On 5 December 2023, in a statement issued by the Ministry of Investment of Saudi Arabia (MISA), in coordination with the Ministry of Finance (MOF) and the Zakat, Tax and Customs Authority (ZATCA), it was announced that multinational groups (MNCs) that decided to relocate their regional headquarters to Saudi Arabia can enjoy significant tax benefits.
1. General Information on the RHQ
The Regional Headquarters (RHQ) initiative was announced back in 2021 to attract MNCs to relocate their regional operations to the KSA. Initially, the idea of attracting investors was realized by announcing limiting access for MNCs without the regional headquarters in KSA to governmental contracts and bidding processes by the end of 2023.
From 1 January 2024 onwards, while the scope of application of the RHQ program in practice remains to be seen, companies that do not participate in the RHQ program are not allowed to be awarded a governmental contract, unless:
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- The estimated cost of the works and procurement is less than SAR 1M
- The contract is to be executed outside the KSA.
- There is only one technically accepted bid or the bid submitted by the MNC without the RHQ in the KSA is the best technically and cheaper by 25% or more than the second best.
- There is an emergency need that can be satisfied only by the MNC that does not have the RHQ in the KSA.
The RHQ license in the KSA can be granted to an entity that is:
- Part of the multinational group having a foreign parent company.
- Carrying activities in more than two countries besides the country of the parent company and the KSA.
Importantly, the entity applying for the RHQ license in the KSA does not have to carry on commercial operations in the KSA. Nevertheless, the applicant must conduct the following activities at the RHQ to obtain the license:
- Formulate and monitor the regional strategy
- Coordinate strategic alignment
- Embed products and/or services in the region
- Support acquisitions, mergers and divestments
- Review financial performance
- Business planning
- Budgeting
- Business coordination
- Identification of new market opportunities
- Monitoring of the regional market, competitors, and operations
- Marketing plan for the region
- Operational and financial reporting
The applicant must carry out the above activities in the KSA besides three additional activities from the below list:
- Sales and marketing support
- Human Resources, and Personnel Management
- Training Services
- Financial Management, Foreign Exchange and Treasury Centre Services
- Compliance and Internal Control
- Accounting
- Legal
- Auditing
- Research and Analysis
- Advisory Services
- Operations Control
- Logistics and Supply Chain management
- International Trading
- Technical Support of Engineering Assistance
- Network Operations for IT system
- Research and Development
- Intellectual Property Rights Management
- Production Management
- Sourcing of Raw Materials and Parts
The license is granted for 1 to 5 years and incurs the statutory annual fees of SAR 12,000 (SAR 10,000 of the service fee and SAR 2,000 annual fee) for the first year and SAR 2,000 annually from the second year onwards.
2. Tax benefits of participation in the RHQ initiative
The tax incentives are a further motivation for participation in the RHQ program. MISA, along with the MOF and ZATCA, announced a 30-year tax relief incentive that includes:
- 0% for the corporate income tax for those with the RHQ license and
- 0% for the withholding tax for the approved RHQ activities.
Those incentives are granted from the day the relevant RHQ license is granted to the applicant.
A company considering participation in the RHQ program must carefully consider the potential costs and benefits of such a move from a commercial and operational perspective. Also, the impact of the Pillar 2 legislation cannot be forgotten as the legislation imposed in the jurisdiction competent for the parent company can nullify the effect of the tax incentive on the group level.
Should you have any further questions on the RHQ initiative and are interested in the analysis of the pros and cons of your business, please kindly let us know at tax@amereller.com.
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This client alert is a public document for informational purposes only and should not be construed as legal advice. Readers should not act upon the information provided here without consulting with professional legal counsel. This material may be considered advertising under certain rules of professional conduct. Copyright © 2023
