Banking and Currency
Foreign Currency Control
There are virtually no currency exchange restrictions in Saudi Arabia. Exchange for payments abroad may be obtained freely, and there are no taxes or subsidies on purchases or sales of foreign currency. Officially, the Saudi Riyal (SR) is pegged to the International Monetary Fund's Special Drawing Rights. Since 1981, however, the Saudi Arabian Monetary Authority has instead chosen to peg the SR to the dollar. In order to minimize exchange risks for the private sector, to facilitate long term planning and to encourage repatriation of capital from abroad, the Saudi Arabian Government has maintained the exchange rate at SR 3.75=US$ 1 since 1987.
The depreciation of the dollar relative to other world currencies such as the Yen and the Deutsch Mark have the effect of making U.S. imports even more competitive in the Saudi market. This depreciation has led to talks within the GCC countries concerning the possibility of moving their currencies to a trade weighted unit that would reflect Western European and Japanese imports. GCC finance officials met again in 1992 to discuss this issue but have apparently postponed any changes.
Banking in Saudi Arabia is regulated by the Banking Control Law of 1966. The Saudi Arabia Monetary Agency (SAMA), established in 1952, is the country's central bank. Among other things, SAMA issues and controls currency, regulates the money supply, regulates and monitors commercial banks (including deposits, loans and investments) and manages foreign assets. The Banking Control Law provides for state owned and private banks.
Under the Banking Control Law there are nine public banks in addition to SAMA. The distribution of government subsidies and grants of loans to public and private sector projects are funneled through specialized public funds or banks.
For example, Saudi Industrial Development Fund, which is linked to the Ministry of Industry and Electricity, is aimed at encouraging Saudis to establish small and medium size industrial projects in the private sector. The funds provide loans and advice on marketing, technical and financial matters.
The Saudi Arabian Agricultural Bank, which is affiliated with the Ministry of Agriculture and Water, grants subsidies and makes loans to farmers for the purchase of machinery, feed and livestock. It also finances joint ventures in agricultural projects with foreign participation.
The Real Estate Development Fund offers loans to Saudi individuals and entities for private and commercial housing projects.
The Public Investment Fund, which is controlled by the Ministry of Finance, is used as a medium to long-term financing vehicle for the petrochemical industry, and it acquires equity in companies and banks in order to subsequently sell the equity to low-income groups.
There are twelve commercial banks operating in Saudi Arabia, three of which are fully Saudi-owned and the remainder of which have a minimum 60 percent Saudi participation. Modern banking in the Kingdom began with branches of foreign banks. As of the mid-1970s, a process of “Saudiization” of foreign banks was undertaken that was completed in the early 1980s. Currently, foreign banks cannot operate directly through branches in the Kingdom and must rely on Saudi banks. Cooperation between foreign and Saudi banks may result in the foreign bank providing international offices, training and access to international networks. Under certain conditions, a foreign bank may issue bonds and guarantees certified by a Saudi bank.
Generally speaking, Islamic law forbids the charging of interest. Many Saudi businesspersons who conduct their activities in accordance with Islamic law, use a profit-and-loss sharing arrangements allowed under Islamic law to finance commercial projects. Banks in the Kingdom, therefore, generally provide facilities enabling finance by way of such arrangements.
Financing Through Financial Institutions
Saudi banks finance Saudi as well as non-Saudi entities. Saudi entities may also borrow from non-Saudi banks and often employ the services of offshore banking units in Bahrain, which is a major banking center for financing countries in the Gulf.
Import Payment Process
Most Saudi imports are received on the basis of an irrevocable letter of credit (L/C), although other arrangements such as open account, cash in advance and documentary collection are also permitted. Imports do not require mandatory, maximum or minimum credit terms. Typical turnaround time in local credit transactions ranges from three to four months.
