As part of the Saudi Vision 2030, which aims to reduce the Kingdom of Saudi Arabia's (the "Kingdom") dependence on oil, diversify its economy, and attract foreign investment, the Kingdom, has been adopting serious steps towards enhancing the legislative environment through developing new laws and reforming the current legislation.
Among such extensive reforms is the
issuance of the new Anti-Fronting Law or Anti-Concealment Law, promulgated
under Royal Decree No. M4/1441, Cabinet Decision No.
785/1441, (the "Anti-Concealment
Law") which replaced the old Anti-Concealment Law No. M/22 dated 4/5/1425H, followed
by its Implementing Regulations, issued under the Ministerial Decision No.
00479/1442, (the "Implementing Regulations").
The Anti-Concealment Law and its
Implementing Regulations were issued to further regulate commercial investments and
combat commercial concealment in the Kingdom, which was still prevalent in the ever-evolving
Saudi Arabian market.
Even after the
issuance of the old Anti-Concealment Law, many Saudi nationals continued to
allow non-licenced foreign entities and individuals to perform economic
activities inside the Kingdom, using the license initially issued to the Saudi
locals. Such arrangement has led many foreign entities to illegally operate
economic activities in the Kingdom by having a facade of being wholly owned by Saudi
nationals, while in reality, the beneficiaries are non-Saudi.
Law and its Implementing Regulations allow violators to correct their status
within a certain period; otherwise, they would be subject to fines and
penalties as further addressed below.
The Saudi Arabian government has extended this grace period for entities and investors to come forward and correct their status and settle their cases up several times now, and most recently until 16/02/2022G.
to the Anti-Concealment Law,
concealment is defined as "an agreement or arrangement under which a
person enables another non-Saudi person to practice an Economic Activity in
KSA, not licensed to practice the same using the licence or approval issued for
Articles 3 and
4 of the Anti-Concealment
Law have classified the actions of concealment based on their nature, whereby
some are considered criminal, while others are violations punishable by the Law.
Furthermore, Article 3 of the Anti-Concealment
Law states that "Any of the following shall be considered a crime
punishable by the Law:
A person enabling a non-Saudi to
practice, for his own account, an Economic Activity in KSA, not licensed to
practice it, including enabling a non-Saudi to use: His name or the licence or
approval issued for the same, his commercial register, commercial name.
A Non-Saudi practising a commercial
activity for his own account in KSA, not licensed to practice it, through the
person enabling him.
Participating in committing any of the
crimes set forth in paragraphs (a) and (b) of this Article. Whoever incites,
helps, or advises in the commission of the crime while being aware of the same,
shall be considered associate therein, whenever the crime is committed or
proceeded based on such incitement, help, or advice.
Obstructing or preventing the people
charged with implementing the provisions of the Law from performing their
duties in any way, including not disclosing information or providing incorrect
or misleading information."
In addition, Article 4 of the Anti-Concealment
Law states that "Any of the following shall be considered a violation
punishable by the Law:
establishment granting a non-Saudi, in an irregular manner, tools that lead to
absolute disposal of the establishment.
Non-Saudi possessing or using, in an irregular manner, tools that lead to
absolute disposal of the establishment.
o The establishment's use, in its transactions related to its Economic Activity, another bank account not belonging to it.
of the Anti-Concealment Law
Article 2 of
the Implementing Regulation has expanded the definition of the tools which may
lead to a total disposition in an entity by including any non-contractual and
contractual action that includes the following:
the entity revenues being
transferred directly or indirectly to the account of the non-Saudi and not the
account of the entity,
sponsoring the facility or any of its
having the power to appoint and dismiss
the manager of the entity,
possessing commercial papers or
contracts signed in blank for the entity, and
approving the distribution methods of the
profits to the shareholders or partners in the company.
Law grants the Ministry of Commerce the right to monitor and control any
violations or crimes committed by entities or individuals performing
concealment. The Ministry will monitor the breaches through a committee to be
formed under its supervision.
Fighting anti-concealment highly relies
on informers and whistle-blowers, who are encouraged to come forward and report
any concealment acts to the Ministry or its committee, knowing that their identities will be
kept confidential, which further promotes such disclosure. These informers will
also be entitled to receive a financial reward not exceeding 30% of the fine
collected from the breaches they had informed the Ministry about.
The Anti-Concealment Law also grants public prosecutors the right to investigate anti-concealment crimes and prosecute the violators. Furthermore, as per Article 5 of the Anti-Concealment Law, the Criminal Court has the jurisdiction to look into and rule in anti-concealment crimes.
The type of penalty varies depending on
(i) the size of the entity which committed the breach, (ii) the period of which
the breach continued to take place, (iii) the revenues generated as a result, and
(iv) the nature of the breach.
Article 9 of the Anti-Concealment Law
states that whoever commits any crime or violation will be punished by
imprisonment for a period not exceeding five (5) years and/or a fine not
exceeding five million Saudi Riyals (SAR 5,000,000).
In addition to the above penalties, a non-Saudi
who is convicted for committing any of the crimes listed in Article 3 of the Anti-Concealment
Law shall be deported from the Kingdom.
Furthermore, in certain instances, the Anti-Concealment
Law may exempt defaulters who notify the competent authorities about the concealment
activities committed prior to their discovery or legal pursuit; these
exemptions shall not include Zakat and tax obligations that remain applicable.
How to correct the status
Recently the Ministry of Commerce
issued the Regulations for Rectifying the Status of Anti-Concealment Law
Violators (the "Regulations").
Articles 2 and 3 of the Regulations stipulates
that anyone who practices an economic activity in the Kingdom can submit a
request to the Ministry to rectify their status through one of the options granted,
will be exempt from the penalties stipulated in the Anti-Concealment Law, and
from other penalties resulting from the crime and its proceeds, as well as from
paying income tax retroactively.
Moreover, Article 5 of the Regulations
clarifies that such exemptions from penalties will not include those arrested
for committing a breach as stated in the Anti-Concealment Law before submitting
a request to rectify their situation or those referred for prosecution or the
competent court before submitting their request.
Article 2 of the Regulations lists the options
for rectifying the status of businesses as follows:
establishing a partnership in the
enterprise between the Saudi and non-Saudi,
registering the ownership of the
enterprise in the name of the non-Saudi,
the Saudi continues to practice the
economic activity by adding a new partner (Saudi or licensed foreign investor),
the Saudi disposes of the enterprise by
sale, assignment or dissolution according to the regular procedures,
the non-Saudi obtains the Saudi premium
residency by virtue of the Premium Residency Law and proceeds to rectify their
status by utilising the benefits of the premium residency,
the non-Saudi leaves the Kingdom
The request to rectify a business' status will be reviewed by the Ministry to verify that it meets the necessary requirements, and applicants will be given a period of 90 days to remedy any perceived failure by the Ministry of Commerce. If the procedure for rectification is still incomplete within the 90 days, the Ministry may grant an additional 180 days to complete the corrective measures.
Additional Grace Period and Way Forward
Recently, a further extension of the
grace period has been granted for applying the rectification, allowing some
additional time for Saudi and Non-Saudi entities and individuals to consult
with their advisors and cure their status. The grace
period ends on 16/02/2022; subsequently, violators will be penalised under the Anti-Concealment
Law and its Implementing
With the Saudi authorities clamping
down on concealment and fronting practices, and with the recent implementation
of the new e-invoicing starting from December 4, 2021, along with the planned linkage
of these e-invoices with the Zakat, Tax and Customs Authority as a second phase,
the Saudi authorities will be monitoring businesses even more closely, and investors
are encouraged to remedy their situation and adopt the new compliance standards.
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