Saudization And Nitaqat System

Analytical Report on the Saudization and Nitaqat System in Saudi Arabia: Requirements, Implications, and Compliance Support

Introduction

Saudization (localization) and the Developed Nitaqat Program are fundamental pillars of Saudi Arabia's labor market policy, imposing an obligation on both Saudi and foreign establishments to achieve specific ratios for employing Saudi nationals.1 Saudization is defined as the ratio of Saudi employees to the total workforce within an establishment, including non-Saudi employees.1 The Nitaqat program represents a sophisticated system for classifying establishments based on their commitment to these ratios, and an establishment's classification directly impacts its ability to benefit from or be deprived of various government services.1

This direction comes within the broader context of the ambitious Saudi Vision 2030 objectives, which seek to achieve comprehensive economic diversification and sustainable development of the national workforce. The Vision aims to develop Saudi competencies, reduce unemployment rates to less than 7% by 2030, in addition to diversifying income sources, increasing exports, and enhancing the competitiveness of the economy and its products in local and global markets.[1, 1, 1] Saudization and Nitaqat are considered essential initiatives to achieve these strategic objectives in the labor market, contributing to providing suitable job opportunities for the national workforce in a safe and attractive work environment.1

This report aims to provide a comprehensive analysis of the Saudization system and the Developed Nitaqat Program, focusing on regulatory requirements, implications for businesses, and government services available to support compliance. It also highlights the pivotal role of government and private entities in assisting companies to achieve localization goals, offering investors and business owners a deep understanding of these vital systems.

Part One: Understanding the Saudization System

The Saudization system, or localization, is a pivotal government policy in Saudi Arabia, aimed at integrating Saudi nationals into the private labor market. Saudization is defined as the calculated ratio of Saudi employees compared to the total number of employees in an establishment, including non-Saudi workers. This ratio is used as a primary criterion to determine the establishment's classification within the Nitaqat program by the Ministry of Human Resources and Social Development.1

The main objectives of Saudization are to achieve a set of national economic and social goals. It seeks to transfer and localize technical knowledge within the Kingdom, thereby enhancing local capabilities and reducing reliance on foreign expertise. It also aims to develop and grow the Saudi workforce by providing employment and training opportunities that contribute to building qualified national competencies. Economically, Saudization contributes to diversifying income sources in the Kingdom, reducing oil dependency, and increasing exports, which enhances the competitiveness of the economy and its products in local and global markets.[1, 1]

Saudization is an integral part of the National Investment Strategy and Saudi Vision 2030. This vision aims to create sustainable job opportunities for Saudi nationals and reduce unemployment rates to less than 7% by 2030.1 This demonstrates that Saudization is not merely an employment policy imposed by the government, but a strategic tool to achieve broader economic goals of Vision 2030, including economic diversification and knowledge transfer. This link between localization and long-term national objectives elevates the importance of compliance for investors. Data clearly indicates that Saudization is a "service imposed" 1 aimed at "developing Saudi human capital" and "diversifying income sources."1 When linking these objectives to the general directions of Vision 2030, which seeks to "create job opportunities" and "reduce unemployment rates" 1, it becomes clear that Saudization is not just a labor regulation, but an integral part of a broader national economic strategy. Consequently, compliance with Saudization requirements represents a direct contribution to achieving the Kingdom's economic vision, making it a crucial strategic element for companies operating in the Kingdom, extending beyond mere operational compliance to partnership in achieving national development.

Part Two: The Developed Nitaqat Program: The Regulatory Framework

The Nitaqat program is a vital system for classifying establishments in Saudi Arabia based on their ratio of Saudi national employment. This program has undergone significant developments aimed at improving labor market efficiency and providing an attractive environment for the national workforce.1 The program's primary goal is to provide suitable job opportunities for citizens in a safe and stimulating work environment.1

The Nitaqat program underwent major amendments under Ministerial Decision No. 182495, issued on May 23, 2021. These amendments included three core points:

