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 which are of 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 Saudi government offers a range of incentives to attract multinational enterprises to establish their RHQs in the Kingdom. These benefits include:
- Government Tendering: Eligibility to participate in government tenders and projects.
- Saudization Exemption: A 10-year exemption from Saudization requirements.
- Visa and Work Permits: Exemptions on visa limits and accelerated visa issuance processes, along with work permits for spouses and dependent sponsorship extension up to 25 years old.
- Professional Accreditation Waivers: Waivers of professional accreditation requirements.
- Comprehensive Support Services: End-to-end services covering business, personal, and concierge needs.
TAX BENEFITS AND INCENTIVES
Under Article 3 of tax regulations, regional headquarters that meet the qualification criteria are granted:
- Income tax exemption for a period of 30 years, renewable, starting from the date of obtaining its license to carry out qualifying activities.
- Zero percent Withholding tax dividends paid by the RHQ to non-residents, linked parties, or unrelated parties for services that are considered essential for the RHQ to carry out its operations.
According to the anti-avoidance clause in article 12 of the tax regulations, RHQ payments related to authorized operations or instances of tax avoidance are not excluded from withholding tax. RHQ income from non-qualified operations is taxed in accordance with the standard Saudi tax system, as well as any applicable international agreements and commitments.
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 authorized 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
According to ZATCA, RHQs are required to ensure that all transactions with related parties are carried out at arm’s length and comply with the current transfer pricing ordinances and regulations. The rules, which follow the same definitions as the transfer pricing bylaws, clarify what is meant by “related companies” or “related persons.”
SELECTING THE TRANSFER PRICING METHOD
The conclusion of the functional analysis determines which type of transfer pricing method to use:
COST-PLUS METHOD: This approach, frequently used for routine or low-value services, determines compensation by adding a markup that reflects a market-based profit to the costs incurred by the RHQ. It works well for services with quantifiable inputs and outcomes.
OTHER METHODS: For services that are non-routine or strategic, other forms of compensation may be more appropriate. These methods aim to capture the economic reality and the RHQ’s contribution to the MNE group and can include compensation based on outcomes achieved, the value of goods sourced, or a percentage of revenues or profits (including the application of profit split methods).
TRANSFER PRICING (TP) DOCUMENTATION AND COMPLIANCE
Sustaining the arm’s length principal compliance of the selected remuneration type requires substantial transfer pricing paperwork. It is imperative to maintain comprehensive documentation of the functional analysis, the reasoning behind the chosen compensation scheme, and the results of benchmarking research. This material provides the RHQ with the necessary tools to successfully defend its transfer pricing plan in addition to supporting adherence to local KSA TP regulations and OECD TP principles. Additionally, it would have to shield the RHQs from any fines outlined in the RHQ tax regulations, such as the cancellation of the RHQ tax incentives for failing to comply with the transfer pricing requirements.
STRATEGIC SIGNIFICANCE
As of end 2023, 180 RHQ companies were announced in the Kingdom reflecting its growing appeal as a strategic business destination. The Saudi government aims to have 480 RHQs fully established by 2030 in line with its 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?
As of January 2024, businesses that do not establish a Regional Headquarters (RHQ) presence in Saudi Arabia will become ineligible to participate in government contract opportunities or submit bids for government projects, Therefore, it is crucial for investors to diligently assess their options and seek professional guidance to ensure full compliance with all relevant laws and regulations.
Creation Business Consultants will keep you well informed about the latest regulations that may affect your business in Saudi Arabia. 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 on [email protected] or call Saudi Arabia +966 54 511 2494 or UAE +971 4 878 6240.
