Construction and Projects Guide: Saudi Arabia - Association ...

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Association of Corporate Counsel 1025 Connecticut Avenue, NW, Suite 200 Washington, DC 20036 USA tel +1 202.293.4103, fax +1 202.293.4701 www.acc.com By in-house counsel, for in-house counsel. ® InfoPAK SM Construction and Projects Guide: Saudi Arabia Sponsored by:

Transcript of Construction and Projects Guide: Saudi Arabia - Association ...

By in-house counsel, for in-house counsel.®

Association of Corporate Counsel 1025 Connecticut Avenue, NW, Suite 200

Washington, DC 20036 USA tel +1 202.293.4103, fax +1 202.293.4701

www.acc.com

By in-house counsel, for in-house counsel.®

Association of Corporate Counsel 1025 Connecticut Avenue, NW, Suite 200

Washington, DC 20036 USA tel +1 202.293.4103, fax +1 202.293.4701

www.acc.com

 

 

 

InfoPAKSM  

Construction and Projects Guide:

Saudi Arabia  

Sponsored by:

   

Construction and Projects Guide: Saudi Arabia

 

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Construction and Projects Guide: Saudi Arabia

March 2016

Provided by the Association of Corporate Counsel 1025 Connecticut Avenue, NW, Suite 200 Washington, DC 20036 tel +1 202.293.4103 fax +1 202.293.4107 www.acc.com

This InfoPAKSM provides a Q&A that gives a high level overview of the main trends and significant deals; procurement arrangements; transaction structures and corporate vehicles; financing projects; security and contractual protections that funders require; standard forms of contracts; risk allocation; excluding liability, including caps and force majeure; contractual provisions covering material delays and variations; appointing and paying contractors; subcontractors; licences and consents; projects insurance; employment laws; health and safety; environmental issues; corrupt business practices and bribery; bankruptcy/insolvency; public private partnerships (PPPs); dispute resolution; tax and mitigating tax liability; the main construction organisations; and proposals for reform.

To compare answers across multiple jurisdictions, visit the construction and projects Country Q&A tool at http://uk.practicallaw.com/4-502-1260.

This Q&A is part of the global guide to construction and projects law. For a full list of jurisdictional Q&As visit www.practicallaw.com/construction-guide.

This material was developed by Practical Law. For more information about Practical Law, visit their website at http://www.practicallaw.com/.

 

 

 

 

 

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Contents

I. Overview of the Construction and Projects Sector ...................................................................... 7

A. What Are the Main Trends in the Local Construction and Projects Market? What Are the Most Significant Deals? .......................................................................................................................................................................................... 7

II. Procurement Arrangements ........................................................................................................... 8

A. Which Are the Most Common Procurement Arrangements If the Main Parties Are Local? Are These Arrangements Different If Some or All of the Main Parties Are International Contractors or Consultants? ... 8

III. Transaction Structures .................................................................................................................... 8

A. What Transaction Structures and Corporate Vehicles Are Most Commonly Used in Both Local and International Projects? ............................................................................................................................................................ 8

IV. Finance ............................................................................................................................................... 9

A. How Are Projects Financed? How Do Arrangements Differ for Major International Projects? .......................... 9

V. Security and Contractual Protections .......................................................................................... 10

A. What Forms of Security and Contractual Protections Do Funders Typically Require to Protect Their Investments? ............................................................................................................................................................................ 10

VI. Standard Forms of Contracts ........................................................................................................ 10

A. What Standard Forms of Contracts Are Used for Both Local and International Projects? Which Organisations Publish Them? .............................................................................................................................................. 10

VII. Contractual Issues .......................................................................................................................... 11

A. Contractors' Risks ................................................................................................................................................................. 11

VIII. Excluding Liability ........................................................................................................................... 11

A. How Can Liability Be Excluded or Restricted under Local Law? ............................................................................... 11

IX. Caps on Liability ............................................................................................................................. 12

A. Do the Parties Usually Agree a Cap on Liability? If Yes, How Is This Usually Fixed? What Liabilities, If Any, Are Typically Not Capped? ................................................................................................................................................. 12

X. Force Majeure ................................................................................................................................. 12

A. Are Force Majeure Exclusions Available and Enforceable? .......................................................................................... 12

XI. Material Delays ............................................................................................................................... 12

A. What Contractual Provisions Are Typically Negotiated to Cover Material Delays to the Project? ................. 12

XII. Material Variations ......................................................................................................................... 13

