Establishment of Special Integrated Logistics Zones

The Kingdom of Saudi Arabia (KSA) has, by Royal Decree, announced the establishment of new Special Integrated Logistics Zones, with the first such zone to be situated at King Khalid International Airport. 

This is part of an initiative by Government authorities to attract foreign investment to the KSA, and will have direct and indirect tax consequences as a result.

Other similar zones to be established in KSA airports should follow, once they are approved by the Council of Economic and Development

A Royal Order (A/17) approves the regulation setting out the rules for the Special Integrated Logistics Zone (the Zone), published in the Official Gazette on Friday, 19 October (The Zone will be administered by the General Authority of Civil Aviation.

The rules confirm that specific taxation rules will apply to activities carried out in the Zone; and that the General Authority of Zakat and Tax (GAZT) will issue special rules and guidelines relating to income tax applicable to entities established and carrying out approved activities inside the Zone. 

In addition, the regulation confirms that, subject to controls to be determined:

• Non-Residents conducting activities directly related to specified Goods inside the Zone shall not be treated as having a Permanent Establishment in the KSA;
• Goods situated inside the Zone will be under customs suspension – therefore customs duties and VAT should not apply whilst goods remain in the zone;
• VAT will not be charged on supplies of goods in the Zone; and
• Temporary transfer of goods between mainland and the Zone for the purposes of repair and maintenance shall not be subject to VAT.

The intention, as set out in Article 6 of the Royal Order, is that certain functions will be targeted for the preferential treatment.  These include:

• Repair maintenance, processing, etc. of goods
• Sorting, repackaging and similar actions in relation to goods, including simple manufacturing processes;
• Import, export and re-export
• Logistics and after sales services; and
• Certain recycling activities.

We expect that further detail on the applicable tax treatment will be provided as part of the special rules and guidelines issued in due course.

In addition to the taxation aspects, the zones aim to provide an environment attractive to foreign investment, including:

• Established entities in the zone will not have any financial restrictions with respect of borrowing from abroad; the repatriation of capital, or the ability to remit dividends, profits, payment of commissions and other similar payments;
• Special rules will allow the governing body of the zone to issue work and residence permits to workforce within the zone;
• Ministry of Labor and Social Development will establish a bespoke Saudization Program which can be applied within the zone; and
• There will be no restrictions on private ownership of assets including intellectual property rights.

The Law entered into force from 19 October, the date of publication in the Official Gazette.