for full power of attorney and control over the business activities.

Corporate Sponsorship

Corporate Sponsorship: The primary difference here compared with an individual sponsor is that the local partner is a 100% Saudi-owned company. This allows for a far more robust governance structure to safeguard foreign investment, allowing issues such as shareholder succession to be dealt with under Company law and typically providing a dedicated team to assist with licence and visa renewals, and any other ad-hoc support required to operate the company. Again, the corporate sponsor will assume a 51% stake in the business, and in exchange for receiving an annual fee it is typical to contractually limit their involvement via a Shareholder Agreement.

Saudi Special Economic Zone / Economic Zone

One option for companies unwilling to explore sponsorship options is to establish a business within one of the Saudi Arabia's free zones. On the surface, free zones appear to be a way for foreign investors to establish a business in Saudi Arabia whilst still retaining 100% ownership. The major drawback to this though is that businesses established in a free zone are limited to the King Abdullah Financial District (KAFD) and KAUST Innovation Zone. Both require companies to process license applications for activities specific to each and located within their zones.