The Saudi Labor Law is one of the most comprehensive and integrated legal systems in the region, distinguished by its organization and precision in regulating the relationship between the employee and the employer. It aims to achieve balance and ensure justice and the protection of rights in the workplace.
The Labor Law sets out clear and detailed regulations that define the employee’s rights in every case of employment termination—whether by mutual agreement, dismissal, unfair dismissal, resignation, or reaching the retirement age. In all these cases, the Saudi system guarantees the employee’s full rights to ensure their financial and social security even after the termination of their employment.
Below, we will explain in detail each case of employment termination, along with the rights and regulations governing it under the Saudi Labor Law.
Types of Employment Contracts in the Saudi Labor System
Before explaining the types of employment relationships, it is important to first understand some of the most important types of employment contracts under the Saudi system, which are classified into three main categories:
Cases of Termination of Employment in the Saudi Labor System
Employment may be terminated in several ways, each governed by specific regulations and legal provisions. Below, we discuss the cases of employment termination and the legal details of each according to the Saudi Labor Law.
First: Termination upon Expiration of the Contract Term or Completion of Work
Fixed-Term Contract:
Article 74 of the Labor Law outlines the circumstances under which employment is terminated upon the expiration of the contract term, as follows:
The parties to a fixed-term contract may agree to renew the contract for another period; in such a case, the fixed-term contract terminates upon the expiration of the renewed period, provided that the following conditions are observed:
Indefinite-Term Contracts:
Regarding indefinite-term contracts, Article 75 of the Labor Law stipulates that if the contract is for an indefinite period, either party may terminate it for a legitimate reason, which must be stated in a written notice given to the other party prior to termination.
If the party terminating the contract fails to observe the required notice period, they shall be obligated to pay the other party compensation equivalent to the worker’s wage for the notice period, or the remaining portion thereof. The worker’s last wage shall be used as the basis for calculating the compensation for employees who are paid on a time-based system.
For workers who are paid on a different basis, the provisions of Article 96 of the Law shall apply, which states:
However, if the termination of employment occurs for an unlawful reason, the party harmed by such termination shall have the right to compensation, which shall be determined by the Labor Disputes Settlement Committee, taking into account both material and moral damages incurred—whether actual or potential—as well as the circumstances surrounding the termination.
Notice Period:
The notice period is the legally prescribed duration during which an employee must continue working after being notified of the termination of their contract, or during which the employer must retain the employee after the employee decides to terminate the contract.
According to Article 75 of the Saudi Labor Law, the length of the notice period varies depending on the type of contract concluded between the two parties:
Secondly: Termination by Mutual Agreement between the Two Parties
In this case, both parties to the contract agree to terminate the employment relationship. It is required that the employee’s consent to the termination be in writing, as this serves as the most reliable form of proof. This written consent enables the employer, in the event of a dispute and the employee’s denial of having agreed to the termination, to present the written document as evidence of mutual agreement, unlike other less definitive methods of proof.
Thirdly: Termination of Employment by Dismissal
There are two types of dismissal: lawful dismissal and unfair dismissal, each governed by specific conditions and resulting in different employee entitlements depending on the circumstances.
(1) Lawful Cases of Dismissal
Article 80 of the Saudi Labor Law stipulates that an employer may not terminate an employee’s contract without compensation, notice, or severance pay except in the following cases, provided that the employer gives the employee the opportunity to present their objections to the termination. The article lists the legitimate grounds for dismissal as follows:
(2) Unfair Dismissal
Unfair dismissal is one of the most concerning issues for employees, as it results in job loss without legitimate cause. It occurs when the employer terminates the employment contract without a lawful reason. For this reason, the Saudi Labor Law includes provisions guaranteeing fair compensation for unfair dismissal to protect the employee’s rights and compensate them for the damages suffered as a result of wrongful termination.
Rights of an Employee Who Has Been Unjustly Dismissed
Articles 77 of the Saudi Labor Law stipulate that an employee who has been unjustly dismissed is entitled to compensation for the damages suffered as a result of the termination of their employment without a legitimate reason. The amount of compensation is calculated according to the following rules:
For an employee who has been unjustly dismissed to be eligible for these rights, the following conditions must be met:
Therefore, employees are strongly advised not to leave their jobs unless they receive a written dismissal notice from the employer, and not to rely solely on verbal notifications from a manager or the company owner.
Fourth: Termination of Employment by Resignation
Resignation is one form of employment termination based on the employee’s desire to end the contract. It is a right guaranteed to employees by law, in accordance with the principle of freedom of will in terminating the contractual relationship. In this case, the employee ends the employment contract voluntarily by submitting a written request to the employer expressing their intention to leave the job.
According to Article 79 of the Saudi Labor Law, for a resignation to be valid, it must be submitted in writing, and it is required that the employee submit it in person or through a legal representative to ensure its authenticity.
It is noted that a resignation becomes effective upon the expiration of the statutory notice period stipulated in Article (75). However, the point of contention lies in the extent of the employer’s acceptance and its effect on the resignation.
However, in the case of a conditional resignation—that is, when an employee resigns due to abuse, mistreatment, or the employer’s violation of the contract terms—Article 81 grants the employee the right to leave work without prior notice while retaining all statutory rights.
Fifth: Termination of Employment upon Reaching Retirement Age
Another reason for the termination of employment is the employee reaching the retirement age. According to Article 74 of the Labor Law, the retirement age for both male and female employees is 60 years. The retirement age may be lowered in cases of early retirement as stipulated in the work regulations.
If the employment contract is for a fixed term, and its duration extends beyond the retirement age, then in this case, the contract terminates upon the expiration of its term.
End-of-Service Gratuity
Article 84 of the Saudi Labor Law defines the end-of-service gratuity as a sum of money paid by the employer to the employee upon the termination of their service or the expiration of their employment contract, whether fixed-term or indefinite. This payment is based on specific criteria and conditions, calculated according to the employee’s last salary, as a token of appreciation for their efforts and as compensation for their period of service. It is considered a fundamental financial right of the employee, guaranteed by the Saudi Labor Law, and cannot be waived or forfeited under any agreement.
The gratuity is calculated according to the type of employment termination, with each case having its own specific rules and criteria, as follows:
Exception: Working women who terminate their contract within six months of marriage or three months of giving birth are entitled to the full gratuity, regardless of the length of service.
Conclusion
In conclusion, after outlining and detailing the provisions governing the termination of employment under the Saudi Labor Law, it is essential to understand your rights clearly.
If you require further clarification, or if you are involved in a dispute and are uncertain about how to claim your rights, we in Mohammed Alkhliwi Law Firm can help you complete the procedures properly and lawfully, ensuring that you receive all your entitlements, including your end-of-service gratuity.
Disclaimer: The above content does not constitute legal advice, and the author of this article assumes no legal responsibility. For legal advice, please contact us.
Registering employees in social insurance is not optional; it is a fundamental pillar in protecting employee rights, enhancing job security, and achieving a stable work environment, as stipulated by the Saudi Labor Law.
Due to the importance and sensitivity of this topic, this article will cover everything related to social insurance in Saudi Arabia, including registration procedures, employer contribution rates, and insurance coverage for both Saudi and non-Saudi employees.
What is social insurance in Saudi Arabia?
