Sri Lanka's Board of Investment said it was the first Saudi investment in Sri Lanka.
"I am confident that this project will be the first of many projects from the Kingdom of Saudi Arabia, a longstanding friend of Sri Lanka and also from the Gulf region in general," BOI's chairman M M C Ferdinando said in a statement.
Hadi Hamad Al-Hammam, the Saudi investor was quoted as saying that Middle Eastern businesses were looking at the island following a visit by Sri Lanka's President Mahinda Rajapaksa to the region, who met business delegations.
Sri Lanka straddles an East-West sea lane is positioning itself to be become a shipping hub.
The BOI said Seagulf Shipyard will focus on repairing and maintaining, yachts, boats and tourist related boats.
Galle is already a port of call for yachts traversing the Indian Ocean. The BOI said Galle will get a dedicated jetty for pleasure craft.
"The facilities at Galle can service vessels from the region and beyond," the BOI said.
"One possibility is for the Galle facility to service Maldivian vessels, which currently sail as far as Indonesia and Thailand for their maintenance.
"The project will also create employment for marine engineers and maintenance in ship repair and shipbuilding worldwide."
About 1,500 people are expected to be directly employed by the project, the BOI said.