Understanding Saudi Regional Headquarters: A Gateway to Strategic Presence

The Regional Headquarters (RHQ) license, a collaborative initiative between the Ministry of Investment (MISA) and the Royal Commission for Riyadh City (RCRC), stands as a gateway for international companies to establish a strategic presence within the Kingdom of Saudi Arabia.

In February 2021, the Saudi Government unveiled an initiative encouraging foreign companies to establish a Regional Headquarters (RHQ) within the Kingdom, emphasizing its importance for fostering business engagements.

As the Kingdom attracts an influx of international businesses at an accelerated rate, the government launched its RHQ programme to be in effect in January 2024. Beyond commercial activities, RHQ licenses are essential for executing specific projects, including those initiated by the Public Investment Fund (PIF), such as NEOM and other governmental ventures. However, there's some ambiguity regarding their precise applicability in such scenarios.

To obtain this license, an entity must operate as a registered foreign company or branch in Saudi Arabia, maintain at least 2 subsidiaries outside both the Kingdom and its country of incorporation, and have a physical presence for regional administrative purposes only. Any commercial operation must be handled by MISA-licensed affiliates.

The RHQ license structure involves an annual fee of SAR 2,000, with an initial payment of SAR 10,000 in the first year, valid for 1 to 5 years. While not permitting commercial activities, it empowers RHQs to manage tasks like budgeting, marketing, and strategic planning.

Practically, an RHQ serves as a strategic support hub for subsidiaries and affiliates in the MENA region, providing direction and overseeing management operations. Additionally, the mandate to hire 15 employees within the first 12 months of operation, with flexibility in nationality, along with the need for 3 C-level executives, is integral to establishing an RHQ.

Benefits of RHQs:

Unlock a spectrum of advantages, including:

• Exemption from Saudization requirements: Enjoy a decade-long exemption from this stipulation.
• Work visas: Acquire work visas for Saudi nationals in restricted professions.
• Ajeer Program access: Extend opportunities to dependents of RHQ employees.
• Residency relaxation: Increase the age limit for male dependents' residency to 25 years.
• Professional accreditation exemption: Waive professional accreditation requirements if duly accredited in the country of origin.
• MISA subscription waiver: Access MISA investor services centers with waived subscription fees.
• Discounted services: Avail discounted rates and preferential treatment for MISA's services.

Tune into a detailed conversation between Alex Nicholls, Director of Expansion at AstroLabs, and Dubai Eye’s host to understand more about setting up an RHQ in Saudi.

Tax Regulations of RHQs in Saudi Arabia

Saudi Arabia’s strategic initiative to diversify its economy has led to the introduction of new tax regulations for Regional Headquarters (RHQs). The purpose of the RHQ tax rules is to incentivize international corporations to establish their regional headquarters in the Kingdom. The regulations are designed to attract foreign investment, stimulate economic diversification, and foster job creation by offering competitive tax benefits and exemptions.

Tax Benefits: Incentives for Eligible RHQs

Eligible RHQs in Saudi Arabia enjoy a range of tax benefits, aimed at reinforcing the Kingdom’s appeal as a destination for international business and investments.

Key tax incentives include:

• Zero (0%) income tax on eligible income;
• Zero (0%) withholding tax on payments to non-residents, with respect to dividends, related persons, and unrelated persons necessary for the RHQ’s activities.

The duration of the incentives is typically 30 years unless the legal entity ceases to be a RHQ.

These tax benefits are contingent upon the RHQs meeting the eligibility criteria and maintaining compliance with the Kingdom’s tax laws and regulations.

Additionally, the tax incentives apply only to income from “eligible activities” of the RHQ, which is defined as “activities that strengthen the group’s profile in the region and provide strategic supervision and administrative guidance and support for the internal business of the company, subsidiaries, and other related companies according to the National Classification of Economic Activities”

Who Qualifies: Criteria for RHQs to Benefit from Tax Incentives

RHQs in Saudi Arabia are subject to economic substance requirements to benefit from the tax incentives offered by the Kingdom. With these criteria, eligible RHQs prove that they have a meaningful physical presence and are conducting substantial economic activities within Saudi Arabia.

