Executive summary

On 15 April 2024, the Zakat, Tax and Customs Authority (ZATCA) published on its website the Guidelines of the regional headquarters in the Kingdom: a guideline to clarify the tax and zakat provisions applied on the activities of regional headquarters* (the Guidelines), offering additional details on the Regional Headquarters Tax Rules (RHQ Tax Rules) published in February 2024. The Guidelines confirm that the 30-year tax holiday is restricted to corporate income tax and withholding tax — i.e., the general rules for zakat, value-added tax (VAT) and real estate transaction tax (RETT) will continue to apply to RHQs. (*Note that the current version of the Guidelines has only been issued in the Arabic language. We understand that the ZATCA is in the process of issuing a translated English version.)

The Guidelines provide additional details on the economic substance requirements applicable to RHQs and how the ZATCA is expected to evaluate compliance with economic substance requirements. The Guidelines also provide illustrative examples with respect to RHQs' qualification criteria, reporting and other requirements.

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. Following this announcement, the ZATCA published the RHQ Tax Rules on 16 February 2024. (See EY Global Tax Alerts, Saudi Arabia offers 30-year tax holiday under Regional Headquarters program, dated 15 December 2023, and Saudi Arabia unveils new tax rules for the Regional Headquarters program, dated 21 February 2024.)

The Guidelines clarify numerous provisions of the RHQ Tax Rules and the ZATCA's position on specific topics, such as applicability of the zakat and VAT regimes, tax residency and permanent establishment (PE) risks for the regional companies supported by the RHQ.

Highlights of the Guidelines

Clarifications that ZATCA has provided include those described below.

RHQs will be eligible to benefit from the tax incentives (i.e., 30-year corporate income tax and withholding tax holiday) if the criteria set by the Ministry of Investment of Saudi Arabia (MISA) are met, including:

• The head office has subsidiaries or branches in at least two jurisdictions globally other than in Saudi Arabia and the country of residence of the head office.
• The RHQ is registered either as a limited liability company or as a branch in Saudi Arabia.
• The RHQ performs the mandatory activities and at least three of the optional activities prescribed by the MISA.

The RHQ's registration in Saudi Arabia should be made via the e-services portal of the MISA, which requires submission of certain documents and details related to the entity and its shareholders.

The Guidelines reiterate the economic substance requirements applicable to RHQs while providing the following additional clarifications:

• RHQs must have a physical office in Saudi Arabia (either owned or leased) and office space must be commensurate with its activities.
• Board meetings must be physically conducted in Saudi Arabia and periodically held based on the level of activity, the number of subsidiaries and the nature of transactions of the RHQs, and duly supported by adequate documentation.
• Although an RHQ may initially have one director (residing in Saudi Arabia), it must have at least three executives who are expected to make key decisions and perform the prescribed mandatory activities of the RHQ.
• RHQs should be able to demonstrate that the level of assets and expenses are suitable for the exercise of its activities.
• RHQs must have sufficient full-time employees (commensurate with its activities) and shall consider the rules for part-time employees, residency and qualification requirements provided in the Guidelines.

To verify that economic substance requirements are met, RHQs shall submit an annual report using the form that will be prescribed by the ZATCA and shall comply with the procedures specified by the ZATCA.

The Guidelines also emphasize that RHQs must not conduct any commercial activities other than those that it is licensed to practice. All commercial activities must be separately carried out by subsidiaries that hold the necessary commercial licenses.

If an RHQ engages in activities outside the scope of its RHQ license, these would be considered as ineligible activities, which shall be:

• Recorded in separate books of accounts
• Subject to regular domestic tax/zakat rules

The general tax residency requirements should apply to an RHQ and its subsidiaries. In other words, the relevant entity should be considered resident if: (1) the RHQ is established in accordance with the Saudi Companies Law or (2) its place of central management (PCM) is in Saudi Arabia. A PCM is established when at least two of the following conditions are met:

• Regular board meetings are held in Saudi Arabia during which key decisions are made.
• Management decisions by senior executives are made in Saudi Arabia.
• The majority of business revenues are derived from Saudi Arabia.

A nonresident affiliate should not be considered a tax resident (or be deemed to have a PE) in Saudi Arabia merely because of the support functions carried out by the group's RHQ in Saudi Arabia.

The "Force of Attraction" rule should apply to RHQs, unless it takes the form of an LLC in Saudi Arabia. Under this rule, if the nonresident head office is providing goods and/or services to a Saudi customer that are the same or similar to the goods and/or services of the RHQ, income from such goods and/or services also must be reported in the RHQ's tax return, unless relief is available under a double tax treaty between Saudi Arabia and the counterparty jurisdiction.

The tax incentives may be revoked in the event of tax avoidance as stipulated in relevant tax laws, and also in the following cases:

• An RHQ deliberately provides false or misleading information or representations to the ZATCA.
• An RHQ deliberately misapplies the tax rules or misuses the tax incentives to benefit or assist others in benefiting from tax incentives for ineligible activities.
• An RHQ makes payments to nonresident persons on behalf of persons who are not eligible for tax incentives.

The 30-year tax holiday does not cover VAT, zakat and RETT. Accordingly, the current VAT rules apply to the supplies undertaken by the RHQ.

Registration of an RHQ for tax/zakat purposes is done automatically upon obtaining a license from the MISA, provided that this tax registration takes place before the end of the fiscal year. But, the RHQ may need to register for VAT purposes, as follows:

• Registration is mandatory if the value of an RHQ's taxable supplies exceeds SAR*375,000 in the previous 12-month period, or if the value of taxable supplies is expected to exceed SAR375,000 in the next 12 months. (*SAR is the abbreviation for the Saudi Riyal.)
• If this threshold is met, but the RHQ only makes zero-rated supplies, the RHQ will not be required to register for VAT but may opt to register for VAT purposes. In such a case, the RHQ shall maintain sufficient evidence that its revenues are only subject to 0% VAT.
• Registration is voluntary if the taxable supplies/expenses are at least SAR187,500 in the previous 12-month period or the following 12-month period.

The RHQ must issue a tax invoice for each supply of taxable goods or services in compliance with the respective VAT and e-invoicing provisions.

The RHQ is entitled to recover input VAT to the extent these are used for the purposes of their overall economic activity. This includes the eligibility of the RHQ to recover input VAT prior to its registration in accordance with the Saudi VAT Implementing Regulations.

RHQs are also subject to Saudi transfer pricing rules and requirements. RHQs should conduct all transactions with its related parties on an arm's-length basis.

Other tax and zakat compliance requirements and procedures also apply to RHQ (i.e., tax return filing, books and records keeping, tax assessments, objection and appeal procedures, and fines and penalties).

Implications

Companies that have already set up or intend to set up an RHQ in Saudi Arabia are encouraged to review the provisions in the Guidelines and assess the applicability of the rules, accordingly, including eligibility to avail of the tax incentives and potential impact.