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A. What Contractual Provisions Are Typically Negotiated to Cover Variations to the Works? ............................ 13

XIII. Other Negotiated Provisions ........................................................................................................ 13

A. What Other Contractual Provisions Are Usually Heavily Negotiated by the Parties? ......................................... 13

XIV. Architects, Engineers and Construction Professionals ............................................................... 14

A. How Are Construction Professionals Usually Selected? Following Selection, How Are They Then Formally Appointed? ............................................................................................................................................................................... 14

B. What Provisions of Construction Professionals' Appointments Are Most Heavily Negotiated? Are Liabilities Routinely Limited or Capped in Construction Professionals' Appointments? ...................................... 14

XV. Payment for Construction Work .................................................................................................. 15

A. What Are the Usual Methods of Payment for Construction Work? Are There Ways for the Contractor and Consultants to Secure Payment or Mitigate Risks of Non-Payment under Local Law? ................................ 15

XVI. Subcontractors ............................................................................................................................... 15

A. How Do the Parties Typically Manage Their Relationships with Subcontractors? ................................................. 15

XVII. Licensing .......................................................................................................................................... 16

A. What Licences and Other Consents Must Contractors and Construction Professionals Have to Carry out Local Construction Work? Are There Any Specific Licensing Requirements for International Contractors and Construction Professionals? ........................................................................................................................................ 16

B. What Licences and Other Consents Must a Project Obtain? ..................................................................................... 16

XVIII. Projects Insurance .......................................................................................................................... 17

A. What Types of Insurance Must Be Maintained by law? Are Other Non-Compulsory Types of Insurance Maintained under Contract? ................................................................................................................................................ 17

XIX. Employment Laws .......................................................................................................................... 17

A. What Are the Main Employment Law Requirements for Hiring Local and Foreign Workers? .......................... 17

B. Which Employment Laws Are Relevant to Projects? .................................................................................................... 18

C. Must an Employer Pay Statutory Redundancy or Other Payments at the End of a Project? Are All Employees Eligible? ................................................................................................................................................................ 18

XX. Health and Safety ........................................................................................................................... 18

A. Which Health and Safety Laws Apply to Projects? ........................................................................................................ 18

XXI. Environmental Issues ..................................................................................................................... 19

A. Which Local Laws Regulate Projects' Effects on the Environment? .......................................................................... 19

XXII. Prohibiting Corrupt Practices ....................................................................................................... 20

A. Are There Any Rules Prohibiting Corrupt Business Practices and Bribery (Particularly Any Rules Targeting the Projects Sector)? What Are the Applicable Civil or Criminal Penalties? .......................................................... 20

 

 

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XXIII. Bankruptcy/Insolvency ................................................................................................................... 20

A. What Rights Do the Client and Funder Have on the Contractor's Bankruptcy or Insolvency? ......................... 20

XXIV. PPPs ................................................................................................................................................. 21

A. Are Public Private Partnerships (PPPs) Common in Local Construction Projects? If So, Which Sectors Commonly Use PPPs? ........................................................................................................................................................... 21

B. What Local Laws Apply to PPPs? ....................................................................................................................................... 21

C. What Is the Typical Procurement/Tender Process in a PPP Transaction? Does the Government or Another Body Publish Standard Forms of PPP Project Agreement and Related Contracts? ............................... 21

XXV. Dispute Resolution ......................................................................................................................... 22

A. Which Are the Most Common Formal Dispute Resolution Methods Used? Which Courts and Arbitration Organisations Deal with Construction Disputes? .......................................................................................................... 22

B. What Are the Most Commonly Used Alternative Dispute Resolution (ADR) Methods? ................................... 22

XXVI. Tax ................................................................................................................................................... 23

A. What Are the Main Tax Issues Arising on Projects? ..................................................................................................... 23

B. Are Any Methods Commonly Used to Mitigate Tax Liability on Projects? Are There Any Tax Incentives to Carry out Regeneration Projects? ..................................................................................................................................... 24

XXVII. Other Requirements for International Contractors ................................................................... 24

A. Are There Any Specific Requirements That International Contractors or Construction Professionals Must Comply with? .......................................................................................................................................................................... 25

XXVIII. Reform and Trends ....................................................................................................................... 25

A. Are There Any Proposals to Reform Construction and Projects Law? Are There Any New Legal or Regulatory Trends Affecting Projects? .............................................................................................................................. 25