1. Sector Simplification and Consolidation: Small and micro-economic activities were integrated with all other economic activities, simplifying the program's structure and making it easier to understand and apply to various establishments.1
2. Fixed Saudization Plan for Coming Years: A fixed Saudization plan covering the next three years was published. This measure aims to provide regulatory stability for businesses, as they can now predict future Saudization requirements and proactively plan their human resources.1 Providing a fixed Saudization plan for three years in advance reflects the government's commitment to providing "regulatory stability."1 This stability reduces the uncertainty investors might face and allows them to strategically plan their human resources in the medium term, fostering a more attractive investment climate. This proactive planning enhances companies' ability to organize their HR plans and makes the investment environment more predictable and appealing, boosting confidence in the Saudi market.
3. Flexible Relationship Between Workforce Count and Required Saudization Ratio: This amendment represents a significant shift from relying on fixed-size bands to applying a smooth and direct relationship between the total workforce in an establishment and the required Saudization ratio.1 The previous system sometimes hindered growth, as establishments faced sharp jumps in Saudization requirements when exceeding certain size thresholds.1 The shift to a "smooth relationship" using a logarithmic formula (y = m * ln(x) + c) 1 represents a significant policy evolution. This change indicates that the government seeks to avoid the "growth impediment" that occurred when companies crossed fixed size thresholds, making the program more supportive of establishments' organic growth rather than penalizing it. The old system relied on "fixed size bands" that "hampered growth" 1, while the new system, through the logarithmic equation, ensures that the increase in the required Saudization ratio is gradual rather than a sharp jump. This change reflects a deeper understanding of business growth dynamics and demonstrates regulatory flexibility aimed at supporting expansion rather than imposing rigid barriers, enhancing companies' ability to plan for sustainable growth.

Mechanism for Calculating an Establishment's Nitaqat Range

The mechanism for calculating an establishment's Nitaqat range in the Developed Nitaqat Program uses a logarithmic equation that ensures flexibility and gradualism in Saudization requirements. The basic equation is:

y=m∗ln(x)+c 1

Where the components of the equation represent the following:

• y: Is the minimum Saudization ratio required for the establishment to fall within a specific range (e.g., Low Green, Medium Green, High Green, Platinum).
• m: Represents the curve gradient, and its value varies depending on the establishment's economic activity. The value of 'm' determines how sensitive the required Saudization ratio is to changes in workforce size. The higher the value of 'm', the faster the required Saudization ratio changes with changes in workforce size. These values are available in Annex No. (1) of the Developed Nitaqat Program Procedural Guideline.1
• ln(x): Represents the natural logarithm of the establishment's total workforce (x). The use of the natural logarithm ensures that the required Saudization ratio increases at a decreasing rate as the total workforce increases, creating a smooth and gradual relationship instead of the sharp jumps that characterized the previous system.
• c: Represents the y-axis intercept of the curve, and its value also varies depending on the economic activity and the year. The value of 'c' reflects the planned increase in Saudization ratios over time, with the third-year value from Annex No. (1) being used from the third year onwards.1

Illustrative Example of Calculation Process:

To illustrate how this equation works, consider the example of Abdullah Plastics Company, an establishment operating in the Manufacturing sector with 400 employees and a current Saudization ratio of 35.00%.1

Calculating the Range for 2023 (January 2023 to December 2023):

Using the 'm' and 'c' values for the Manufacturing sector for 2023 from Annex No. (1) 1:

• Low Green: 1.68∗ln(400)+12.08=22.15
• Medium Green: 1.87∗ln(400)+18.87=30.07
• High Green: 2.08∗ln(400)+22.47=34.93
• Platinum: 2.08∗ln(400)+28.37=40.83

Since the company's Saudization ratio is 35.00%, it falls into the High Green range for 2023 (34.93<=35.00<40.83).1

Calculating the Range for 2024 (January 2024 onwards):

Using the 'm' and 'c' values for the Manufacturing sector for 2024 from Annex No. (1) 1:

• Low Green: 1.68∗ln(400)+17.08=27.15
• Medium Green: 1.87∗ln(400)+23.87=35.07
• High Green: 2.08∗ln(400)+25.47=37.93
• Platinum: 2.08∗ln(400)+32.87=45.33

Since the company's Saudization ratio is still 35.00%, it falls into the Low Green range for 2024 (27.15<=35.00<35.07).1 This example illustrates how an establishment's classification can change over time as the targets specified in the 'c' values increase, requiring companies to continuously plan to achieve targeted Saudization ratios.