Social insurance in Saudi Arabia is a system established by the General Organization for Social Insurance (GOSI), which was founded by Royal Decree No. (M/22) dated 6/9/1389 AH (corresponding to 15/11/1969 AD). Its insurance, social systems and legislation have since evolved to protect employees in both the private and public sectors, whether Saudi or foreign.
GOSI is committed to ensuring the financial stability of employees and protecting their families upon retirement, in cases of disability or death, and in the event of any work-related risks, accidents, or injuries. The General Organization for Social Insurance (GOSI) requires all employers to register their employees with social insurance and pay the monthly contribution rate determined by GOSI. This rate is equal to or greater than the percentage deducted from the employee's salary. Penalties and fines are imposed on any company or employer who fails to comply with this system or commits violations against their employees.
What are the employer's contribution rates?
GOSI has specified, in its regulations and bylaws, the monthly contributions that employers must pay for their employees, based on the employee's salary and the type of insurance applied to them. Generally, however, the contributions are calculated as follows:
For Saudi employees:
(1) Social Insurance Contributions: A specific percentage is deducted from the employee's salary, as determined by GOSI, and the employer is required to pay a similar percentage from their own account to the Social Insurance fund.
(2) Pension Insurance (retirement, non-occupational disability, and death): In the case of retirement, 9% is deducted from the employee's monthly salary, and the employer is also required to pay 9%.
(3) Occupational Hazard Insurance (work-related injuries and occupational diseases): 2% of the monthly salary is the employer's responsibility.
(4) Unemployment Insurance (SANED): The employer and the employee each contribute 0.75%.
Therefore, the total contribution borne by the employer for a Saudi employee is 11.75% (9% pension + 2% occupational hazard + 0.75% SANED). The total contribution for Saudi employees is 9.75% (9% pension + 0.75% unemployment insurance).
For foreign employees:
The mechanism differs for foreign employees. Contributions are limited to occupational hazard insurance, with the employer only responsible for a 2% fee. Foreign employees are not required to pay any contribution.
What happens if an employer fails to register employees with social security?
To ensure that companies and employers comply with its regulations and bylaws, the General Organization for Social Insurance (GOSI) has established a set of penalties to protect workers' rights and ensure fairness in the workplace. These include:
(1) Financial penalty: A financial penalty is imposed on the employer if they are late in paying social security contributions or fail to register employees.
(2) Retroactive registration: GOSI requires the employer to register the employee retroactively from the date they actually started work and to collect all contributions due for that period.
(3) Late payment penalties: In addition to the basic penalty for the violation, a late payment penalty is imposed on contributions that were not paid on time, at a rate of 2% per month of the outstanding contributions.
(4) Penalty for disbursing compensation without entitlement: If the violation (such as failing to register an employee who was entitled to "Sanad" compensation after leaving work) results in the disbursement of compensation without entitlement, the penalty is more severe.
It is worth noting that if an employer fails to register an employee, the employee has the right to notify the relevant social security office and request to register themselves. According to the "Overview of Social Security in the Labor Law," the relevant office is obligated to compel the employer to register the employee once the registration requirements are met. This is the direct, official procedure for protecting the employee's rights before resorting to any legal action.
How to Register Employees with Social Insurance
With the Kingdom's digital transformation across all sectors, it has become easy to register employees with social insurance electronically through the General Organization for Social Insurance (GOSI) website.
For Saudi employees, the steps are as follows:
- Access the GOSI website.
- Start by registering the company if it is not already registered.
- Add the new employee and enter their data, including their ID number, date of birth, contract type, and salary.
- Specify the employee's actual start date.
- Review the data and confirm registration to begin monthly contributions.
For non-Saudi employees, the registration process is usually automatic once the employee transfers to the Ministry of Human Resources and Social Development.
The employer's responsibility here is to "complete the data," not "register from scratch." They can access their "My Insurance" account and select the "Complete Data for a Non-Saudi Subscriber Registered Automatically" service.
This applies to exceptional cases requiring manual registration where automatic registration is not available, such as (GCC citizens, nomadic tribes, and private expatriates not sponsored by the establishment).
In this case, the employer uses the "Add a non-Saudi subscriber who has not previously been registered with insurance" service, and manually enters the residence number, border number, or passport data and completes all the data.
In conclusion, we have covered the details of social insurance in Saudi Arabia, which is important for all employees, whether Saudi or foreign, and is also a concern for employers who are keen to comply with labor laws and regulations.
If you wish to register your employees with social insurance, or if you are facing any legal issues related to insurance, please do not hesitate to contact us at Mohammed AlKhliwi Law Firm. We will be happy to assist you.
Disclaimer: The above content does not constitute legal advice, and the author of this article assumes no legal responsibility. For legal advice, please contact us.
Governance is a fundamental pillar that ensures the sustainability and continuity of companies, helping them achieve their long-term goals. It revolves around how companies are managed, the decision-making process, and performance monitoring mechanisms to guarantee transparency and protect the rights of all stakeholders, including shareholders, the board of directors, and employees.
This article will explore the concept of governance, how to implement internal and external governance, and its impact on companies.
What is meant by corporate governance?
Corporate governance refers to the rules that regulate the interests and relationship between the board of directors and business stakeholders. These rules are established by the government or through an agreement between the board of directors and the company's stakeholders. Therefore, each company has its own governance system, but the goals of governance remain the same: achieving transparency, accountability, and oversight to ensure business continuity.
Corporate Governance in Saudi Arabia
Since this article discusses corporate governance in Saudi Arabia, it is essential to clarify the regulations and legislation governing internal and external corporate governance in the Kingdom. These include:
What are the implications of implementing corporate governance?
Governance is a vital and pivotal element in the success and sustainability of companies. Its importance lies in achieving the following:
- Enhancing Transparency
Good governance contributes to providing investors and stakeholders with the necessary and reliable information, helping them make informed decisions based on accurate data.
- Achieving Accountability
Governance ensures that all parties are held accountable for their performance and decisions, significantly reducing errors and transgressions.
- Improving Performance
Governance contributes to raising the efficiency of operational processes and reducing risks and errors through the mechanisms it employs in management and oversight.
- Increasing Trust
When companies implement governance and adhere to its standards, it increases the trust of shareholders and customers, strengthening the company's reputation in the market and among competitors. - Achieving Sustainability
Governance aims to manage company resources responsibly, thereby achieving sustainable development.
Internal Corporate Governance
Internal governance refers to the policies and organizational framework established by a company to regulate internal relationships, which includes the following:
- The Board of Directors and its Committees: The Board of Directors is considered one of the most important pillars of corporate governance. It plays a pivotal role in guiding the company, setting its strategies, and determining its management methods.
- Disclosure and Transparency Policy: This refers to the company's periodic disclosure of all financial and non-financial information to ensure transparency and protect shareholders' rights. It is a fundamental part of the company's internal policy.
- Internal Control Systems: These are a set of procedures implemented to verify the accuracy and reliability of financial reports and prevent errors or fraud.
- Internal Committees: Governance requires companies to establish an audit committee, a compensation committee, and a risk assessment committee to assist the Board of Directors in making sound and informed decisions.
- Governance Culture: This requires the company to cultivate a governance culture within the company, encompassing ethical standards and values, and promoting transparency and accountability. It is worth noting that all these elements are included in the Corporate Governance Regulations issued by the Capital Market Authority Board Resolution No. (8-16-2017), which obliges companies to prepare internal policies that ensure their compliance with governance principles.