XXIX. Main Construction Organisations ................................................................................................. 26

A. Ministry of Commerce and Industry ................................................................................................................................. 26

B. Saudi Arabian General Investment Authority (SAGIA) ................................................................................................. 26

C. Saudi Council of Engineers .................................................................................................................................................. 26

D. Department of Zakat and Income Tax (DZIT) ............................................................................................................... 26

E. Saudi Chamber of Commerce ............................................................................................................................................ 26

XXX. Online Resources ............................................................................................................................ 27

A. Saudi Arabian General Investment Authority ................................................................................................................. 27

B. Ministry of Commerce and Industry ................................................................................................................................. 27

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C. Ministry of Justice ................................................................................................................................................................... 27

D. Ministry of Labour ................................................................................................................................................................. 27

E. Ministry of Interior ................................................................................................................................................................ 27

F. Ministry of Foreign Affairs .................................................................................................................................................... 27

G. Ministry of Municipal and Rural Affairs ............................................................................................................................. 28

H. Saudi Arabian Monetary Agency ......................................................................................................................................... 28

I. Saudi Embassy ......................................................................................................................................................................... 28

J. Saudi e-Government National Portal ................................................................................................................................ 28

K. National Centre for Documents and Archives (NCDA) ............................................................................................. 28

L. Bureau of Experts at the Council of Ministers ................................................................................................................ 28

XXXI. About the Authors ......................................................................................................................... 29

A. Belal Hashmi, Managing Associate (Head of Corporate Department) ...................................................................... 29

B. Abdulrahman Hammad, Associate ..................................................................................................................................... 29

 

 

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I. Overview of the Construction and Projects Sector

A. What Are the Main Trends in the Local Construction and Projects Market? What Are the Most Significant Deals?

1. Main Trends

Saudi Arabia is among the largest exporters of oil in the world and invests heavily in construction projects. Due to the increasing population of Saudi Arabia, the government has shifted its focus to building infrastructure and housing, transportation systems (such as railroads, airports and bridges) and commercial development space.

2. Major Projects

The main projects currently include:

■ King Abdullah Economic City (KAEC). This is a new US$103 billion super-city in the middle of the desert with hospitals, schools and golf courses, a port capable of handling 20 million containers a year, an industrial complex, a financial island, beach facilities and residential neighbourhoods.

■ King Khaled International Airport, Terminal 5, Riyadh. The Saudi Arabian general authority for civil aviation, in collaboration with a Turkish joint venture, is currently building an extension to the existing airport. This project is valued at US$400 million.

■ Jeddah Corniche. This new development attracted many interested bidders. Lamar Investment and Real Estate Development Company offered a SAR 1.73 million contractual agreement to build two towers, each containing 49 storeys, which will include a hotel and apartments. It is a 4.5km stretch of family-friendly recreational space consisting of fountains, parks and lakes.

■ Abraj Kudai development. This project is a complex development in Mecca, which was assigned to Binladen Group. It involves the construction of 12 towers ranging from 30 to 45 storeys that will boast over 10,000 residential units and hotel rooms. It will also include public transport facilities such as a bus station and car park, as well as restaurants and a mall.

■ Riyadh metro. This public rail metro project will be constructed by BACS consortium, according to the development authority, for US$22.5 billion. Two rail lines will be designed and built, with a total length of 176km across Riyadh, including 85 stations.

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■ Jeddah metro. Costing US$12 billion, this project is a huge step towards the utilisation of public transportation in Saudi Arabia. The contractual agreement has been made with AECOM and the facilities that will be provided to the public will include a metro, a tram, a 750km-long bus route with 3,000 stops, ferries and taxis.

II. Procurement Arrangements

A. Which Are the Most Common Procurement Arrangements If the Main Parties Are Local? Are These Arrangements Different If Some or All of the Main Parties Are International Contractors or Consultants?

Generally, local and international contractors use the same procurement arrangements. The most common arrangements include:

■ The appointment of a contractor.

■ The appointment of a subcontractor.

■ Employer/client arrangements.

 

 

III. Transaction Structures

A. What Transaction Structures and Corporate Vehicles Are Most Commonly Used in Both Local and International Projects?

1. Local Projects

Joint ventures partnerships are commonly used as a transaction structure in Saudi Arabia, whereby two or more companies form an alliance and take on a project together.

