<p>The purpose of this article is to provide a general overview of the  establishment of the Economic Cities (ECs) under the authority of the Saudi  Arabian General Investment Authority (SAGIA) and information on key issues  including land ownership and employment issues. The article also discusses  implications of ECs and the specific incentives offered by SAGIA and the  establishment of business operations in ECs.<br /><br />For reasons that will become  clear below, we note that many areas of the applicable regulations to ECs are  uncertain, evolving or subject to change.<br /><br /><strong>ECs sites and  objectives</strong><br /><br />The following are the ECs that are at the development  stage:</p>
<ol>
<li>King Abdullah Economic City (KAEC) is located mid-way between Makkah and  Madinah and the commercial hub of Jeddah. It encompasses some 168-180 square  kilometres, equivalent to around 65 percent of the total area of the emirate of  Ajman in the UAE or about the size of the Principality of Liechtenstein. From  residential complexes to resort district, KAEC seeks to establish itself as a  regional transhipment center. It will comprise a seaport expected to be among  the world&rsquo;s largest on completion.&nbsp;&nbsp;</li>
<li>The Knowledge Economic City (KEC), situated in Al-Madinah, aims to be a  regional hub for the knowledge and information market. The investment cost of  the city will amount to around Twenty Five Thousand Million Saudi Riyals,  creating some 20,000 job opportunities.</li>
<li>Prince Abdulaziz bin Mousaed Economic City (PABMEC) is in Hail, 720  kilometres north of Riyadh, and is slightly smaller in land size than KAEC,  covering an area of 156 square kilometres. The project cost is approximately  Thirty Thousand Million Saudi Riyals or $8 billion. PABMEC is earmarked as a  land-based transport and logistics and touristic centers.&nbsp;</li>
<li>Jazan Economic City (JEC) is intended to become another all-inclusive city  similar to KAEC. JEC is some 725 kms. south of Jeddah and will have its own  desalination plant and a power plant generating 4,000 MW of electricity. It will  cover an area of 100 square kilometres or two-thirds of the entire city. Jazan  is industrial in nature and will attract the investors accordingly.<br />SAGIA is  the regulator of the ECs in KSA.</li>
</ol>
<p><br /><strong>SAGIA status and authority<br /></strong><br />SAGIA was created  under the Foreign Investment Act (FIA) in April 2000. The FIA significantly  amended the foreign investment framework in the Kingdom of Saudi Arabia (KSA).&nbsp;  <br /><br />SAGIA issues licenses to foreign investors for foreign capital  investment in permitted business activity in KSA, whether permanent or  temporary.<br />Pursuant to a recommendation of the Supreme Economic Council in  June 2006, by a decision of the Council of Ministers, SAGIA was specifically  granted the responsibility for all activities relating to the ECs.&nbsp;  <br /><br />Before this date SAGIA was already active in the promotion of the ECs.  For example, in November 2005, SAGIA entered into an agreement with Emaar  Properties, under which it agreed to take certain actions to facilitate the  development of KAEC. Further, with respect to PABMEC in May 2006, SAGIA signed  an agreement with a regional investment holding company for the development of  the project. <br /><br />Generally, based on the above, SAGIA has the authority to  issue licenses for the development of the ECs. The license issued by SAGIA  allows the Master Developer (MD) to establish and carry out investment projects  in connection with the relevant EC. SAGIA license includes the cost of the  project. A MD will usually establish a Project Company (PC) to undertake the  development of an EC.&nbsp;&nbsp;&nbsp;<br />&nbsp;&nbsp; <br />The authority of SAGIA regarding ECs appears  to be implicitly recognized under Saudi law. We are not aware of the publication  by SAGIA of any special act or regulations applicable to the special ECs in KSA.  However, we have been informed that the Economic Cities Agency at SAGIA has  finalized the draft of the Economic Cities Act and legal code but has not  approved it or disclosed it yet.&nbsp;&nbsp; <br /><br /><strong>Land Ownership and  Development in ECs</strong><br /><br />Rights and Obligations of SAGIA and License  holder<br /><br />The rights and obligations of the parties (SAGIA and MD) are  covered in contractual arrangements for development. In principle, MD will enter  into a Master Developer Agreement (Agreement) with SAGIA. Key obligations of a  MD include the development and operation of EC and committing-on behalf of PC  (under formation) - to undertake an initial public offering. As part of the  private sector participation in KSA&rsquo;s economic growth the PC will be required to  offer 30% of its issued share capital to the retail.