KSA: Regional headquarters program

15 March, 2023

In brief

Although no tax rules/guidelines have been published to date in connection with the RHQ program, on December 27 2022, the Saudi Ministry of Finance issued a new set of controls sharply limiting the ability of Saudi government agencies to do business with MNCs that do not have RHQ in Saudi Arabia. The controls, which will enter into effect on January 1, 2024, allow only for very narrow exemptions (bidding/procurement related).

For MNCs doing business in the Kingdom, particularly those that generate significant business from the government, time is of utmost importance. If not done so already, companies that wish to secure access to government procurement should move quickly to ensure they are ready to comply with the RHQ policy by 2024.

This will require rigorous internal planning to address the various organisational, tax, operational and legal aspects of any RHQ move. Companies should view the RHQ Program in the context of their long-term business goals in the Kingdom – this is not just about compliance, but rather strategic engagement with government decision-makers.

Regional Headquarters Program Timeline

"The Saudi Minister of Investment H.E. Khalid Al-Falih while addressing concerns of multinationals setting up their RHQ in KSA clarified that the tax regime for RHQs is under codification and that income earned by RHQ from prescribed activities will be granted tax relief."

Tax and Legal Services PwC Middle East

Feb 2021

The Saudi Government announced its intent to limit contracting with foreign companies that do not have regional headquarters (“RHQ”) in the Kingdom of Saudi Arabia (“KSA”).

Feb 2022

The Saudi Ministry of Investment of Saudi Arabia (“MISA”) issued new guidance on Invest Saudi portal aiming to incentivise companies who set up RHQ in KSA.

Dec 2022

The Saudi Ministry of Finance issued a new set of controls (effective from January 1, 2024) sharply limiting the ability of Saudi government agencies to do business with MNCs that do not have regional headquarters in KSA.

March 2023

The Saudi Minister of Investment, H.E. Khalid Al-Falih, while addressing concerns of multinational companies setting up their RHQ in KSA clarified that tax regime for RHQs is under codification and that income earned by RHQ from prescribed activities will be granted tax relief.

In detail

Going forward from January 1, 2024, the Ministry of Investment, in coordination with the Ministry of Finance and the General Authority for Foreign Trade shall prepare a list of Companies with no Regional Headquarters in the Kingdom. The list will be updated periodically and will be published in the unified electronic portal for government procurement, meaning that such groups will not be awarded Government projects other than in exceptional circumstances.

Exceptions:

1. Government Agencies may contract with MNCs or their related parties not having RHQ in KSA where:

the estimated cost of the works and procurements is less than one million Saudi Arabian Riyals; or
the works and procurements are conducted outside KSA.

2. MNCs or their related parties not having RHQ in KSA may submit bids for any public tender put forward by Government Agencies, provided that such Agencies only accept these bids in either of the following cases:

there is only one technically accepted bid; or
the bid submitted by the Multinational Group not having its RHQ in KSA, is the best technical bid after the overall evaluation and in financial terms is twenty five percent (25%) less than the value of the second-best bid.

3. Government Agencies may invite MNCs or their related parties that do not have RHQ in KSA to participate in limited tenders in either of the following cases:

there is only one qualified bidder (other than companies or related parties that do not have their RHQ in KSA); or
there is an emergency that can only be addressed by inviting companies or related parties that do not have their RHQ in KSA.

4. Government Agencies are only permitted to invite MNCs or their related parties to participate in direct purchases in either of the following two cases:

the works or procurements are exclusively available at the company or the related party that does not have its RHQ in KSA;
there is an emergency that can only be addressed by direct purchases from the company or the related party that does not have its RHQ in KSA.

In relation to above, an Exemption Committee (reporting to the Ministry of Finance) would be created to review and approve exemption applications submitted by relevant Government Agencies.

MISA Guidance

In February 2022, MISA published detailed guidance on Invest Saudi portal defining as to what constitutes a regional headquarter along with comprehensive explanation of RHQ prescribed activities, licensing and employment requirements.

Under the guidance, Multinational groups having a foreign parent and carrying on business in more than two jurisdictions (other than parent country) through the parent entity, subsidiaries, branches or affiliates may apply for an RHQ license in KSA for the purpose of supporting, managing, and providing strategic direction to their branches, subsidiaries and affiliates operating in MENA region. The guidance further elaborated that RHQ would not directly conduct commercial operations that generate revenue other than RHQ License activities and may be incorporated either as a branch or an LLC.

The Takeaway

The MNC groups must undertake an assessment for structuring their RHQ operation in a tax efficient manner and to avoid any unforeseen tax exposures for their offshore subsidiaries whilst at the same time securing valuable opportunities offered by the Middle East’s largest economy, the Kingdom of Saudi Arabia. Issuance of tax benefits package for RHQs is around the corner, so watch out for more publications from PwC on this topic in future.