 

 

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The most commonly used corporate vehicle is the limited liability company (LLC). The advantage of this structure is that assets are protected, and there are fewer restrictions. For example:

■ An LLC can be formed with two shareholders, whereas a joint stock company requires at least five shareholders.

■ No share certificates are issued as each shareholder's ownership is evidenced in the articles of association.

■ There is no provision on the issuance of different classes of shares.

2. International Projects

Local and international projects usually use the same transaction structures and corporate vehicles (see Section III.A.1).

IV. Finance

A. How Are Projects Financed? How Do Arrangements Differ for Major International Projects?

In the past, infrastructure and industrial projects with significant capital requirements were mostly financed through a combination of local and international commercial and export credit agency facilities. In recent years, and with more focus on public works, there has been a shift towards contractor financing.

Projects in Saudi Arabia, especially industrial projects, seek financing from the Saudi Industrial Development Fund (SIDF) and Public Investment Fund (PIF). Government projects usually use bridge financing, where banks fund the contract initially, and are later paid back through a fee paid by the government.

In practice, commercial transactions often combine a number of the above mechanisms to produce the desired economic result, and/or may incorporate both Sharia compliant (Islamic funding) and conventional funding.

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V. Security and Contractual Protections

A. What Forms of Security and Contractual Protections Do Funders Typically Require to Protect Their Investments?

1. Security

Funders typically use bonds, guarantees and mortgage lending to protect their investments. Bank guarantees and promissory notes are also used for security purposes.

2. Contractual

Contractual protections include, but are not limited to:

■ Pledge on accounts and receivables.

■ Share and asset pledges.

■ Parent company guarantees.

VI. Standard Forms of Contracts

A. What Standard Forms of Contracts Are Used for Both Local and International Projects? Which Organisations Publish Them?

1. Local Projects

The standard forms of contracts used in Saudi Arabia include the International Federation for Consulting Engineers (Fédération Internationale des Ingénieurs-Conseils) (FIDIC) suite of contracts and the standard government forms of contracts.

For local government projects, customised forms and agreements are used.

 

 

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2. International Projects

International projects in Saudi Arabia adopt the same forms as local projects, although they generally remain in standard form. FIDIC contracts are the most widely used.

VII. Contractual Issues

A. Contractors' Risks

1. What Risks Are Typically Allocated to the Contractor? How Are These Risks Offset or Managed?

In Saudi Arabia, risks such as design, site risk and structural collapse are typically allocated to the contractor. These risks can be mitigated through liability insurance and contractual indemnities clauses.

VIII. Excluding Liability

A. How Can Liability Be Excluded or Restricted under Local Law? A 10% liability cap is typically placed under the Government Tender and Procurement Law (Government Tenders Law). The Government Tenders Law is applicable to all tenders and procurements undertaken by government entities. This Law requires that contracts for public work procurements must be in an approved standard form and submitted to the Ministry of Finance for approval.

In non-public construction contracts, all liabilities are typically capped at 10% of the contract price.

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IX. Caps on Liability

A. Do the Parties Usually Agree a Cap on Liability? If Yes, How Is This Usually Fixed? What Liabilities, If Any, Are Typically Not Capped?

All liabilities are typically capped at 10% of the contract price and are fixed contractually. However, if a dispute is submitted to the courts, the courts will typically adjust liability caps (such as liquidated damages) to the actual loss incurred, rather than enforce the contractual provisions.

X. Force Majeure

A. Are Force Majeure Exclusions Available and Enforceable? Force majeure exclusions are recognised under Saudi law to a certain extent. Force majeure is generally defined as circumstances that make performance absolutely impossible, rather than merely difficult. These include events beyond a party's control, which excuse the obligation to perform.

Force majeure exclusions are not often in standard contracts. However, the parties are free to amend such contracts.

XI. Material Delays

A. What Contractual Provisions Are Typically Negotiated to Cover Material Delays to the Project?

The costs associated with material delays are an important factor and are typically negotiated before entering into a contract. Another critical provision is the possible extension of the project's timelinethat can be due to material delays. In the event of a material delay, certain penalties may be payable. Under Article 51 of the Government

 

 

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Tenders and Procurement Law, the contract will be extended if the delay is due to unforeseen circumstances that are beyond human control.

XII. Material Variations

A. What Contractual Provisions Are Typically Negotiated to Cover Variations to the Works?

A bill of quantities (BOQ) typically covers all material variations to a project. Contractual provisions include cost and timeline. The BOQ sets out criteria relating to labour, materials, parts and their costs.

