KSA Regional Headquarters Tax Incentives

On 16 February 2024, the Zakat, Tax, and Customs Authority (ZATCA) released the new Regional Headquarters rules (RHQ). These rules apply in addition to the Zakat/Tax Law provisions and the Ministry of Investment of Saudi Arabia (MISA) guidance published in February 2022, providing tax incentives for businesses establishing their RHQ in the Kingdom of Saudi Arabia (KSA).

The rules state that RHQs meeting the criteria issued by MISA and ZATCA will be granted the following tax incentives:

• 0% KSA corporate income tax on Eligible Income (please see below for details).
• 0% Withholding Tax (WHT) on payments by the RHQ to non-residents for dividends, payments to related persons, and payments to non-related persons for necessary RHQ activities (but not for payments related to non-eligible activities).
• Potential relaxation from Saudization requirements for 10 years subject to agreement with MISA.
• Potential easing of visa restrictions/benefits subject to agreement with MISA.

The release comes at an important time, as the KSA Government has enacted rules stating that any businesses wishing to bid for government contracts from 1 January 2024 must have their RHQ located in KSA from a MENA perspective, (with exceptions such as projects with an estimated cost of under SAR 1 million or cases where there is only one qualified bidder).

Eligible Activities of an RHQ are defined as activities that strengthen the Group's profile in the region, provide strategic supervision and administrative guidance for the company and its related entities. The MISA Guidance categorizes these activities as follows:

1. Eligible RHQ activities (to commence within six months of receiving the RHQ license):

• Creating and monitoring the regional strategy and alignment.
• Engaging in key management activities such as business planning, product and service embedding, budgeting, operational and financial reporting, business coordination, and market analysis (such as growth opportunities and competitors).
• Supporting investment strategy and the marketing plan for the region.

2. Optional RHQ activities (three optional activities must commence within the first year of receiving the RHQ license):

Services and activities related to advisory, research and development, sales and marketing, human resources support, training, financial management, foreign exchange treasury, accounting and audit, legal, supply chain management (including sourcing of raw materials/parts), compliance and internal controls, international trading, technical engineering and IT operations support, intellectual property rights management, and production management.

Suppose an RHQ engages in Non-eligible Activities during a tax year. In that case, it must maintain separate accounts for these activities, allocating income between Eligible and Non-eligible Activities as if they were independent from each other.

To qualify as an RHQ, several key conditions must be met, which include but are not limited to:

• Being part of a foreign-parented multinational group carrying on business in more than two jurisdictions outside of the parent country and KSA. Holding a valid license for RHQ activities.
• Employing a minimum of 15 full time employees for RHQ activities. Satisfying Economic Substance Requirements (ESR), such as having adequate premises and qualified full-time employees in KSA, generating revenues and expenses in KSA, and being directed and managed in KSA, both in terms of board meetings physically in KSA and having at least one KSA resident director.
• Deriving Eligible Income from Eligible Activities and preparing separate accounts for Non-eligible Activities if conducted.
• Complying with Transfer Pricing (TP) requirements.

It remains to be clarified how these rules will affect group entities managed by the RHQ, as they may be brought under the scope of KSA tax jurisdiction due to having a KSA place of effective management or KSA permanent establishments. Failure to meet the conditions can lead to fines and, ultimately, if not remedied under the provisions of the law, cancellation of the RHQ license by MISA.

The rules also introduce administrative requirements associated with the incentive:

• Registering RHQs with ZATCA;
• Filing tax and Zakat returns and an annual report verifying their compliance with ESR under the RHQ provisions; and
• Preparing and maintaining accounts.

Details on Transfer Pricing requirements

RHQs must comply with the TP Bylaws issued by ZATCA. To receive benefits from the RHQ program, RHQs are required to employ key personnel at senior levels to perform strategic management activities on behalf of related parties in the region. Risks may arise if intra-group arrangements are not carried out on an arm's length basis, which may put the RHQ status and license at risk. Therefore, intra-group arrangements should follow the arm's length principle and be supported by contemporaneous TP documentation as required by the KSA TP Bylaws.

From a TP perspective, RHQs should undertake the following analysis:

Functional analysis: Evaluate the functions performed, risks undertaken, and assets utilized by the RHQ. To receive the tax incentives, the RHQ are required to perform the Eligible Activities and Optional Activities as mentioned in the section above. The functional analysis performed should also identify any Non-eligible Activities undertaken by the RHQ.

Selection of the most appropriate Transfer Pricing method: According to the Organization for Economic Cooperation and Development (OECD) TP guidelines and KSA TP Bylaws, five approved methods can be applied to price intercompany transactions. With regards to the RHQs eligible activities, the Transactional Net Margin Method (TNMM) may be considered as one of the approved methods to apply, using the cost-plus profit margin Price Level Indicator (PLI) to remunerate the RHQ. However, depending on the facts and circumstances (e.g. level of risk control and DEMPE decisions performed by RHQ employees), another approved method might be more suitable.

Transfer Pricing documentation: Activities undertaken by the RHQ should be supported by legal agreements and TP documentation (i.e. local file) as required by the KSA TP guidelines.

To meet regulatory requirements and receive the tax benefits offered under the RHQ program, special consideration should be given to the TP arrangements of the RHQ, including performing a detailed transfer pricing analysis.