Saudi Arabia has opened the door for international law firms to establish a presence. International law firms will now be able to choose between two options to setup offices in Saudi Arabia. There are, however, substantive requirements for international law firms to observe, including in relation to residency of partners, restrictions on referring work to out of Kingdom offices, training and development of Saudi Arabian lawyers, and having appropriate on-the-ground administrative support.
International law firms have also been given a six-month deadline to end any existing “association / affiliation / cooperation” relationships, or otherwise restructure them to meet the new requirements.
While some details remain subject to the final issuance of various implementing rules, this bulletin outlines the options that international law firms can adopt, along with the requirements, advantages, and limitations of each.
As the leading independent Saudi Arabian law firm, K&A would be happy to discuss these options with international law firms that seek to restructure their relationships or invest in Saudi Arabia.
Background
For decades, the way international law firms served their clients in respect of Saudi Arabian related issues relied on so called “association / affiliation / cooperation” agreements. These agreements were entered into with Saudi Arabian licensed lawyers or Saudi Arabian law firms. Typically, these agreements outlined the scope of the relationship, exclusivity terms or lack thereof, terms regarding secondment of personnel, licensing of trade names, publicity issues, conflict checks processes, fee-sharing arrangements, and other such terms.
These relationships ranged from being loose “best friends” relationships to de facto branch office relationships between the Saudi Arabian lawyer or firm and the international law firm.
These relationships were fraught with issues. From a regulatory perspective, they skirted – if not at times trampled over – the Saudi Arabian licensing and tax requirements. From a risk perspective, they subjected the Saudi Arabian lawyer or firm to undue legal and commercial risk. From a client perspective, clients were often confused as to whom they were contracting with. From an investment perspective, it did not give comfort to international law firms to invest in Saudi Arabia because control was only exercised contractually, and without equity being built in favor of the international law firm over time.
What has Changed?
Eligible international law firms will now be able to setup a presence that they would control and have equity in, albeit with substantive requirements.
Eligible international law firms are firms that have:
- an exceptional reputation according to international indices and journals;
- been established for over ten years; and
- presence in over three countries, or five provinces in one country
We believe that almost all leading international law firms will be able to meet these requirements with ease.
Options for Investment
Eligible international law firms will have the following two options to choose from:
Professional Services Company: Under this option, eligible international law firms would establish a professional services company in Saudi Arabia, and own it up to 75%, with the remaining 25% being owned by one or more Saudi Arabian registered lawyers.
The main advantage of this option is that this company will be allowed to engage in the full spectrum of legal services in Saudi Arabia. This includes advising on Saudi Arabian legal issues, issuing legal opinions on matters of Saudi Arabian law, acting on all types of capital markets transactions, and engaging in litigation through its Saudi Arabian licensed lawyers.
Like any joint venture relationship, international law firms and Saudi Arabian lawyers that aim to form such companies will want to carefully consider the myriad of issues that normally arise: funding, governance, deadlock, non-compete, exit rights, profit distributions, liquidation, intellectual property rights, and so on. While some of these matters may be contractually customized and agreed, some enforceability risk will likely remain.
Branch: Under this option, eligible international law firms would establish branches in Saudi Arabia. These branches would be 100% owned and controlled by the respective international law firms.
This branch option limits the legal services that can be provided. The branch will not allow the international law firm to advise on matters relating to Saudi Arabian law, and therefore is not capable of providing the same services that the professional services company option allows. Instead, the branch can only advise on:
- international law;
- laws of jurisdictions the international law firm is licensed to advise on;
- arbitration, mediation, and reconciliation services; and4. benchmarking or studies of other legal jurisdictions.
As such, the main advantage of this branch option over the professional services company option is that it would allow the international law firm to have complete control over the business. If the international law firm sees that its clients need Saudi Arabian legal advice, then it can seek such assistance from Saudi Arabian law firms on a case by case basis.
Conditions
Under both the professional services company and branch options, international law firms will be required to:
- have one or more physical offices in Saudi Arabia, along with all required registrations;
- have at least two partners based in Saudi Arabia who must be resident for no less than 180 days a year;
- employ the requisite percentage of Saudi Arabian lawyers and staff;
- provide training and knowhow transfer to Saudi Arabian lawyers;
- register any non-Saudi Arabian lawyers at the Saudi Bar Association, with the requirement being that only foreign lawyers with five years or more of experience being eligible for registration;
- provide its legal services through the employees based in the Saudi Arabian office(s), where assistance and referrals to other offices being possible on a limited basis;
- obtain professional liability insurance; and
- file and pay for income tax, withholding tax on payments to the international firm, and VAT on services provided from the professional services company or branch.
The requirements aim to create a substantive presence in Saudi Arabia, with employment opportunities for Saudi Arabian talent. They aim to prevent international law firms from only having an office for marketing or referral purposes. We believe that these requirements will also dovetail with upcoming requirements of having international entities move their regional headquarters to Saudi Arabia as part of Vision 2030 initiatives.
Penalties
Firms and lawyers that do not adhere to the terms above, or engage in Saudi Arabian legal advice without the requisite licenses or choosing the correct forms, would be subject to penalties that include being banned from work in Saudi Arabia, deportation, or financial fines. Penalties under tax and cover-up legislation may also be assessed, including closure of business and jailtime.
Temporary license
If the above requirements prove too onerous on international law firms, they can still contract with clients in Saudi Arabia on a cross border basis by obtaining a “temporary license” from the Ministry of Justice. Both the client and international law firm may need to show that the services required under the temporary license cannot be provided by law firms in Saudi Arabia (including international law firms that have established professional services companies or branches). More details on these requirements may be issued by the Ministry of Justice down the line.
In any case, the scope of the temporary license would be limited to one matter, and the term would expire at the expiry of the relevant underlying engagement with the client. The above requirements relating to residency and having a physical office in Saudi Arabia are not necessary to obtain this temporary license.
What Next?
International law firms will need to immediately revisit existing relationships with their association / affiliation / cooperation partners. Unless the Minister of Justice extends the six-month deadline, international law firms may find themselves in breach of the new rules if they do not.
International law firm management will want to consider whether they want to be in Saudi Arabia or not. Much has been written about the Vision 2030 initiatives and the opportunities that those will present, and so if there was ever a time to invest in Saudi Arabia, this would be it.
If international law firm management decides that it wants to be in Saudi Arabia, then it needs to decide whether it wants to partner with a Saudi Arabian firm, or go it alone.
If international law firm management wishes to engage in the widest spectrum of Saudi Arabian legal services, and have a head start on partnering with well-established firms, then the professional services company option would be the way to proceed. However, care must betaken in both the selection of Saudi Arabian lawyers to partner with, and the contractual arrangements that will be put in place, because reconfiguring or ending partnerships in professional services companies can be quite challenging and costly.
While establishing a branch and going it alone has its advantages (e.g., control and equity will not be shared), the branch will be limited to a narrow set of activities as discussed above, and growth will be slowly built over time. Of course, the international law firms can still seek the assistance of Saudi Arabian law firms on a case-by-case basis when working on matters requiring Saudi Arabian legal advice.
Under both the professional services company and branch options, the same substantive requirements will apply: residency of partners, restrictions on referring work to out of Kingdom offices, training and development of Saudi Arabian lawyers, and having appropriate on-the-ground administrative support. This means that international law firms must be ready to make a sizable and continued investment in Saudi Arabia under either option.
Should none of the above options appeal to international law firm management, they can fall back on the more limited temporary license option for one-off type engagements.
For more details about K&A’s corporate, strategic alliances, and compliance practices and capabilities, please visit our relevant expertise pages.
