Routes to Market in Saudi Arabia

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Routes to Expand

So you've decided to expand your business to Saudi Arabia and have researched your market. Now it's time to decide how you will register and establish your business. What is the best, most viable option for your company, your products, and yourself. Which is the path of least resistance?

Here are your typical options:

Economic Cities

With Saudi Arabia having risen from 67th to 23rd position in the World Banks Ease of Doing Business Index 2008, the kingdoms intentions to encourage foreign investors is startlingly apparent. With the country opening four Economic Cities, the government offers the following incentives to foreign businesses expanding into Saudi Arabia:

• 100% Self Owned or Venture Companies (Limited and Joint Stock); including property, private residences and employee accommodation
• No minimum capital required for a new business and there are no restrictions on exchanging money back to a sovereign currency.
• Exemption from import fees for selected raw materials imported for manufacturing.
• 0% individual income tax

With the intention of developing private enterprise to diversify the economy from its reliance on oil, the cities cover a wide range of business, which is divided into four main categories; ports, logistics, light industry and services. This covers everything from education and consultancy to blue chip businesses and manufacturing. www.sagia.gov.sa  

There are also several alternative ways of entering the market and setting up a business which small to medium sized UK companies looking to expand a business to Saudi Arabia can take.

Commercial Agents and Distributors

With knowledge of the local market and abilities to carry out transactions, it is a good idea to employ a business agent. However its recommended that such appointments be chosen with caution, as despite Saudi Arabias liberal legislation in comparison to other Gulf States, changing agents can still be lengthy and difficult.
The role of a commercial agent can cover a variety of areas, such as selling services, and the purchasing and sale of products. Agents can also buy and resell products from other manufacturers. However, the manufacturers require commissions and the process is subject to commercial laws.

Requiring approval from a commercial agent, a representative office allows investors an independent base in the Saudi market. They must take the form of Technical or Scientific Offices but a minimum capital is not required.

Permanent and Temporary Branches

Generally restricted to administration and unable to carry out trading activities, a minimum capital of 500,000 SR is compulsory when opening a permanent branch. The parent company is liable to all activities undertaken and the branches require a license from the Government Investment Authority.
When working on government projects, a temporary branch can be set up without any minimum capital required.

Sole Proprietorships

With the option for foreign investors to operate as sole traders, the proprietor requires a minimum capital of 100,000SR to start such a business.

Licensing

Licensing is the permission for someone else to use your intellectual property rights: either a patent, trademark, trade secret, or copyright. Different types of license include:

• Non-Exclusive License - A non-exclusive license implies that your intellectual property rights can be awarded to more than one licensee.
• Exclusive License - A little more complex because, although the license may not be exclusive to one licensee, it may be exclusive to a geographic location, a certain product, or limited area of use. For instance, you may grant a licensee exclusive use of the rights in France, yet grant another licensee its use in Germany.
• Patent License - The allowance of another party to use your patented product, design or process.
• Trademark License - Trademark licensing means permission is awarded to a licensee to sell a product or service. However, the licensor retains more control in order to ensure that quality is maintained. Quality control is in place to uphold the image of the brand / product / service / licensor, and therefore   sustain customer confidence and satisfaction.

Franchising In Saudi Arabia

Franchising is the licensing out of a business name, product, technique, philosophy, trademark, etc, for a percentage of the income. Instead of setting up new outlets as part of your expansion, you license your existing business blueprint out to franchisees who then set up and manage it for you. Franchising is becoming an increasingly popular form of business in Saudi Arabia. It offers greater flexibility than commercial agency agreements but does not require the resources of a branch office or joint venture. 

The benefits of franchising your business in Saudi Arabia include: more freedom, as the franchisee takes on major responsibilities; minimal expense; lower cost and higher profits; potential for fast growth; brand building.
Disadvantages of franchising a business in Saudi Arabia: although few, rely predominantly on your franchisees. They include: poor quality franchisees; franchisees not declaring all income; poor performance.

The Saudi government provides a model franchise agreement, but the parties are not compelled to follow the governments model. After the parties have signed the agreement, the Ministry of Commerce must approve it. Saudi commercial agency law applies to the franchise agreement. Franchise laws are relatively new so a foreign company should proceed carefully before establishing, changing or terminating a franchisee.
The franchise law has only been effective since 19992. Commercial agency law applies to franchises, therefore many of the same concerns may arise regarding the potential wrongful termination of a franchisee. In order to avoid later difficulties, a foreign corporation should consult an attorney familiar with Saudi franchise law before entering into a franchise agreement or terminating a franchisee.

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