Color Ranges and Establishment Classification

Establishments in the Nitaqat program are classified into five main levels, known as color ranges, with each range reflecting a certain level of commitment to Saudization ratios 1:

• Platinum Range: Represents the highest level of compliance with Saudization ratios, enjoying maximum benefits.
• High Green Range: Indicates a high level of compliance, with significant benefits.
• Medium Green Range: Denotes a medium level of compliance, receiving most benefits.
• Low Green Range: Reflects a low level of compliance, with some service restrictions imposed.
• Red Range: Represents the lowest level of compliance, with the most severe restrictions on government services imposed.

Part Three: Impact of Nitaqat on Available Government Services

The direct link between an establishment's Nitaqat range and vital government services is a pivotal factor in shaping corporate behavior towards Saudization compliance. This linkage creates a strong incentive for companies to ensure their adherence to requirements, as non-compliance is not limited to financial penalties but extends to directly impacting the establishment's fundamental operational capability.1 Government services such as expatriate worker visas, occupation changes, work permit renewals, and sponsorship transfers are essential for business continuity, and hindering access to them can lead to significant operational challenges, making compliance a strategic necessity for maintaining business continuity and growth.

The following table details the services available and restricted for each color range, providing investors and business owners with a quick practical overview of the implications of their establishment's classification 1:

Establishment Range

Available Services

Restricted Services

Platinum

- Apply for new expatriate worker visas. - Change expatriate workers' occupations. - Renew work permit of existing expatriate workers. - Transfer expatriate workers' sponsorship to the entity from any other entity. - Immediate counting in Nitaqat program.

None

High Green

- Apply for new expatriate worker visas. - Change expatriate workers' occupations. - Renew work permit of existing expatriate workers. - Transfer expatriate workers' sponsorship to the entity from any other entity. - Immediate counting in Nitaqat program.

None

Medium Green

- Apply for new expatriate worker visas. - Change expatriate workers' occupations. - Renew work permit of existing expatriate workers. - Transfer expatriate workers' sponsorship to the entity from any other entity. - Immediate counting in Nitaqat program.

None

Low Green

- Renew work permit of existing expatriate workers. - Immediate counting in Nitaqat program.

- Cannot apply for new expatriate worker visas. - Cannot change expatriate workers' occupations.

Red

None

- Cannot change expatriate workers' occupations. - Cannot transfer expatriate workers' sponsorship to the entity. - Cannot apply for new expatriate worker visas. - Cannot issue work permit for new expatriate workers. - Cannot renew work permit of existing expatriate workers.

This table clearly shows that an establishment's classification in the lower ranges (Low Green and Red) leads to significant restrictions on government services related to human resources, hindering the establishment's ability to expand or even maintain its current operations. This system transforms compliance from merely avoiding penalties into a critical factor in maintaining competitiveness and operational viability, strongly pushing companies towards achieving the required Saudization ratios to ensure their business continuity and growth. Consequently, understanding these implications and prioritizing compliance becomes a valuable tool for strategic planning and decision-making.

Part Four: Support for Saudization and Nitaqat Compliance

Saudi Arabia recognizes the importance of supporting businesses in their journey towards compliance with Saudization and Nitaqat requirements. Therefore, various government and private entities provide diverse support mechanisms to help investors and companies efficiently achieve localization goals.

Role of the Ministry of Human Resources and Social Development

The Ministry of Human Resources and Social Development (MHRSD) plays a pivotal role in supporting businesses by providing direct services for labor management and ensuring compliance with regulations.[1, 1] These services include:

• Data Updating Services: This service allows establishments to continuously update their data to ensure the accuracy of information registered with them and the Ministry.[1, 1]
• Expatriate Services Transfer: This service enables establishments to transfer expatriate workers' services to them, facilitating the redistribution of the workforce and contributing to filling job needs.[1, 1]
• High Professions Amendment: The Ministry provides a service for amending the professions of General Managers, CEOs, and Chairmen of the Board, giving companies flexibility in their organizational structure and adapting to market requirements.[1, 1]

The provision of services by MHRSD such as "Expatriate Services Transfer" and "High Professions Amendment" [1, 1] indicates that the Ministry does not merely impose regulations but also provides practical mechanisms to help companies adapt to changing labor market requirements. This reflects a supportive government approach aimed at facilitating compliance rather than simply enforcing it. As the primary regulatory body for Saudization and Nitaqat, the Ministry offers essential services for flexible and efficient workforce management. This demonstrates that the Ministry adopts a dual role as both a regulator and a facilitator, helping companies adapt to regulations and fostering a collaborative work environment.

