Saudi Arabia Regional Headquarters Programme: Contracting with government entities
Saudi Arabia Regulatory Update: Four new special economic zones launched
Legal Development 27 April 2023 27 April 2023
Corporate & Advisory - Regulatory Risk
On 14 April 2023, the Kingdom of Saudi Arabia (KSA) announced the launch of four new Special Economic Zone(s) (SEZ(s)).
The Economic Cities and Special Zones Authority (ECZA) is the enabler and umbrella regulator of KSA’s Economic Cities (ECs) and SEZs. ECZA was originally formed in 2010 to oversee the development of ECs. In 2019, ECZA’s mandate was expanded to include the supervision of SEZs and the creation of the right regulatory environment to attract businesses.
The key goals of the ECZA are to raise KSA’s global competitiveness through the launch and enablement of an ECs and SEZs ecosystem that provides:
- an investor friendly regulatory environment, competitive sector specific incentives and enablers;
- highly efficient integrated government services; and
- an inspiring living experience with global quality of life standards.
A “Special Economic Zone” has been defined under the Statute of the Economic Cities and Special Zones Authority (the ECZA Statute) as a KSA special economic zone established under the ECZA Statue. SEZs are geographically delineated areas that support specific activities such as investment, trade and employment by providing competitive advantages and legislative frameworks that differ from the base economy.
Launch of four new SEZs
On 31 October 2022, the General Authority of Civil Aviation (GACA) had launched the Integrated Logistics Bonded Zone (ILBZ), a SEZ located adjacent to the Riyadh International Airport, as part of KSA’s plans to boost cargo capacity, bolster supply chains and become a global logistics hub.
ECZA has now announced the launch of four new SEZs to capitalise on KSA’s potential as a global business hub. These new SEZs have been built upon previous free zone initiatives in KSA. The launch of the new SEZs is in line with Saudi Vision 2030 and represents the initial phase of a long-term programme focused on fostering foreign direct investment, attracting global talent, and encouraging entrepreneurship/economic development in KSA. The establishment of the SEZs is in line with KSA’s aim to become a global investment destination and a hub for global supply chains by capitalising on its unique position in global trade routes.
The four new SEZs focus on key growth sectors of advanced manufacturing, maritime activities, metal conversion/logistics and cloud computing respectively. They are:
- King Abdullah Economic City (KAEC) SEZ;
- Ras Al-Khair SEZ;
- Jazan SEZ; and
- Cloud Computing SEZ.
Accordingly, with the launch of the four new SEZs, KSA will have a total of five SEZs, noting that as per the ECZA this is the first wave of the SEZs in KSA. In launching these SEZs, which support a wide range of industry sectors and business activities, KSA offers a platform for investors to accelerate their regional and international growth through a globally connected market.
Overview of the SEZs in KSA
KAEC SEZ is located in the Makkah province in a strategic location at the heart of global trade routes. The zone benefits from its unique geostrategic location on the Red Sea where 13 per cent of global trade passes through enabling entities to easily connect with global supply chains here, utilising existing world-class infrastructure and KSA’s newest full-service commercial port, King Abdullah Port.
The zone will help parties gain access to key global markets through KAEC’s position along the Red Sea, a key maritime route of the Belt and Road Initiative (BRI), and establish an ideal platform from which to access Europe, Africa and Asia. Anchor investor Lucid, a leader in the global EV industry, will produce 150,000 electronic vehicles a year from its base in KAEC SEZ.
The main sectors of focus are automobile supply chain and assembly, consumer goods, Information and Communications Technologies (ICT), light electronic manufacturing, pharmaceuticals, medical technology and logistics.
Ras Al-Khair SEZ is located in the Eastern Province. The zone aims to build on established maritime industries in the area to grow this cluster and build the maritime capabilities of the future.
It is also conveniently located near Ras Al-Khair Port, KSA’s newest industrial port, with the capacity to handle bulk cargo and serving more than 100 manufacturing projects. Ras Al-Khair’s shipyard, the largest in the MENA region, has the capability to provide newbuild and maintenance services, repair and overhaul services for offshore support vessels, jack-up rigs, Very Large Crude Carriers (VLCCs) and bulk carriers.
The main sectors of focus are the Maintenance, Repair and Operations/Overhaul (MRO) activities in relation to shipbuilding and rig platforms.