External Corporate Governance
External governance refers to the regulatory framework imposed on companies by regulatory bodies in Saudi Arabia, such as the Ministry of Commerce, the Capital Market Authority (CMA), the Zakat, Tax and Customs Authority,
. External governance is implemented through the following:
- Financial Disclosure: Companies are required to provide reliable financial reports to investors and stakeholders.
- Compliance with Standards and Regulations: Companies are obligated to comply with Saudi regulations as well as international laws.
- Relationships with Investors: Building strong relationships with investors enhances investor confidence.
- External Audit: Independent firms are engaged to conduct financial audits to ensure the accuracy of financial data and verify compliance with applicable standards.
- Dealing with External Parties: This involves effectively managing relationships with regulatory bodies.
Finally, if you wish to implement governance in your company accurately and systematically, contact Mohammed Alkhliwi Law Firm to handle all governance procedures for you and professionally implement both internal and external corporate governance.
Disclaimer: The above content does not constitute legal advice, and the author of this article assumes no legal responsibility. For legal advice, please contact us.
Listing companies on the Saudi Stock Exchange is a pivotal strategic step that many companies aspire to. It elevates companies to a higher level of trust, maturity, and growth in the eyes of investors and businesspeople. Once a company is accepted into the stock market, it signifies that it is a strong entity that has met all the governance, financial, and legal standards set by the Capital Market Authority.
Due to the importance of this step, the Saudi Stock Exchange has established a set of essential conditions and requirements for company acceptance. Any company that adheres to these standards can easily achieve its listing aspirations. Therefore, in this article, we will explore these conditions and the mechanisms for listing on the Saudi Stock Exchange in detail.
What does listing companies on the Saudi Stock Exchange mean?
Simply put, listing a company means officially listing its shares on the stock exchange (Tadawul), making them available for trading among investors. In other words, it transforms the company from a private company into a public joint-stock company whose shares, or a portion thereof, are offered for public subscription and traded on the Saudi Stock Exchange (Tadawul).
To reach this stage, a company must fully comply with the regulations and bylaws issued by the Capital Market Authority to ensure transparency and fairness in the Saudi market.
Listing Paths in the Saudi Market
The Capital Market Authority (CMA) offers two listing paths, each with its own criteria and target companies. These are:
(1) Listing on the Main Market (Tadawul)
This type of listing targets large companies with a strong financial track record, substantial assets, and a long operational history. It helps companies quickly access a large segment of investors and provides them with higher liquidity in stock trading.
Furthermore, it enhances the company's reputation and market position, and increases its chances of obtaining financing compared to companies that are unable to list.
(2) Listing on the Parallel Market (Nomu)
This type of listing targets startups and small and medium-sized enterprises (SMEs), offering them fewer requirements and less stringent conditions compared to listing on the Main Market, which targets only large companies.
It also helps companies access capital to finance growth and expansion, and allows them the possibility of transferring to the Main Market after fulfilling the listing requirements of this type of market.
Why do companies in the Saudi market seek listing?
Many companies in Saudi Arabia aspire to the dream of listing on the stock exchange, because once a company is listed, it enjoys tremendous advantages not available to other companies. The most prominent of these are:
- Enhanced trust and transparency: Being listed on the Saudi Stock Exchange (Tadawul) is a sign of a company's transparency and commitment to standards, reflecting its strength and credibility in the eyes of investors and businesspeople.
- Easier access to financing: Companies listed on the Saudi Stock Exchange have greater ability to attract capital.
- Access to financing more easily.
- Improved reputation and credibility: Listing raises the company's standing with clients, suppliers, and both government and private entities.
- Increased shareholder liquidity: Shareholders can easily sell their shares, giving them greater flexibility and freedom.
- Significant government support: The Saudi government provides numerous incentives and facilities to companies listed on the stock exchange.
- The ability for listed companies to use their shares as currency to complete acquisitions or mergers with other companies.
- Financial benefit for founders: Listing allows founders and shareholders to sell a portion of their shares on the market. - Special advantages in property ownership: Saudi listed companies receive significant exemptions regarding property ownership, even within the boundaries of the holy cities of Mecca and Medina, which are subject to restrictions on non-Saudi ownership.
- Attracting foreign investment and strategic partnerships: Listed companies are better positioned to attract foreign capital, whether in the form of equity investments or long-term strategic partnerships.
Basic Listing Requirements
First: Listing Requirements on the Main Market (TASI)
The Main Market targets large and mature companies and is characterized by its stringent requirements, which reflect the size and financial strength of these companies. According to the Listing Rules, the most prominent requirements are as follows:
1. Legal Form: The company must be a "Joint Stock Company," as per Article 7(a) of the Listing Rules.
2. Market Capitalization: The total expected market capitalization of all the company's shares upon listing must not be less than SAR 300 million. This requirement reflects the size of the companies targeted by this market.
3. Public Ownership: Public ownership must not be less than 30% of the class of shares to be listed, to ensure sufficient liquidity for the shares in the market.
4. Number of Shareholders: The number of public shareholders must not be less than 200 upon listing. This is another requirement aimed at enhancing the share's liquidity.
Second: Listing Requirements for the Parallel Market (Nomu)
The Parallel Market is designed as a gateway for small, medium, and emerging companies, and therefore features more flexible requirements compared to the Main Market. The basic requirements, according to the "Listing Rules" and the "Registration and Listing Rules for the Parallel Market," are:
1. Legal Form: The company must be a "Joint Stock Company," just like the Main Market.
2. Minimum Market Capitalization: The company's total market capitalization must not be less than SAR 10 million. This lower threshold facilitates entry for startups and small companies.
3. Public Ownership: This requirement is more flexible, requiring that public ownership be at least 20% of the shares, or that the value of shares owned by the public be at least SAR 30 million (whichever is lower).
4. Number of Shareholders: A minimum of 50 public shareholders is required upon listing.
5. Operating History: The company must have been operating as a primary business for at least one fiscal year, which allows relatively new companies the opportunity to list. 6. Financial Statements: The company must have prepared its audited financial statements for the fiscal year preceding the application.
Third: Common and Procedural Requirements
In addition to the specific requirements for each market, there are general and procedural requirements, including:
In short, the two tracks (main and parallel) represent strategic options for companies based on their size, growth stage, and ambitions. Each market provides requirements tailored to the nature of the companies it targets.
Listing Stages
The company goes through three main stages to list on the Saudi Stock Exchange (Tadawul), each with specific steps. These are as follows:
Preparation and Evaluation Stage
Submission and Approval Stage
Offering and Trading Stage
Stage 1: Preparation and Evaluation Stage
This stage requires a set of steps, including:
- Appointing a specialized financial advisor to manage the listing process.
- Preparing a comprehensive valuation of the company, including audited financial statements and the company's legal status.
- Developing a detailed listing plan that includes the offering percentage, timeline, and marketing strategy for investors.
- Preparing the required essential documents, such as financial statements, audit reports, and important contracts.
Stage 2: Preparing the Listing File, Submitting the Application, and Obtaining Approval
- Preparing the listing file and prospectus, including financial data and shareholder structure.
- Officially submitting the listing file to the Capital Market Authority (CMA) for review and approval.
