REQUIREMENTS FOR ESTABLISHING AN RHQ
Setting up a Regional Headquarters (RHQ) in Saudi Arabia involves meeting specific requirements set by the Ministry of Investment (MISA). These include:
CORPORATE SHAREHOLDER REQUIREMENTS:
- The multinational must have at least two subsidiaries located in two different countries other than Saudi Arabia and the country of incorporation.
- The multinational company must provide annual audited consolidated financial statements of the last financial year of the applicant, attested at the level of the Saudi Embassy in the respective country.
- The RHQ must maintain a physical office in Saudi Arabia.
OPERATIONAL ACTIVITIES:
- Within six months of license issuance, the RHQ must start three mandatory activities, which could include administrative support, strategic planning, and regional coordination.
- Within the first year, the RHQ must initiate three optional activities, including marketing, training, and IT support.
EMPLOYMENT:
- The RHQ must employ 15 full-time staff within the first year of its incorporation, three of whom are at the executive level.
- At least three employees must be at the Corporate Executive level, such as CEO, CFO, or Vice President.
WHAT ARE THE ACTIVITIES MANAGED UNDER THE KSA REGIONAL HEADQUARTERS?
The mandatory RHQ activities are the provision of strategic direction and management functions. RHQ’s strategic direction functions include:
- Formulate and monitor the regional strategy.
- Coordinate strategic alignment.
- Use of local products and/or services.
- Support acquisitions, mergers, and divestments.
- Review financial performance.
RHQ management functions include:
- Business planning.
- Budgeting.
- Business coordination.
- Identification of new market opportunities.
- Monitoring of the regional market, competitors, and operations.
- Marketing plan for the region.
- Operational and financial reporting.
The RHQ must commence the mandatory activities within six months of issuing the License.
The optional RHQ activities are:
- Sales and Marketing Support
- Human Resources, and Personnel Management
- Training Services
- Financial Management, Foreign Exchange, and Treasury Centre Services
- Compliance and Internal Control
- Accounting
- Legal
- Auditing
- Research and Analysis
- Advisory Services
- Operations Control
- Logistics and Supply chain management
- International Trading
- Technical Support or Engineering Assistance
- Network Operations for IT System
- Research and Development
- Intellectual Property Rights Management
- Production Management, and Sourcing of Raw Materials and Parts
The RHQ must commence at least three optional activities within one year of issuing the RHQ License.
HOW TO SET UP A REGIONAL HEADQUARTERS IN SAUDI ARABIA?
WHAT ARE THE REQUIREMENTS TO REGISTER A REGIONAL HEADQUARTER IN SAUDI ARABIA?
- Applicant’s corporate documents, attested at the level of the Saudi embassy in the country of origin.
- Applicant’s certificate of registration or commercial license issued in two different countries, excluding Saudi Arabia and the country in which the headquarters of the Multinational Group is located, attested at the level of the Saudi Embassy in the respective countries.
- The annual audited consolidated financial statements of the last financial year of the applicant, attested at the level of the Saudi Embassy in the respective country.
BENEFITS OF ESTABLISHING AN RHQ IN SAUDI ARABIA
The government of Saudi Arabia has comprehensive incentives that multinational businesses can apply for if they and their business meet certain criteria to establish their RHQ in the Kingdom. Incentives include:
- Government Tendering: Bidding on government tenders.
- Saudization Exemption: 10-year exemption from Saudization.
- Visa and Work Permits: Exemptions on visa cap and fast track visas for employees, relocation permits for spouses and dependents and up to 25 years sponsorship for dependents.
- Professional Accreditation Waivers: Professional accreditation exemptions.
- Comprehensive Support Services: Services from start to end for commercial, personal and concierge needs.
TAX BENEFITS AND INCENTIVES
In Article 3, taxing regulations to the extent that the Regional Headquarters meets the eligibility criteria it is allowed:
- Income tax exemption for 30 years, with renewal & starting from the time it can obtain its license to undertake qualifying activities.
- Zero per cent withholding tax dividends paid by the RHQ to non-residents, a reciprocal party, or an unrelated party for services deemed crucial for the RHQ to conduct its operations.
According to the anti-avoidance provision of Article 12 in the tax law, RHQ payments made as part of authorised activity or instances of tax avoidance are nevertheless subject to withholding tax. RHQ income from non-qualified activities is taxed under the usual Saudi tax regime, and any relevant DR, but along with any relevant international treaties and obligations may also apply.
COMPLIANCE WITH ZAKAT, TAX AND CUSTOMS AUTHORITY (ZATCA) TAX REGULATIONS
An RHQ is required to prepare and maintain books of accounts for each tax year, including the partial tax year that runs from the date the RHQ license was issued to the end of that tax year.
