Business Setup In KSA – What Are The Real Issues?
Gulf countries are popular among global investors and business owners to expand their business operations into new markets. Not only do these countries offer a favorable geographical advantage, but they also offer excellent investment and growth opportunities. Saudi business setup is becoming a growing interest, as the Saudi Arabian government has recently made many changes to simplify business setup in the country.
Moreover, the advantageous location and diversified economy offer excellent opportunities for those who are starting a business in Saudi Arabia. Despite introducing changes to ease business setup, starting a business in KSA is complex compared to other Gulf countries, like the UAE. Keep reading this blog to learn about the real issues entrepreneurs and business owners may face while establishing a business in Saudi Arabia.
What Makes Business Setup In KSA A Smart Investment?
Starting a business in Saudi Arabia presents an attractive investment for global investors, as the country offers investor-friendly policies and attractive tax benefits. KSA has a favorable location and offers easy access to prominent markets across Europe, Asia, and Africa. Additionally, the country houses a large population of over 35 million, offering a strong consumer base for diverse industries.
To end the economic dependence on the oil and gas sector, the Saudi Arabian government is implementing active efforts. The nation’s government is launching many opportunities to support businesses operating in technology, tourism, and other sectors. Moreover, the 100% foreign ownership in most sectors, attractive tax benefits, and a simpler procedure to register a company in Saudi Arabia create a welcoming environment for new businesses, especially foreign companies.
Top 10 Real Issues in Saudi Business Setup
Under Vision 2030, the Saudi Arabian government has introduced several reforms, including creating new business opportunities, competitive tax rates, and chances to participate in government contracts. Despite these changes, the business setup in KSA involves many real issues that are as follows:
1. Complex and Time-Consuming Regulatory Process
The biggest issue for anyone planning a business setup in KSA is that they need to deal with multiple government entities, including the MISA, MoC, GOSI, and ZATCA. Each government body has its own procedures and requirements, and you have to navigate them all, making the overall business setup process in the country time-consuming and complex.
Moreover, for foreign investors and businesses, the Saudi business setup procedure is not only lengthy, but also their approval process takes several months. It is again since various stages are involved in the setup procedure, and for each stage, you need to secure approval from a relevant government authority. Additionally, you have to be physically present in the nation during some documentation procedures, making registering a business in Saudi Arabia challenging and expensive for foreign investors.
2. Mandatory Saudization (Nitaqat Program)
Another issue with business setup in KSA is that business owners are required to hire a certain percentage of Saudi employees under the Nitaqat program. The mandatory Saudization requirement varies based on the company’s size and the sector in which it plans to operate. This program limits the freedom of business owners to build teams, as they can’t only hire employees with the best talent from any nationality but have to find and hire Saudi nationals to fit their needs.
Not only do they face serious problems in finding skilled and qualified Saudi nationals for certain roles, but they also have to invest heavily in staff training and development. Moreover, hiring Saudi employees is more expensive than hiring expats, particularly in sectors with high demand for local talent. If any business fails to meet Saudization requirements, it has to face penalties and legal issues. The non-compliance penalties and high cost of hiring local talent make starting a business in Saudi Arabia challenging for startups and small businesses.
3. High Initial Capital Requirements
One of the biggest real issues with starting a business in Saudi Arabia is the minimum capital requirement in certain sectors. For example, SAR 1,000,000 for most entity types in the industrial sector, SAR 500,000 for the service sector, and SAR 500,000 for companies involved in public transportation. Foreign companies that want to engage in trading activities independently in KSA need to submit a minimum capital of SAR 30 million, while those partnering with a Saudi entity and a foreign partner need to submit SAR 26 million and SAR 20 million, respectively.
Unlike other Gulf nations, like the UAE, the minimum capital needs to be deposited into a local bank account; only then can you proceed with the procedure of a company set up Saudi Arabia. This mandatory requirement can be a big challenge for foreign investors, especially those with limited initial capital or those who prefer to manage their funds through international accounts.
4. Limited Ownership in Some Sectors
Another issue with business setup in KSA is that business owners are provided with limited ownership in many sectors. The country has a Negative List of industries in which 100% foreign ownership is limited for international investors. Primarily, the ownership is restricted in sectors, including media, defense, and oil. If a foreign company wants to engage in industries where full foreign ownership is restricted, a partnership with Saudi partners is mandatory.