- Obtaining final approval for the offering and its terms.
Stage 3: Offering, Allocation, and Listing
- Officially listing the shares on the Tadawul platform and commencing trading. - Opening the subscription period for institutions and the public.
- Organizing marketing campaigns for investors, including determining the final offering price.
Finally;
If you wish to prepare your listing file or need legal counsel to represent you in the listing process, please don't hesitate to contact us at Mohammed Al-Khliwi Law Firm. We would be delighted to be your partners in your success journey from the very beginning.
Disclaimer: The above content does not constitute legal advice, and the author of this article assumes no legal responsibility. For legal advice, please contact us.
The Kingdom of Saudi Arabia is working diligently to develop its investment and business environment through the economic and legislative reforms launched as part of Vision 2030. Despite this progress, legal risks persist for companies operating in the Saudi market, both local and foreign.
This article will explore all legal risks, how to manage them, and how to prevent them altogether to ensure business continuity and protect companies from fines and penalties.
Risks of Non-Compliance
One of the most prominent legal challenges and risks facing companies in Saudi Arabia is non-compliance with the regulations and systems established by government entities such as the Ministry of Commerce, the Zakat and Tax Authority, the Customs Authority, the Saudi Authority for Data and Artificial Intelligence, and other regulatory bodies that define the rules and frameworks for operations in this field.
These regulations are designed with the sole purpose of protecting all stakeholders—employees, workers, customers, investors, and even the company owners themselves. Violating or failing to comply with them poses a threat to business continuity and the company's financial stability. It also causes disruptions and confusion in operational processes, as well as legal and regulatory disputes.
Therefore, compliance with regulations is the only way to avoid these problems. In the event of any disputes, compliance ensures that you can address and resolve them in a way that safeguards your rights and the rights of your stakeholders.
Solution:
- Establishing a dedicated legal department within the company to ensure legal compliance.
- Hiring a reputable lawyer specializing in corporate law with the necessary experience to handle any of these risks.
- Staying informed about all regulations and keeping up with updates issued by official authorities.
Contract-Related Risks
Legal risks related to contracts are among the most common types of legal risks in companies. This is simply because companies often fail to adhere to the terms of the contract signed with the other party, whether intentionally or unintentionally. Sometimes, a company withdraws from a contract or fails to fulfill one of its conditions due to a dispute with the other party.
Other times, a contract may be terminated due to disagreements regarding project or product specifications upon delivery, resulting from a lack of clarity in the contract and a failure to include all necessary details for reference in case of a dispute.
Solution:
- Consult a lawyer specializing in contracts and Saudi commercial law.
- Register contracts with official government agencies.
- Draft contracts clearly and comprehensively, including all project details and explicit clauses for resolving disputes should they arise.
Labor-Related Risks
Labor-related issues are among the most significant legal risks facing Saudi companies. This category encompasses a long list of problems, such as termination of employment, delayed salaries, and non-compliance with the terms of the employment contract.
It also includes issues of discriminatory treatment, failure to adhere to the minimum wage, and failure to meet the quotas for employing Saudi nationals. All of these issues arise when Saudi labor laws are violated. Therefore, if a company fails to comply with the regulations.
Solution:
- Adhere to all labor laws within the company.
- Train the company's human resources department on proper employee relations and the application of labor regulations.
- Appoint a lawyer specializing in labor law to handle any such issues should they arise.
- Establish a dedicated department to address and prioritize employee complaints.
Risks of Intellectual Property Rights Infringement
With the massive digital transformation in Saudi Arabia and worldwide, trademark, copyright, and patent rights are sometimes infringed, whether intentionally or unintentionally. This exposes companies to hefty fines or, in some cases, the withdrawal of their products from the market.
Solution:
- Commit to the immediate registration of trademarks with the Saudi Authority for Intellectual Property.
- Monitor competitors to prevent the unauthorized use of trademarks.
- Ensure that any software or content used in company activities complies with the required licenses.
Tax and Financial Risks
Failure to comply with the regulations issued by the Zakat, Tax and Customs Authority is the primary reason Saudi companies face tax and financial risks. These risks include late payments, failure to maintain required records, and misinterpretation or miscalculation of taxes.
Companies often find themselves facing substantial fines or additional taxes due to late payments or non-compliance with the tax system in general, along with other financial and legal repercussions that place them in a difficult position.
Solution:
- Use modern electronic systems and software to manage taxes, zakat, and invoices.
- Utilize the electronic services offered by the Zakat and Tax Authority to facilitate the calculation process.
- Train the company's accounting department to enable them to address financial risks.
Data Protection Risks and Cybercrime
Unfortunately, some companies still lack sufficient depth in this area, despite the Kingdom's efforts to achieve digital security for individuals and companies through the implementation of the Personal Data Protection Law (PDPL). This law protects the company from potential data breaches or leaks in any form, or exposure to cybersecurity attacks, which could later lead to financial penalties, damage to its reputation, and loss of customers.
Solution:
- Adhere to the PDPL and implement all its standards within the company.
- Train employees in cybersecurity and personal data protection.
- Report immediately any breach or security vulnerability before the problem escalates.
Finally;
To ensure the continuity of your business without any legal risks or financial problems, you should consult a specialized lawyer who is an expert in the legal risks facing Saudi companies. And as for the office of Mohammed Al-Khalawi, with its experience that extends for many years in corporate cases of all kinds, it can help with legal guidance and direction.
Disclaimer: The above content does not constitute legal advice, and the author of this article assumes no legal responsibility. For legal advice, please contact us.
Companies sometimes face problems and crises that force them to liquidate their operations. Undoubtedly, this is a difficult and painful choice, especially for companies that have been established for many years. However, in some situations, there may be no other solution to overcome the crisis except liquidation.
In this article, we will explore the concept of company liquidation in the Saudi system and how the Saudi business environment guarantees the rights of all parties—partners, creditors, and investors—through the company liquidation system. This system regulates the relationship between all parties and defines the legal procedures for dissolving the company and disposing of its assets in a fair and precise manner.
The Concept of Company Liquidation
Company liquidation refers to the set of procedures that follow the dissolution of a company, the cessation of its commercial activity, and the legal termination of its existence. The liquidation process includes inventorying its assets, settling its receivables, and distributing its assets to partners and shareholders according to the agreed-upon percentages, after settling its debts and obligations.
The company cannot be liquidated without legal intervention. Liquidation procedures such as valuation, settlement, and asset distribution all require an expert, known as the liquidator, who is the person responsible for managing the liquidation in a legally sound manner. This person can be from inside or outside the company, provided that they possess the necessary skills and experience to carry out this difficult task quickly and transparently.
Types of Company Liquidation in the Saudi Arabia
Company liquidation is divided into two types according to the provisions stipulated in the Companies Law: voluntary or judicial. Each case has its own specific circumstances, as follows:
First: Voluntary Liquidation:
Voluntary liquidation is carried out by a decision of the partners themselves, upon their agreement to dissolve the company. A general assembly meeting is held, and during this meeting, a resolution to liquidate the company is issued. The liquidator is also appointed, and their powers, fees, and all details of the liquidation process are determined.