Jazan SEZ is located in the Jazan province inside Jazan City for Primary and Downstream Industries (JCPDI). This zone leverages on Jazan’s unique position on the crucial Red Sea shipping route and will enable KSA’s mining industry to play an increasingly important role in global construction and processed metals and minerals markets.
The zone is also located adjacent to the biggest port in the region, the Port of Jazan, and this allows for efficient delivery of materials with no land shipment costs. Investors in the zone can take advantage of regional socio-economic developments, including NEOM and BRI infrastructure projects across the Middle East and Africa.
The main sectors of focus are food processing, metal conversion and logistics.
Cloud Computing SEZ is located at the Innovation Tower at the King Abdulaziz City for Science and Technology (KACST).
Cloud Computing SEZ will serve as a centre for emerging and disruptive technology focusing on cloud computing services. This zone is different from the others in that it lacks a central physical location. The zone is based around a hybrid model that allows investors to establish physical data centres and cloud computing infrastructure in several locations within KSA. Accordingly, while the Cloud Computing SEZ will have supportive and operative offices in KACST, investment and establishment can occur anywhere within KSA.
The Clouding Computing SEZ is driven by the National Strategy for Digital Transformation and the Information and Communications Technology (ICT) Sector Strategy and will benefit from government commitment to encouraging and supporting the growth of digital technologies in KSA. It will enable investors to establish data centres and cloud computing infrastructure within KSA.
ILBZ is located in the Riyadh province adjacent to Riyadh International Airport.
ILBZ is KSA’s leading industrial and logistics zone and is considered to be one of the world’s first truly integrated logistics zone. ILBZ enjoys global and regional connectivity due to its proximity to the airport and access to rail, metro and ring road system.
The main sectors of focus are consumer products, computer parts, pharmaceuticals, nutritional and medical supplies, aerospace spare parts, luxury goods, jewellery and precious metals.
Ease of establishment of entities
ECZA has indicated that it is dedicated to supporting investors at every step of the investment process, from a streamlined application and approval process to an integrated One-Stop-Shop (OSS) service, acting as the only resource an investor will need to access all SEZ services and support. The OSS service includes services pertaining to property development, real estate services, company licensing/registration, employment services, tax and customs services, legal and compliance services, and residential services.
International best practices have been incorporated into the company application and approval process to provide a quick and simple journey. ECZA aims to offer a seamless experience for establishing a business in KSA with a significantly reduced time frame and regulatory requirements. The simplified licensing process for obtaining the necessary company licensing through the SEZ OSS, reduces the touchpoints with different entities. A high-level outline of the procedure is set out below (and we expect further rules and details to be provided in this regard, which may vary for each SEZ):
- complete and sign letter of assignment for a representative;
- obtain attestations of documents from the relevant government entities;
- select up to five commercial names (in order of preference);
- complete application, pay fees and submit licensing and registration forms;
- confirm land assignment;
- complete articles of association/constitutional document; and
- receive licences and registration certificates for the entity.
Key benefits offered by SEZs
SEZs offer a range of benefits to the participants – based on the current guidance, these include:
- Corporate income tax: a reduced corporate income tax rate of 5 per cent corporate income tax for up to 20 years;
- Withholding tax: 0 per cent withholding tax permanently for repatriation of profits from a SEZ into foreign countries;
- Customs duties: 0 per cent customs duties deferral for goods inside the SEZ;
- Expat levy: expat levy exemptions ensuring fees exemptions for employees and their families in the zone;
- Value-Added-Tax (VAT): 0 per cent VAT for all intra-SEZ goods exchanged within the zone and between zones; and
- Foreign nationals: flexible and supportive regulations around foreign talent during first 5 years.
We expect further guidance and regulations relating to the various SEZs to be announced in the coming months.
It is important that investors who wish to establish entities in KSA should evaluate if their business objectives are met by establishing a legal entity within a SEZ or whether or not the investor needs a separate legal entity onshore in KSA (i.e., outside of a SEZ) because the licenses and benefits may be limited to activities conducted within a SEZ.
Our corporate team in Riyadh has assisted international and local clients in relation to the establishment of entities in KSA and advising on structuring/regulatory matters. We assisted with the establishment of one of the first companies in the ILBZ which included working closely with the regulatory authorities on the various procedural and practical nuances in relation to setting-up an entity in a SEZ.
If you would like further information on any of the matters referred to in this article, please contact one of the authors.