Saudi Regional Headquarters Program: an overview of tax and non-tax incentives

Background

This article provides a summary of the requirements for establishing a Regional Headquarters (RHQ) in the Kingdom of Saudi Arabia (KSA), as well as the various tax and non-tax incentives granted to RHQs.

The RHQ program in KSA is a strategic initiative launched by the Saudi government as part of its Vision 2030 plan, aimed at diversifying the economy and reducing its dependency on oil. The program is designed to encourage multinational companies (MNCs) to establish their regional headquarters in KSA, specifically in Riyadh, to serve their operations in the Middle East and North Africa (MENA) region. With this initiative, KSA aims to position itself as a leading business and investment hub, fostering economic development, innovation, and job creation. This RHQ program is a collaboration between the Ministry of Investment of Saudi Arabia (MISA) and the Royal Commission for Riyadh City.

MISA announced that over 350 international investors have so far obtained licenses to establish their regional headquarters in KSA, most of which will be in Riyadh.

The RHQ Program was first announced in February 2021, with the Saudi government announcing its intention to limit contracting with companies that do not have their RHQ in KSA.

In February 2022, MISA published detailed guidance on the Invest Saudi portal providing clarity regarding what constitutes a RHQ along with comprehensive explanation of RHQ prescribed activities, licensing and employment requirements.

In March 2023, the Saudi Minister of Investment, H.E. Khalid Al-Falih announced that RHQs would be able to benefit from tax relief in KSA.

On 27 December 2023 the Saudi Council of Ministers issued a resolution approving the regulations of government agencies contracting with entities that do not have a regional headquarter in KSA and their related parties. The resolution stipulated that, as of 1 January 2024, companies eligible for the RHQ Program that have not established their RHQ for MENA in KSA will not be able to enter into contracts with Saudi government entities.

On 16 February 2024, the Zakat, Tax and Customs Authority (ZATCA) published a guideline specifying the RHQ tax rules, implementing the previously announced tax incentives for RHQs.

Exemptions

As of 1 January 2024, unless subject to an exemption (available in very limited circumstances), MNCs without an RHQ in KSA can no longer participate in government tenders without restrictions and on similar financial terms with other bidders . In practical terms, all tendering through the Etimad platform¹ will require bidders to demonstrate that RHQ requirements have been satisfied or that the MNC can benefit from an exemption, as outlined below, or that the RHQ program is not applicable to it.

RHQ is not mandatory for engaging in contracts or projects under the following conditions:

• Smaller contracts that do not exceed SAR 1 Million can proceed without the need for an RHQ in KSA.
• Contracts for projects being executed outside KSA are exempt from the RHQ requirement, facilitating international operations and collaborations.
• In situations where only a single bid meets the technical specifications, or in case of emergency where the requested services can only be provided by a company without RHQ, government entities can award the contract regardless of the bidder's RHQ status. This is mainly to ensure that essential projects can move forward without delay due to RHQ constraints.
• A bid from a company without an RHQ in KSA can be accepted if it is rated as the highest-quality technical bid and it is financially more competitive by at least 25% compared to the second-best bid.

Eligibility

The RHQ program is available to MNCs that are active in the MENA region. For a company to qualify as a MNC and apply for the RHQ program, it must meet several criteria. Specifically, it must have a presence in at least two countries outside of its headquarters jurisdiction and KSA, be active in the MENA region, and engage in strategic direction, management functions, or support functions through its branches, subsidiaries, or affiliates within the MENA region.

Regulatory Requirements

The key regulatory requirements for MNCs wishing to participate in the RHQ program include:

• Obtain an RHQ license from MISA and begin operations within six months after issuance;
• Hire at least 15 full-time employees within one year of receiving the RHQ license;
• RHQ employees must have the relevant skills and knowledge to engage in mandatory RHQ activities;
• At least 3 employees must be C-level executives;
• Undertake all mandatory RHQ activities specified by MISA, plus a minimum of three optional RHQ activities;
• Ensure that all entities within the MENA region report to the Saudi RHQ; and
• Refrain from conducting any commercial activities through the RHQ.

Failure to meet these requirements may result in the RHQ license being cancelled by MISA.

It is important to note that the RHQ must be established either as a registered branch or as a subsidiary as it is not possible to conduct RHQ functions from an (existing) operational entity in KSA. Therefore, MNCs that are already operating in the Kingdom through another entity will either need to incorporate a branch or a new legal entity, in order to fulfil the RHQ requirements.

Non-Tax Incentives

The RHQ and its employees can benefit from the following non-tax incentives:

• Exemption from Saudization: RHQs enjoy a 10-year exemption from the Saudization requirements.
• Unlimited employee visas: RHQs can obtain an unlimited number of visas for their employees.
• Employment for dependents: dependents of RHQ employees can find employment opportunities through the Ajeer portal. Maximum age for residency of dependents of RHQ employees increased to 25 years.
• Exemption from professional accreditation requirements: employees of RHQs holding valid professional accreditations in their home countries are exempt from the need to acquire additional local accreditations.

Tax incentives

In February 2024, ZATCA published a guideline clarifying the tax rules applicable to RHQs (Tax Rules).