The eligibility criteria include:

• Valid License: RHQs must have a valid license from MISA and operate only within its scope.
• Physical Presence: RHQs are expected to maintain an adequate physical presence in Saudi Arabia. This means having office space that is appropriate for the scale of the RHQ operations and can accommodate all employees.
• Operational Expenditure: RHQs are required to demonstrate a significant level of operational expenditure within Saudi Arabia. The operational expenditure includes, but is not limited to, office rents, employee salaries, and other business-related expenses.
• Revenue Generation: RHQs must generate revenue from their activities within the Kingdom.
• Employment: RHQs must employ a certain number of full-time employees in Saudi Arabia, including locals and potentially expatriates depending on the nature of the RHQ’s operations and activities. In addition, all employees must possess the necessary qualifications and skills to fulfill their duties.
• Local Management: All core business activities of the RHQ must genuinely take place within Saudi Arabia. Examples include board meetings and key strategic decisions.
• Local Director: At least one director of the RHQ must be a Saudi Arabian resident, which ensures that there’s local oversight and involvement in the management process of the RHQ.

In addition to this, RHQs are required to maintain separate books of accounts for any ineligible activities. The income from such activities will be taxed according to the applicable provisions of Saudi Arabian Tax Law.

Compliance Obligations of RHQs

Upon receiving tax benefits, RHQs are subject to obligations to maintain their eligibility and compliance with Saudi Arabia’s tax laws and regulations. By complying with them, RHQs contribute to the country’s economic development while benefiting from the incentives.

One of the primary obligations is continuous compliance with the economic substance requirements. RHQs are expected to maintain adequate operational expenditure, generate sufficient revenue within the Kingdom, employ the required number of full-time employees, and ensure that management and strategic decision-making processes occur locally.

Accurate record-keeping and reporting is another important obligation. RHQs must maintain detailed records of their financial transactions, operational expenditures, employment details, and other relevant activities. The records need to be readily available for review by the Saudi tax authorities to verify adherence to tax laws and the status of the benefits.

Additionally, RHQs are required to file annual tax returns and make necessary disclosures to the Zakat, Tax, and Customs Authority (ZATCA). This involves submitting detailed financial statements and reports on compliance with the economic substance requirements among other things. Filing tax returns and disclosures is a crucial process that promotes transparency regarding RHQs’ financial health and operational status.

Despite enjoying some tax exemptions, RHQs still have the responsibility to pay withhold and remit taxes on specific payments made to entities or individuals outside the scope of the tax incentives.

RHQs must also notify the Saudi Ministry of Investment and ZATCA of any significant operational, structural, or compliance status changes that could impact their eligibility for tax benefits. Whether it’s a change in operational scope, relocation, or cessation of activities in Saudi, timely notification is mandated.

Another obligation critical for RHQs is adherence to the Kingdom's anti-abuse rules, aimed at preventing tax evasion or avoidance schemes. RHQs must verify that their operations and transactions are structured in a way that reflects economic reality and complies with regulatory expectations.

Finally, RHQs are obliged to cooperate fully with any audits, inspections, or requests for information from Saudi tax authorities. Failing to do so results in penalties that are outlined in the relevant Tax and Zakat laws. For instance, if the RHQ does not fulfill any of the Economic Substance Requirements during the duration of its license, the Tax and Customs Authority will impose a SAR 100,000 fine, then a SAR 400,000 fine if the first fine is not remedied within 90 days or the RHQ repeats the same violation within three years from the date of imposition of the first fine. If the second fine is also not remedied within the next 90 days, the tax benefits will be suspended.

Compliance with these regulations ensures that RHQs contribute meaningfully to the Kingdom's economic development while benefiting from a competitive tax regime. Companies already operating or considering the establishment of Regional Headquarters in Saudi Arabia should actively evaluate the impact of the new RHQ Tax Rules on their operations. Being compliant with the Economic Substance Regulations is crucial to fully capitalize on the available tax incentives.