Second: Judicial Liquidation:
Here, liquidation is carried out by a court order. This occurs in the event of a dispute between the partners, where any shareholder files a lawsuit demanding the company's liquidation, or in the event of the company becoming bankrupt or violating any regulations. The court issues a liquidation order, appoints the liquidator, and determines their powers, fees, and the timeframe required for the liquidation process.
Reasons for Company Liquidation
The Saudi Companies Law issued in 2022 outlines a set of administrative and legal reasons that lead companies to liquidate, as detailed in Articles 282 to 296. The most prominent of these reasons are:
A. Legal Reasons:
1. Expiration of the term specified in the company's articles of incorporation without renewal.
2. Achievement of the company's objective, or its inability to be achieved.
3. Agreement of the partners to dissolve the company and cease its operations.
4. Significant loss of capital, or the majority thereof, rendering continuation an unwise decision.
5. Issuance of a court ruling to dissolve the company or declare its bankruptcy.
B. Practical Reasons:
7. Failure of management to attract investments to the company.
8. Mismanagement, depletion of resources, and continuous exposure to losses.
9. Differences in vision among the partners, and the occurrence of disputes that hinder management and impede the achievement of objectives.
Company Liquidation Procedures
Company liquidation procedures are carried out in accordance with the provisions of the Saudi Companies Law to protect the rights of all parties. Once the liquidation decision is issued, the procedures begin as follows:
(1) Officially publishing the liquidation decision in the Commercial Register to inform all relevant parties and stakeholders.
(2) Identifying and selecting an experienced liquidator to safely liquidate the company. This liquidator is chosen by the partners or the court.
(3) Inventorying the company's assets and prioritizing its accumulated debts and receivables. Government dues are the first priority, followed by employee dues, then creditors, and finally, partners.
(4) Commencing debt repayment and addressing creditors' claims.
(5) Converting assets into cash to begin distribution.
(6) Distributing the remaining funds among the partners according to their respective shareholdings.
(7) Finally, canceling and removing the company from the Commercial Register and announcing the completion of the liquidation by publishing the announcement in an official newspaper.
At this point, the company effectively ceases to exist and disappears as if it had never existed. If you are currently undergoing liquidation and seeking an experienced liquidator to guide your company through this critical phase to safety, do not hesitate to contact Mohammed Alkhliwi Law Firm. We will handle all liquidation procedures for you in a legal, organized, and fair manner that guarantees the rights of all parties.
Disclaimer: The above content does not constitute legal advice, and the author of this article assumes no legal responsibility. For legal advice, please contact us.
Establishing a commercial registration is the first step for anyone wishing to officially and legally launch their own business in Saudi Arabia, whether an individual or a company. A commercial registration grants legal approval to conduct business activities in any field and ensures access to government and financing services directed to the business sector.
If you intend to start your own business in Saudi Arabia, you need to know all the details of the process of establishing a commercial registration. Follow along with us.
First: What is a Commercial Registration?
A commercial registration is a legal document that grants any business the approval to conduct its commercial activities. It is also a database under the supervision of the Ministry of Commerce, containing information on all merchants, companies, and sole proprietorships, such as the merchant's or company's name, type of activity, establishment address, registration number, and other details related to the business.
Second: Requirements for Establishing a Commercial Registration in Saudi Arabia
The Ministry of Commerce in Saudi Arabia sets a number of requirements for establishing a commercial registration, the most important of which are:
- The business owner must be a Saudi citizen.
- The business owner or applicant for a commercial registration must be at least 18 years old.
- The business owner or the business establishment must not be a government employee. - The project owner must not already possess a commercial registration for a sole proprietorship.
- Obtaining an investment license from the Ministry of Investment for foreign investors.
Third: How to Establishing a Commercial Registration
Applications to open a commercial registration can be submitted at service centers located throughout Saudi Arabia. However, with the Kingdom's digital transformation under Vision 2030, an online commercial registration service has been made available through the Ministry of Commerce's electronic service via the Saudi Business Center platform. This service aims to help citizens start their businesses without needing to visit service centers.
- Steps to create a commercial registration via the Saudi Business Center platform:
(1) Access the Saudi Business Center platform.
(2) Select the "Commercial Registration" service from the list of electronic services, specifying that the registration type is "Establishment."
(3) Enter all the required information about the establishment, such as specifying the business activity, capital, and any applicable e-commerce activity details.
(4) Also, fill in your personal information as the establishment owner and your contact information.
(5) Finally, review the information, agree to the declaration, and submit the application.
It's worth noting that if you already have a commercial registration, you can submit a renewal or amendment request through the platform, completing all steps electronically, including paying fees using the various payment methods offered.
- Required Documents for Issuing a Commercial Registration
There are a number of documents that must be attached when submitting a request to open a commercial registration:
1. Proof of approval from the licensing authority if the business activity requires a license before commencing operations.
2. Proof of e-commerce activity if the business activity is conducted electronically.
3. If the application is submitted by a cooperative or charitable organization, the following documents are required from the Ministry of Human Resources and Social Development or the National Center for the Development of the Non-Profit Sector: (A copy of the registration certificate; a copy of the letter approving the organization's board of directors along with a copy of the organization's bylaws; a copy of the cooperative's bylaws; and a document authorizing a Saudi national from the organization's board to complete the registration procedures in the commercial register.)
4. If the application is submitted by a charitable endowment (waqf), the following documents are required: (The endowment deed from the Personal Status Court; and a legal power of attorney from the endower, the endowment administrator, or the board of administrators to obtain a commercial registration using the endowment deed.)
Fourth: Commercial Registration Fees
Commercial registration fees are undoubtedly part of your project or business budget, so it's essential to understand the costs in detail.
(1) When opening or issuing a commercial registration
The cost of opening a new commercial registration for the main register ranges from 200 to 1,200 Saudi Riyals, varying according to the legal entity type. For example, the main registration fee for an Establishment is 200 Riyals annually, and for a branch registration, it's 100 Riyals, while the annual registration fee for a limited liability company is 1,200 Riyals.
(2) When amending the commercial registration
Sometimes, business owners or establishments change their name after launch, change their address, or even change the business activity itself. In such cases, it's necessary to update the commercial registration with the latest data to ensure there are no discrepancies between the information recorded and the actual business activity.
Therefore, if you make any changes to the basic information related to the business activity, you must amend the commercial registration.
The fee for amending the commercial registration is 100 Riyals.
Finally, If you wish to start your own business legally and officially, contact us at Mohammed AlKhliwi Law Frim to help you complete all the procedures related to issuing your commercial registration.
Disclaimer: The above content does not constitute legal advice, and the author of the article bears no legal responsibility. For legal advice, please contact us.
With the Kingdom of Saudi Arabia's increasing globalization and the growing job opportunities across various sectors, it has become essential for every employer and employee to understand the different types of employment contracts regulated by the Saudi Labor Law. Choosing the right contract type not only determines the duration of employment but also impacts rights, obligations, and termination procedures.
Therefore, this article will discuss all types of employment contracts in Saudi Arabia in detail, enabling you to understand the differences between them and identify the type best suited to your job as an employee or your needs as an employer.
Definition of an Employment Contract
Article 50 of the Saudi Labor Law defines an employment contract as a contract between two parties: the employer and the employee. This contract obligates the employee to work under the employer's management in exchange for an agreed-upon wage.