 

 

XIII. Other Negotiated Provisions

A. What Other Contractual Provisions Are Usually Heavily Negotiated by the Parties?

Other contractual provisions that are heavily negotiated by parties include:

■ Payment terms.

■ Back-to-back clauses.

■ Liquidated damages.

■ Quality of materials.

These factors have an impact on the timeline of the project. It is therefore critical that all parties are well aware of such clauses.

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XIV. Architects, Engineers and Construction Professionals

A. How Are Construction Professionals Usually Selected? Following Selection, How Are They Then Formally Appointed?

In public procurement contracts, contractors are appointed under a traditional procurement process, in accordance with the Government Tenders and Procurement Law.

In non-public procurement contracts, construction professionals are usually selected through private bids, in line with standard market practices.

B. What Provisions of Construction Professionals' Appointments Are Most Heavily Negotiated? Are Liabilities Routinely Limited or Capped in Construction Professionals' Appointments?

1. Negotiated Provisions

Provisions in construction professional's appointments that are most heavily negotiated include:

■ Design.

■ Scope of work.

■ Limitation of liability.

■ Exclusions of liability.

■ Caps on liability.

2. Liability

All liabilities in the contract are typically capped at 10% of the contract value.

 

 

 

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XV. Payment for Construction Work

A. What Are the Usual Methods of Payment for Construction Work? Are There Ways for the Contractor and Consultants to Secure Payment or Mitigate Risks of Non-Payment under Local Law?

1. Methods of Payment

The usual methods of payment for construction work include:

■ Advance payments.

■ Monthly invoicing.

2. Securing Payment

If payment has not been made, the contractor can typically choose to suspend the works until payment is made.

XVI. Subcontractors

A. How Do the Parties Typically Manage Their Relationships with Subcontractors?

Back-to-back provisions are typically included in contracts that govern the owner, contractor and subcontractor relationships.

 

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XVII. Licensing

A. What Licences and Other Consents Must Contractors and Construction Professionals Have to Carry out Local Construction Work? Are There Any Specific Licensing Requirements for International Contractors and Construction Professionals?

Foreign entities must obtain a licence from the Saudi Arabian General Investment Authority (SAGIA) before they can do business in Saudi Arabia. They must also maintain a commercial presence in the country. In addition, all construction professionals must obtain a permit from the Saudi Council of Engineers.

B. What Licences and Other Consents Must a Project Obtain?

1. Before

Important permits must be obtained before initiating a construction project, including:

■ Building permits.

■ Permission from the Civil Defence Ministry.

■ Industrial permits.

■ Environmental licences.

■ Utilities licences.

2. During

During construction, the project will be subject to various inspections. Once documentation has been obtained stating that the project is under construction, and a municipality is appointed to approve the building requirements, the project will be subject to random inspections.

3. On Completion

On completion, a permit will be granted by an inspector, which states that the building requirements are fulfilled. A statement of completion will then be issued, following which, approval by the Civil Defence Ministry will be granted. In addition, each building, depending on its usage, must comply with certain rules and regulations that are set by the municipalities.

 

 

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XVIII. Projects Insurance

A. What Types of Insurance Must Be Maintained by law? Are Other Non-Compulsory Types of Insurance Maintained under Contract?

1. Compulsory Insurance

Under Saudi law, all employees of a company must have health insurance.

2. Non-Compulsory Insurance

Non-compulsory insurance typically taken out by the contractor includes all-risks insurance.

 

XIX. Employment Laws

A. What Are the Main Employment Law Requirements for Hiring Local and Foreign Workers?

1. Local Workers

Under the Nitaqat programme, a company must have a minimum percentage of Saudi employees, as set by the government. Currently, a company must not generally employ less than 30% of Saudi nationals, although percentage requirements vary depending on the company's size and business sector.

In addition, under the Nitiqat programme, whether a business meets the required percentage determines the issuance of foreign work permits, as follows:

■ If the company meets the required percentage and falls within the "green" category, it will be allowed to obtain foreign work permits.

■ If the company falls within the "yellow" category, it will only be able to renew existing permits.

■ If the company falls within the "red" category, existing foreign work permits will not be renewed.

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2. Foreign Workers

All foreign workers in a company must have:

■ A work permit issued by the government.

■ A visa.

■ Medical insurance.

B. Which Employment Laws Are Relevant to Projects? The Saudi Labour Law is relevant to projects. This Law outlines the relationship between employers and employees and defines the rights and duties of both parties.

