BDO Corporate Tax News

Saudi Arabia - Beneficial regional headquarters regime in effect

Multinational companies (MNCs) establishing regional headquarters in Saudi Arabia can benefit from a 30-year tax incentive package that applies as from 1 January 2024. The package includes an exemption from corporate and withholding tax for approved regional headquarters (RHQ) activities for three decades, starting from the date the RHQ licence is issued. 

The Zakat, Tax and Customs Authority (ZATCA) released detailed regulations on 16 February 2024 that set out the conditions that MNCs must fulfil to receive the 30-year incentives when moving their regional headquarters to the country. RHQs are treated as residents if they meet criteria outlined in the Income Tax Law and any international agreements involving Saudi Arabia. To benefit from the RHQ incentives, MNCs must fulfil specific conditions, provide accurate information and refrain from tax evasion or malpractice.

Tax incentives

Article 3 of the regulations provides for the following tax incentives for RHQs meeting the Ministry of Investment criteria: 
  • Zero percent income tax on qualifying income; and 
  • Zero percent withholding tax on dividend payments made by the RHQ to nonresidents, payments to related persons and payments to unrelated persons for services that are deemed to be necessary for the RHQ to conduct its activities.
The withholding tax exemption does not apply to RHQ payments related to unapproved activities or in cases of tax avoidance as outlined in the anti-avoidance provision in article 12 of the tax rules. The tax treatment of RHQ income from non-qualified activities follows the usual Saudi tax system and relevant agreements and international obligations. 

Eligibility requirements and setting up an RHQ

The following requirements must be met for an MNC to be eligible for RHQ status:
  • The RHQ must be established as a separate legal personality in Saudi Arabia as a company or a registered branch of a foreign company.
  • The MNC must have a presence in at least two jurisdictions other than Saudi Arabia and the country in which the headquarters of the MNC is located, either through subsidiaries or branches. (Presence in the Middle East and/or North Africa is not required to establish an RHQ in Saudi Arabia.)
  • The MNC must apply for an RHQ licence from the Ministry of Investment.
  • The RHQ must employ at least 15 full-time employees, including at least three employees at the Executive Director and Vice President levels, within one year of the issuance of an RHQ licence. Employees carrying on “mandatory” RHQ license activities (see below) must have the relevant skills and knowledge developed at the headquarters or another regional headquarters of the MNC.
  • The MNC may not directly engage in commercial revenue-generating activities other than activities permitted under the RHQ license. Once RHQ status is granted, the MNC must limit its activities to mandatory activities and at least three optional activities.
  • The RHQ must commence mandatory activities within six months and three optional activities within one year of issuance of the licence.
Mandatory RHQ activities are the provision of strategic direction and management. Strategic direction functions include:
  • Formulating and monitoring the regional strategy;
  • Coordinating strategic alignment;
  • Embedding products and/or services in the region;
  • Supporting acquisitions, mergers and divestments; and
  • Reviewing financial performance. 
RHQ management functions include:
  • Business planning;
  • Budgeting;
  • Business coordination;
  • Identification of new market opportunities;
  • Monitoring of the regional market, competitors, and operations;
  • Creating a marketing plan for the region; and
  • Operational and financial reporting.
In addition, the RHQ must commence at least three of the following optional RHQ activities:
  • Sales and marketing support;
  • Human resources and personnel management;
  • Training services;
  • Financial management, foreign exchange, and treasury centre services;
  • Compliance and internal controls;
  • Accounting;
  • Legal;
  • Auditing;
  • Research and analysis;
  • Advisory services;
  • Operations control;
  • Logistics and supply chain management;
  • International trading;
  • Technical support or engineering assistance;
  • Network operations for IT systems;
  • Research and development;
  • Intellectual property rights management;
  • Production management; and
  • Sourcing of raw materials and parts.

Compliance requirements

The regulations highlight the need for RHQs to be registered with the Ministry of Investment and obtain an RHQ licence and register with ZATCA in line with the procedures in the relevant tax and Zakat regulations. In addition, an RHQ must file an annual tax or Zakat return (as the case may be), submit an annual report using ZATCA’s designated form to ensure compliance with the economic substance rules (e.g., hold a valid licence, maintain suitable premises) and prepare/maintain books of accounts for each tax year, including the partial tax year commencing from the date the RHQ licence was issued to the tax year-end. If the RHQ engages in non-qualifying activities, separate accounts must be kept and income must be allocated to qualifying activities as if they were independent of the RHQ’s other activities. ZATCA is authorised to carry out regulatory, executive and administrative functions, including gathering information and making evaluations, and conducting examinations and audits of RHQs in Saudi Arabia. ZATCA ensures RHQ compliance with economic growth requirements on an annual basis. An RHQ has the right to object to assessments, reassessments and penalties imposed by ZATCA, and there are avenues for appeals. An RHQ can request interpretive decisions and rulings from ZATCA to clarify tax-related issues. 

Noncompliance with tax and Zakat regulations by the RHQ will result in penalties. The guidance specifies that if the RHQ fails to meet the economic substance requirements during the licence period, ZATCA will notify the RHQ of the violation and provide a 90-day corrective period. Failure to comply also may result in a penalty of SAR 100,000, increasing to SAR 400,000 if the RHQ fails to make the correction within 90 days. It is also worth noting that if the RHQ repeats the violation within three years from the date a penalty is imposed, the increased fine will be levied and the tax incentives will be cancelled. Anti-avoidance and evasion rules also apply to RHQs. 

Transfer pricing

ZATCA has confirmed that RHQs must comply with the current transfer pricing bylaws and rules and ensure that all transactions with related persons are conducted at arm’s length. The regulations simplify the interpretation of “related companies” or “related persons” by adopting the same definition as the transfer pricing bylaws. 

As there are currently no specific transfer pricing guidelines for RHQs, we expect the documentation requirements will be consistent with the obligations outlined in the transfer pricing bylaws. Further explanatory material and guidance is expected to be released by ZATCA. To optimise the full benefits granted under the RHQ regime, MNCs should ensure alignment with the Saudi transfer pricing regulations, follow the specific requirements and be aware of the business activity restrictions applicable to RHQs.

Muhammad Imran Sial
Ismael Navarro
BDO in Saudi Arabia 
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