This contract is drafted according to a standardized template developed by the Ministry of Human Resources and Social Development. It includes essential information such as the employer's name, workplace, employee's name or address, type of work, start date, agreed-upon wage, and the employment period if it is for a fixed term. All of these factors contribute to regulating the relationship between the employer and the employee.
Both the employer and the employee can add any specific terms or conditions, provided they do not violate any of the regulations, decisions, or provisions of the Labor Law. After the contract is finalized, two copies are made: one for the employer and one for the employee to guarantee their rights.
Types of Employment Contracts in Saudi Arabia
Employment contracts in the Saudi labor system vary according to the nature and characteristics of the work, whether it is for a fixed term or an indefinite term, whether the work is remote or on-site, whether it is related to a specific task and ends, or is permanent. These are some of the factors that determine the contract. The following are the most common types of employment contracts in Saudi Arabia:
(1) Fixed-Term Employment Contract
As its name suggests, this is a contract tied to the completion of work within a specific timeframe. The contract ends upon the expiration of its agreed-upon term between the employer and the employee. All regulations and decisions pertaining to employment contracts stipulated by the labor law apply to it.
Both parties can renew the contract and continue the work. It is worth noting that a fixed-term contract in Saudi Arabia can be converted into an indefinite contract if work continues after the contract expires, if the agreed-upon term, including renewals, exceeds four years, or if the contract is renewed three consecutive times.
(2) Indefinite-Term Employment Contract
An indefinite-term employment contract is a contract not bound by a specific timeframe. Both the employer and the employee are bound by all the terms and conditions stipulated therein, just like any other contract. Both parties have the right to terminate the contract at any time, provided there are legitimate reasons for doing so.
If either party wishes to terminate the contract, they must notify the other party in advance, within the notice period specified in the contract. This notice period must be at least 60 days if the employee's salary is paid monthly, and at least 30 days if the salary is paid daily or in any other non-monthly manner.
If either party terminates the contract without providing the other party with the required notice period, they will be obligated to pay a financial penalty as stipulated by the applicable regulations.
(3) Specific Task Contract
A specific task contract is similar to a fixed-term employment contract in that it includes a clause specifying the termination date. In a fixed-term contract, the work ends upon the expiration of the specified period, while in a specific task contract, the contract ends upon completion of the task.
In this contract, the task and its details are clearly defined and documented, along with an approximate timeframe for completion. The contract concludes upon the completion of the work in its entirety, including all its descriptions and details.
(4) Seasonal Work Contract
A seasonal work contract is for work performed seasonally, such as during the Hajj season. Foreign workers are brought in to perform various tasks during this period using a seasonal work visa, which allows them entry into the Kingdom for a temporary period—the duration of the work season.
It is worth noting that holders of this type of visa are not permitted to perform Hajj, as it is issued solely for seasonal work. Furthermore, it is not renewable, as the stay cannot exceed the legally permitted duration, and it cannot be converted into a permanent work visa. (5) Temporary Employment Contract
A temporary employment contract in Saudi Arabia is a type of short-term, predetermined contract used by employers when they need a worker to complete a specific task within a period not exceeding ninety days.
For example, a contracting company might need additional temporary workers for a specific project. The work may end upon project completion or the expiration of the agreed-upon timeframe, but in both cases, the contract duration must not exceed 90 days.
The Kingdom provides a temporary work visa, which is issued for single or multiple entries, for a period not exceeding one year, and for specific work outside the scope of Hajj-related work. Hajj-related work falls under the category of seasonal work contracts.
(6) Part-Time Employment Contract
A part-time employment contract is used when an employee is not fully dedicated to the employer, meaning their working hours are less than half the company's daily working hours. Part-time work may mean a few hours per day or for some days of the week. The duration of the work is specified in the contract, and it can be renewed for a period agreed upon by both the employee and the employer. Part-time employees retain all the rights to vacations, official holidays, and other provisions stipulated by the Labor Law for full-time employees. They also have the right to be notified before their employment contract is terminated by their employer. If the contract is terminated without prior notice, the employee is entitled to a penalty as specified in the contract.
It is worth noting that Saudi employees working part-time at any company are counted towards the Saudization quotas approved by the Nitaqat program (a program to incentivize establishments to Saudize jobs) and are registered with the General Organization for Social Insurance as part-time workers.
(7) Remote Work Contract
With the spread and expansion of remote work culture worldwide, this type of work has gained popularity and attention in Saudi Arabia. It offers employees greater flexibility and freedom in choosing their work location, without being tied to the company's physical premises.
The remote work contract specifies the location from which the employee will work, the required daily working hours, and the start and end times. It also outlines the salary and all rights stipulated by labor law regarding remote work.
The contract also stipulates the employee's obligation to be present at the workplace when necessary. The employer will provide the necessary equipment for the employee to perform their work. If the employee uses their own equipment, they are required to adhere to the employer's cybersecurity protocols and remote communication policies.
(8) Training Contract
Training is no less important than work. Many companies require trainees to perform certain work-related tasks. The training contract obligates the employer to train and equip an individual with all the necessary skills to perform a specific job. The training period, type of job, and the financial compensation the trainee will receive upon completion are clearly defined within the contract.
The training contract includes the trainee's rights regarding annual leave and official holidays, daily rest periods, weekly rest days, occupational safety and health regulations, work-related injuries and their conditions, and all provisions related to the employment system.
The training contract also stipulates that the employer has the right to terminate the training and qualification contract if it is proven that the trainee is unable to complete the training effectively. The trainee also has the right to terminate the training contract if they do not benefit from the training program. The party terminating the contract is obligated to notify the other party of their intention to discontinue training at least one week in advance.
If the training program is completed to its end; The employer has the right to require the trainee to work for them for a period equal to the duration of the training. If the trainee refuses, they must reimburse the employer for all training costs incurred throughout the program.
(9) Employment Contract for Non-Saudi Employees
The employment contract for a Saudi employee is the same as for a foreign employee, meaning it includes all provisions and is subject to the regulations of the Labor Law. However, the difference is that the employment contract for a non-Saudi employee must be for a fixed term. If the contract does not specify a term, the work permit serves as the employment period. Foreigners are not permitted to work in Saudi Arabia without a valid work permit issued by the Ministry of Human Resources and Social Development.
(10) Flexible Employment Contract
A flexible employment contract is very similar to a part-time contract, but the difference is that it is only for Saudi employees, and the daily working hours must be less than half the company's regular daily working hours.
For the contract to be valid, it must be for a fixed term, specifying the working hours, the agreed-upon wage, and the times the employee is required to be present. The employee has the right to accept or refuse work assignments at any time without facing any repercussions. Finally, employment contracts are a guarantee of the rights of both the employer and the employee. Without them, neither party can secure their rights or claim them from the other. They formally and legally regulate the relationship, obligating each party to fulfill their duties towards the other as agreed.
If you wish to draft a legally sound employment contract that guarantees your rights, don't hesitate to contact us at Mohammed Alkhliwi Office. We will help you begin your professional journey with complete professionalism.
Disclaimer: The above content does not constitute legal advice, and the author of this article assumes no legal responsibility. For legal advice, please contact us.
Among the significant developments achieved by the Kingdom of Saudi Arabia in recent years is its focus on protecting the privacy of user data, whether for individuals, employers, companies, or institutions, through the launch of The Personal Data Protection Law (PDPL).