<br /><br />Under the Agreement,  SAGIA generally assumes certain obligations with respect to the facilitation of  EC project&rsquo;s development, conferring any special status on EC required for the  project, and facilitating governmental and other approvals and other required  actions. SAGIA will, for example, commit to facilitate (a) the registration of  all foreign owned companies and other entities established in the ECs, (b) the  registration of all land title deeds in the name of foreign entities established  in ECs and (c) the issuance of licenses and other regulatory approvals allowing  for industrial land usage within the ECs, including district cooling,  warehousing, logistics and industrial park distribution &hellip;etc.  <br /><br /><strong>Project Land Ownership in ECs</strong><br /><br />Generally, the  following chain of ownership structure has been used in some of the ECs by  SAGIA: the land for the EC is acquired by the MD -chosen by SAGIA- from a  governmental entity, local authority or other party that owns the land. The  terms of such acquisition may vary on a case-by-case basis, for example, as to  price. The MD will then transfer title to the land to the PC, for example, by an  in-kind contribution on its formation. The PC will in turn transfer the land to  investors under a long-term lease or develop the land for sale to third parties  or retain ownership of the land and manage the developed property or enter into  strategic partnerships, alliances or joint ventures for the development of  components of the EC.<br /><br />Similar model was contemplated by SAGIA for the MD  of KAEC and PABMEC. <br /><br />Note that under Royal Decree number M/15 dated  11/03/1424 (H.) corresponding to 13/05/2003 (G.), ministries, governmental  agencies and other authorities (including SAGIA) may appropriate real estate for  public interest purposes, subject to fair compensation being paid and such  acquisition being for a project expressly contemplated in the government budget.  Therefore, the land may remain in the ownership of the SAGIA but be managed by  MD. In such case, there should be a clear agreement between MD and the SAGIA  giving PC the ability to convey title/ownership rights to third party  purchasers.<br /><br /><strong>Rights of property ownership<br /><br /></strong>Real  estate ownership in KSA for companies and individuals which are non GCC /Saudi  nationals is mainly covered by the Foreign Investment Law and the Law of  Non-Saudis Proprietorship and Investment of Real Estate issued by the Royal  Decree 15 dated 17/4/1421H (Foreign R/E Ownership Law).<br /><br />With regard to  GCC Nationals Royal Decree No 4 dated 12/7/1415/H and Executive Rules (GCC R/E  Ownership Law).<br /><br />One of the issues is that foreign ownership of KSA  property must be linked to a particular project and is not a general  right.<br /><br />The GCC ownership law provides that GCC nationals can own real  estate in the Kingdom of Saudi Arabia (&ldquo;KSA&rdquo;) in the following  circumstances:</p>
<ol>
<li>In the case of a company that is wholly owned by GCC nationals:<br />&nbsp;The  property is allocated for the needs of the licensed business activity and  determined by the competent authority;<br />&nbsp;The size of the property is  appropriate for the needs of the licensed activity in KSA as determined by the  competent authorities;</li>
<li>In the case of&nbsp; an individual who is a GCC national:<br />&nbsp;The individual  (unless determined otherwise by the competent authority) owns no more than 3000  square meters;<br />&nbsp;The property is owned as a residence for himself and his  family;<br />&nbsp;Is naturalized and may be the subject of a stipulation by the  competent authority that at least 5 years has elapsed before they have the right  to own property. <br />&nbsp;If the GCC national is licensed to undertake a profession  or business in KSA then the restrictions in the case of a company wholly owned  by a GCC national apply.</li>
</ol>
<p>The Non&ndash;Saudi Proprietorship Law entitles foreign investors to own real  estate in KSA which is required for:</p>
<ul>
<li>the conduct of their professional, technical or economic activities,</li>
<li>private residences for housing employees of a licensed project,</li>
<li>residential use by individuals with normal legal residency status, or</li>
<li>property development which the total cost of the project (both land purchase  and construction cost) must be at least SR 30 million and invested within 5  years from the date of purchase of the land.&nbsp;</li>
</ul>
