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JEDDAH

Khalil Khazindar Law Firm
in Association with
JASON HUF INTERNATIONAL pc
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Kingdom of Saudi Arabia
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  • A "21st Century" Saudi Arabia

    21st Century Saudi Arabia

    Near the close of 2016, while the West was focused on the High Holidays, a new American President and the NFL Post-Season that would culminate in a historic Super Bowl LI, the government of Saudi Arabia (KSA) leapt into the 21st Century - literally.

    Under the direction of Deputy Crown Prince Mohammed bin Salman, with the full support of his father King Salman, the Saudi Government officially abandoned the Hijri Calendar (the Islamic, lunar calendar which begins with the Prophet Mohammed's trek from Mecca to Medina and the establishment of the first-ever Islamic state), and has adpoted the "Gregorian" calendar (named after Pope Gregory XIII, the solar calendar predominantly used as the civil calendar in the West and elsewhere, which begins one week following the Roman church's, and the day of the Eastern Orthodox churches', traditionally espoused birth of Jesus Christ; the civil calendar used in the West arbitrarily measures months as being either 28/29, 30 or 31 days in length).

    Initially functioning as a budget cutting measure, with government employees receiving the same monthly salaries while working an additional eleven (11) days of the year, its the eternal questions of "what next?" that holds the world's attention as those with commercial ties to the KSA wait the other shoe(s) to drop.  What are the other consequences, both intended and unintended, of the Saudi government's adherence to this new calendar?  How, if at all, will this impact governance and/ or commerce in the Kingdom?

    Saudi Arabia is, and was founded to be, an Islamic state.  Its Constitution is the Quran.  The change from a calendar that is dear to their faith and which honors the pilgrimage of their holiest and most revered prophet, to a calendar created by a Roman military dictator and revised by a Catholic Pontiff is, in and of itself, revolutionary.

    For now, its impact is seen strictly as a government austerity measure. Nonetheless, and predictably, the more conservative elements of Saudi society, including the clerics with whom the King shares and exercises power, are resisting this particular change.  They presently appear to center their resistance around their concern that the masses will not adhere as faithfully as they have in the past to the holy month of Ramadan (which, like all months in the Hijri calendar, is measured by the lunar cycle).
     
    JHI is confident that good muslims will adhere to Ramadan, just as good christians adhere to Easter, the date of which is determined by the advent of the Jewish observance of the Passover holiday (the Jewish calendar measures months by lunar cycles, occasionally adding a month to make up the discrepancy in days between 12 lunar months and one solar year; thus, while Passover - and the subsequent Christian Easter - are celebrated on the same days of year, every year, on the Jewish calendar, they are celebrated at different times of the year on the civil, or "Gregorian", calendar).

    Neverless, acquiescence to the Saudi government's new calendar will not occur overnight.  As conservative elements tend to dominate the judiciary, and are well-ensconced in the various levels of the bureaucracy in the KSA, JHI feels that for the time being it remains prudent to continue to use language referencing the "Gregorian" calendar as controlling in the boilerplate of contracts and other documents pertaining to business in the Kindgdom of Saudi Arabia - including and especially those documents related to participation in government projects, whether as a contractor or sub-contractor.

    JHI will continue to follow the evolution of this particular change, and other developments related to the Vision 2030 reforms, as the Deputy Crown Prince pulls his country into the 21st Century - both metaphorically and literally.
  • Saudi Arabia's Vision 2030 & "Riyadh Day" at the UN

    You are about to see a rapid-fire (for this space, anyway) succession of as yet unpublished updates covering a period from Spring 2016 to present.  We will start with an initial discussion of Saudi Arabia’s “Vision 2030”, touted as the most sweeping series of reforms in the Kingdom’s history.
     