This law aligns with international standards such as GDPR to guarantee individuals' right to privacy and ensure their digital security. So, what is this system? And what are its objectives? This is what we will explore in this article.
What is the Personal Data Protection Law in Saudi Arabia?
The Personal Data Protection Law (PDPL) is a system issued to protect individuals' data and privacy in the digital world. It was issued by Royal Decree No. (M/19) of 1443 AH (2021 CE), and the Saudi Data & Artificial Intelligence Authority (SDAIA) was tasked with overseeing its implementation. In 1444 AH (2023 CE), the law was amended by Royal Decree No. (M/148).
The law helps provide digital security in the Kingdom of Saudi Arabia, especially in light of rapid technological advancements, by regulating the collection, exchange, processing, disclosure, and retention of personal data between individuals, companies, institutions, and other entities that process personal data of individuals residing in the Kingdom. This applies even if the entity is located outside the Kingdom, as these entities cannot process any personal data unless they have the legal basis granting them this authority and the consent of the data subjects themselves. The system aims to regulate all aspects of handling personal data, from its collection and processing to its disclosure and storage, emphasizing a fundamental principle: personal data may not be processed without the consent of its owner, except in cases specified by law.
The law requires companies to develop a privacy policy that details how they process personal data, explains the purpose behind collecting this data, and obligates them to destroy collected data when it is no longer necessary.
The Kingdom has also ensured that the Law is compatible with international standards, particularly the European Union's General Data Protection Regulation (GDPR), which is considered a global standard for data protection.
Objectives of the Personal Data Protection Law?
The main objectives of the Personal Data Protection Law are as follows:
Rights of Personal Data Subjects When Their Data Is Used
The Law stipulates the full protection of the rights of data subjects, which include:
1. The Right to Know: The data subject has the right to know how their data is processed, the purpose for which their personal data is requested, and that their data is not processed in a manner inconsistent with the purpose for which it was collected or in circumstances other than those stipulated in Article (10) of the system.
2. The Right to Access: The data subject has the right to access their personal data held by the data controller, to review it, and to obtain a copy of it free of charge.
3. The Right to Rectification: The data subject has the right to request the correction, completion, or updating of their personal data held by the data controller.
4. The Right to Request Deletion: The data subject has the right to request the deletion of their personal data when it is no longer needed, without prejudice to the provisions of Article (18) of the system.
5. The Right to Withdraw Consent to the Processing of Personal Data: Data subjects have the right to withdraw their consent to the processing of their personal data at any time and in all circumstances, except as stipulated in the Personal Data Protection Law and its Implementing Regulations.
What are the penalties for non-compliance with the Personal Data Protection Law?
To ensure that data controllers adhere to and implement the Personal Data Protection Law, the Kingdom has imposed penalties for non-compliance. These penalties may include restrictions on data processing activities, mandatory corrective actions, or damage to the controller's reputation, which can negatively impact its business.
The penalty may also be a financial fine. The fine is determined based on the nature of the violation, whether it involves sensitive personal data or a large amount of data, and whether the violation was due to negligence or deliberate intent.
To ensure full compliance, the law has established deterrent penalties for violators. The most severe penalty is stipulated in Article 35 of the Personal Data Protection Law, which states:
Anyone who discloses or publishes sensitive data in violation of the provisions of this law, with the intent to harm the data subject or to gain personal benefit, shall be punished by imprisonment for a period not exceeding two years and a fine not exceeding three million riyals, or by either of these penalties.
How to avoid privacy violations and protect your personal data?
It is essential to know how to protect your personal data, especially now that everything has gone digital.
Among the most important ways to protect your data are:
Finally;
If you wish to protect your personal data more effectively, or if you wish to file a lawsuit against any entity that has used your personal data without your permission, or incorrectly, or failed to safeguard your rights when using it, do not hesitate to contact us at Mohammed Al-Khalawi's office so we can assist you immediately in protecting your privacy and regaining full control over your data.
Disclaimer: The above content does not constitute legal advice, and the author of this article assumes no legal responsibility. For legal advice, please contact us.
The commercial sector in Saudi Arabia is witnessing remarkable development, driven by Vision 2030, which aims to improve the business environment and expand the scope of investment by attracting local and foreign investors.
Among the important legal entities for investors and entrepreneurs at the beginning of their projects, as well as for owners of small and medium-sized enterprises, are the sole Establishment and the single-person company.
Despite their similarity in terms of sole ownership, there are fundamental differences in terms of legal liability, management, size, and financing.
Therefore, in this article, we will review the most prominent differences between them, clarifying the advantages and disadvantages of each, to help you choose the most suitable structure for your goals and future vision.
Definition of a Sole Establishment
In the Kingdom of Saudi Arabia, a sole establishment refers to any commercial or industrial establishment owned and managed by a single individual. It does not possess a separate legal personality or financial liability distinct from its owner, and it operates independently without direct government involvement.
The business is based on individual ownership and personal management, where the owner or a person appointed by the owner directly manages the commercial or industrial activity.
Sole Establishments include a wide range of businesses such as restaurants, retail stores, offices, and technology companies.
These businesses are a fundamental pillar of the Saudi economy, playing a vital role in creating job opportunities, providing goods and services, and supporting sustainable development by encouraging entrepreneurship and private investment.
Advantages and Disadvantages of a Sole Establishment
Advantages:
Disadvantages:
Definition of a Single Person Company
The Single Person Company (SPC) is one of the newest forms of legal entities in the Kingdom, and it is an attractive option for individuals and investors who wish to establish and manage their companies independently.
It is a company owned by whether a natural or legal person, and their financial liability is limited to the company's capital.
Although it enjoys an independent legal and financial personality, the owner may bear personal liability in some specific cases, such as gross breach of obligations.
Advantages and Disadvantages of a Single-Person Company
Advantages:
Disadvantages:
Key Differences Between a Sole establishment and a Single-Person Company
1. Ownership:
A sole establishment is owned by a natural person, while a single-person company is considered a separate legal entity .
2. Financial Liability:
In a sole establishment, the owner is personally liable for all debts and obligations of the business.
In a single-person company, liability is limited to the company's capital only.
3. Management:
A sole establishment is managed by the owner alone, while the owner of a single-person company can appoint a manager or a board of directors to manage it.
4. Size and Scope:
A sole establishment is smaller in size and resources, while a single-person company offers greater opportunities for expansion and growth.
5. Financing:
Financing for a sole establishment often depends on the owner's personal resources, while a single-person company can attract investors or institutional financing.
6. Profits:
In a sole establishment, profits are considered personal income for the owner.
In a single-person company, profits are first recorded in the company's name and then distributed to the owner according to the distribution policy.
How to Convert a Sole establishment into a Single-Person Company
The Saudi Ministry of Commerce allows the conversion of a sole establishment into a single-person company electronically through its official website by following these steps:
1. Visit the Saudi Business Center website.
2. Select "Start Service".
3. Log in to your account.
4. Create a new request.
5. Specify the type of registration, region, and required service.
6. Upload the required attachments.
7. Review the data and ensure its accuracy.
8. Submit the request electronically.
Conclusion
Choosing the appropriate legal entity depends on the nature of the business, the size of the project, and the level of financial risk the business owner is willing to bear.
Understanding the differences between a sole establishment and a single-person limited liability company will help you make a more accurate legal and financial decision that aligns with your future goals and investment vision.
