New forms of shareholding offered for professional companies in KSA

A special form of establishment for the foreign investor is the formation of a professional partnership, which is of particular interest to freelancers such as architects, civil engineers and management consultants. To this end, the Professional Companies Law of 2020 (“PCL”) represents a fundamental change to the previous manner in which freelancers can establish their companies. Previous restrictions are lifted by the possibility
of establishing limited liability companies and joint stock companies, as well as the possibility of shareholdings, and allowing succession.

In deviation of the previously longstanding requirement of multiple shareholders, the PCL now allows licensed professionals to establish partnerships with individuals or legal entities. Even Sole proprietors can form a limited liability company with only one shareholder. The currently valid company law contains a reference that it also applies to limited liability companies in the form previously described. This allows to combine various professional activities in one company, which leads to an increase in the diversity and complexity of the services offered and thus to an increased versatility and attractivity for the investor as well as an increased competition.

The implementing regulation of the PCL provides for detailed specifications as to how such a company must be structured. For example, the maximum permissible percentage of a non-professional participation is 30 percent. Further, at least 25 percent Saudi participation in a professional company with participation of a foreign shareholder is mandatory.

Of course, there is a regulatory body for each profession: legal services are regulated by the Ministry of Justice; engineering services are supervised by the Council of Engineers; auditing and accounting services are under the Saudi Organization of Certified Public Accountants. The relevant ministry also imposes specific requirements for professional liability and other insurance policies for defined activities. Non-compliance with the requirements stipulated in the PCL is sanctioned with penalties set forth therein. The purpose of introducing this insurance coverage for regulated activities is to provide greater security to the clients of these entities and to therefore requires registered professionals to present comprehensive professional liability insurance policies. In the event of noncompliance, this may result in the temporary suspension of the license by the licensing authority or even the complete withdrawal and subsequent closure of the company within six months.

Succession is generally a complex issue under Saudi law. Under the former law, the heirs of a deceased physician were not allowed to continue his share in the company. The rule was that the share was valued, and a sum of money was paid to the heirs. The PCL now allows heirs to inherit shares (in a limited liability company) and maintain an interest in the company.

The introduction of a flexible methodology for the establishment of professional companies, which is of interest to the foreign investor, has an impact on the entire market. Although the individual company is subject to greater supervision, it offers local and foreign freelancers the opportunity to combine professional expertise and financing to be able to better serve and support the market.

Author: Christine Baltzer-Zacharias

Senior Lawyer