Role of the Ministry of Investment

The Ministry of Investment (MISA) plays a vital role in facilitating the entry of foreign establishments and the formation of legal entities in the Kingdom, and continuously works to improve the investment environment to attract foreign capital.[1, 1] Its services include:

• Post-Registration Services: The Ministry offers a wide range of services after the initial registration of the establishment, such as annual data updates, ownership amendments, approval for property acquisition and sale, updating establishment information, and registration cancellation.1
• Value-Added Programs:
  • Miza Program: This program aims to enhance the investor experience by providing a governed electronic portal that facilitates access to private sector business service providers, thereby enhancing the efficiency of the investment environment.1
  • Strategic Investor Program: This program offers a package of services and benefits to national and foreign companies meeting eligibility criteria, including advisory support for legislation and regulations in the Kingdom, and consultations on Saudization requirements and procedures.1

MISA's provision of programs such as "Miza" and "Strategic Investor Program," which include "consultations on Saudization requirements and procedures" 1, confirms that Saudization is an integral part of the overall investment environment. This demonstrates that the government adopts a proactive approach to integrating localization objectives within investment attraction strategies, and providing the necessary support for investors to achieve compliance. As the entity responsible for attracting FDI, MISA offers value-added programs that include consultations on Saudization. This means that Saudization is not just a labor regulation, but a strategic factor addressed in the context of investment, reflecting an integrated government vision for economic and social development.

Role of Consulting Firms (e.g., Motaded) in Supporting Compliance

Specialized consulting firms, such as "Motaded Management Consulting," play a vital role in supporting foreign investors to ensure compliance with Saudi regulations. Motaded provides comprehensive strategic support covering the entire company formation process, including facilitating visa procedures, contract registration, government entity registration, and Saudization compliance.1

Specifically, Motaded offers specialized services in supporting Saudization compliance and recruiting Saudi talent, in addition to managing HR operations and related platform registrations.1 The existence of specialized consulting firms like Motaded, which offer comprehensive support for Saudization compliance and Saudi recruitment 1, indicates that the support services market has evolved to meet investor needs. This highlights that compliance, despite its complexity, can be effectively managed through specialized local expertise, reducing operational risks for new or expanding investors. The demand for these services suggests that investors face challenges in understanding and implementing Saudization regulations themselves. Consequently, consulting firms play a crucial role in bridging the gap between government regulations and companies' operational capabilities, making the investment environment more manageable and reducing administrative burdens on investors.

Role of the Saudi Business Center

The Saudi Business Center (SBC) is an integrated platform aimed at facilitating the initiation and conduct of economic activities in the Kingdom, and enhancing its competitiveness.2 The SBC contributes to improving the quality of government requirements by reducing the time and costs associated with obtaining government services and licenses.2

SBC services include issuing commercial registrations, opening establishment files with MHRSD, registering with ZATCA, registering with GOSI, and registering with Chambers of Commerce.4 The existence of the SBC as a "one-stop destination" 3 and an "integrated platform" 2 for company formation and linkage with relevant government entities (such as MHRSD, ZATCA, GOSI) 4 indicates a strong government drive towards streamlining bureaucratic procedures. This indirectly supports compliance by reducing the initial administrative burden on companies, allowing them to focus on complying with substantive regulations like Saudization. The SBC aims to "facilitate the start and practice of economic activities" and "reduce time and costs" 2, and offers company formation services that include opening files with MHRSD and GOSI.4 Streamlining establishment procedures reduces initial barriers to investment, freeing up resources that companies can later allocate to ensuring compliance with regulations like Saudization, instead of depleting them in initial administrative procedures.