    In a nutshell, Saudi Arabia’s Vision 2030 is a collection of planned economic and social reforms designed to construct a “Post-Oil” Saudi Arabia, in line with globally-held concepts of Sustainable Development. King Salman has invested his son, Deputy Crown Prince Mohammed bin Salman, with broad, sweeping powers to enable him, his advisors and other subordinates to design and execute these reforms between now and the target date of 2030.
     
    Within the stated goals of weaning the Kingdom (KSA) off of being an Oil-based economy and becoming an industrialized state, with greater Foreign Direct Investment (FDI), full employment for working-aged males, improved access to high-quality education, greater rights for women and a more liberal social structure generally, two items are immediately obvious:  we are seeing Riyadh’s intent to finalize the end the era wherein OPEC, the powerful cartel of oil-producing states, has been the world’s definitive maker of oil policy; and, a rapid and intense military build-up intended to strengthen a block of states that includes the KSA, Egypt and the smaller Gulf States determined to withstand growing Iranian and Russian influence in the Gulf region following continued declining US influence and interest there and in the greater Middle East.
     
    While JHI is not a policy think tank, we feel it is important to know the backdrop and overall purpose of any upcoming reforms.
     
    Our principle concern is FDI, and the impact any reforms may have on the attractiveness of FDI in the KSA. This program is still young, so specific laws and regulations impacting FDI are not yet in effect. For the time being, there is nothing set in concrete that a law firm can dissect for the benefit of its clients.
     
    Therefore, in our typical less-than-modest fashion, JHI offers some suggestions on how to make FDI in the KSA more attractive to potential investors:
     
    1.  The Corporate Income Tax should continue to be (gradually) lowered, and personal income tax should remain zero.  Although declining oil revenues and their impact on the national government’s budget needs to be addressed, increasing the number of companies investing in the KSA, rather than increasing the tax existing companies pay, seems the best way to address the current budget shortfalls giving rise to the KSA’s national debt.
     
    2.  Saudization is seen, by and large, as a form of tax by potential foreign investors. The best way to address the employment crisis in the KSA is not by compelling investors to hire Saudi nationals, but by making the hiring of them more attractive.  Foreign investors ordinarily love to avail themselves of a local workforce – after all, importing staff and finding housing for them is pretty darned expensive!  Many such imported workers do not know the language or withstand the culture shock very well.  Unfortunately, fairly or unfairly, the idea of hiring Saudis is generally considered unattractive, thus the current Saudization requirements.  Rather than increase these requirements, education should be improved and made more accessible, and a sense of work ethic (rather than entitlement) needs to be instilled in the Kingdom’s youth.  And, the world needs to actually KNOW of the existence of such an educated, hard-working labor pool – numbering in the millions, and proud of real accomplishment at the workplace.  Do this, and Saudization will no longer be necessary at all.
     
    3.  Make the process of obtaining a business license less burdensome and more efficient.  Telling clients that it could take a minimum of six (6) months to obtain the necessary documentation before proceeding with business activity tends to be something of a turn-off for them.  Additional agencies designed to steer and otherwise regulate foreign investment eases nothing and are simply additional "layers” of bureaucracy.  Streamlining, rather than adding to, the process of licensing incoming businesses would be a productive step.
     
    4.  Women’s rights, and human rights generally, should be broadened – and, can be without offending the Kingdom’s religious sensibilities or its historical traditions.  It is much easier, on multiple levels, for a company to invest in a country whose culture is not the focus of controversial discussions centered around notions of equality and individual human dignity.  Additionally, it is essential that people throughout the Kingdom feel some sense of “ownership” in their country and their respective futures (see, 2. above).  They need to feel that their rights are being protected by their government, not denied.  This isn’t a call for the overnight imposition of Jeffersonian democracy.  Quite the contrary:  JHI asserts that the keys to unlocking a more liberal social structure (without rocking the stability of the KSA) lay within the old tribal and other cultural traditions of the modern Kingdom.
     