Saudi law protects the rights of nationals and foreigners in the field of intellectual property. Every natural or legal person that suffers injury resulting from trademark law infringement may claim damages. Expert proceedings regarding the infringement are permissible, and damages for trademark and patent infringements are punitive and provide compensation for the injured.
Intellectual property rights are also indirectly protected by the provisions of the Regulations for Combating of Commercial Fraud, which enable Saudi authorities to impose numerous sanctions for the production of counterfeit products or unlicensed copies of products, that include seizure and destruction of such products and imposing monetary fines up to SR 100,000 for violation of the provisions of the regulations.
The burden of proof in intellectual property cases lies with the plaintiff, and it is an onerous responsibility, unless the unlawful products are seized. Under Saudi law, documentary evidence does not supplant oral evidence, but the two combined may support each other. In trademark cases, discovery may provide the injured party with material and documentary evidence which alleviates the burden of proof.
Orders are enforced in respect of payment of money by effecting seizure against the party losing the case. With regard to prohibitory injunctions and writs of mandamus, orders are submitted to civil right directorates of the Interior Ministry to execute. Non-compliance with such orders may result in the imprisonment of the offender and the seizure of his assets.
The Saudi Patent Regulations of 1989 established a patent registration system, covering any new article, methods of manufacture (including improvements in either of them) and product patents. In 1996, the Saudi Patent Office granted its first patents since its establishment in 1990.
A patent may be granted to either Saudi or foreign citizens, including companies. Upon compliance with the registration formalities, the application receives a filing number and the filing date is secured. Patents are valid for fifteen Hijri years (a lunar year under Islamic precepts) as from the date of grant and may be extended for an additional period of five years.
The rights to a patent belong solely to the inventor, who may assign these rights with or without consideration. An industrial patent must be exploited within two years as from the date of grant, and if reasonable grounds are provided, this period may be extended for another period not exceeding two years. Failure to exploit the patent within the relevant period of time entitles the Patent Office to grant a compulsory license for exploiting the patent to any person capable of fully exploiting it.
Patent cases are heard by an administrative commission that has legal competence. This commission sits in the City of King Abdul Aziz for Science and Technology. Decisions concerning patents may be contested by third parties within ninety days of the announcement that a patent has been granted.
Trademarks and Service Marks
Trademarks and service marks registration is governed by the Trademarks Regulation of 1984. Saudi Arabia follows the International Classification of goods and services, but is subject to various limitations. For instance, trademarks for certain alcoholic goods are not registerable. Additionally, registration applications may be rejected if the trademark offends or is contrary to public morality.
A trademark/service mark application accepted for registration is published in the Official Gazette (Ummulqura). If no opposition is filed within three months, the owner would have an incontestable right to use the trademark/service mark for ten Hijri years as of the date of filing the application. The registration of the trademark/service mark can be renewed for additional periods of five Hijri years each. Use of trademarks in not compulsory for purposes of registration or keeping registration in force. A trademark/service mark may be canceled if it was not used for a period of five successive years.
Unauthorized use of a registered trademark/service mark, an imitation applied on goods or with respect to services of the same class, storage, sale, exhibiting for sale or using the trademark/service mark in the course of unauthorized promotion are offenses punishable under Saudi law by fines and imprisonment.
Infringement proceedings in relation to trademarks are heard by the Grievance Board. Forged and imitated goods may be seized by the Commerce Ministry or its branches. If civil proceedings in a trademark case are not initiated before the Grievance Board within 10 days, however, the precautionary proceedings shall become void. A public case must be heard within three years of the alleged offense having been committed. There is no such limitation for private cases.
Decisions of the Trademark Office can be challenged through administrative judiciary channels in the Commerce Ministry and legally before the Grievances Board. Applicants or third parties that have an interest in objecting to a registration have the right to challenge such decisions.
Saudi Arabia does not have a statutory design registration system in force. Protection is thus limited and the only available means of protection is through publication of cautionary notices in the Ummulqura or in local newspapers. These notices define the owner's interest in the property, announce the ownership thereto and alert the public against any possible infringement. Since cautionary notices are not covered by regulations and are not registered with any government department, it is advisable to republish such notices at frequent intervals.