Potential Exemptions from Saudization

Despite the mandatory nature of Saudization requirements, some exceptions and incentives exist in specific areas aimed at attracting certain types of investments:

• Special Economic Zones (SEZs): SEZs are a key initiative within Vision 2030 and the National Investment Strategy, aiming to attract qualitative investments and technology transfer.6 These zones offer competitive incentives and advantages, including exemptions from Saudization requirements.8 Some sources indicate 10-year exemptions from Saudization requirements for Regional Headquarters (RHQs), in addition to unlimited work visas for foreign workers.10 Other sources confirm that companies in these zones "will not be required to meet Saudization requirements."9

Saudization exemptions in SEZs 8 represent a dual government strategy. While Saudization is strictly enforced in the main economy, SEZs provide a more flexible environment to attract specific investments (e.g., advanced technology and RHQs) that may require greater flexibility in hiring. This indicates that the Kingdom balances national localization goals with economic development goals targeted at specific sectors requiring global expertise. The government uses SEZs as a tool to attract high-value-added investments by offering comprehensive incentives, including employment flexibility, while continuing to promote localization in other sectors not located within these zones.

Penalties for Non-Compliance

In addition to the restrictions on government services detailed in Part Three, non-compliance with Saudization regulations can lead to financial and regulatory consequences. Certain violations, such as failure to perform annual information updates or provide required data, are classified as "non-serious violations."1 Financial penalties may also be imposed on companies that do not comply with the required Saudization ratios.11 This adds another layer of risk for non-compliance, as financial costs accumulate alongside operational restrictions, reinforcing the importance of strict compliance. Data indicates that there is a "list of non-serious violations" monitored by MISA 1, and these violations include failure to update data and non-compliance with conditions. Other sources also refer to financial penalties for non-compliance with Saudization ratios.11 Consequently, companies not only risk losing access to vital government services but also face direct financial costs and fines, increasing the pressure for strict and continuous compliance.

Conclusion and Recommendations

Saudization and the Developed Nitaqat Program are pivotal government tools in Saudi Arabia, designed to achieve Vision 2030 objectives related to labor market development and economic diversification. The Developed Nitaqat Program relies on a flexible calculation mechanism and a fixed Saudization plan to enhance regulatory stability and support business growth. Compliance with Nitaqat has proven to have a direct and crucial impact on companies' ability to access vital government services, making it an indispensable operational and strategic necessity.

A wide range of government support is available, from MHRSD and MISA, in addition to support from specialized consulting firms, to help companies achieve compliance. SEZs also provide significant exemptions from Saudization, along with other incentives, making them an attractive option for certain types of investments that require greater flexibility in hiring foreign talent.

To ensure effective compliance and maximize benefits from the investment environment in the Kingdom, investors and companies are recommended to:

• Proactive Workforce Planning: Companies should leverage the fixed three-year Saudization plan to integrate Saudization targets into long-term recruitment strategies, identifying future needs for Saudi competencies. This proactive approach allows establishments to build sustainable recruitment plans aligned with government requirements.
• Maximize Government Support: Investors should actively engage with MISA (especially programs like the Strategic Investor and Miza) and MHRSD. These entities can provide valuable support services and consultations, facilitating the compliance process and offering solutions to potential challenges.
• Evaluate Special Economic Zones as a Strategic Option: Companies, especially those requiring high flexibility in foreign labor recruitment or seeking advanced technology transfer, should evaluate the comprehensive advantages of SEZs. These advantages include Saudization exemptions, in addition to tax and customs incentives, making them a strategic investment option that can enhance competitiveness.
• Collaborate with Local Experts: It is highly advisable to engage specialized consulting firms with local expertise, such as Motaded. These experts can simplify complex compliance procedures, ensure alignment with evolving regulations, and mitigate operational risks that may arise from a lack of full understanding of the system.
• Continuous Compliance and Performance Monitoring: Companies should regularly monitor their Saudization ratio and promptly update government data when any changes occur. Ensuring adherence to the green ranges is crucial to avoid restrictions on government services and financial penalties, thereby ensuring smooth operational continuity.
• Invest in Training and Development of Saudi Competencies: Since Saudization aims to develop local human capital, investing in the training and development of Saudi employees not only ensures compliance but also contributes to building a sustainable and qualified workforce. This investment benefits the company by enhancing its productivity and employee loyalty, and the national economy by building a strong knowledge base.

These recommendations focus not only on passive compliance (avoiding penalties) but on positive compliance that transforms challenges into opportunities. Through proactive planning, leveraging available support, and choosing the appropriate investment location, companies can turn Saudization requirements from a burden into a competitive advantage that aligns with national goals, enhancing their position in the Saudi market and contributing to achieving Saudi Vision 2030.