Saudi Arabia introduces 30-year tax exemption for regional corporate HQs
The Saudi Zakat, Tax & Customs Authority (ZATCA) published guidance in February on the rules implementing the previously announced 30-year tax exemption package for foreign companies that establish their regional headquarters (RHQ) in Saudi Arabia.
The RHQ programme is a key part of its campaign to attract multinational enterprises (MNEs) to bring international investment and headcount to the Saudi Arabia and is linked to the government’s Vision 2030, an ambitious campaign launched in 2016 to create private sector jobs and diversify the Saudi economy away from oil as its population grows.
A joint initiative between the Ministry of Investment (MISA) and the Royal Commission for Riyadh City (RCRC), the programme aims to attract MNEs to set up their RHQ in Saudi Arabia and position the Kingdom of Saudi Arabia (KSA) as the leading commercial, industrial and investment hub for the MENA region, by offering a range of benefits and premium support services that complement its globally competitive value proposition.
It is also Saudi government policy that any foreign company that does not have its MENA RHQ office in the KSA is to be excluded from doing business with Saudi state entities as of 1 January 2024.
“The Regional Headquarters Programme is a bold and strategic business development in Saudi Arabia to attract large multinational organisations to the Kingdom,” said Nazar Musa, CEO of sovereign PPG Saudi Arabia.
“The incentives behind the programme are driving the establishment rate and investment commitment that these businesses are making. It will be interesting to see the number of RHQs that have decided to benefit from engaging in the programme by the end of this year, which should be another progressive milestone towards the Vision 2030 targets.”
What tax benefits does the RHQ programme offer?
The RHQ programme offers an unprecedented 30-year exemption from corporate income tax on eligible income and on withholding taxes in respect of activities that are designated as “approved regional headquarters activities”.
The exemption applies from the date of issue of the RHQ licence until the earlier of 30 years or when the entity ceases to be an RHQ. The 30-year period is also subject to renewal.
‘Eligible Income’ is income from ‘Eligible Activities’, which are the mandatory and optional RHQ activities involving management functions, strategic direction of MENA entities and other RHQ activities.
Income from Non-Eligible Activities will be subject to the standard tax regime. The KSA generally imposes a 20% corporate tax rate on profits and levies withholding tax on various types of service, with rates varying between 5%, 15%, and 20%.
What other benefits does the RHQ programme offer?
The RHQ programme package also offers a range of other benefits to licence holders including:
- RHQs can participate in Saudi government tenders without restrictions and on similar financial terms with other bidders.
- RHQs enjoy a 10-year exemption from the Saudisation requirements.
- RHQs can obtain an unlimited number of visas for their employees.
- Dependents of RHQ employees can find employment opportunities through the Ajeer portal.
- Employees of RHQs holding valid professional accreditations in their home countries are exempt from the need to acquire additional local accreditations in KSA.
What are the economic substance requirements?
To benefit from the tax incentives, an RHQ must comply with ZATCA’s Economic Substance Requirements (ESR) as follows:
- The RHQ must hold a valid licence from the Ministry of Investment of Saudi Arabia (MISA) and must only carry out activities that are within the scope of the licence.
- 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 – board meetings where strategic decisions are made should be held in KSA and at least one director should be a resident in KSA.
- The RHQ must incur operational expenditure in KSA that 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 that is proportionate to the level of activity carried out by the RHQ.
- Employees must have the necessary qualifications and skills necessary to execute their duties and fulfil their responsibilities.
Ongoing compliance
To maintain an RHQ licence, holders are required to comply with various obligations including ZATCA registration, filing annual tax returns, filing annual ESR reports and preparing and maintaining annual accounts.
RHQs must also adhere to transfer pricing regulations and should always apply the arm’s length principle when providing services to group entities. This should be documented.
How can Sovereign help?
Sovereign Group has an experienced team on the ground in Saudi Arabia, which can assist your business to establish and license an RHQ in the KSA, and then help you to remain in compliance with all ongoing obligations under the RHQ programme.
If you need assistance with RHQs or any other matter relating to company formation, restructuring, local partners or PRO support in the KSA, please contact us on +971 4 270 3400 or email us at info@sovereigngroup.com. You can also complete the contact form on our website.
