Rules for RHQ Tax Incentives and Economic Substance Requirements 

On 16 February 2024, rules were published to implement the previously announced tax incentives for Regional Headquarters (RHQs) in the Kingdom of Saudi Arabia (KSA) and also to introduce Economic Substance Requirements (ESR) for RHQs. 

A summary of these rules is provided below. 

Tax Incentives

The rules provide that RHQs meeting the criteria issued by the Ministry of Investment of Saudi Arabia (MISA) will be granted the following tax benefits:

• 0% income tax on “eligible income” (which is income derived from “eligible activities” carried on by a RHQ).
• 0% withholding tax on dividends paid by a RHQ.
• 0% withholding tax on payments to related non-residents from a RHQ.
• 0% withholding tax on payments to non-residents from a RHQ that are necessary for the RHQ activities.

Exemptions from withholding tax do not apply in cases where: 

• The amount paid by a RHQ relates to non-eligible activities. 
• There are instances of tax avoidance. 

Income of a RHQ from non-eligible activities shall be treated according to relevant Tax Laws of KSA, subject to valid agreements in KSA and international obligations.

The tax benefits will be available from the date the RHQ license is granted to the earlier of 30 years or when the entity ceases to be a RHQ.  

Economic Substance Requirements

In addition to the eligibility criteria stipulated by MISA, a RHQ must satisfy all of the following ESR:

• The RHQ must hold a valid license issued by MISA, and its activities must be within the scope of the license. 
• The RHQ must have adequate premises in the Kingdom that are suitable for its business activities.
• The activities of the RHQ shall be directed and managed in the Kingdom, including the holding of board meetings of the RHQ where strategic decisions are made.
  
• The RHQ must incur operational expenditures in the Kingdom that are commensurate with its activities.
• The RHQ must generate revenues from eligible activities carried out in the Kingdom.
• The RHQ must have at least one director in the Kingdom.
• The RHQ must employ an adequate number of full-time employees in a tax year that are proportionate to the level of activity carried out by the RHQ.
• The employees of the RHQ must have the requisite qualifications and skills necessary to execute their duties and fulfill their responsibilities.

Compliance requirements 

A RHQ is required to:

• Register with the Zakat, Tax & Customs Authority (ZATCA).
• File tax and Zakat returns for each tax year.
• File an annual report in the prescribed form with ZATCA for the purpose of compliance with the ESR.
• Prepare and maintain accounts for each tax year.

If a RHQ carries on non-eligible activities during a tax year, it must maintain separate accounts for the eligible and non-eligible activities. The allocation of income between eligible and non-eligible activities must be done as if these activities are independent from each other.

Transfer Pricing 

• A RHQ is required to comply with the Transfer Pricing Bylaws and it must ensure that its transactions with related parties are conducted at arm’s length. 

International Treaties and Agreements

• For the purposes of all of the international treaties and agreements to which the Kingdom is a party, RHQs are deemed to be residents of the Kingdom if they satisfy the residency requirements in the Income Tax Law.

Anti-Avoidance and Tax Evasion

• The provisions in the Income Tax Laws regarding anti-avoidance and tax evasion will also apply to RHQs. 

Monitoring and Examination 

• ZATCA is entitled to exercise all of its powers for administration under the Zakat and Tax Laws, including obtaining information and conducting examinations, in relation to RHQs. 
• ZATCA is also responsible for monitoring and verifying whether a RHQ has fulfilled the ESR. 
• A RHQ may submit a request to ZATCA for a ruling to provide an interpretation or clarification on taxation matters related to these regulations and also to the tax laws in the Kingdom.

Non-Compliance

• If a RHQ does not comply with the requirements of the Tax and Zakat Laws, it will be subject to the penalties outlined in those Laws. 
• A RHQ has the right to object to the assessments, reassessments and penalties raised by ZATCA, as well as the right to submit appeals in accordance with the Tax and Zakat Laws.  

If a RHQ fails to fulfil any of its ESR, ZATCA shall notify the RHQ of this, and the RHQ has 90 days from the date of such notification to remedy the violation. If the violation is not rectified within this period, then:   

• A SAR 100,000 fine would be imposed if the violation is remedied within 90 days from the date of imposition of the fine. 
• A SAR 400,000 fine would be imposed if the violation is not remedied within 90 days from the date of imposition of the fine, or if the RHQ repeats the same violation within 3 years of the imposition of the fine. 

If the violation persists after 90 days from the date of imposition of the fine, then ZATCA, in coordination with MISA, may suspend the tax incentives.

Revocation of RHQ Tax Incentives

The tax incentives for a RHQ may be revoked by ZATCA in conjunction with MISA if a RHQ has intentionally done any of the following:

• Submitted false or misleading information or declarations to ZATCA.
• Misapplied the tax rules or misused tax incentives to take advantage or assist others to take advantage of the tax incentives in relation to non-eligible activities and activities not licensed by MISA.
• Made payments to non-residents on behalf of persons that do not qualify for the tax incentives.  If the tax incentives for a RHQ are revoked for a tax year, ZATCA will issue a tax assessment, including any applicable penalties, in accordance with the Tax Laws for that year.

If the tax incentives for a RHQ are revoked for a tax year, ZATCA will issue a tax assessment, including any applicable penalties, in accordance with the Tax Laws for that year.

Deloitte’s view

The implementation of tax incentives and ESR for RHQs in KSA marks a significant milestone for multinational corporations establishing their presence in the region. These rules reflect the Kingdom’s commitment to enhancing transparency and attracting foreign investment, signaling a favorable environment for business growth. To ensure compliance with these rules, multinational corporations must establish a clear demarcation between the eligible activities carried out by a RHQ and the non-eligible activities carried out by other entities.