Not only is finding a reliable partner a big issue in such a case, but it also adds to the paperwork load, as you have to develop a partnership agreement. Moreover, to successfully register a company in Saudi Arabia, you have to completely and thoroughly understand local customs, legal frameworks, and business practices. However, if you partner with a local partner, you can easily navigate the local legal requirements.
5. Physical Office Space Is Mandatory
To register a company in Saudi Arabia, you have to find and lease a suitable physical office space, as registering a business with a virtual or shared office is not allowed. The mandatory requirement of a physical office might make business setup costly for SMEs and startups. The high upfront costs of leasing a physical office space can be a big barrier for businesses looking for affordable entry into the Saudi Arabian market.
Unlike in popular business hubs in the Gulf region, like Dubai, where virtual and shared offices are allowed, securing and maintaining a physical office in Riyadh, Jeddah, and other cities is mandatory. This mandatory requirement adds up to additional operational costs, including rent and utilities.
6. Challenging Banking System
Similar to the UAE and other Gulf countries, opening a corporate bank account in Saudi Arabia is a mandatory step in the business setup. However, the bank account opening process might take weeks or even months, particularly for foreign businesses, which is a big challenge for their expansion plans. Additionally, the strict compliance and KYC norms lead to a lengthy and complex verification process, further delaying the company bank account opening process.
Even though English is widely used in Saudi Arabia, you have to face the hurdle of language differences when navigating the bank account opening procedures, especially documentation requirements. Moreover, the policies, terms, and procedures vary among different banks, making the opening and managing of company accounts more challenging.
7. Licensing and Sector-Specific Restrictions
Another issue with the company set up Saudi Arabia is the different regulations for each industry. For example, if you want to engage in the food and beverage sector, you need to follow strict hygiene and safety standards, while educational and construction businesses face licensing requirements related to curriculum and staffing.
Moreover, the documentation can be challenging, as you have to get multiple approvals. To secure permission to proceed with the next step in the business setup in KSA, you have to undergo a complex inspection procedure. The local inspection processes conducted by various local authorities slow down the setup process.
8. Limited Access to Free Zones
Compared to the Emirates, KSA has fewer free zones, which are special economic zones that help startups and small businesses to make affordable entries into new markets. The few free zones offer limited options for businesses looking to operate in such zones and secure cost-effective benefits. Additionally, even if you register a company in Saudi Arabia, you’ll not be provided with such compelling benefits as those offered in the UAE.
9. Language and Cultural Barriers
The official language of Saudi Arabia is Arabic and is used in all government communications and most business transactions. English is widely spoken and used in major cities, but it is still not the primary language for all official settings. When starting a business in Saudi Arabia, you need to prepare and translate legal documents, contracts, and other important paperwork into the country’s official language.
You have to hire a translator to deal with government agencies for securing permits and other official processes. Moreover, to run a successful business in KSA, you need to learn local business etiquette.
10. Cost of Compliance and Operational Maintenance
Lastly, businesses need to comply with ongoing maintenance of compliance requirements, like ZAKAT, VAT filings, GOSI registration, and labor office reports. In addition to the initial investment for a Saudi business setup, you have to heavily invest in maintaining ongoing compliance. If you fail to do so, you don’t only have to pay hefty fines, but it might also lead to suspension of business activities and even blacklisting you from government contracts.
Simplify Your Saudi Business Setup Journey with Us
From a diversified and growing economy to a favorable location, many benefits make starting a business in Saudi Arabia a smart investment plan. However, the above-mentioned real issues in setting up a business in KSA clearly show that the setup process is not easy without expert guidance. Moreover, regularly updating local laws, licensing requirements, and approval procedures makes company setup more confusing for new investors and foreign businesses.
Connect with Express Business Service, a trusted provider of company setup services, for successfully establishing a business in this opportunity-rich Gulf nation. Our team can help with faster setup, easier navigation of compliance requirements, and significant cost savings. Moreover, we offer customized solutions based on our clients’ business activity, ownership type, and industry. Contact our team and choose us as your trusted partner for a hassle-free business setup in KSA.
Also Read: What Makes Saudi Business Setup Expensive? A Closer Look At Fees