    5.  The labor market, and the regulation of such, should be loosened, and greater rights should be provided to foreign “unskilled” laborers and household staff.  As above (see, 4.), this is a matter of conscious for many potential investors, as well as foreign professional staff who visit the KSA.
     
    6.  Banking reform is a must.  The KSA is one of the most – if not the most – “underbanked” markets on the face of the earth.  While new banks and fresh capital and competition need to be allowed in, stronger regulation and monitoring needs to be in place, giving rise to stronger internal compliance programs.  While banking needs to be more readily available in the KSA, companies and governments around the world also need to have more confidence in the country’s banks.
     
    7.  For local and foreign companies alike, receivables can be something of a headache in the KSA.  Its no secret that debt, and the collection of debt, can be problematic there.  As the Kingdom undertakes judicial reform, it should continue to consider the importance of the confidence a company can have in the investment it makes in Saudi Arabia.
     
    8.  One of the most crucial assets in play when investing in any country is a company’s intellectual property. Intellectual property protections and anti-piracy measures need to be greatly strengthened, and quickly.  It is important for any company (say, you sell shampoo and find yourself competing with a counterfeit knock-off of your product – that’s not good), but when looking to attract high-tech industries, especially, it is absolutely fundamental that such companies have confidence that intellectual property worth hundreds of millions, perhaps billions, of US dollars will not be stolen from them and effectively rendered next to worthless overnight.
     
    These are eight basic principle points upon which JHI would like to see the building of any reform package affecting FDI in the KSA.
     
    JHI will track any concrete steps within this subject, and Mr. Huf hopes to learn more when “Riyadh Day” (its actually a week of symposiums, workshops and other such meetings), sponsored by the KSA’s High Commission for the Development of Riyadh, is held at the United Nations in New York at the end of September.
  • Saudi Banking Market to Open Up?

    During King Salman's recent visit to Washington, DC, members of the Saudi delegation issued several announcements concerning planned commercial reforms and other developments that could prove significant to Foreign Direct Investment (FDI) in Saudi Arabia (KSA) as the Kingdom looks to broaden its economy at a time when low oil prices are projected to be the norm for the medium term.  We will highlight some of the more significant announcements in this and subsequent notes.

    While Saudi Arabia remains committed to continuing its current record-setting output of light sweet crude (one of the major factors contributing to low oil prices), the KSA is now facing projections of massive budget deficits and rapidly depleting cash reserves.  Increased FDI, particularly from the United States, appears to be critical to the KSA's strategy for coping with the downsides of consistently low oil prices. 

    Reforms in the Arab world often begin with teasers that function as "trial balloons".  This note will reference such a trial balloon floated by a Saudi official associated with the Deputy Crown Prince.  In a closed door meeting with business leaders in DC, this official announced that the Kingdom is considering opening the Saudi banking market to permit entry of additional foreign banks - especially American ones - wishing to do business in the Kingdom.  In additional to financing major projects, it is hoped that such banks would also cater to small businesses and individual depositors.

    Even with the recent entry of a branch of a bank based in fellow Gulf Cooperation Council (GCC) Member State Qatar, Saudi Arabia is still seen as, perhaps, the most "under-banked" market in the world.  To attract additional FDI, which has been in slight decline in recent years, some see the entry of additional Foreign banks and the capital they bring as critical.  Entry by foreign banks based elsewhere in the GCC has been helpful, but it will take the power of additional American and other western banks to take a more broad-based growth to the next level.

    Not stated, but understood, in this announcement is Saudi Arabia's desire that western powers continue to see that they have a stake in the stability of the Kindgom vis-a-vis its continuing conflict with Iran and, increasingly, Russia.

    Of course, the devil is in the details: What will be required to gain entry? And, once in the market, how secure is a bank's investment in the Kingom and how will such a bank be regulated and taxed?  How might such a venture impact an investing bank's legal and regulatory position at home?

    JHI will continue to track the flight path of this trial balloon and let you know where it lands...