<p>Even the smallest minority interest held by a non-GCC (or foreign) national  will be sufficient to make a corporate entity &ldquo;foreign&rdquo;, thus triggering the  requirement for a SAGIA license.<br /><br />At this stage, instead of designating  areas for possible foreign ownership in the nature of free zone jurisdictions  and investment zones, KSA has left the licensing of sites to the discretion of  SAGIA and simply stipulated two areas where there is a prohibition on foreigners  acquiring real estate, namely land within the city limits of Mecca and Al Medina  Al Munawara.<br /><br /><strong>Property lease/ownership and deed  formalities<br /><br /></strong>In terms of real estate ownership in ECs, 100%  foreign landownership is allowed in the ECs except for KEC-in Al Medina Al  Munawara. Once the investor has completed all commercial agreements with the EC  developers regarding land lease and/or ownerships, the Smart Service Center  (SSC) will facilitate the official property lease/ownership and deed formalities  required. <br /><br />Documentation requirements include the following:</p>
<ul>
<li>Individual Identification Set&nbsp; and Company Identification Set ;</li>
<li>Original lease and or property sale contract(s) (between investor and city  developer); and</li>
<li>Copy of original contract(s).&nbsp;However, foreign Muslims may rent property in  KEC in Al Medina Al Munawara for renewable terms of no more than two  years.</li>
</ul>
<p><br /><strong>Employment issues<br /></strong><br />With respect to the ECs and  employment matters, SAGIA offers a one-stop shop/fast track government  immigration centre for ECs to deal with prompt approval and processing of visas,  easing of application of labour law requirements, overseas recruitment and  renewal of visa and work permits. Since the development of an EC is considered a  private project, employing Saudi citizens will be required . <br /><br />The amount  of information available from SAGIA on this subject is very  limited.<br /><br />However, we note that in the ECs, a more liberal regime will  apply to employment issues than in the normal Saudi environment. However,  Saudization requirements would still apply in ECs.&nbsp;<br /><br />Further incentives  offered by SAGIA: <br /><br /><strong>SAGIA offers the following incentives to  investors in ECs:</strong></p>
<ul>
<li>One stop-shop/fast track government servicing centre for the city to deal  with document processing, planning approvals, building permits and approvals  from municipalities.</li>
<li>One stop-shop/fast track government business registration centre for the  city to deal with registration of businesses, incorporation of companies,  approval, issue and renewal of trade and commercial licenses, approval, issue  and renewal of industrial licenses and monitoring of conditions to comply with  environmental guidelines.</li>
<li>Within the ECs, the creation of an attractive business environment for both  domestic and international businesses with respect to exemption from import  duties, ownership of land and property, taxation, employment, immigration and  land use.</li>
<li>Each EC may choose to have a bounded zone within its designated area which  may comprise an industrial zone.</li>
</ul>
<p><strong>Foreign investment restrictions in the ECs:</strong></p>
<p>An understanding of foreign investment restrictions in ECs requires some  background on the applicable foreign investment framework in Saudi Arabia. See  generally the creation of SAGIA under the FIA discussed above.<br /><br />Negative  List<br /><br />A negative list has been issued by SAGIA for some business  activities that are prohibited to foreign investment. These include manufacture  of military materials, equipment and explosives, oil exploration and production,  services related to security, real estate brokerage, and land transportation  services (excluding trains), among others. The Kingdom is currently reducing the  sectors that are not open to foreign investors: retailing, telecommunications  and insurance have already been removed from the list.<br /><br />In a change from  the previous investment law, the FIA allows foreigners 100% ownership of certain  projects, as well as property required for the project itself or for housing  company personnel (with the exception of real estate in Mecca and Al Medina Al  Munawara-see above). Under this scheme, foreign investors are allowed to retain  the same incentives, privileges and guarantees given to national companies other  than taxation.<br /><br />For example, projects that are 100% foreign-owned are  eligible for loans from the Saudi Industrial Development Fund. Investors are  also able to hold investment licenses in more than one type of activity. The law  has also brought significant changes to the previous sponsorship regulations.  Under the new scheme, foreign investors and their non-Saudi employees may be  sponsored under a new licensed firm.