Before the general manager’s (GM) arrival in Saudi Arabia, the company’s Articles of Association (AoA) must include the GM’s passport number.
Upon their arrival in the Kingdom, the GM must have their Iqama issued and then replace the passport number in the AoA with their newly issued Saudi ID (Iqama).
This vital process is called “harmonization,” a necessary step to unlock the ability to assign the GM’s Iqama to the governmental portals.
Why is Harmonization Important?
Without their Iqama ID clearly stated in the company’s AoA, the GM can’t effectively resume their powers and responsibilities.
These responsibilities typically include setting up the company’s government portals, establishing a subsidiary, hiring staff, and opening a bank account, to name a few.
What Does the Harmonization Process Look Like?
The process of replacing the passport number with the Iqama ID, also known as harmonization, is similar to drafting an AoA.
It takes 3-5 working days to complete and is done through the Saudi Business Council (SBC).
Let’s take a step back and define what an AoA is and its requirements to ensure the harmonization process is completed properly.
Drafting Articles of Association (AoA): Key Factors to Consider
The AoA serves as a company’s internal rulebook, outlining how the company conducts its day-to-day operations, rules on shareholder rights, and director responsibilities.
1. General Manager (GM) Powers and Responsibilities
It typically refers to the scope of authority granted to them. These powers are crucial for conducting key transactions and processes related to both business setup and post-business setup stages.
Without these powers, a company’s growth can be at stake.
Key factors to consider:
- It is recommended to grant all powers to GMs to ensure smooth business operations, and, if needed, certain powers can be restricted internally.
- Companies can limit or expand the GM’s powers depending on their governance frameworks. However, limited powers can lead to noncompliance, which can manifest in various aspects of business operations.
Refer to this article to learn more:Responsibilities and Powers of a General Manager in Saudi Arabia
2. Capital and Share Distribution
This clause defines how much capital is being invested in the company and the profit distribution among shareholders.
Key factors to consider:
- Minimum capital is SAR 25,000.
- Capital must be stated in Saudi Riyals.
- After the bank account is set up, the capital must be deposited by the parent company into the Saudi entity’s bank account within a month.
- Ownership structure determines decision-making and profit distribution.
3. 10% Legal Reserve
This clause is not mandatory but gives the company the option to create a financial safety net by allocating 10% of its annual profits to a legal reserve until it reaches 30% of the capital.
Articles of Association (AoA): Why Does It Matter to Your Business in Saudi?
For companies setting up a business in Saudi Arabia, here are the reasons why drafting a company’s Articles of Association (AoA) is crucial.
Business Setup: Before setting up a business in KSA, a company has to get its AoA attested by the Ministry of Commerce.
Bank Account Activation: To open a bank account, companies have to verify GM powers and capital structure in their AoA.
Visa Processing: Government entities may refer to the AoA to validate the company structure and approve visa processes.
Future Amendments: Changes in GM’s powers, shareholding agreements, or the GM must be updated in the AoA.
Frequently Asked Questions (FAQs)
1. Why is selecting GM powers important in Saudi Arabia?
Clearly defining the GM’s powers in the AoA is the cornerstone of the first phase of a successful Saudi market expansion process for a Saudi entity.
2. What are the consequences if GM responsibilities are limited?
Limiting crucial GM’s powers means a company might face operational disruptions, such as the inability to open and manage the business bank account, hire staff, etc.
3. What are the primary regulatory tasks GM must handle?
The responsibilities of general managers in Saudi Arabia typically include, but are not limited to:
- MISA license issuance and renewal
- Chamber of Commerce (CoC) matters, including securing the CR certificate
- Regulatory compliance issues related to banking and managing the workforce
4. Does the general manager have to be in Saudi Arabia?
A GM must have an Iqama and become a resident in Saudi Arabia to hold the position of general manager of its foreign-owned business.
5. What is the difference between Memorandum of Association (MoA) and Articles of Association (AoA)?
The MoA and AoA have different purposes and contents.
The MoA should cover:
- Articles of company formation
- Shareholder information
- Company name and registered address
- Management and board of directors
Additional non-compulsory details to add:
- Procedures for board meetings
- Powers granted to directors
AoA must include:
- MISA (Ministry of Investment of Saudi Arabia) license number
- Registered address of the company
- Details of the general manager (GM)
- Registered company name
- The capital of the company
- The powers granted to the GM