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Executive summary

On 16 February 2024, Saudi Arabia published the Tax Rules for Regional Headquarters (RHQ Tax Rules) in the Official Gazette. The new RHQ Tax Rules aim to clarify the scope and conditions of the tax reliefs for RHQ entities, as announced by the Saudi Arabian Government in December 2023.

Detailed discussion

Background

On 5 December 2023, Saudi Arabia announced a 30-year tax incentive to multinational companies willing to establish their RHQ in Saudi Arabia, with detailed tax rules expected to be published later. See EY Global Alert, Saudi Arabia offers 30-year tax holiday under Regional Headquarters program, dated 15 December 2023.

Subsequent to this announcement, the RHQ Tax Rules were published on 16 February 2024, making Saudi Arabia a competitive RHQ destination.

Highlights of the new RHQ Tax Rules

Under the RHQ Tax Rules, RHQ entities established in Saudi Arabia that meet the relevant criteria are granted a 30-year renewable tax incentive of 0% corporate income tax (CIT) and 0% withholding tax (WHT). The WHT exemption applies to the following payments the RHQ makes to nonresidents: (i) dividends; (ii) payments to related persons; and (iii) payments to unrelated persons for services that are necessary for the RHQ's activities.

In applying the tax incentives, the following considerations should be taken into account:

• The tax incentives apply to income from "eligible activities" of the RHQ. These are defined as "activities 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."
• The RHQ is required to maintain separate books of accounts for any ineligible activities. The income from such activities is taxed in accordance with the applicable provisions of the Saudi Arabian Tax Law.
• The RHQ is required to comply with the Transfer Pricing Bylaws issued by the General Authority of Zakat and Tax Board (now the Zakat, Tax and Customs Authority (ZATCA)) on 31 January 2019 and should conduct all transactions with its related persons at arm's length.
• Regardless of meeting the criteria for the RHQ registration set out by Ministry of Investment of Saudi Arabia (MISA), an RHQ entity must comply with the following Economic Substance Regulations (ESR) requirements:
• Hold a valid license from the MISA, operating only within its scope
• Possess adequate premises in Saudi Arabia suitable for RHQ activities
• Direct and manage RHQ activities in Saudi Arabia, including strategic decision-making at board meetings held there
• Incur operational expenses in Saudi Arabia commensurate with RHQ activities
• Generate revenue from eligible activities within Saudi Arabia
• Have at least one resident director in Saudi Arabia
• Employ an adequate number of full-time employees proportional to RHQ activities in each tax year
• Confirm that RHQ employees possess the necessary qualifications and skills to fulfill their duties

Noncompliance with the ESR may lead to penalties of:

1. 100,000 Saudi Riyal (SAR100k) if the violation is corrected within 90 days from the date of the imposition of the fine
2. SAR400k if the violation described in (i) is not corrected within 90 days from the date of the imposition of the fine or where the RHQ repeats the same violation within three years from the date of imposition of the first fine and corrects the violation within 90 days of imposition of the second fine
3. Potential revocation of tax incentives if the RHQ fails to remedy any of the violations after the imposition of the second fine

Implications

Companies that have already set up or intend to set up an RHQ in Saudi Arabia are encouraged to assess the tax impact of the new RHQ Tax Rules and their eligibility to avail of the tax incentives considering the level of their transfer pricing and ESR compliance.