KSA Regional Headquarters Tax – Introduction
On February 16, 2024, the Zakat, Tax, and Customs Authority (ZATCA) released new Regional Headquarters (RHQ) rules in Saudi Arabia.
These rules supplement the existing Zakat/Tax Law provisions and the Ministry of Investment of Saudi Arabia (MISA) guidance published in February 2022, offering tax incentives for businesses establishing their RHQs in the Kingdom of Saudi Arabia (KSA).
Key Tax Incentives for RHQs
RHQs that meet the criteria set by MISA and ZATCA will enjoy the following tax incentives:
- 0% KSA Corporate Income Tax on Eligible Income
- 0% Withholding Tax (WHT) on payments by the RHQ to non-residents for dividends, payments to related persons, and payments to non-related persons for necessary RHQ activities (excluding non-eligible activities).
- Potential Relaxation from Saudization Requirements for 10 years, subject to agreement with MISA.
- Potential Easing of Visa Restrictions/Benefits, subject to agreement with MISA.
The timing of these new rules is helpful as, since January 1, 2024, businesses must have had to have their RHQ located in KSA in order to bid for government contracts (with some exceptions).
Eligible RHQ Activities
Eligible RHQ activities
The following are Eligible RHQ Activities**
- Creating and monitoring the regional strategy and alignment.
- Engaging in key management activities such as business planning, product and service embedding, budgeting, operational and financial reporting, business coordination, and market analysis.
- Supporting investment strategy and the marketing plan for the region.
In order to qualify, the activities must commence within six months of receiving the RHQ license.
Optional RHQ Activities
Three of the following optional activities must commence within the first year of receiving the RHQ license:
- advisory,
- research and development,
- sales and marketing,
- human resources support,
- training,
- financial management,
- foreign exchange treasury,
- accounting and audit,
- legal,
- supply chain management,
- compliance and internal controls,
- international trading,
- technical engineering and IT operations support,
- intellectual property rights management, and
- production management.
RHQs engaging in non-eligible activities must maintain separate accounts for these activities, allocating income between eligible and non-eligible activities as if they were independent.
Qualification Criteria for RHQs
To qualify as an RHQ, the following key conditions must be met:
- The entity must be part of a foreign-parented multinational group operating in more than two jurisdictions outside the parent country and KSA.
- Hold a valid license for RHQ activities.
- Employ a minimum of 15 full-time employees for RHQ activities.
- Satisfy Economic Substance Requirements (ESR), such as having adequate premises and qualified full-time employees in KSA, generating revenues and expenses in KSA, and being directed and managed in KSA, including holding board meetings in KSA and having at least one KSA resident director.
- Derive Eligible Income from Eligible Activities and prepare separate accounts for Non-eligible Activities if conducted.
- Comply with Transfer Pricing (TP) requirements.
Failure to meet these conditions can lead to fines and potentially the cancellation of the RHQ license by MISA.
Administrative Requirements
The rules also introduce several administrative requirements:
- Registering RHQs with ZATCA.
- Filing tax and Zakat returns and an annual report verifying compliance with ESR under the RHQ provisions.
- Preparing and maintaining accounts.
Transfer Pricing Requirements
RHQs must comply with the TP Bylaws issued by ZATCA. Key considerations include:
- Functional Analysis: Evaluating the functions performed, risks undertaken, and assets utilized by the RHQ.
- Appropriate TP Method: Selecting the most suitable TP method according to OECD TP guidelines and KSA TP Bylaws, often using the Transactional Net Margin Method (TNMM).
- TP Documentation: Supporting activities with legal agreements and TP documentation as required by KSA TP guidelines.
Special consideration should be given to TP arrangements to meet regulatory requirements and receive the tax benefits offered under the RHQ program.
KSA Regional Headquarters Tax – Conclusion
The new RHQ rules provide substantial tax incentives and administrative benefits for businesses establishing their regional headquarters in KSA.
These incentives aim to attract multinational companies and enhance KSA’s position as a regional business hub.
Businesses planning to establish an RHQ in KSA should carefully review the new rules and consider the TP arrangements to ensure compliance and maximize tax benefits.
Final thoughts
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