C. Must an Employer Pay Statutory Redundancy or Other Payments at the End of a Project? Are All Employees Eligible?

In accordance with the Ministry of Labour requirements, the employer must pay end of service benefits at the end of a project. This compensation is payable to the employee if the employee is terminated without any reason.

XX. Health and Safety

A. Which Health and Safety Laws Apply to Projects? The General Environmental Law prohibits any act, or failure to act, that may result in adverse environmental effects. It also requires that a number of pre-emptive and precautionary measures be undertaken and implemented to ensure that any such adverse effects do not occur in relation to the activity or construction of a project.

Parties must use the most up-to-date and appropriate technology, and materials that are environmental-friendly and least likely to cause contamination. For new construction projects, the government will require workers to provide certain information regarding the design and structure, as well as a clear statement that will include the amount of pollution the new project will cause.

 

 

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The penalties for causing environmental harm are imprisonment for up to five years and fines up to SAR500,000. In addition, starting a project without obtaining a permit is subject to fines between SAR5,000 and SAR15,000.

XXI. Environmental Issues

A. Which Local Laws Regulate Projects' Effects on the Environment? The Environmental Law of Saudi Arabia covers a range of environmental issues. The Presidency of the Meteorology and Environment (PME), an agency of the Ministry of Defence, is the government entity responsible for the protection of the environment in Saudi Arabia. PME's primary function is to ensure that both the public and private sectors adhere and comply with the requirements of the Environmental Law.

Requirements include that an environmental impact assessment must be carried out for projects that may have potentially adverse effects on the environment.

Other environmental laws include the:

■ Green Initiative.

■ Environmental Protection Act.

B. Do New Buildings Need to Meet Carbon Emissions or Climate Change Targets?

The Environmental Law sets out carbon emission targets requirements for new buildings.

The standard requirements relating to the quality of air include to:

■ Monitor ambient air.

■ Maintain and restore ambient air quality.

■ Minimise the effects on the environment and people's health.

The Presidency of the Meteorology and Environment also enforces restrictions on indoor air and monitor the impact of natural events on air quality.

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XXII. Prohibiting Corrupt Practices

A. Are There Any Rules Prohibiting Corrupt Business Practices and Bribery (Particularly Any Rules Targeting the Projects Sector)? What Are the Applicable Civil or Criminal Penalties?

1. Rules

Under Saudi law, the act of any public officer receiving a promise or a gift is considered an act of bribery, which is considered a crime. The gift offered need not have a specific value or price, and can be offered conditionally.

2. Penalties

In Saudi Arabia, there are no statutory exemptions or limitations of liability for bribery based on the value of gifts. Each case will be evaluated on its own merits taking into consideration the specific facts of the case.

The highest penalty is imprisonment for up to ten years and a fine of up to SAR1 million. The fine will amount up to ten times the amount of the bribe, and the company will not be permitted to maintain any further relations with the Saudi Government.

 

XXIII. Bankruptcy/Insolvency

A. What Rights Do the Client and Funder Have on the Contractor's Bankruptcy or Insolvency?

In Saudi Arabia, in the event of a contractor's bankruptcy or insolvency, the client and funders only have the option of terminating the contract.

 

 

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XXIV. PPPs

A. Are Public Private Partnerships (PPPs) Common in Local Construction Projects? If So, Which Sectors Commonly Use PPPs?

PPPs are used in Saudi Arabia in sectors and projects such as:

■ Telecommunications.

■ Desalination plants.

■ Railroads.

■ Power generation.

B. What Local Laws Apply to PPPs? There are currently no specific laws that apply to PPPs in Saudi Arabia.

C. What Is the Typical Procurement/Tender Process in a PPP Transaction? Does the Government or Another Body Publish Standard Forms of PPP Project Agreement and Related Contracts?

There is no typical procurement or tender process used in a PPP transaction in Saudi Arabia.

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XXV. Dispute Resolution

A. Which Are the Most Common Formal Dispute Resolution Methods Used? Which Courts and Arbitration Organisations Deal with Construction Disputes?

1. Formal Dispute Resolution Methods

Commonly, an ad hoc committee is formed where representatives from both parties meet to negotiate a solution to the dispute. Failing this, the local courts are still commonly used to resolve disputes in Saudi Arabia.

Alternatively, arbitration is becoming an increasingly common form of dispute resolution. The recent Saudi Arbitration and Enforcement Law, and the new Saudi Centre for Commercial Arbitration provide parties with an alternative option for the resolution of disputes.