The Tax Rules stipulate that RHQs meeting the requirements stipulated by MISA will be granted the following tax incentives:

Corporate Income Tax

• 0% Corporate Income Tax (CIT) on eligible income.
• ‘Eligible Income’ is defined as income from ‘Eligible Activities’ carried on by the RHQ. The term ‘Eligible Activities’ is defined as: the main activities of the RHQ towards strengthening the group’s profile in the region and providing strategic supervision and administrative guidance and support for the internal business of the company, subsidiaries and other related companies according to the National Classification of Economic Activities No. 701011. This presumably refers to the mandatory and optional RHQ activities specified by MISA, which involve management functions, strategic direction of MENA entities and other RHQ activities.
• Income from Non-Eligible Activities will be subject to the standard tax regime.

Withholding Tax

• 0% Withholding Tax (WHT) on dividends.
• 0% WHT on payments to related persons
• 0% WHT on payments to unrelated persons that are necessary for the RHQ activities. The Tax Rules do not specify when payments are considered ‘necessary’.

Exemptions from WHT do not apply if:

• The payment relates to Non-Eligible Activities; or
• There are instances of tax avoidance.

Duration

The tax benefits will be available from the date the RHQ license is granted until the earlier of 30 years or when the entity ceases to be an RHQ. The 30-year period is subject to renewal.

Transfer Pricing

The RHQ can recharge costs to its regional entities for headquarter services performed. However, in doing so, the RHQ must comply with the Transfer Pricing Bylaws and must ensure that all related party transactions are conducted at arm’s length.

Economic Substance Requirements

The Tax Rules introduce Economic Substance Requirements (ESR) for the RHQ as a condition to benefit from the RHQ tax incentives.

In addition to the eligibility criteria stipulated by MISA, the RHQ must meet the following substance requirements:

• The RHQ must hold a valid license from MISA and shall only carry out activities that are within the scope of such license.
• The RHQ must have adequate premises in KSA that are suitable for its business activities.
• The activities of the RHQ must be directed and managed in KSA. This entails that the RHQ’s board meetings where strategic decisions are made should be held in KSA. At least one director must be a resident in KSA.
• The RHQ must incur operational expenditure in KSA, which is proportionate with the activities of the RHQ.
• Revenue from Eligible Activities must be generated in KSA.
• The RHQ must employ an adequate number of full-time employees in a tax year, proportionate to the level of activity carried out by the RHQ.
• The RHQ’s employees must have the necessary qualifications and skills necessary to execute their duties and fulfil their responsibilities.

Compliance obligations

The RHQ will need to comply with various compliance obligations for CIT and Zakat purposes. Including:

• Register with ZATCA;
• File annual CIT and/or Zakat returns;
• File an annual ESR report; and
• Prepare and maintain accounts for each tax year².

Tax Rulings

An RHQ will be able to submit ruling requests to ZATCA to provide an interpretation or clarification on taxation matters related to the Tax Rules applicable to RHQs or other tax laws in KSA.

Audits and enforcement

ZATCA will have the authority to monitor and examine the activities of the RHQ in accordance with the procedures and provisions outlined in the relevant CIT and Zakat laws. If a RHQ does not comply with the requirements of the CIT and Zakat laws, it will be subject to the penalties outlined in those laws. The RHQ will have the right to object to the assessments, reassessments and penalties raised by ZATCA, as well as the right to submit appeals in accordance with the CIT and Zakat Laws.

ZATCA will also be responsible for monitoring and verifying whether a RHQ has met the ESR. If the RHQ fails to satisfy the ESR, ZATCA may impose the following sanctions and penalties:

Anti-avoidance

ZATCA, in cooperation with MISA, may revoke the RHQ tax incentives in the following cases:

• The RHQ has intentionally submitted false or misleading information or declarations to ZATCA.
• The RHQ has intentionally misapplied the Tax Rules or misused tax incentives to take advantage or assist others to take advantage of the tax incentives in relation to Non-Eligible Activities and activities not licensed by MISA.
• The RHQ provided payments to non-residents on behalf of persons that do not qualify for the tax incentives.

If the tax incentives for a RHQ are revoked for a tax year, ZATCA will issue a tax assessment for the relevant tax year, including any applicable penalties.

The Tax Rules also stipulate that any anti-avoidance provisions or provisions with respect to tax evasion will apply to the RHQ.

Tax treaty benefits

A RHQ should be able to claim treaty benefits under applicable double tax treaties concluded by KSA, to the extent that he RHQ satisfies the residency criteria under the relevant tax treaty.

Conclusion

Starting 1 January 2024, MNCs without a RHQ in KSA will no longer be able to participate in government tenders, with only limited exceptions.

Companies aiming to establish an RHQ should verify their eligibility and requirements for obtaining an RHQ license from MISA.

With the publication of the Tax Rules for RHQs, ZATCA has provided more clarity on the previously announced tax incentives granted to RHQs.

To benefit from these tax incentives, the RHQ will need to meet the substance requirements imposed by ZATCA, or face penalties or even suspension of the RHQ tax incentives.

Another important point which has now been clarified, is that RHQs must adhere to transfer pricing regulations, similarly to other tax and Zakat payers. This entails that the RHQ should apply the arm’s length principle when providing services to group entities.

ZATCA is expected to issue more detailed guidance on the Tax Rules applicable to RHQs in due course.

Reference: Regional Headquarters Tax Rules

¹ The Etimad portal is a unified electronic portal for government procurement in KSA.
² The RHQ must maintain separate accounts for Non-Eligible Activities. The allocation of income to Eligible Activities shall take place as if these are independent from the other activities of the RHQ.