Following pressure from the US Special Trade Representative Office, Saudi Arabia issued its Copyright Regulations in 1989. These Regulations are fairly limited in scope in that they fail to protect foreign copyrights. Also the Regulations do not address enforcement or registration procedures.
Saudi copyrights are generally protected for the life of the author plus fifty and twenty-five years with respect to books and sound and audio visual works respectively. As to computer software, while its protection seems explicit, the Regulations do not specify the protection duration.
A zakat or income tax (a religious wealth tax) is assessed on the taxable income of most business organizations. Since only Saudis and GCC nationals are subject to zakat, foreigners pay an income tax in proportion to their equity interest. Foreign employees are not taxed on their salaries or wages. There is no sales tax. Capital gains fall under the same umbrella as ordinary income. Taxable net income is fairly consistent for all types of business organizations, foreign or resident.
Corporate Income Tax
Corporate income taxes are levied on the profits of foreign shareholders in a mixed company and the net profits of branches of foreign companies. Company tax rates, which are applicable to limited liability and joint stock companies, are taxed between 25 to 45 percent depending on profit. Petroleum and other hydrocarbon producing companies, however, are subject to a flat tax rate of 85 percent of net operating income.
Foreign companies entering into joint ventures with Saudi companies that have been recognized as developing projects by the Foreign Capital Investment Committee may receive a five year tax holiday. The exemption only applies to the particular project for which the Foreign Capital Investment Committee approval is granted. Other income may be held to fall outside the exemption, and therefore, be taxable. Manufacturers of agricultural products may be granted a ten year tax exemption.
Deductions and Losses
In general, all necessary business expenses incurred in Saudi Arabia are tax deductible except for specific types of expenses which may not be deductible. Expenses of the later type include doubtful debts, termination benefits and general administrative costs of the head office. Other types of expenses may be deductible only if certain conditions are met (e.g., agency fees). Statutory maximum rates have been set with regard to depreciation.
Saudi law has no provision allowing tax losses to be carried forward or back.
Taxation of Partnerships
A general partnership is taxed in a manner similar to that of a resident company. Non-Saudi and non-GCC individuals and corporate partners, however, are taxed upon their allocated share of profit at the applicable individual corporate tax rates.
Taxation of Individuals
Saudis and GCC nationals are not subject to income tax. Self employed foreigners who are resident in Saudi Arabia are not taxed on income from non-Saudi sources but only on Saudi-source income. Foreign employees are not taxed on their wages and salaries. When applicable, income tax is levied by reference to the following table:
SR Tax Rate
over 66,001 30%
* If the period which the foreigner stays in the Kingdom exceeds one year, the first SR 6,000 of income will not be taxed.
Zakat is the religious wealth tax imposed on Saudis and GCC nationals, and on companies entirely owned by them. In case of mixed participation, zakat is assessed by reference to the proportion of Saudi or GGC participation. Zakat rates are 2.5 percent of capital which is not invested in fixed assets or long term investments or which relate to deferred pre-incorporation expenses.
Withholding tax is imposed on payments made to non-residents and to persons not registered with the tax authorities for activities within the Kingdom. Tax must be withheld based on deemed minimum profit of 15 percent of the payment. Certain management fees, license fees and royalties are taxed assuming a 100 percent profit. Companies must withhold tax on payments to non-residents including foreign shareholders regardless of any tax holiday granted to the company.
Treaties for the Prevention of Double Taxation
The only double tax treaty signed in Saudi Arabia is with France. Similar treaties have been negotiated with Britain and with Germany. Countries, including Britain, Germany, Japan, and the United States, allow taxpayers to take a credit against their taxable income in such countries for any Saudi Arabian income tax paid.
© 2000 Mena Report (www.menareport.com )