Saudi Arabia’s RHQ program benefits and tax incentives

Central to Saudi Arabia’s Vision 2030 reforms, the Kingdom has introduced its Regional Headquarters (RHQ) program, an initiative poising Saudi Arabia as a powerhouse in the Arab region.

Framework

In terms of Saudi Arabia’s Foreign Investment Law, companies wishing to be part of the RHQ program must fulfil specific criteria set by Saudi Arabia’s Ministry of Investment (MISA).

RHQs must partake in certain mandatory activities, such as strategic planning and financial performance analysis, and at least three optional activities, such as human resources management and legal services. Importantly the RHQ license does not permit commercial activities, and therefore, the RHQ will not be allowed to engage in commercial activities. The requirements include:

• Establishing a legal entity within the Kingdom with a physical office.
• Functioning as an administrative nucleus for its group’s regional operations.
• Engaging in strategic and management activities rather than profit-driven commercial operations.
• Commencing mandatory activities within six months and optional ones within a year of obtaining the RHQ license.
• RHQs are also mandated to hire a set number of full-time employees and executive officers in the first year.

RHQ commercial and tax Incentives

Commercial incentives

The RHQ program offers the below commercial benefits:

• Companies that have an RHQ in Saudi may participate in lucrative government tenders.
• An exemption from the terms of Saudization for 10 years.
• Visa limit exemptions.
• Waiver of professional accreditation.
• Premium residency for the RHQ’s top executives and their families.
• Comprehensive services (business, personal, concierge) services provided by MISA.

Tax incentives

On 5 December 2023, MISA, together with the Ministry of Finance and the Zakat, Tax and Customs Authority (ZATCA), announced a 30-year tax incentive package for RHQs, thus allowing an exemption from the standard 20% corporate income tax. At this stage, the tax incentives have been broadly announced, and there is currently not tangibly clear information or detail on the actual incentives, or the nuanced compliance requirements to be eligible for the tax incentives or zero percent tax rate. Nevertheless, the following incentives have been announced:

• Zero Percent Corporate Income Tax: Income generated by the RHQ will be subject to zero percent tax rate (effectively no tax on such income). However, as mentioned, the RHQs activities will not be commercial in nature, thus the revenue generated will stem from approved headquarter activities.
• Zero Percent Withholding Tax for approved activities: While the list of approved activities or payments in this regard is not clear, it is anticipated that zero percent WHT will apply on certain outbound payments, which may include dividends, payments to related parties, and services payments to non-resident unrelated parties for RHQ activities.

The tax incentives will be applicable for a period of 30 years from the date that the entity receives the RHQ license.

Timeline

From 1 January 2024, Saudi Arabia will prioritize government contracting with companies that have established their RHQs in the Kingdom, significantly influencing the awarding of government contracts.

Authored by: Zain Satardien