Saudi Arabia’s new commercial registration law: impacts and next steps for business owners

In September 2024, we published an article outlining the key reforms introduced under Saudi Arabia’s new Commercial Registration Law (CR Law) and Tradenames Law. The CR Law, approved by the Saudi Cabinet, introduced a unified national commercial registration system, eliminating branch-level registrations and transitioning to a unified national commercial registration system.

The CR law is set to come into force on 3^rd April 2025, requiring businesses that currently hold sub-registers (branches) to either convert their branch(s) into separate legal entities or cancel them. To facilitate the transition, the law provides a five-year grace period for compliance, allowing businesses until April 2030 to restructure.

Now, as the business community begins to implement these changes, it is essential to examine the real-world implications of the CR Law. The transition brings financial, legal, and operational challenges, including corporate restructuring, Saudization compliance, asset transfers, M&A considerations, regulatory filings with the General Authority for Competition (GAC), and foreign investment licensing through the Ministry of Investment (MISA).

This article examines the practical implications of the CR Law, helping business owners understand the financial, operational, and regulatory impact while outlining the steps they need to take to ensure compliance.

Financial and operational consequences

With the shift to a single national commercial registration, businesses must reassess their corporate structures. Those with branch registrations now face a choice between conversion or closure, both of which carry financial and operational consequences. We also expect some will consider spinoffs to avoid costs of restructuring, whilst others will look at it as an opportunity to expand. 

Businesses opting to convert branches into separate legal entities must consider the financial implications of creating new companies. This process may require allocating capital resources, restructuring financial and banking arrangements, and complying with separate licensing and reporting requirements, considering the potential absence of a consolidated arrangement. Additionally, the move to an independent legal structure may lead to increased operational costs, including separate tax filings, financial audits, and corporate governance obligations.

For businesses that choose to close their branches, the process involves ensuring a smooth transition of operations. This may require terminating contracts (employment, vendors, banks, and others), settling outstanding or accelerated obligations. Additionally, there are tax implications to consider. While Saudi-owned businesses are subject to Zakat, foreign-owned companies must ensure compliance with corporate income tax regulations. In cases where branch movable assets are sold or transferred, businesses must also assess the VAT implications, as some asset transfers may attract a 15% VAT charge unless exemptions apply. In cases of real-estate, some would be looking at 5% according to the Real Estate Transactions Tax (RETT).

Saudization and workforce management challenges

The elimination of branch CRs also affects Saudization (Nitaqat) compliance. Under the new regime, businesses that convert branches into separate entities must ensure that each newly registered company meets its own Saudization quotas. This may result in an increased need to hire additional Saudi employees to maintain compliance with labor regulations.

For businesses choosing to close a branch, the transition must be handled in accordance with Saudi labor law. This includes properly terminating employment contracts, providing severance payments, and offering reassignment opportunities where possible. Companies that fail to adhere to Saudization and labor regulations risk penalties and operational delays.

Workforce planning is therefore a critical part of the transition process. Businesses should engage HR and legal advisors early to ensure a smooth transition that mitigates risk and disruption.

Asset transfers and corporate restructuring

The new CR Law requires businesses to evaluate how assets tied to branch operations will be managed. In cases where a branch is converted into a separate company, assets such as real estate, intellectual property, contracts, and equipment must be formally transferred to the new entity. This involves legal and financial considerations, including re-registering ownership titles, modifying supplier and customer agreements, and ensuring proper documentation for licensing and regulatory approvals.

Tax considerations must also be accounted for, particularly Zakat adjustments for Saudi-owned businesses and corporate income tax obligations for foreign-owned businesses. Intra-company transfers must comply with Saudi transfers pricing rules, and some asset transfers may trigger VAT and/or RETT liabilities unless exemptions apply.

For businesses considering broader corporate restructuring, the five-year transition period provides and opportunity to consolidate operations, optimize tax structures, and streamline compliance efforts. 

Mergers, acquisitions, and competition law considerations

The elimination of branch registrations could lead to increased merger and acquisition (M&A) activity, as some businesses may prefer to merge operations rather than establish new entities. Additionally, some companies may seek to acquire competitors’ discontinued branches as a means of expanding market presence.

However, businesses must be mindful of Saudi competition law when engaging in M&A transactions. The General Authority for Competition (GAC) requires notification for transactions that meet certain thresholds. Any business restructuring that results in market share concentration or significant sectoral changes may be subject to GAC review and approval.

As such, companies pursuing M&A opportunities as part of their restructuring strategy should engage competition law specialists to assess whether a mandatory GAC filing is required. Failing to comply with GAC requirements can result in regulatory penalties and fines, and naturally potential delays in finalising transactions.

Foreign-owned businesses and MISA compliance

Under the Commercial Registration Law, foreign businesses that previously operated through branch registrations must now either convert these branches into separate legal entities or withdraw them from the market. This requires registering the new entity in accordance with the Investment Law, which mandates that all foreign investments be recorded in the national investment register maintained by the Ministry of Investment. Since foreign branches can no longer operate under a parent company’s registration, businesses must ensure their legal structure aligns with the new requirements to avoid operational disruptions. Meaning, enjoying the benefit of one investment registration will not be the case for those who decide to convert their branches into separate legal entities. 

What business owners should do now

With the 3^rd April implementation date approaching, business owners should take proactive steps to ensure compliance. The five-year grace period provides some flexibility, but companies should begin planning early. Key actions include:

• Conducting a corporate structure review to determine the best course of action for branch conversions or closures.
• Assessing financial implications, including taxation, Zakat, Saudization compliance, and regulatory costs.
• Reviewing contracts, licenses, and operational agreements to ensure they reflect the new legal structure, including possible termination triggers and financial elements.
• Developing a workforce transition plan to comply with Saudi labour law and avoid disruption.
• Engaging with regulators, including GAC, MISA, and the Ministry of Commerce, to ensure all necessary filings and approvals are completed on time.
• Seeking expert legal and financial guidance to navigate the complexities of restructuring, taxation, and regulatory compliance.

Conclusion

The new Commercial Registration Law represents a major transformation in Saudi Arabia’s business environment. The elimination of branch registrations forces businesses to rethink their legal, financial, and operational structures. While the transition presents challenges, it also creates opportunities for streamlining operations, improving compliance, and optimizing corporate structures.

By acting now, business owners can stay ahead of regulatory requirements, avoid last-minute risks, and position themselves for long-term success in Saudi Arabia’s evolving commercial landscape. Consulting with corporate law, tax, and regulatory experts will be key to ensuring a smooth and compliant transition under the new law.

HFW trainee Noura Al Mousa supported the authors in the research required to publish this article