2. Courts and Arbitration Organisations

The most commonly used arbitration institution is the International Chamber of Commerce (www.iccwbo.org).

B. What Are the Most Commonly Used Alternative Dispute Resolution (ADR) Methods?

Arbitration and mediation are becoming increasingly common forms of ADR in Saudi Arabia.

 

 

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XXVI. Tax

A. What Are the Main Tax Issues Arising on Projects? Tax is administered by the Department of Zakat and Income Tax (DZIT). The DZIT was established under the supervision and control of the Ministry of Finance to administer the Income Tax Law and collect any monies due in accordance with the Law.

1. Income Tax

The Income Tax Law is applicable to:

■ Resident companies with non-Saudi shareholders (in proportion to non-Saudi shareholding).

■ Resident non-Saudi individuals conducting business in Saudi Arabia.

■ Non-resident individuals conducting activities in Saudi Arabia.

■ Non-resident individuals who have other income that is subject to tax from sources within Saudi Arabia.

■ Individuals engaged in natural gas investment activities.

■ Individuals engaged in oil and hydrocarbon production.

Taxable income includes all income, profits, gains or payment that arises from carrying out of any activity, as well as certain capital gains or incidental income that are not exempt.

Saudi nationals' and foreign employees' salaries and benefits are not taxable income.

The income tax rate is fixed at 20% for all taxpayers, except for activities related to natural gas investment, oil or other hydrocarbon related activities for which the rate can be up to 85%.

2. Zakat

Zakat is an administrative Islamic tax on wealth and is one of the five pillars of Islam. As such, Zakatis seen by most Muslims as more than a mere economic obligation. Zakat is levied on:

■ Saudi Arabian and Gulf Cooperation Council (GCC) natural persons.

■ Wholly Saudi or GCC owned companies.

■ Saudi or GCC shareholders or companies.

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The Zakat rate is 2.5% of a natural person's net worth, or 2.5% of a company's total capital resources.

However, calculation of the Zakat base differs from the calculation of net income. The income year for Zakat is based on the lunar calendar. This means that Zakat requires special consideration and should not be seen simply as a 2.5% flat tax on what would otherwise be taxable income. Despite the low rate, the methods of calculation used to determine the tax base can mean that a company'sZakat liability will exceed its income tax liability.

3. Withholding Tax

Withholding tax is levied whether or not a resident is considered a taxpayer under the Income Tax Law. Where a resident makes a payment to a non-resident, which derives from a source or activity within Saudi Arabia, that resident must withhold tax from such payments (which will be transmitted to the DZIT) at the following rates:

■ 5% for rents.

■ 15 % for royalties.

■ 20% for management fees.

■ 5% for payments for air tickets, air freight and maritime freight.

■ 5% for payments of international telecommunications services.

■ 15% for any other services.

There are currently no exchange control restrictions on the repatriation of foreign capital in Saudi Arabia.

B. Are Any Methods Commonly Used to Mitigate Tax Liability on Projects? Are There Any Tax Incentives to Carry out Regeneration Projects?

1. Mitigating Tax

Not applicable.

2. Tax Incentives

Not applicable.

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XXVII. Other Requirements for InternationalContractors

A. Are There Any Specific Requirements That International Contractors or Construction Professionals Must Comply with?

Foreign entities must:

■ Obtain a licence from the Saudi Arabian General Investment Authority.

■ Register with the Saudi Council of Engineers.

XXVIII. Reform and Trends

A. Are There Any Proposals to Reform Construction and Projects Law? Are There Any New Legal or Regulatory Trends Affecting Projects?

1. Reform Proposals

There are currently no proposals to reform construction and projects law.

2. Trends

Not applicable.

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XXIX. Main Construction Organisations

A. Ministry of Commerce and Industry Main activities. Participates in the development and enforcement of commercial policies to achieve efficiency and effectiveness for the sector.

W https://mci.gov.sa

B. Saudi Arabian General Investment Authority (SAGIA) Main activities. Oversees the policies on foreign investment in Saudi Arabia.

W www.sagia.gov.sa

C. Saudi Council of Engineers Main activities. Promotes the engineering profession and facilitates engineers and engineering establishments to reach ideal solutions and enhance their level of performance, and encourage innovation and creativity to achieve an internationally recognised standard.

