Saudi Arabia’s new investment law is a legislative ace up the kingdom’s sleeve that signals a conducive, clear and equal-opportunity climate for global capital. But only time will tell whether this new law will truly be a game-changer or just another mirage in the desert of economic reforms.
- New law aims to attract foreign investment
- Equal treatment for domestic and foreign investors
- Enhanced dispute resolution options for global investors
In a move that's making waves in the global investment community, Saudi Arabia has unveiled its new Investment Law, set to take effect in Feb. 2025. The Saudi Arabian government, in its pursuit of Vision 2030, is betting big on this new law to diversify its economy and reduce dependence on oil revenues.
The royal flush they're hoping for includes attracting more foreign direct investment, creating a level playing field for domestic and foreign investors, streamlining investment procedures, enhancing investor protections, and promoting fair competition. Both domestic and foreign businesses are eyeing this development with keen interest. The expectation is that this new law will open doors wider than ever before, allowing for easier market entry and operation in the Kingdom.
“This is a clear signal to the market that the Kingdom is serious about attracting foreign investment,” says Sean Huber, a Saudi Arabia-based partner at global law firm Greenberg Traurig.
While investor interest in Saudi Arabia has been growing in the last few years, stalling foreign direct investment numbers highlight the kingdom's need for further reforms to meet its ambitious targets of $100 billion in annual FDI by 2030.
Saudi Arabia drew $5.18 billion in FDI in Q2, which was little changed from $5.17 billion in Q2 last year, the General Authority of Statistics data showed. Although FDI volumes in Q2 rose 14.5 percent from the first quarter of 2024, total inflows in the first half were similar to the first six months of last year at $9.6 billion, versus $9.5 billion.
The International Monetary Fund, in a recent country report, said reforms to enhance Saudi Arabia's attractiveness for foreign investment are progressing. This recognised the record high number of foreign investment licenses and increasing licenses for firms to establish regional headquarters in the country.
"Enhancing private sector development will require providing more clarity to investors and removing remaining bottlenecks identified, including those in the regulatory and business environment," the IMF said.
The new Investment Law aims to do just that. The law isn't just a facelift, it's a complete makeover. The existing requirement for foreign investment licenses has been a significant barrier, which the new law replaces with a simpler registration process under a new national register of investors. Experts anticipate that the simplified registration process will significantly reduce bureaucratic hurdles for foreign investors.
Foreign investors have faced restrictions that domestic investors didn't, but the new law promises equal treatment for all. Investors can invest in any sector or activity, with some exceptions listed as “excluded activities.” There's speculation that the list of “excluded activities” might be narrower than before, potentially opening more sectors to foreign investment.
“The new law aligns with a series of changes that have been made in Saudi Arabia’s regulatory regime under Vision 2030 to create a more diversified and internationally aligned global economy. It is a statutory recognition of the rights of investors, particularly foreign investors, including in respect of their rights to profit, and ownership of investments.”
- Waleed Rasromani, Linklaters
The law also offers enhanced protection against confiscation and expropriation and ensures the right to transfer funds freely.
“The new law aligns with a series of changes that have been made in Saudi Arabia’s regulatory regime under Vision 2030 to create a more diversified and internationally aligned global economy”, says Waleed Rasromani, Linklaters’ national managing partner for Saudi Arabia. “It is a statutory recognition of the rights of investors, particularly foreign investors, including in respect of their rights to profit, and ownership of investments.”
The kingdom for many years has been successfully working on digitising and formalising the economy so as to reduce bureaucratic red tape and decision-making that is often unpredictable, arbitrary and opaque, giving investors a clearer view of the regulatory process and timeline associated with an investment – a problem that has been flagged by many investors in the past.
The current system provides limited recourse for dispute resolution, while the new law expands these options significantly, especially when the counterparty is a government-controlled entity.
Investors can now choose between court proceedings and alternative dispute resolution methods, providing more flexibility in handling disputes. This is also a strong signal to global investors, who prefer arbitration as a dispute resolution mechanism, that the government is keen to listen to and address their concerns.
“The law expressly recognises the role of the courts in disputes involving the government and the ability of parties to agree to alternative dispute resolution mechanisms, whether it is with a government counterparty or a private one,” Rasromani says.
This gives the government and their counterparty the freedom to choose the venue to adjudicate disputes outside the court system, often described as opaque and protracted.
BRIDGING GAPS
Additionally, the existing framework lacks clear investment incentives, a gap the new law addresses by providing a basis for granting such incentives. The law provides a clear framework for granting investment incentives and promotes competitive neutrality between public and private sector entities. To further streamline processes, the Ministry of Investment of Saudi Arabia (MISA) will establish a "single window" to facilitate obtaining all required legal approvals.
“The government is making concrete effort at highlighting how much the Kingdom has opened for business, and equalising the legislative playing field among investors around the world and internally”, says Chadi Salloum, head of Greenberg Traurig’s UAE corporate practice.
While opinions vary on the magnitude, most experts agree that the new law should lead to increased FDI inflows. Some experts point out that this move puts Saudi Arabia in a stronger position to compete with other regional investment destinations, particularly the UAE.
The local market players have also changed their company-building and corporate governance mechanisms over the last few years to create more high-quality investible assets.
The desire for private investment in the local economy is strong, experts say. A plethora of high-quality projects come with internationally trained local professionals who build towards turning these into highly investible assets.
“The market appears well prepared to receive foreign investment. There is a positive climate within the country where towards foreign investment – the Investment Law reflects that,” says Huber.
This matches with the government’s objective of ensuring availability of funds from diverse sources, adds Rasromani. This includes debt and equity from the local banking system, international banks, private equity and global funds.
While the new Investment Law lays out an impressive blueprint, the devil is in the details. The implementing regulations, expected to be released within six months of the law's publication, will be crucial in determining how effectively the law's principles are put into practice.
These regulations will likely cover the specific process for investor registration, details of the "excluded activities" list, criteria for granting investment incentives, procedures for the "single window" system, and specifics of the new penalty regime.
Clients, while keen to invest in the country’s rapidly modernising markets, are on wait-and-watch mode, to see how the big-ticket items discussed in the Investment Law are put into motion before they pour in.
Lawyers have been cautious in handling client queries surrounding the new law pending the passing of the implementing regulations.
Investors and businesses are waiting for these regulations to fully understand the practical implications of the new law, says Salloum.
International lawyers in the region say that the implementation of the law, through the regulations, is the biggest concern among clients looking to invest in the Kingdom. Investors are waiting on the real-time reaction of regulatory and banking institutions, as well as global markets, to implementing regulations before they invest.
The Investment Law also recognises, encompasses and streamlines the sectoral regulation of industries in the Kingdom, which currently is organised by government organisations that regulate each sector independently.
How sectoral regulation will be streamlined within the new investment regime remains to be seen when the implementing regulations and related rules are released, says Rasromani.