<br /><br />Foreign investments are protected by  law and may not be confiscated wholly or partially without a court order.  Moreover, such investments may not be subject to expropriation wholly or  partially except in the public interest in return for equitable  compensation.<br /><br />SAGIA will provide all Government services through its  Smart Service Center (SSC) operations. SAGIA is in the process of establishing  SSC centers within the ECs offering enhanced services to investors, until the EC  SSC centers are completed, all investors wishing to establish in the ECs will be  serviced (60/24/7) through existing SSC&rsquo;s located in all major cities within  KSA. The SSC currently offers more than 128 government services and is  continuously enhancing its basket services. SSC ensures a fast-track and  hassle-free process for establishing a company in ECs.&nbsp; <br /><br />Foreign  investments - general<br /><br />Generally, a license will be required from SAGIA  for any such investment. <br /><br />The conditions for SAGIA granting a foreign  investment license include the following:</p>
<ul>
<li>The investment activity to be licensed should not be on the negative list -  see above;</li>
<li>The intended product of the company should comply with Saudi rules and  regulations and other applicable laws of the European Union or the United States  of America and certain other conditions;</li>
<li>The applicant should be a natural person or corporate entity that intends to  invest in the Kingdom;</li>
<li>The foreign investor should not have been convicted in the past for  substantial violations of the provisions of the FIA;</li>
<li>The foreign investor should not have been convicted in the past for  financial or commercial violations whether in the Kingdom or in other countries;  and</li>
<li>The grant of a license should not result in the breach of any international  or regional agreement to which the Kingdom is a party.</li>
</ul>
<p><br />Most of the above conditions are fulfilled by foreign investors  relatively easily.<br /><br />Foreign investors are also required to submit a  declaration stating non-availability of a residency permit in KSA over the last  two years. In cases where the investor has held a residency permit in KSA, a  letter approved by the last investor&rsquo;s sponsor must be submitted stating the  sponsor&rsquo;s non-objection to the return of the investor to KSA for the purpose of  investment.&nbsp;&nbsp; <br /><br />Corporate structures in use in ECs <br /><br />An investor may  choose one of several forms of business when establishing business operations in  the ECs.&nbsp; The following are the common legal forms used in ECs:</p>
<ul>
<li>Branch;</li>
<li>Limited Liability Company (LLC);</li>
<li>Joint Stock Company (JSC); and</li>
<li>Technical Scientific Services Office (TSO).</li>
</ul>
<p><br /><strong>Establishment process- Step by Step- at SSC</strong></p>
<p>The establishment of an investment vehicle in the ECs in whatever form will  inevitably involve a number of common steps, including:</p>
<p>Step 1.&nbsp;Obtain an investment license from SAGIA;<br />Step 2.&nbsp;Approval of the  entity&rsquo;s trade name and location ;<br />Step 3&nbsp;Obtaining Labor Office File Number  (File 700);<br />Step 4.&nbsp;Resident Manager: Obtain Residency Permit/Iqama;<br />Step  5.&nbsp;Physical premises: Obtain Property Ownership Deed/Lease contract;<br />Step  6.&nbsp;Approval of draft articles of association (or a Ministerial resolution for a  branch);<br />Step 7.&nbsp;Notarizing and Publishing the articles of association  (Companies only);<br />Step 8.&nbsp;Depositing the entity&rsquo;s paid-up capital in a local  bank and issuing bank certificate;<br />Step 9.&nbsp;Commercial Registration from the  Ministry of Commerce;<br />Step 10.&nbsp;Chamber of commerce and industry membership  registration;<br />Step 11.&nbsp;Labour Office registration;<br />Step 12.&nbsp;Tax  registration;<br />Step 13.&nbsp;Registering employer and employees for the General  Organisation of Social Insurance (GOSI) contributions; and<br />Step 14.&nbsp;possibly,  the role of specialised authorities/agencies such CITC or Ministry of  Information.<br /><br />The above entire process is serviced on a fast-track basis  through SSC.<br /><br />Al Tamimi &amp; Company&rsquo;s KSA office is focusing on setting  up foreign companies in Special Economic Cities and is currently providing legal  assistance for the Master Developer of King Abdullah Financial District  (KAFD).&nbsp;&nbsp;<br /><br />Our KSA office is involved in the revision of all rules and  instructions regulating the KAFD and most agreements and contracts between MD  and other developers, contractors and companies intended on having a presence in  the KAFD, such as banks and financial institutions.</p>