It must also file an annual tax or Zakat return, as applicable, and submit an annual report using the ZATCA-designated form to ensure compliance with economic substance rules.
Income from non-qualifying operations must be allocated to qualifying activities as if they were separate from the RHQ’s other activities, with separate accounts maintained for these activities.
ZATCA is authorised to perform executive, administrative, and regulatory tasks such as information gathering, appraisal, inspection, and auditing of Saudi Arabian RHQs. RHQs may challenge ZATCA evaluations, reassessments, and penalties through available appeal channels.
TRANSFER PRICING CONSIDERATIONS
The ZATCA showed that RHQs should ensure all related party transactions are done at arm’s length and clearly comply with the current transfer pricing ordinances and regulations. The rules follow the same definitions as the transfer pricing bylaws, detailing what constitutes “related companies” or “related persons.”
SELECTING THE TRANSFER PRICING METHOD
The completion of the functional analysis will determine which type of transfer pricing method needs to be used.
COST-PLUS METHOD:
Typically used to determine compensation for services that are either routine or of little value. This method adds a markup to costs incurred by the RHQ, which equals a profit that could ordinarily be earned in the market. The method could be suitable where services are low-value or where inputs and outcomes can be easily measured.
OTHER METHODS:
For non-routine or strategic services, other alternative methods of compensation may be considered more appropriate under certain situations. These methods attempt to reflect the economic reality and contribution of the RHQ to the MNE group, which may include compensation based upon the results achieved, the value of goods procured, or a percentage of revenues or profits (including through the application of profit split methods).
TRANSFER PRICING (TP) DOCUMENTATION AND COMPLIANCE
To maintain the arm’s length principle, the application of a given remuneration type requires highly extensive transfer pricing documentation. A full transfer pricing study would compile thorough documentation on all analyses of functions performed, rationale for the selection of the type of remuneration, and benchmarking results. This package further helps the RHQ adequately safeguard its transfer pricing policy, besides merely complying with KSA local TP legislation and OECD TP principles. Besides, it would protect the RHQs against any penalties provided in the RHQ tax law relative to cancellation of RHQ tax incentives due to non-compliance with transfer pricing requirements.
STRATEGIC SIGNIFICANCE
As of the end of 2023, 180 RHQ companies have been announced in the Kingdom, indicating the increasing attractiveness of Saudi Arabia as an important place for business and investment. The Saudi government wants to have 480 RHQs established and operational by 2030, as part of the Kingdom’s vision. This initiative aims to position Saudi Arabia as the leading investment for the MENA region and enhance its economic, commercial and industrial diversity by attracting multinational enterprises.
Some of the major multinational corporations which already established their RHQs in Saudi Arabia or obtained licenses include:
- Technology: Apple, Microsoft, Oracle, SAP, Huawei
- Industry: General Electric, Boeing, Siemens, General Motors
- Retail: Amazon, Adidas, Nike, The Body Shop, L’Oreal
- Financial Services: JPMorgan, Morgan Stanley, Citigroup, HSBC, Standard Chartered
- Logistics: DHL, FedEx, UPS, Maersk
- Aerospace and Défense: Boeing, Airbus, Lockheed Martin
- Law Firms and Legal Consultants: Greenberg Traurig LLP, Clyde & Co, Latham & Watkins
EXEMPTIONS TO THE REGIONAL HEADQUARTER (RHQ) MANDATE
The RHQ mandate is not applicable to contracts below SAR 1 million or those conducted outside the Kingdom. Additionally, government entities may accept offers from companies without established RHQs if there is no more than one technically acceptable offer or if the offer is significantly (25% or more) lower than the second-best offer.
Nevertheless, MISA and the Ministry of Finance will maintain a list of multinational companies without RHQs in Saudi Arabia and publish it on the government procurement unified electronic portal (Etimad). Companies on this list will be ineligible for government projects unless exempted under the RHQ Rules.
HOW CAN WE HELP?
Starting from January 2024, companies without the set-up of Regional Headquarters (RHQ) in Saudi Arabia shall no longer be eligible to participate in government procurements or tender submissions for government projects; therefore, investors must carefully consider their options and seek expert advice to warrant complete compliance with all relevant laws and regulations.
Creation Business Consultants shall keep you abreast of the recent regulations accordingly. Our team of experts will leverage our extensive experience to help you navigate recent changes while providing comprehensive guidance on managing your company in Saudi Arabia. Contact a member of our team to learn more about setting up a company in the UAE and Saudi Arabia. Email us at [email protected] or call Saudi Arabia +966 56 865 2329 or UAE +971 4 878 6240.