W www.saudieng.sa

D. Department of Zakat and Income Tax (DZIT) Main activities. Reporting directly to the Ministry of Finance, the DZIT oversees taxation policies in Saudi Arabia.

W https://dzit.gov.sa/en/home

E. Saudi Chamber of Commerce Main activities. The main role of the Saudi Chamber of Commerce is to encourage and assist the private sector in improving the national economy.

W www.csc.org.sa

 

 

 

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XXX. Online Resources

A. Saudi Arabian General Investment Authority W www.sagia.gov.sa

Description. Website of the Saudi Arabian General Investment Authority.

B. Ministry of Commerce and Industry W https://mci.gov.sa

Description. Website of the Ministry of Commerce and Industry.

C. Ministry of Justice W www.moj.gov.sa

Description. Website of the Ministry of Justice.

D. Ministry of Labour W http://portal.mol.gov.sa/Sites/default.aspx

Description. Website of the Ministry of Labour.

E. Ministry of Interior W www.moi.gov.sa/wps/portal

Description. Website of the Ministry of Interior.

F. Ministry of Foreign Affairs W www.mofa.gov.sa/sites/mofaen/Pages/Default.aspx

Description. Website of the Ministry of Foreign Affairs.

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G. Ministry of Municipal and Rural Affairs W www.momra.gov.sa

Description. Website of the Ministry of Municipal and Rural Affairs.

H. Saudi Arabian Monetary Agency W www.sama.gov.sa/Pages/Home.aspx

Description. Website of the Saudi Arabian Monetary Agency.

I. Saudi Embassy W http://www.saudiembassy.net

Description. Website of the Saudi Embassy.

J. Saudi e-Government National Portal W www.saudi.gov.sa

Description. National web portal of the Saudi Government.

K. National Centre for Documents and Archives (NCDA) W www.ncda.gov.sa

Description. Website of the NCDA.

L. Bureau of Experts at the Council of Ministers W http://boe.gov.sa/ViewSystemDetails.aspx?lang=en

Description. Website of the Bureau of Experts at the Council of Ministers.

 

 

 

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XXXI. About the Authors

A. Belal Hashmi, Managing Associate (Head of Corporate Department)

Hammad & Al-Mehdar in alliance with Simmons & Simmons

T +92 000 4626 Ext 101 F +966 (2) 606 9190 E [email protected] W www.hmco.com.sa

Professional qualifications. Bachelor of Law, University of the Punjab

Areas of practice. Real estate and construction; corporate law; M&A; banks and financial institutions law; capital markets and securities law; foreign exchange/investment law; project finance; Islamic finance.

Recent transactions

■ MIDROC (Al Muwakaba for Industrial Development and Overseas Commerce): advising on the joint venture between MIDROC and other significant Saudi Arabian investors. Value US$1 billion.

■ The Jeddah central district and historical district project: advising City Centre Development Company in relation to project structuring for the development and construction of land that belongs to Amanat Madinat Jeddah (Municipality of Jeddah). The project is in south Jeddah, covering about six million square metres. The project has been declared as a mega development project in Jeddah and is valued at SAR30 billion.

■ Knowledge Economic City Developers (KECD): advising KECD, the developer of the Knowledge Economic City in Madinah, in connection with various legal matters, particularly real estate matters.

Languages. English, Arabic, Urdu

B. Abdulrahman Hammad, Associate Hammad & Al-Mehdar in alliance with Simmons & Simmons

T 011 4631 030 F +966 (2) 606 9190 E [email protected] W www.hmco.com.sa

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Professional qualifications. New York State Bar, US

Areas of practice. Corporate; M&A; banks and financial institutions law; capital markets and securities law; foreign exchange/investment law; energy; infrastructure; project finance.

Non-professional qualifications. Juris Doctorate degree with Magna Cum Laude Honours, University of Miami, US (concentrating on securities, finance, and business law); Bachelor of Science with Cum Laude Honours, Southern Illinois University, (majoring in finance – investments)

Recent transactions

■ Lead counsel to Saudi Aramco and subsidiaries with regards to structuring and executing a refining joint venture with Sinopec in Saudi Arabia, Yanbu Aramco Sinopec Refining Company.

■ Counsel to Saudi Aramco and Sadara Chemicals Company on a US$12 billion project financing.

■ Counsel to Saudi Aramco and Sadara Chemicals Company regarding the structuring and issuing of US$2 billion of publicly traded sukuk in Saudi Arabia.

Languages. English, Arabic