If you wish to undertake any procedure related to a sole establishment or a single-person company, please do not hesitate to contact us at Mohammed Al-Khliwi Law Firm, and we will assist you with utmost professionalism.
Disclaimer: The above content does not constitute legal advice, and the author of this article assumes no legal responsibility. For legal advice, please contact us.
With the booming hospitality sector in Saudi Arabia and the tremendous transformation driven by Vision 2030—aimed at attracting millions of visitors from around the world through various entertainment and sporting events hosted by the Kingdom—the demand for hotels has increased significantly. As a result, the Kingdom has adopted the hotel management agreement model to enhance hotel operations and, consequently, improve the overall guest experience.
So, what exactly are hotel management agreements? And what are the essential features of these agreements? This is what we will explore in this article.
What are Hotel Management Agreements?
The hotel sector in Saudi Arabia is undergoing a major transformation. With the growing demand for hotels, the need for a legal framework to govern the relationship between commercial property owners and hotel operators has become increasingly important. Many people are unaware that any hotel essentially consists of two companies: the company that owns the property and the management company that owns the brand.
Recognizing this, Saudi Arabia began adopting the hotel management agreement model to regulate the relationship between these two entities responsible for hotel operations—particularly with the surge of visitors drawn by the Kingdom’s expanding entertainment scene. Hotel management agreements have emerged as a practical solution for managing the industry and as an attractive opportunity for investors seeking partnerships with leading hotel brands.
These agreements can take several legal forms, the most prominent of which are:
First: Franchising and Licensing
We are dealing here with two different models. The first involves hotel operators that own and manage their properties, meaning that management, ownership rights, and reservation systems are all handled internally. In this model, franchises and licenses are not part of the organizational structure.
The second model involves hotel operators who license the brand from a third party. A franchise or licensing agreement may be in place. In this case, the property owner must ensure that the operator has conducted proper due diligence regarding these arrangements and that the agreements remain valid for the entire duration of the contract.
The agreement should also include representations and warranties regarding the adequacy and status of the franchise or licensing agreement, as well as covenants to maintain it in force, and intervention or remedy rights for the benefit of the commercial property owner to ensure continuity and compliance.
It should be noted that these franchise or licensing agreements cannot be used to define the specific terms and conditions of the arrangement between the commercial property owner and the hotel operator; however, they form an important part of the overall context within which the hotel management agreement is properly concluded.
Secondly: Lease Agreements
Lease agreements are fundamental to income-generating assets in the commercial real estate sector. They are legally binding contracts that guarantee the rights of both the property owner and the hotel operator. From the tenant’s perspective, lease agreements ensure a registrable right to the land, protect against third-party interference, and limit the owner’s ability to disrupt the tenant’s business operations.
From the owner’s perspective, lease agreements establish a clear and defined obligation to pay rent, specify responsibilities and obligations at the end of the contract term, and grant certain privileges in the event of the tenant’s bankruptcy.
Despite these advantages, this model is not preferred for use in hotel management. . The reason is that fixed rent poses a significant risk to the operator in the event of a market downturn and does not accurately reflect the hotel’s operating profits. Moreover, traditional lease concepts are not compatible with the nature of the hotel business, which relies on variable operations and fluctuating income.
As a result, the relationship between the owner and the operator has evolved into a form of agreement that combines the benefits of a lease while eliminating its drawbacks, incorporating special provisions tailored to the nature of hotel operations. This is what is known today as a hotel management agreement.
Third: Hotel Management Agreements
The third legal framework governing the relationship between the commercial property owner and the hotel operator is the hotel management agreement. This represents a more advanced and modern form of hotel lease agreements and is known by several names, most notably operating service agreements and hotel operating agreements.
Hotel management agreements have their own specific standards and regulations, aiming to establish a deeper business relationship between the owner and the operator. They grant the property owner a voice in strategic decisions and allow them to benefit from the potential profits generated by the hotel’s performance.
Fourth: Revenues, Expenses, and Fees
The section concerning revenue sharing is the most important part of a hotel management agreement. Unlike lease agreements, where revenue is fixed through a predetermined rent, the owner in this case receives all net revenue after deducting costs and operator fees. This arrangement incentivizes the owner to control costs and ensures transparency in fee calculations.
Regarding fees, the common market practices dictate how profits are distributed. current market practice involves setting both a base fee and an incentive fee for the hotel operator. As for budgeting, this structure provides the property owner with a mechanism to approve the budget, serving as a control tool to monitor performance and manage expenses effectively.
Fifth: Management and Employees
It has become common practice for hotel management agreements to require that all employees working in the hotel be legally employed by the commercial property owner.For many owners, employing staff to serve tenants is an uncommon practice; therefore, owners should pay particular attention to this requirement and ensure its legality.
Although the hotel manager usually supervises the employees directly, their status as employees of the owner complicates the legal relationship between the parties. In exchange for assuming employment responsibilities—or due to their involvement in operational activities—the owner may obtain the right to approve or reject appointments to key management positions.
When drafting these rights, consideration should be given to the operator’s organizational structure, the status of existing employees, and the need to ensure their job security. Owners should also carefully assess the actual authority these rights grant them.
Sixth: Renovation and Development
The legal framework of hotel management agreements includes a Property Improvement Plan (PIP)—a structured plan outlining the necessary upgrades and renovations that the commercial property owner must undertake to maintain brand standards. The obligations under the Property Improvement Plan typically extend throughout the duration of the hotel management agreement and and it shall be updated periodically at intervals mutually agreed upon.
To ensure that commercial property owners adequately fund these obligations, hotel management agreements often require the establishment of a reserve account, funded by a fixed percentage of gross revenues. This mechanism guarantees adherence to the plan and ensures the periodic renovation and upkeep of the hotel.
Seventh: Term and Termination Rights
Hotel management agreements generally have fixed terms that are longer than typical commercial leases, sometimes extending up to 20 years. They also include termination rights for each party in the event of a breach of obligations by the other. However, because longer terms tend to disproportionately benefit hotel operators, it is common for property owners to negotiate additional termination rights.
Property owners may also secure termination rights in the following circumstances:
(a) Upon the sale of the property.
(b) Without cause after specified periods (to allow for property redevelopment or other reasons).
(c) If projected revenue targets are not consistently met. This last right can replace—or operate alongside—a minimum revenue target clause to ensure that hotel operators do not overestimate gross revenue.
Conclusion
Hotel management agreements form the cornerstone of the relationship between commercial property owners and hotel operators, surpassing traditional lease models due to their flexibility and adaptability to the sector’s needs. This makes them an ideal framework for fostering collaboration and creating long-term value in the hospitality industry.
If you are looking for professional assistance in drafting and structuring these agreements, you are in the right place. At Mohammed Al-Khliwi Law Firm, we will help you complete all necessary procedures with expertise and ease.
Disclaimer: This content is not legal advice. No liability is assumed. For legal consultation, please contact us.
Mohammed Alkhliwi Law Firm is a Saudi legal practice that serves individuals, institutions, and corporations, drawing on extensive experience in litigation and legal consultancy. The firm believes that law is not merely a set of regulations and procedures, but a powerful tool to protect rights and ensure justice. For this reason, the firm is dedicated to serving its clients with the utmost professionalism and responsibility.
